Phoenix XXI: When will then be now?

[Whileee]

THere is a geographic limit in the new lease. It is within one half-mile radius of the arena.

If you look at the Walker Report, on page 31 (page 230 of the offering memorandum PDF), you will find that, in fact, it includes the parking for the entire Westgate complex.

Keep in mind as well that Hulsizer is not monetizing properties, but rather contractual rights in respect of those properties.

Understood. But presumably he is not in the position to monetize all of the Westgate parking lots. There must be both a logical basis, and presumably contractual agreements that would limit what Hulsizer can monetize.

 

[Dado]

So are the bonds still going on sale tomorrow, or is National Margarita day going to cause a delay? With no news yet again, It's 11:15.

I'm still waiting to here there's actually a signed lease...

 

[GSC2k2*]

Understood. But presumably he is not in the position to monetize all of the Westgate parking lots. There must be both a logical basis, and presumably contractual agreements that would limit what Hulsizer can monetize.

I believe the limitations are, as someone else alluded to earlier, that the rights are only in respect of arena events. That would be sensible.

 

[OthmarAmmann]

Numbers! Excellent. Let's discuss.

If you would review the debt service amounts, you would note that they clearly contemplate a component for principal. This is confirmed in the summary of the indenture as set forth in schedule A-1 (starting on page 35 of the pdf). The principal portion is placed in the "Bond Retirement Fund". As such, your interest rate calculations which do not assume such component are not correct in my view.

Why does this matter? I suspect that you already know by now, but I will explain for anyone else reading this. In calculating the viability of an investment such as these parking rights to determine whether one "breaks even", one does not look at the portion of any debt service related to the principal. The reason is that, at the end of the financing, one still has the asset which one has purchased. Certainly one must look at the value of an asset for an asset that is losing its value (such as a piece of machinery with a definite usable life span), but such is not the case with land rights such as this. The fact is, of course, that the value of the land will be worth more than its acquisition price, given the nature of the development.

In other words, if you DO count the principal, you are actually counting profit for the owner of the parking rights. IF, for example, at the end of the thirty years, you have paid all of the debt service AND the principal, you are left with the land rights, free and clear. In that case, you have MADE $100M in profit.

To put it in another way, what you are referring to as a "cumulative deficit" is in fact the equity in the land rights that the CoG will have paid off. the CoG still has the asset which will be worth $100M as a minimum, and likely well in excess of that 30 years from now.

As such, there is no such cumulative deficit. Based on Walker's self-admitted conservative projections, there is a deficit at the beginning, but it is reduced year by year and overcome in the later years of the term of the bonds.

I calculated the yield as the IRR on the cashflow. That's a very standard definition for which I'd refer to Fabozzi or Tuckman. I only brought it up as to the reasonableness of the cashflow.

And yes, I understand how a levered investment works. I was under the impression that they were only purchasing the right to charge for parking for a period of 30 years from the lessor.

Frankly, I'm more interested in the annual deficits over the next 10 - 15 years than the cumulative (I only threw the *** in there as a total) which was my original point a couple posts back.

I missed where Walker admitted their projection was conservative. Where was that?

Noted on the 2.5/2.7, which is different from the 2.6/2.8 that i thought I recalled. That being said, you should be aware that 2.5 is a pretty universal standard in the parkiing business, so it is conservative nevertheless (since the only time they used the universal 2.5 standard is where they were referring to the penny-ante "other" events, which were chickenfeed as a parking contributor by comparison).

Conservative by about 4% to 8%. Even at 8% they still face a funding shortfall of at least $4 million per year until 2027.

To correct you on a point, CSL is NOT the firm retained by MH to manage the facility. They are in fact only a consultant firm, and do not manage facilities. The documentation clearly indicates that they were hired as a consultant (page 197 of PDF). They were not even hired by Hulsizer, interestingly enough.

Accordingly, your speculation about CSL's incentives as noted above is not germane.

I'll concede that point. I read that part when the report was first posted on GWI's website.

"Future demand for Arena parking (and corresponding parking revenues) is based heavily on future event projections provided to Walker by Convention Sports and Leisure (CSL) International. CSL is an outside consultant specializing in Arenas and other similar venues and was retained to study the Jobing.com Arena by one of the private groups seeking to purchase the Coyotes franchise."

I recalled "manage" instead of "study". At any rate, I don't see a reason why those numbers could not be relied upon.

I don't think the numbers support you here, at all.

If you are suggesting that a shortfall of ~2500 patrons per pre-season game (even assuming that to be the case) offsets 17,000 patrons (times two at a minimum) every few years, without even taking into account >4 game series or longer runs than one-round-and-out every so often, then i simply have to challenge that as unsupportable. That would assume that one can project anything longterm from the current disjointed scenario when attendance has been depressed.

As noted above, the numbers that you cite are fundamentally flawed due to the principal component issue.

I guess you missed the pics from this last fall's pre-season games.

Fair enough. 17,200 / 2.5 * $13 = $90k per game. Not a huge dent in that funding shortfall.

This is not in the least bit germane to the Business of Hockey. It has not a thing to do with this transaction. I am at a bit of a loss as to why you would raise it apropos of nothing.

Other than the last nonsequiter, great discussion.

Public pensions are going to die, and relatively soon. The money isn't there, and today's taxpayers aren't going to agree to pay those bills.

So, take any deficit with a grain of salt.

You're confusing social pensions with public pensions. OASDI will most likely not be able to pay full projected benefits. Pensions for public employees are often guaranteed by state constitution, which makes walking on them a little bit more tricky. Some municipalities and states (New Jersey for example) are pushing the issue however since they have no other choice, but as it currently stands pension beneficiaries are very senior creditors. I admit I don't know the situation in Arizona. Walking on policemen and firefighter's pensions when you're bankrolling an NHL franchise is likely to be difficult politically.

I raise it only because I find the wider implications the cashflow shortfall interesting. The funding shortfall and the management fee could affect the health of their pension, which in turn could negatively affect their cashflow in the future.

 

[Lard_Lad]

You're confusing social pensions with public pensions. OASDI will most likely not be able to pay full projected benefits. Pensions for public employees are often guaranteed by state constitution, which makes walking on them a little bit more tricky. Some municipalities and states (New Jersey for example) are pushing the issue however since they have no other choice, but as it currently stands pension beneficiaries are very senior creditors. I admit I don't know the situation in Arizona.

Guaranteed by a constitutional amendment in 1998, apparently:

http://www.azcentral.com/news/articles/2010/11/12/20101112arizona-pension-funds.html

(near the end, first paragraph under the 'Solutions' subtitle)

 

[Fugu]

You are asking the right questions, Whileee.

In fact, they are purchasing the rights in perpetuity back. Please refer to section 8.1.1 of the new lease, wherein MH is transferring to the CoG "all of [his] rights and obligations with respect to the City Parking Area". Hulsizer is renouncing and reconveying back to the CoG all of his parking rights over those lands. FYI, it is done under a separate agreement called an Agreement of Assignment, Reconveyance, Modification and Abrogation of Rights which is entered into pursuant to the terms of the lease. It is not governed or limited by the duration of the lease.

I know I missed this earlier, if stated by you or anyone else here.

Is the NHL the current owner of the rights to these parking areas? Is that by virtue of the old lease with Moyes, assumed by the NHL, which I understood had been canceled by Moyes that past summer. Court had extended it for one year, iirc.

Can someone back track and fill in the steps on the parking rights? Please.

 

[GSC2k2*]

I know I missed this earlier, if stated by you or anyone else here.

Is the NHL the current owner of the rights to these parking areas? Is that by virtue of the old lease with Moyes, assumed by the NHL, which I understood had been canceled by Moyes that past summer. Court had extended it for one year, iirc.

Can someone back track and fill in the steps on the parking rights? Please.

The parking rights were held by the team pursuant to the MUDA (mixed-use development agreement) and the parking agreements among the related parties (specifically, the "arena operator" or "arena developer" - i forget which - and the team).

The AMULA had nothing really to do with it.

When the NHL acquired the team, they made a number of decisions about which contracts they wanted to undertake. Along with all of the operational-type contracts and the employee/player contracts, and the NHL contracts, they acquired a number of those development contracts. One of them was that temporary agreement whcih contained the $25M in escrow monies supplied by Ellman long ago (for obvious reasons). Another one was the contract which provided parking rights in favour of the team (for equally obvious reasons).

 

[Fugu]

The parking rights were held by the team pursuant to the MUDA (mixed-use development agreement) and the parking agreements among the related parties (specifically, the "arena operator" or "arena developer" - i forget which - and the team).

The AMULA had nothing really to do with it.

When the NHL acquired the team, they made a number of decisions about which contracts they wanted to undertake. Along with all of the operational-type contracts and the employee/player contracts, and the NHL contracts, they acquired a number of those development contracts. One of them was that temporary agreement whcih contained the $25M in escrow monies supplied by Ellman long ago (for obvious reasons). Another one was the contract which provided parking rights in favour of the team (for equally obvious reasons).

So the NHL has something that is of higher value than "just" the team.

 

[Killion]

Double post error.....System Failure. Not the operator...

 

[Fugu]

Oh?. Well thats interesting. I was under the impression the Parking Rights were contained under the Moyes-Interim-Lease agreement with the NHL, expiring in June, reverting back to the COG at that time should a deal not close, which if incorrect, opens up yet another jar of pickles.

That's what I thought.

 

[Killion]

That's what I thought.

Well ya. I had an argument with GHOST about this very point. 6 Pages & 73 minutes of my life I'll never get back. How could the Parking Rights be separated from the Lease & or the Arena Mgmnt Contract out of the BK beyond an interim basis?. That would mean that if a deal didnt close, and theres a separate tangible agreement for the Parking Rights for the next 30yrs the NHL acquired, then Look Out Lucy because here comes Charlie Brown.

Assume a deal cant be struck, the team leaves, what does Glendale tell an incoming Arena Mgmnt firm, the AHL or maybe the Arena Football League or whomever?. "You'll have to talk to the NHL about buying the paper back for the parking rights. Sorry". Doesnt compute. The suggestion is absolutely diabolical yes?. The league gets its $170M+ (hypothetically) from TNSE; $60M from Moyes in the Civil Suit; and by the COG's very own "CommissionedConsultants" reports, extorts another $100M out of either Glendale itself or the incoming anchor tenant?. Giddyup Gary. Thats just...... Evil.

 

[GSC2k2*]

Well ya. I had an argument with GHOST about this very point. 6 Pages & 73 minutes of my life I'll never get back. How could the Parking Rights be separated from the Lease & or the Arena Mgmnt Contract out of the BK on an interim basis?. That would mean that if a deal didnt close, and theres a separate tangible agreement for the Parking Rights for the next 30yrs the NHL acquired, then Look Out Lucy because here comes Charlie Brown.

Assume a deal cant be struck, the team leaves, what does Glendale tell an incoming Arena Mgmnt firm, the AHL or maybe the Arena Football League or whomever?. "You'll have to talk to the NHL about buying the paper back for the parking rights. Sorry". Doesnt compute. The suggestion is absolutely diabolical yes?. The league gets its $170M+ (hypothetically) from TNSE; $60M from Moyes in the Civil Suit; and by the COG's very own "CommissionedConsultants" reports, extorts another $100M out of either Glendale itself or the incoming anchor tenant?. Giddyup Gary. Thats just...... Evil.

I swearI cannot tell if you're agreeing with my explanation or not?!?

 

[Killion]

I swearI cannot tell if you're agreeing with my explanation or not?!?

Neither. Looking for a freakin flashlight, a match, anything to see through the darkness youve just engulfed me (and apparently Fugu) in Man!. WTF just happened their?.

Please explain....Are you telling me the NHL has acquired a contract, through the BK, sort of sifting through Moyes' detrius with long, yellow & withered tobacco stained fingers like something straight out of Dickens, poking about the contracts by candlelight, that gives them full rights to the parking lots within a 1.5mile radius of the job, along with advertising & naming rights, for a 30 year period & access to Ellmans 25Mil that was in escrow; that the COG is basically being "forced" to buy it back from them for $100MillionDollars through Hulsizer?!. This cannot be, surely..... Im sorry GSC, I have to stop now, I cant see through the tears of laughter....


Surely the Parking Rights are assigned under the interim lease & revert back to Glendale when it expires, replaced & superceded by the new one with MH?. If not, then the NHL could ask for $270M. $170M for the team & another $100M for the parking.

 

[Whileee]

Neither. Looking for a freakin flashlight, a match, anything to see through the darkness youve just engulfed me (and apparently Fugu) in Man!. WTF just happened their?.

Please explain....Are you telling me the NHL has acquired a contract, through the BK, sort of sifting through Moyes' detrius with long, yellow & withered tobacco stained fingers like something straight out of Dickens, poking about the contracts by candlelight, that gives them full rights to the parking lots within a 1.5mile radius of the job, along with advertising & naming rights, for a 30 year period & access to Ellmans 25Mil that was in escrow; that the COG is basically being "forced" to buy it back from them for $100MillionDollars through Hulsizer?!. This cannot be, surely..... Im sorry GSC, I have to stop now, I cant see through the tears of laughter....


Surely the Parking Rights are assigned under the interim lease & revert back to Glendale when it expires, replaced & superceded by the new one with MH?. If not, then the NHL could ask for $270M. $170M for the team & another $100M for the parking.

Nope. I think he was saying that they have the parking rights in perpetuity, not just for 30 years.

And if the rights are forever, then it should be worth well north of $100 million, right?

 

[Killion]

Nope. I think he was saying that they have the parking rights in perpetuity, not just for 30 years. And if the rights are forever, then it should be worth well north of $100 million, right?

Get out of town.... Are you kidding me?. If thats true, well, Im just Gobsmacked. Surely the Parking Rights are assigned under the Lease to the team, the NHL's "ownership" of the Parking Rights purely interim. If not, and they fall under a completely separate agreement that the leagues' acquired, well, it's just incredible. I thought this thing was completely cooked up exclusive of the NHL, between the COG & MH. That the league actually owns these rights for 30yrs or in perpetuity?. My God, breathtaking. That is one heavy hammer.

 

[Whileee]

Get out of town.... Are you kidding me?. If thats true, well, Im just Gobsmacked. Surely the Parking Rights are assigned under the Lease to the team, the NHL's "ownership" of the Parking Rights purely interim. If not, and they fall under a completely separate agreement that the leagues' acquired, well, it's just incredible. I thought this thing was completely cooked up exclusive of the NHL, between the COG & MH. That the league actually owns these rights for 30yrs or in perpetuity?. My God, breathtaking. That is one heavy hammer.

Yes, there is much about this idea that makes no sense to me. If the NHL now owns the parking rights in perpetuity, and if they are indeed worth $100 million ("perpetuity is a long time"), then if they sell the team and transfer those rights to Hulsizer in the sale of the Coyotes they are essentially giving him the team for $70 million, and he is turning around and selling the parking rights back to the City of Glendale for the $100 million.

But if that's the case, then I suppose that a good argument could be made that the City of Glendale has already provided a "gift" by giving the parking rights to the NHL for essentially nothing.

 

[OthmarAmmann]

Nope. I think he was saying that they have the parking rights in perpetuity, not just for 30 years.

And if the rights are forever, then it should be worth well north of $100 million, right?

I get to $101 million by adjusting the CBRE valuation in include a terminal multiple at the end of 30 years. This is common practice in equity valuation, where you say the last year is worth some multiple of the projected income in that year to reflect the perpetual nature of the cashflow. A terminal multiple of 18x based on the 5.4% discount rate results in a valuation of $101 million (18x is rather high however, in practice it tends to be lower). Using a discount rate of 6.5% as indicated in the OM however results in a value of only $80 million with a terminal multiple of 15x. These values of course still result in funding requirements in the interim.

edit: Even 6.5% is low based on the risk of the project. Using a 12% hurdle rate the value of the Walker NOI is only $35 million with a terminal multiple of 8.3x. That is the value that a corporate entity might place on the project. Municipalities I gather only use the cost of their debt since they have no shareholders. I see that as contempt for taxpayers but whatever.

The first question that comes to mind is what prevented the team from charging for parking if they held the rights to do so? Why didn't the previously contemplated deals with JR or IEH ascribe such value from the rights? Were the value of these rights considered during the bankruptcy?

Very interesting.

 

[Whileee]

I get to $101 million by adjusting the CBRE valuation in include a terminal multiple at the end of 30 years. This is common practice in equity valuation, where you say the last year is worth some multiple of the projected income in that year to reflect the perpetual nature of the cashflow. A terminal multiple of 18x based on the 5.4% discount rate results in a valuation of $101 million (18x is rather high however, in practice it tends to be lower). Using a discount rate of 6.5% as indicated in the OM however results in a value of only $80 million with a terminal multiple of 15x. These values of course still result in funding requirements in the interim.

The first question that comes to mind is what prevented the team from charging for parking if they held the rights to do so? Why didn't the previously contemplated deals with JR or IEH ascribe such value from the rights? Were the value of these rights considered during the bankruptcy?

Very interesting.

But this idea of Hulsizer monetizing parking rights in perpetuity, when he is signing a lease for 30 years, seems very odd to me. If those parking rights don't revert back to the City of Glendale (the land owners), at the end of the lease, then to whom do the parking rights go? Would they automatically transfer to the next arena manager? In that case, the City of Glendale would presumably have to pay another sum to retain parking revenue rights in any new lease beyond 30 years.

If Hulsizer is acquiring the parking rights to the City of Glendale's parking lots in perpetuity as a financial asset from the NHL, then it becomes even more strange. In effect, when the NHL purchased the team in the bankruptcy case for $140 million, it was like purchasing $100 million worth of parking rights, with the Coyotes thrown in for $40 million. Now, Hulsizer would be purchasing (and reselling) the parking rights for $100 million, with the team being thrown in for $65-70 million. As you point out, if these parking rights are worth anything close to $100 million, then Glendale has been rather cavalier in tossing them around in previous agreements.

Do you think that Balsillie's bankruptcy auction bid for the Coyotes included the perpetual parking rights around the Jobing.com arena? If not, then from a financial perspective perhaps it was even better than some have suggested.

 

[OthmarAmmann]

But this idea of Hulsizer monetizing parking rights in perpetuity, when he is signing a lease for 30 years, seems very odd to me. If those parking rights don't revert back to the City of Glendale (the land owners), at the end of the lease, then to whom do the parking rights go? Would they automatically transfer to the next arena manager? In that case, the City of Glendale would presumably have to pay another sum to retain parking revenue rights in any new lease beyond 30 years.

If Hulsizer is acquiring the parking rights to the City of Glendale's parking lots in perpetuity as a financial asset from the NHL, then it becomes even more strange. In effect, when the NHL purchased the team in the bankruptcy case for $140 million, it was like purchasing $100 million worth of parking rights, with the Coyotes thrown in for $40 million. Now, Hulsizer would be purchasing (and reselling) the parking rights for $100 million, with the team being thrown in for $65-70 million. As you point out, if these parking rights are worth anything close to $100 million, then Glendale has been rather cavalier in tossing them around in previous agreements.

Do you think that Balsillie's bankruptcy auction bid for the Coyotes included the perpetual parking rights around the Jobing.com arena? If not, then from a financial perspective perhaps it was even better than some have suggested.

Further to that, at some point somebody signed a temporary lease and along with it obtained perpetual rights to revenue on city land. If that passed muster under the Gift Clause, you'd wonder why they would highlight the same as a risk in this deal.

I have not really looked at the CBRE report until now, but it appears that they've overvalued the put option. They used a real-world deterministic valuation of the derivative where they should have used a risk-neutral approach. They valued the option as

[$40 million - $18 million] / 1.054^30 = $3.7 million

Since the option is a European type where exercise is only permitted at maturity, one could use Black-Scholes to value the option. Using the 30 year Treasury as the risk-free rate, one would require an implied volatility of 16.5% (19.3% for the valuation using 4.9% as the discount rate) to get to the same value. This is rather high and more indicative of equities. I'm not certain what the implied volatility on real estate is, but it certainly would be lower than equities. Using 3% results in an option value of about $0.8 million.

 

[OthmarAmmann]

Yes, it is notwworthy, although it is more a reflection of numbers you can assemble when you slice and dice a business' components.

If, for example, an owner was permitted to sell off its share of NHL Central Revenues (~$9M per year and growing), that portion of the business would be worth much, much more than the parking rights.

Wait, what? Bifurcation of cashflows is a well established principle of corporate finance and financial accounting. It is in fact foundational to FAS 133 and FAS 141, the latter I'm sure you're acquainted with through deal-making (I am envious if you've never had to deal with issues of amortization of identifiable intangible assets under 141). The depth to which bifurcation is required under IFRS is painful to say the least.

 

[metalfoot]

Wait, what? Bifurcation of cashflows is a well established principle of corporate finance and financial accounting. It is in fact foundational to FAS 133 and FAS 141, the latter I'm sure you're acquainted with through deal-making (I am envious if you've never had to deal with issues of amortization of identifiable intangible assets under 141). The depth to which bifurcation is required under IFRS is painful to say the least.

Wow. My dad's an accountant and still, I must admit, this is completely opaque to me. Essentially, are you saying that you can't just split off the revenue streams but you have to consider everything as a package to create the value of $170 million which is being tossed around, and, likewise, the value of the $197 being offered to Hulsizer to purchase it?

 

[aj8000]

Well why not?. If your backs to the wall & its perfectly legal, why wouldnt you take advantage of every loophole available & drive a Mac through it if you could?. According to Beasley "no taxpayer funds will be required to service the debts on the Bonds". I have a very hard time believing that, however, live by the Sword, and if they fall on it & die trying well, thats their decision to make. What other options or alternatives did they/do they have?. No one's willing to plunk down $170M+ just to buy the franchise as is/where is; and they dont want to even consider life without an NHL team in the arena. If your arguing that the COG somehow broke the Gift Clause by assigning/including the parking rights in the Lease & in buying them back breached the borders, I think you'll find any number of legal minds & others who could mount a pretty vociferous defence & likely win that argument before a judge in Arizona. If your referring to the Arena Management portion of the agreement, Im not so confident. Perhaps with some tweaking, but as it stands, Id say its the Achillies' Heel to this thing getting done without Challenge, combined with the existing issues swirling around transparency & lack there-of.

No argument here. I think you are right the challenge will come.

 

[aj8000]

Not sure of your point. Can you try to articulate it in a different way?

My point is that you are back to your old devils advocate stance. Not saying it is a bad thing, just stating a fact. Nice to see you are back, at least you add some excitement to the conversation.

The rest of my post was just an open comment to the rest of the board stating that all the parking studies in the world to support the 100 million do not matter because of the following

If the parking is worth 100 million over 30 years; then the lease of the jobing would have to include the 100 million in the lease payments or they are subsidizing the private business by lowing the lease payments. ie against the law

If you want the parking rights, you do not include it in the new lease to buy back for 100 million, you just keep the rights,

They cannot have it both ways. It doesn't matter in the end, we all know it is a subsidy, the only question is whether the GWI decides to make an example of the COG and takes them to court. However, we have to first wait to see if the bonds sell. Didn't someone mention the MH said they would be sold today?

 

[aj8000]

The parking rights were held by the team pursuant to the MUDA (mixed-use development agreement) and the parking agreements among the related parties (specifically, the "arena operator" or "arena developer" - i forget which - and the team).

The AMULA had nothing really to do with it.

When the NHL acquired the team, they made a number of decisions about which contracts they wanted to undertake. Along with all of the operational-type contracts and the employee/player contracts, and the NHL contracts, they acquired a number of those development contracts. One of them was that temporary agreement whcih contained the $25M in escrow monies supplied by Ellman long ago (for obvious reasons). Another one was the contract which provided parking rights in favour of the team (for equally obvious reasons).

They are negotiating a new lease, the old lease is irrelevant to any future negotiations other than the fact it may be a starting point.

 

[Whileee]

They cannot have it both ways. It doesn't matter in the end, we all know it is a subsidy, the only question is whether the GWI decides to make an example of the COG and takes them to court. However, we have to first wait to see if the bonds sell. Didn't someone mention the MH said they would be sold today?

I don't think Hulsizer was specific about the day, but he was quoted by someone who reported that they spoke with him at a game last week saying that the deal would be wrapped up by this Friday. So, presumably the bonds would go on sale before that.

I believe that it was Rebekah Sanders and other "insiders" who indicated that the bonds would go on sale today, with the deal closing shortly thereafter.

Does anyone know whether the lease has finally been signed and whether the bonds are actually going on sale? As I recall, there were still some uncertainties in the bond offering related to the interest rate, among other things.