Lack of NHL Sustainability Means New Lease Will Throw Even More Good Money After Bad

Yesterday on the Fan590, Daryl Jones, COO of Ice Edge Holdings, made the boldest statements yet regarding what his group needs from the City of Glendale in order for the Coyotes to tread water.

In the interview he characterized his group’s financing contingent upon a favourable new lease from Glendale. Jones said that Ice Edge will need an extra $10 to $15 million annually in order for their sale to proceed. This is a crucial admission that the NHL on its’ own cannot work. Listen to the entire interview here: http://www.fan590.com/media.jsp?content=20100315_171408_12116

So just what options exist for the City of Glendale?

One option is to give in to NHL demands. Hand over net of $10-$15 million cash to the team each year or lose whatever taxable benefit the city gains by having NHL hockey play at Westgate. Cities gain tax revenues primarily from consumption and not income taxes. Thus it would be very hard for any economist to conclude that the spinoffs in the area due to 41 NHL games would reach $10 million in Glendale’s coffers.

Now if you figure in State taxes, then income tax from the players, team staff and spinoff Westgate labour would offset the subsidy to a larger degree. However the State of Arizona isn't figuring into this equation. This would make more sense from a financial point of view, but the State wisely simply will not engage the NHL's demands by crosschecking a tax reallocation proposal last month.

Should Glendale sell Jobing.com arena?

Another option relates to Glendale unloading the arena asset. Considering the rink is only around 5 years old, most repayment so far has been in interest payments not in principle. So a $220 million total cost, which had $40 million come from the hockey team, leaves about $180 million remaining in debt to service. It is very important to note that the current lease with the NHL and past lease between Jerry Moyes and Glendale already included every single revenue stream from all events, so there's no benefit for the team to take ownership of the building and pay property tax on it. Therefore, even for just one US Greenback, I doubt the NHL team would take it. And precisely because the team is getting all this revenue, the rink effectively has zero value to any other property owner while the team calls it home.

What about the lost taxes if the team leaves Glendale?

If the NHL leaves, those remaining non-hockey events might generate revenues that might interest a buyer for the rink itself. In that way, Glendale potentially removes a $180 million asset off its' books and someone else pays Glendale for annual property taxes on it to say nothing about the per ticket parking surcharge of $2.50 that is the main driver of eliminating the rink debt. With this in mind, eventually the rink would be paid off without the NHL present. In fact, as with most troubled NHL teams, their would-be departure frees up 40 plus dates that could be used for profitable events as opposed to money burning NHL games. Concerts can book devoid of main tenant limitations and other sporting events or teams could become the next main tenant complete with main tenant perks. Bear in mind, the NHL would only bring 620,000 people to the area yearly. That is based on 41 games at 15,000 fans per game. Given Coyote attendance history this would be the high water mark for crowds within Westgate to replace. So to fill that gap upon the NHL’s departure isn't out of line for Glendale and the Westgate entertainment district to consider.

This "Just-say-no-subsidy" option actually might have better long term upside for the City of Glendale. Ice Edge Holdings has publicly admitted yesterday, what Jerry Reinsdorf’s leaked documents hinted at in the summer of 2009, that NHL hockey is unsustainable as a business, even with all rink revenue streams in hand. We now have widespread agreement that only between $10 and $23 million per year can hold back the dam of red ink for this troubled team. In fact, Glendale would probably agree that without their subsidy the team is lost.

In the end, the NHL negotiation strategy is very transparent. The perception that the NHL and Ice Edge Holdings are trying to sell is that Glendale would be the one kicking the team out of the state without a subsidy. The reality is that the NHL cannot work in Glendale to the tune of roughly $10 to $15 million per year.

Deck Stacked Against NHL

Politicians and their self-interest look for decisions that align with the majority of residents. One would be OFFside to neglect this factor in the Glendale decision. Beyond the pressure exerted by the NHL, there is little goodwill for further extending support to the NHL in Arizona. The roadblocks include the financial options as reviewed, the poor long term outlook of team viability, the lack of “Save The Coyotes” supporters, the historically low crowds watching poor, mediocre and even excellent teams over the past few years and the vocal opposition of the Goldwater Institute to anything that remotely looks like a corporate gift. Moreover, the current economic backdrop lends no favours to the NHL in this regard while the entire state is trying to recover from the worst economic downturn since Pearl Harbour.

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Chris
President, www.myNHLincludesWinnipeg.com
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