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Arbitrator’s Stadium Facility Rent Decision Includes Agreement and Disagreement With Both Parties

The arbitration decision ending the nearly three-years long Levi’s Stadium facility rent dispute took a middle road, giving neither the Santa Clara City Council/Stadium Authority (SA) nor the 49ers Stadium Company (StadCo) everything they asked for.

In his decision, the arbitrator, Honorable Read Ambler  — a retired judge — relied on one key principle: that “a one-time adjustment to the Facility Rent Schedule …shall be determined in a manner general consistent with the Facility Rent assumptions,” he wrote.

The SA asked for the facility rent — initially set in the lease contract at $24.5 million — to be increased to $25.9 million while StadCo asked for the amount to be reduced to $20.25 million. Ambler decided on a rent increase to $24,762,000 as the amount that met the terms of the 2012 and 2013 Levi’s Stadium leases.

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The facility rent isn’t “rent” in the ordinary sense. It’s a payment that is the difference between the stadium’s revenue — excluding NFL event tickets — and its expenses, the largest of which is the construction debt.

Another way to look at it is that facility rent is the amount of money needed to ensure that the stadium is financially self-sufficient. Before the stadium opened the facility rent was set at $24.5 million based on a best-guess financial model. The trigger for the one-time rent reset was the dramatic reduction in debt and interest expense after Levi’s Stadium opened.

The dispute came down to two principle disagreements. First, whether the 2014 forecasted revenue numbers used in the reset calculation should be updated based on the Stadium’s higher-than predicted revenues since 2014. The second was a disagreement about what was to be included as operating revenue in the reset calculations.

 

“Parties Understood Updated Revenues Would Be Considered”

The SA took the position that 2014 revenue forecast should be used in the rent reset calculation because revenue isn’t explicitly mentioned in the contract’s description of the reset process. But the SA said adjusted expense numbers should be used because expenses are explicitly noted in the contract.

The SA also asserted that anything not enumerated in the many-times-revised 2012 and 2013 leases — interest on reserve accounts, seat license resale, non-NFL ticket surcharges, Fanwalk — shouldn’t be considered as revenue for the purposes of calculating the payments.

The SA’s proposed $25.9 facility rent is based on a model that includes these two assertions.

StadCo’s position was that updated numbers for both expenses and revenues should be used in the reset calculations, because both were considered in the original facility rent forecast — in other words, an absence of mention didn’t mean that they should be excluded. StadCo also said that all income should be considered revenue.

These assertions were the basis of StadCo’s $20.25 proposal.

Although Ambler gave the SA $262,000 more than it’s currently receiving, he didn’t buy its biggest claim: that reset calculations should use 2014 revenue forecasts instead of adjusted revenue numbers.

“Repeated readings of …the 2013 lease do not support the Authority’s assertion that the ‘plain language’ is unambiguous with respect to the uses of updated revenues in the calculation of the facilities rent,” Judge Ambler wrote.

He continued. “The record presented does not support the conclusion that there was any agreement to exclude revenue adjustments from the adjustment to the Facility Rent. The weight of the extrinsic [i.e. outside the contract itself] evidence instead established that the parties understood and agreed that updated revenues would be considered as part of the adjustment process.”

That evidence includes contemporaneous communications and current testimony about the 2012-2013 contract negotiations and the 2016 reset discussions.

A February 2016 report to the SA Board (the City Council) states, “As part of the rent adjustment process, Stadium Authority staff and consultants and StadCo have been working to determine the adjusted rent based not only on reduced debt service but also on: a) revisions to the operating expenses and b) revenues based on the operating history of the Stadium.”

The report also noted, “the City’s economic consultants (Kayser Marston Associates) have spent the last few months working through the projections for Stadium Authority revenue, expenses and debt service…”

At the 2016 public meeting where this was presented, no Council Member — five are still on the Council — asked for an explanation of  the meaning of “revenue projections” in this context, nor did they indicate that they understood the word “revenue” to mean the 2014 estimates.

 

Intrest Income Isn’t Revenue

The judge ruled that StadCo’s inclusion of ticket resale, Fanwalk and non-NFL ticket fees as operating revenue was appropriate.

But Ambler didn’t agree that interest on reserve accounts was appropriately considered revenue for paying stadium bills. Interest income is about $4 million a year and its inclusion in the calculation is one of the factors in StadCo’s calculation of the facility rent at around $20 million.

“The evidence …established that the parties understood and intended that interest on reserves would be used as a cushion for the Authority, not as revenue for purposes of determining the facility Rent,” the judge wrote, and doing so would be “inconsistent with the formulas and assumption of the 2013 Exhibit J and therefore improper.”

With respect to the other revenues, Ambler wrote that including the other additional income streams in the revenue number was “‘generally consistent’ with the formulas and assumptions in 2013 Exhibit J [the rent reset calculations].” Further, he ruled that the SA’s calculations of these, rather than StadCo’s, were consistent with the 2013 agreements. The facility rent number that Ambler settled on, $24,762,000, was a revision of the SA’s original proposal that included adjusted revenues.

 

City Finance Director Thought StadCo Proposal “Inadequate”

In his decision Ambler noted testimony from then-Santa Clara Finance Director Gary Ameling that Ameling thought StadCo’s $20.25 million proposal in 2016 “was inadequate in his professional judgment” and “did not meet the requirements of the 2013 Lease.” However, Ameling didn’t tell the SA Board “that he disagreed with the assumptions and revenue and expenditure expenses” underlying the proposal.

Ameling did, however, tell then-City Manager Julio Fuentes that he thought “the 49ers were attempting to get to a target number and that some of our modeling…was showing a higher result.”

Ambler didn’t explain what role, if any, this testimony had in his decision. As of press time, Ameling was unavailable to provide clarification.

 

No More Money for City’s General Fund

It’s unlikely that the City of Santa Clara’s general fund will see any money from the facility rent over the 40-year term of the lease. Ambler’s decision also includes a succinct summary of the “waterfall” for distributing any excess stadium revenue:

  • Paying outstanding balance of revolving loan (paid)
  • Bring operating reserves up to $2 million
  • $1 million to stadium capital expenditure reserve
  • Bring stadium operating reserves up to $10 million
  • Pay any outstanding principal of subordinated loan
  • Bring the stadium operating reserves up to $20 million
  • Bring the renovation/demolition reserve to $70 million
  • Payment of SA discretionary expenses, including distribution to the City of Santa Clara’s general fund

Read the decision here.

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