Penguins' lease can be rent free next season
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The Penguins won't have to skate off to Kansas City to play in a rent-free arena next season. They can get the same deal at Mellon Arena.
Lost in the discussion over Plan B is that the Penguins can exercise a short-term lease extension for Mellon Arena this summer that would give them more control over building revenues without paying any rent, perhaps while a new facility is constructed.
Under the proposed extension, the Penguins would become master tenants of the arena in place of SMG, a property management group that specializes in running publicly owned facilities. SMG would become building manager.
With the change, the Penguins would stop paying rent to SMG, estimated at close to $2 million a year, and would have greater access to such building revenues as concessions and parking, for both hockey and non-hockey events. Those could generate close to $20 million in gross revenues annually.
But there are costs associated with such an extension as well, including a $5 million payment due to SMG when the switch is made. The Penguins also would pay SMG to manage the arena at an amount to be determined.
The arena management changes, negotiated as part of the team's 1999 bankruptcy filing, could give the Penguins interim relief during construction of a new arena, which won't be finished until at least 2009, assuming the franchise can reach a deal with state and local officials over funding.
They also could serve as the framework for a long-term lease for the Penguins in a new building. With gambling proceeds financing the lion's share of the construction, state and local officials have said they have the ability to offer the team virtually all arena revenues.
The Penguins have until next month to exercise a proposed one-year lease extension, but it's unlikely that they will sign on unless they have reached a deal with Gov. Ed Rendell, Mayor Luke Ravenstahl, and Allegheny County Chief Executive Dan Onorato on funding for a new arena.
The extension would kick in at the end of June, at the same time the team's current lease expires, leaving the franchise free to move elsewhere.
Mellon Arena is the oldest venue in the National Hockey League, and the Penguins have long insisted that they need a new home if they are to stay competitive with other franchises.
Marc Ganis, president of Sportscorp Ltd., a Chicago sports business consulting firm, said a Mellon Arena lease extension, even under more favorable terms, would work "only on an interim basis."
Even if the team is getting all of the arena revenue, it's "still playing catch-up" compared to clubs in newer, bigger facilities that generate more revenue.
"[An extension works] only as an interim step and only if they have a new arena deal or expect a new arena deal shortly. It is not something you would look at on a long-term basis, just as a bridge," he said.
Although the Penguins wouldn't have to pay rent in the switch with SMG and would get most arena revenues, including parking, they would be responsible for the building's operating costs, which is not unusual for teams that have control over money streams.
As part of the deal negotiated in the 1999 bankruptcy, the Penguins also would have to make the $5 million lump sum payment to compensate SMG for building assets and for the change in management. SMG originally was to serve as master tenant until 2012.
The $5 million payment would be in addition to a management fee paid to SMG. The amount is not known but is believed to be in the hundreds of thousands of dollars.
The $5 million payment also may have to be accounted for in some fashion in the negotiations on a new arena. Even if a deal is reached, the Penguins still would have to play in Mellon Arena for at least two more seasons and most likely would want building revenues and the same rent-free offer they have from Kansas City, which opens the $276 million Sprint Center in October.
Neither the Penguins nor SMG would comment about a possible extension on the arena lease. Mr. Onorato also wouldn't talk about a possible extension yesterday, saying through a spokesman the issue is related to the Plan B negotiations on which he has not been commenting.
State and local officials have been working diligently to put together a deal under Plan B after a meeting last week between Mr. Onorato, Mr. Rendell and Mr. Ravenstahl and Penguins owners Mario Lemieux and Ron Burkle.
They would like to reach an agreement before the end of next week. The Penguins have said they want to make a decision by early February between Pittsburgh and Kansas City.
Under the original Plan B, the Penguins were required to make an upfront payment of $8.5 million and contribute $4 million a year, including $1.16 million annually in naming rights, toward the construction.
However, state and local leaders presented a somewhat sweetened version last week. Although the exact details aren't known, the Penguins' annual contribution likely will end up closer to $2.9 million, the same the Pirates paid toward PNC Park.
The $8.5 million payment may be accounted for in the sale of the old St. Francis Central Hospital on Centre Avenue to the city-county Sports & Exhibition Authority, which needs it as part of the new arena site. The Penguins purchased the property for $8 million.
Mr. Ganis sees the Penguins remaining in Pittsburgh, assuming they can reach an arena deal with very little capital costs to the team and decent revenue streams.
Despite the much heralded rent-free offer in Kansas City, Mr. Ganis views it as an "above average deal and that's it. The reason for that is it's not a great market.
"As it stands right now, I don't see it as a great relocation opportunity other than a building being under construction right now. But it's a thoroughly mediocre market," he said.
Another factor that could work against Kansas City is that naming rights already have been accounted for and flow to Anschutz Entertainment Group. The Penguins would have the ability to cut their own deal in Pittsburgh, one likely to generate at least $2 million a year for the team.
Prudential announced this week it would pay $105.3 million over 20 years to put its name on the New Jersey Devils' new arena, although no one expects a bid that high for the Pittsburgh rights.
First Published January 12, 2007 12:00 am