Those interested in running the city-owned Covelli Centre through a lease, a five-year deal with a five-year option, would be required to pay at least $700,000 a year to the city with the first two years in advance payments.
Also, the company would have to pay $75,000 annually to the city for capital improvements to the building.
If someone wants to buy the center, which cost $45 million to build in 2005, the asking price is $15 million. The city’s portion of that $45 million was $11.9 million with only $600,000 paid so far toward the principal.
No member of city council, which would have to approve a lease or sale, wants to sell the facility, and Mayor Charles Sammarone said he doesn’t expect to find a buyer.
The city will advertise its request for proposals to lease or sell the center starting today or early next week. Those submitting proposals have until 4 p.m. April 5 to do so.
The city will “move quickly” on deciding to lease the center if any offers are submitted, Sammarone said.
Bruce Zoldan — president and chief executive officer for B.J. Alan Co., a fireworks company, and owner of the Youngstown Phantoms hockey team that plays its home games at the center — said he is assembling a group of investors who would be interested in leasing the facility. Also, the Western Reserve Port Authority is looking at the possibility of leasing both the center and W.D. Packard Music Hall in Warren.
Sammarone said he hasn’t received a written proposal from anyone.
“I don’t do anything unless it’s in writing,” he said. “Over the years, a lot of people have talked to me. If everyone who said they were interested” submitted proposals, there would be about 50 of them.
The provisions for those interested in leasing the center could make that option cost-prohibitive.
But it’s not as restrictive as what Sammarone proposed last week during an appearance on Vindy Radio. On the show, Sammarone said the city would require a company interested in leasing the center to put up an amount of money in a bond equal to the approximate cost of covering the annual principal and interest payments for a 10-year period. If a company leasing the center declared bankruptcy or went out of business, the city would be guaranteed the money from the bond.
The actual proposal requires companies to guarantee only the first two years.
Based on history, making a profit on the center while having to guarantee $700,000 annually is a tall order. The facility never has come close to a $700,000 annual operating surplus. There’s also the $75,000 annual capital-improvement-fund payment requirement.
Although the 2012 financial report for the center isn’t finalized, delayed by an audit of its books, the facility is expected to report about $300,000 to $320,000 in operating surplus, a record for the building. The center is projecting a $350,000 operating surplus for this year.
The city paid $325,000 in a principal payment last year toward the $11.9 million it borrowed in 2005. It started making principal payments in 2011, when it paid $275,000.
The interest rate dropped to 1 percent this year, $113,250. But in previous years, it paid $579,925 to $818,720 in interest alone.
The city also makes money from a 5.5 percent admission tax on tickets sold for arena events. It’s estimated that about $175,000 was made in 2012 from that tax, and that figure should rise to $225,000 this year.
But under the city’s lease proposal, the company managing the center wouldn’t get that ticket tax, thus making it more challenging to cover the $700,000 annual fee to the city. A company leasing the center would have to more than double the profit made last year just to break even.
If the city finds a party seriously interested in leasing, everything is negotiable, including the admission tax, Sammarone said.
“We’ve had a number of calls” from those interested in leasing the center, he said. “Now, we’ll find out if someone is interested.”
A recent $50,000 report of the center, commissioned by the city, urged Youngstown not to sell or lease the center. But a September 2012 study of city operations, which cost $250,000 with most of it paid by Youngstown, recommended the sale or lease of the center.
If there are no proposals, the city administration will sit down with Eric Ryan, the center’s executive director and head of JAC Management Group, to discuss an extension of his company’s contract, which expires at the end of the year, Sammarone said.
“Eric does a good job, but if there are ways to improve [the city’s] bottom line, we’ll do that,” Sammarone said.
One potentially serious problem with leasing is the building could lose its tax-exempt status, according to a letter to city Finance Director David Bozanich from Pamela I. Hoover, an attorney at Squire Sanders LLP, a Cleveland law firm. Bozanich requested the letter.
“There is a risk that the exemption cold be lost if the lease terms and provisions were such that the city is no longer deemed to be the owner of the Centre for these purposes,” she wrote. “In other words, even if the city held legal title to the Centre, the lessee could be deemed to be the owner.”
In May 2012, the state Legislature voted to forgive $4.75 million in delinquent taxes and penalties the Ohio Department of Taxation contended the city owed dating back to 2005. Also, the Legislature gave tax-exempt status to the arena as long as it remains a city property.
Losing that status could add about $600,000 to $750,000 a year in costs to a company interested in leasing the center.
The city’s contract with JAC is structured in a way that the company handles city funds and manages the center on behalf of Youngstown. The lease proposal that would require $700,000 annual payments would be different as it would guarantee a specific minimum payment to the city. The JAC deal doesn’t include that.