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Monday, July 2, 2018

Well, at Least We Weren't Planning to Pay for the Q Transformation with Cavs Playoff Revenue. OH WAIT.

Posted By on Mon, Jul 2, 2018 at 11:55 AM

click to enlarge SAM ALLARD / SCENE
  • Sam Allard / Scene
On the same day that the greatest basketball player of all time signed a four-year contract with the Los Angeles Lakers, Cuyahoga County made its first debt payments on the bonds borrowed for the $140 million engorgement of the arena in which he will no longer regularly compete.

According to payment schedules produced by KeyBanc Capital Markets for Cuyahoga County, more than $4 million was forked over to investors yesterday, beginning a 17-year repayment schedule that will undoubtedly be subject to continual restructuring.

Based on that initial schedule, published in October, 2017, the county should have paid 914,593.75 in interest on its Series A bonds, $867,054.55 in interest on its Series B bonds, and $1,235,000 in principal / $1,494,937 in interest on its Series C bonds. Payments are scheduled every six months for all three sets of bonds through 2034, with higher interest payments in the earlier years of the schedule.

We reported extensively on the controversial deal to authorize public subsidies for the Quicken Loan Arena's renovation last year. One thing we noted repeatedly was the dangerous speculation inherent in the projected payment structure. We also noted how the repayment was misrepresented (deliberately or not) by the deal's proponents.

But this should be abundantly clear: paying off the Q Deal gets a heck of lot dicier if the Cavs fail to regularly make and advance in the NBA playoffs.

Why? Because the bulk of the public portion of the Q Deal's financing comes from an eight percent admissions tax on events at the Q. As that tax is currently structured, a portion goes to the city's general fund, and the other portion goes to Gateway bonds for paying off the original construction of the Gund Arena.

When July of 2023 rolls around, the portion of the admissions tax that currently goes toward paying off the Gund will start paying off the Q's renovation. And until that time, that portion of playoff admissions tax revenue will go toward paying off the Q renovation instead of the Gund. That playoff revenue stream was projected at approximately $8.7 million.

We noted how foolish it was to project playoff success from 2024-2034, presumably long after LeBron James will be playing in the NBA. But it was also dangerous to project playoff success in the near-term. It's now possible that the LeBronless Cavs may not make (or advance past the first round of) the playoffs at all for the remainder of this period (2016-2023) when playoff revenue will help finance the renovation.

As the county's financial adviser Tim Offtermatt said during a Cleveland City Council hearing last year:

"If [the Cavs] don't [make the playoffs from 2016-2023], however, then the debt service of course still needs to be paid. Gateway, at that point, would look to the various reserves to fund the debt service. And if there was no money in the reserves—"

He was cut off by Councilman Zack Reed that day. But what he would have said is that if there was no money in the reserves, the Cavs would front the county money in the form of "contingent rent" to make their debt payments on time. 

That's what was meant, last year, when the deal's proponents kept saying that the Cavs would "cover shortfalls" on the project. But as we reported, the Cavs will only lend the county that shortfall money. When the reserves are replenished, the Cavs will be reimbursed by the public. (This was an arrangement that the Cavs evidently insisted upon during private negotiations.) 

All these eventualities, which were purely hypothetical a year ago, now look increasingly likely with a basketball team in purgatory. We'd be wise to recall that before LeBron James, the Cavs only advanced past the first round of the NBA playoffs three times

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