Katz Group Presentation to Edmonton City Council - July 21, 201023 July 2010 | In The News
CHECK AGAINST DELIVERY ** To view a video of Daryl Katz's portion of the presentation, click here. John Karvellas Good afternoon Mr. Mayor, members of City Council and City Administration. My name is John Karvellas and I am Executive Vice President and General Counsel for the Katz Group. I would like to thank the Mayor and City Council for inviting us here today. I would also like to thank Simon Farbrother, Gary Klassen, Lorna Rosen and their colleagues for their report and presentation of it today, and for the work they have done on this matter over the past many months. Let me quickly introduce the members of our team who are here today to participate in our presentation and to answer questions. From the Katz Group, we have: - Daryl Katz, Founder and Chairman of the Katz Group I am also very pleased to introduce you to Ted Tanner, Executive Vice President, Real Estate Development for AEG. AEG is the world leader in developing vibrant and successful sports and entertainment-based districts and has been advising us on the Edmonton Arena District. Ted has joined us from Los Angeles for today's meeting. We have had many others, both in-house and outside advisors and consultants, assist us with this project and I wish to acknowledge the value they have provided, as they will not be part of our presentation today. Daryl Katz will begin our presentation by talking about the need and opportunity for a new downtown arena. Ted Tanner will speak briefly about AEG, its capabilities and its expertise developing arena projects elsewhere in North America and around the world and the value such projects can bring to a city. Paul Marcaccio will discuss some of the financial realities facing the Oilers and professional sports teams in general , and will then comment on the funding framework described in the Administration report. I will offer some closing remarks, at which point we will be pleased to turn the meeting back to you for your questions. With that, I would like to call upon Daryl Katz.
Daryl Katz Thanks John, and good afternoon Mayor Mandel and members of city council. I want to thank you... each of you... for the opportunity to share our vision and answer your questions. I particularly want to thank Mayor Mandel and the City Administration for your efforts over the past many months to help us move this project through the City's process. I know we haven't always made it easy -- and I'll be the first to apologize for that -- but I can assure you that our hearts are in the right place. Like each and every one of you, I am passionate about this city. I love its community spirit. I believe in its future, and I am committed to helping build it. I also recognize that I have the easy job. I am the proponent of a bold vision...which is not mine alone... for a project that can help Edmonton realize many of its broader goals... as a gateway to the North, as a liveable city that is attractive to business and marked by great urban design, and as a vibrant centre of sports, culture, post-secondary education and so much more. You have the difficult job. You have to weigh this project against other worthy priorities. I respect that, and I hope that through today's discussion we can help make your job easier by articulating why this project is necessary... important and can benefit all Edmontonians. I also want to say we recognize the many positive developments already underway downtown. Many of these -- like the LRT expansion, the Jasper Avenue upgrade and the Art Gallery of Alberta -- are the direct result of your leadership and support. Our own direct involvement in the revitalization of downtown began...over 2 years ago... in April 2008 when then-City Manager Al Maurer asked John Karvellas if we would agree to lead the process of developing a new downtown arena. This was before we had even closed our purchase of the Oilers, but we were proud to accept that role and have since put... our time, our energy, our reputations and a significant amount of risk capital into the effort. We have accomplished a lot since then, not the least of which has been to secure 16 acres of undeveloped downtown real estate and engage AEG to advise on its development. But today isn't about real estate. It's about giving you the information you need to properly consider this project. From my perspective, this project has always been about three fundamental things: 1) It is about sustaining the NHL and the Edmonton Oilers -- in Edmonton -- for the long-term; 2) It is about using Edmonton's need for a new arena to provide a major catalyst for the ongoing revitalization of downtown; and 3) It is about capitalizing on the broader opportunity to secure a dynamic future for our city. Let's start with the Oilers. It's no secret that I have had a lifelong passion for the Oilers and would desperately love to see the Stanley Cup back in Edmonton. But that's not why I bought the team. If that was all this was about, I could have remained a fan without all of this public attention. I bought the team for 3 reasons: FIRSTLY...While the EIG recognized the need for a new arena to ensure the team's viability, the group did not display the willingness or cohesion to build one; SECONDLY...I wanted to work with the various stakeholders to ensure the long-term sustainability of the Oilers in Edmonton; and THIRDLY...I am an Edmontonian, born and raised, and I saw the arena as a means to create something really significant for the city's future. Now some may say the Oilers are just a hockey team, but I think we all know that they are much more than that. They are an essential part of our history, our identity, our community and our economy. We are all very fortunate to have them. But the team is also a business and like any business, it needs a sound financial base in order to be sustainable which today it is NOT. I'll ask Paul to speak more specifically about the realities of the Oilers' business in a few minutes. But first, I'd like to talk about the contribution that I believe the Edmonton Arena District can make to the future of our City... Edmonton is a great, great city.... I believe that as strongly as anyone here... and with all my heart. But if we don't move forward... we will fall behind.... It's that simple. So we can - and we should - debate transportation concerns, funding models and design details...and we will. But at the end of the day, the real question is: How do we make Edmonton better? How do we make Edmonton more competitive? How do we build on our identity as a great Northern city... with an unrivalled community spirit? The answer... as this Council has demonstrated it is well aware... is that we have to make strategic investments in our future and in our community. We have invested in ring roads, the LRT and other civic infrastructure - and for good reason. But we also need to make strategic investments in the heart and soul of our city - and that means our downtown. No one combines sports, entertainment and community better than Edmonton. Think about the Heritage Classic. That event -- in its originality, in its scale, and in the way in which it drew upon the special relationship between Edmonton and the Oilers -- is what Edmonton is all about. The Heritage Classic is now a marquee event of the NHL season and every year it is acknowledged to millions of people across North America that Edmonton was the city that gave birth to it. OUR CITY CREATED THAT. If we can bring that kind of vision and spirit into our downtown, we will have done something really good and important. But it's more than that, too. From the beginning... we have pursued a vision that we believe will benefit all Edmontonians... by creating jobs... by providing a jolt of investment to our urban centre... by shrinking our environmental footprint and by developing a world class sports and entertainment district in the core of our City. I believe we have a once in a generation opportunity -- through the Oilers, and through the need for a new arena -- to do something transformative for downtown and for our city. Edmonton is the gateway to the North - a region that is poised to become the oil capital of the world. There is currently $150 Billion of committed investment in our region...with far more to come. A new downtown arena district can represent Edmonton's potential, its capacity to be bold and to think big, and its future as a leading Northern city. I believe this project is important for Edmonton's long-term competitiveness. I also believe it is achievable, and I want you to know that I am prepared to do my part to make it happen... As you know, I invested on the order of $200 million to buy the team. At that time, I made a commitment to invest $100 million towards the development of a new arena. Several months ago, we proposed a model that would see that money drive private sector investment to help support public financing of the arena. Mayor Mandel has since stressed to me the importance of putting my investment directly into the construction of a new arena... that will be owned by the City of Edmonton...and if that's what it takes to move this project forward..... then I am prepared to do that. I am also prepared to sign a location agreement as part of a lease in a new downtown arena.....that will keep the Oilers in Edmonton. In addition.... I still fully intend to invest at least another $100 million in leading the development of the Arena District. Taken together, I expect that I will invest no less than $400 million with the aim of: - ensuring the long-term sustainability of the Oilers in Edmonton, - creating a major catalyst in the ongoing revitalization of downtown, and - contributing to a positive sense of momentum in our city that is worthy of our place in the world and our potential. This is not an amount of money I invest casually or without regard for risk. But to make it happen, we need the City of Edmonton to be our "partner". And like in any partnership we understand that the deal has to work for both sides. So, what am I asking for in return? We respect City Council's role in this process.... And... we are not asking you to sign off today on an arena, an arena district or a funding model. We are asking City Council to give City Administration a mandate to negotiate a deal that -- assuming we can come to terms, and subject to your approval - will enable us to move forward with the development of a new downtown Arena District. I believe that...together... we have a great opportunity here to do something that will benefit Edmonton for generations to come. I sincerely hope you will all join us in this effort.
Paul Marcaccio Thanks, and good afternoon. As Daryl indicated earlier, I will be sharing with you some of the business realities of operating a National Hockey League franchise and what that means for the Oilers. I will also comment on a potential financial framework for a new arena in the context of the Information Report prepared by the city administration. NHL Hockey teams generate revenue in the following ways: - They sell tickets - They sell advertising and sponsorship opportunities - They sell broadcast rights - They sell food, beverages and parking at games These revenue streams are what we, and the League, refer to as "Hockey Related Revenues". These must be reported to the League and are referenced by the League in making various determinations which impact owners and players across the league. Most NHL hockey teams also generate revenues from concerts, entertainment events and other arena-based activities. These streams are not considered as Hockey Related Revenues and hence, do not get reported,measured or referred to in any League determinations or statistical reports. Let's look at each of these in turn. With the second smallest arena in the League, we are limited in the revenue we can generate from the sale of tickets for seats, and, we have limited premium seating opportunities. As you would expect, food & beverages sales and parking revenues directly correlate to the number of seats available. Also, Edmonton has the NHL's highest percentage of individual - as opposed to corporate -- season ticket holders, which means many of our ticket holders are paying with after-tax dollars and as such, there is a relatively higher sensitivity to what we can charge for a ticket. And because the Oilers operate in the smallest media market in the NHL, we face significant limits on the amount of broadcast, advertising and sponsorship revenues we can generate. I will spend a minute on this point as it is a particularly important and not well appreciated. Edmonton, including the broader capture area which defines the Oiler's geographic market, has the smallest population of any NHL market. In fact, the entire Alberta market, which of course we split with the Flames, is still one of the smaller NHL markets. This matters because the value of broadcast rights, advertising and sponsorship revenues are based on size of market. Having the league's second oldest building limits what we can do with food and beverage sales. This is because the concourses at Rexall Place are antiquated and narrow, the commissary facilities are of limited capacity and there is not a full service dining area -- as is the case in virtually every other arena in the NHL. The last revenue stream I mentioned - concerts, entertainment events and other arena-based activities -is a very important component of the sustainability model for today's NHL teams. These are commercial activities which are ancillary to the game day and other scheduled dates of the team or teams which are the anchor tenant or tenants in a sports facility. Today, the Oilers are the ONLY team in the NHL that does not control its arena, and the ONLY team that does not receive the Non-Hockey Related Revenues from the facility in which they play. For sake of comparison: in Edmonton, those revenues go to Northlands. In Calgary, they do not go to the Stampede Board; they go to the Calgary Flames organization. On the expense side of the ledger, we are more in linewith other teams. That is to say, in the hockey business, expenses are somewhat similar across all teams, given that the single largest component of expense are player salaries, which are bound by a cap and floor, calculated based on league wide Hockey Related Revenues. As a result, hockey is a business where the operator does not have much discretion over its most significant cost item. In fact, as the other teams raise the bar on Hockey Related Revenue opportunities, our costs potentially go up while our revenues do not. Further on the cost side, salaries and certain other costs are denominated in U.S. dollars while for all of the Canadian teams, most revenues are Canadian dollar based, resulting in significant currency exchange risk. While we exercise prudent risk management over currency exposure, in the long-run this is a risk we cannot control. Due to our geographic location, the Oilers also incur more travel miles and travel expense than almost any other team in the League. It is for all of these reasons that we find ourselves talking about the Oilers' long-term sustainability in Rexall Place. Currently, Daryl Katz has had to subsidize the team by several million dollars in each of the past two years in order for the team to break even. As I indicated before, this is not because the Oilers' expenses are higher than other teams, but because our revenue opportunities are limited - despite the fact we sell out almost every game. Under the Oilers' current operating model at Rexall Place - a model in which we do not control non-hockey related revenues -- that trend will likely continue in each year between now and 2014. As we all know, businesses must generate profits to be sustainable. Hence, if professional hockey in Edmonton is going to be sustainable, something has to change, regardless of who owns the team. No business can sustain losses in perpetuity. Many factors - such as the size of our market -- cannot be helped. We understand and accept that. Others can only be addressed by a new arena and having the same operating model as the Calgary Flames and all other NHL teams. I hope that's a helpful overview. We can try to answer any questions you have in this regard during the Q&A session. For now, let me turn to a discussion of funding. To preface my remarks on funding, we believe a new downtown arena can be funded with a mix of public and private investment in a manner that benefits the City of Edmonton, without an increase in property tax rates as a direct consequence. What we hope to do is build on what you have heard from the City Administration and to communicate our optimism that, starting with their proposed funding model and having an opportunity to work through the various elements with the City Administration, we will arrive at a workable solution. Picking up on Daryl's comments, the Katz Group would invest $100 million directly into the construction of a new arena that will be owned by the City of Edmonton. We agree with the City Administration report that an additional amount of funding can be financed by the City of Edmonton using a CRL (or Community Revitalization Levy), with all of that amount being repaid over time. We hope to have the opportunity to assess and agree with City Administration on what this amount can be, if based on all new development in and around the proposed arena district. The prospects of success for the CRL will be greatly enhanced by Katz Group's plans to lead the development of the district, for which we have earmarked a minimum of $100 million of additional investment over time. We understand Mayor Mandel's belief that there should be some element of "user pay" - or a ticket tax - in the funding model, and we are prepared to have that discussion with City Administration, though for the reasons I touched on earlier, there are natural limits to what we can agree to as relates to revenue streams which impact ticket prices. The balance of funds, including funds for related infrastructure, would come from other sources, including the Federal and Provincial governments. For this, we would need the City of Edmonton to signal that a downtown arena is a priority and join us in making this request. In summary, we are aligned with the direction set by the city administration, subject to reaching agreement on the various financial estimates inherent in the structure and specific business terms of the arrangement. We believe this can work for everyone. Thank you for your attention. I will now turn the presentation back to John for some closing remarks.
John Karvellas Thanks Paul. The need for a new arena is not unique to Edmonton. At some point or another, every NHL market has faced or will face this question. Certainly, it is a question faced by every market that is in search of a team. In many ways...it is simply the price of being an NHL City and all that brings in the way of national exposure, civic pride, economic impact and identity. Before I close, permit me to make a few additional points regarding the idea of renovating the existing Rexall Place: - We know that a renovation of Rexall Place will cost an estimated $250 million, according to a 2008 study by HOK Sports, a world leader in arena design. - We also know that if that estimate has indeed come down as a result of lower prevailing labour costs, then the same would be true of the construction costs for a downtown arena. - We know - or at least, we have to believe - that any renovation of Rexall Place will be funded out of existing tax dollars, while construction of a new arena would not. In other words, the cost of renovating Rexall Place will likely come out of the pockets of Edmonton homeowners by way of increased taxes. - We also know that the financial model to justify any renovation would depend in large part on the willingness of the Edmonton Oilers and Oil Kings to enter into a new lease that runs beyond June 2014. To avoid any uncertainty in this regard, I can tell you that we do not believe a renovation would assist in the sustainability of the Oilers, we will not invest in or otherwise support such a project, and we do not intend to have the Oilers play in a renovated Rexall Place As well, renovating Rexall Place does nothing for downtown Edmonton and will not benefit the City overall in our view. - Finally, we know - we absolutely know...and understand...and respect - that this downtown project only works if it satisfies the City's planning and development process, fulfills the City's public consultation requirements, and meets with the approval of Edmonton City Council. In that regard, I would like to say that with Daryl's rather extraordinary support, we are ready and willing to lead the development of a new downtown arena district that can achieve a number of important goals for our city. We have written expressions of interest from national and international hotel chains, restaurants and retailers. We have had positive discussions with major office tenants. These are high quality prospective partners and tenants, but they are facing timelines, competing priorities and decision points of their own. In order for us to be able to move forward and secure these opportunities, we need some commercial certainty. Perhaps it goes without saying that we have timing concerns of our own, not the least of which is the need for a new home for the Oilers by the fall of 2014. So what are we asking for today? As Daryl indicated, we are asking that you give your Administration authority to negotiate with us to develop an agreement dealing with the design, construction and financing of a new arena and related sports and entertainment facilities in downtown Edmonton. We will support the City's public consultation process and continue with our own. It is our desire and hope that prior to the end of this calendar year, a proposed form of agreement would be brought back to Edmonton City Council for discussion and, hopefully, approval. Let me conclude with Daryl's words: We have an opportunity here to do something that will benefit Edmonton for generations to come. We hope you will join us in the effort. We will now be pleased to take your questions. This is your forum and we respect that you will proceed as you may wish, but if you would be so kind as to direct your questions to me, I can refer them to the member of our team that would be best able to respond to each question.
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