City officials release financial plan for Rupp project; renovations will top $350 million

bmusgrave@herald-leader.comApril 25, 2014 

  • Team Rupp

    The University of Kentucky will oversee fan contributions for a "Team Rupp" one-time fundraiser to generate $35 million for the renovation of Rupp Arena and attached convention center space.

    The program will ask for one-time contributions of $300 from an estimated 140,000 people. Of that money, $250 will go to the Rupp redesign and $50 will go to UK.

    UK is working on details of the Team Rupp program. But those who buy a $300 share will likely be invited to special events. It is modeled after a program used by the Green Bay Packers to renovate Lambeau Field.

The total cost of a renovated Rupp Arena and downtown convention center will top $350 million, according to a financial plan for the project.

Construction and design costs account for $302 million of the $351 million price tag. But the project also includes other costs, such as paying off a 2004 renovation of the convention center — $18 million — and cash reserves needed to issue bonds, city officials told the Herald-Leader this week.

Details about the financial plan had not been made public until this week. Frank Butler, project manager for the Rupp redesign, said the University of Kentucky — Rupp's marquee tenant — did not want the financial plan released until after the legislative session was completed April 15. UK has not yet signed a 30-year tentative lease agreement between it and Rupp.

"There is and always has been a detailed conservative financial plan for this project," said Susan Straub, a spokeswoman for the city.

The financial plan depends largely on a mix of state, city and university money, and fan support. The project includes $80 million in state bonds, $40 million in city bonds and $35 million in fan support that has been dubbed "Team Rupp."

Butler said the Team Rupp program will offer a one-time membership fee of $300 — $250 would go toward the Rupp redesign project; the university would keep $50.

To generate $35 million in support, 140,000 fans would need to buy the membership.

The program, Butler said, is modeled after a stock buy used by the Green Bay Packers to remodel Lambeau Field. The publicly owned professional sports team has issued stock several times to pay for renovating its iconic stadium.

In this case, UK would run the program. Team Rupp could also be a key revenue generator for the university, netting it $7 million if it sells the target 140,000 units.

Butler said they are still discussing what people would get for the one-time membership fee.

"We are putting together a package of benefits such as an annual meeting with the coach each year, but these are just ideas that are being developed," he said.

Butler noted that this would be the first time that fan support for a capital project has been used for an arena at the collegiate level.

"What our study has said is that if any institution could pull it off, it would be this one," Mayor Jim Gray said this week.

Consultants on the project have completed market studies and think there is more than enough fan support for the concept, consultant Stan Harvey said.

The combination of state, city and fan support would pay $159 million of the $351 million price tag. To make up the difference, the Lexington Center Corporation — which runs Rupp, the convention center and the retail shops — will need a $192 million loan.

Debt payments on the $192 million loan would be roughly $15.3 million a year for 30 years, according to the financial plan.

UK will pay a little more than half of the $15.3 million in annual debt payments. The two groups have agreed in principle to a lease that will generate $8 million a year in additional revenue for Rupp.

The actual lease is for $10.7 million. But the university could receive up to $2.7 million back from Rupp in the form of advertising and other revenue generated by the renovation.

That's a significant increase from UK's current lease.

According to information provided by the Lexington Center Corporation, the University of Kentucky Athletic Association paid $216,268 to Rupp in 2013. The university's total rent payments and other fees were more than $912,000, but the university received nearly $700,000 back in advertising revenues.

Butler said details remain to be worked out between the university and Rupp; he said he could not say when the lease will be signed.

Other revenue sources

In addition to UK's increased rent, the plan banks on $1.5 million in additional revenue generated by the redesigned facility. That $1.5 million would come from additional conventions or events in Rupp Arena.

For example, a redesign of the convention center would allow Rupp to host more NCAA women's basketball and other sports tournaments that it cannot currently host because the NCAA requires more space than the current convention center can provide.

Part of the city's hotel and motel tax — 3 percent of a 6 percent sales tax — would also be dedicated to paying off the $192 million revenue bond. That tax would generate about $3.8 million each year for debt payments.

Also included in the $15.3 million is $2 million annually for naming rights for Rupp. Gray has stressed that Rupp will remain part of the name of the revamped complex.

Jamie Emmons, Gray's chief of staff, said that consultants' analysis has shown that naming rights could likely be sold for between $1.5 million and $2.5 million.

"We feel like ($2 million) is an accurate estimate," Emmons said.

If any of the potential revenue sources for the $15.3 million annual payments fall short and the convention center can't make its payments, the obligation to pay off the $192 million loan will fall to the city.

"Since the Lexington Center Corporation is basically a political subdivision of the city, the city has the ultimate obligation and has since the creation of the Lexington Convention Center," Butler said. "We will have a 30-year lease with the university in writing. The real risk overall is what happens if UK quits playing basketball halfway through the contract."

But Butler said that's not a problem. The tentative negotiated lease requires UK to continue to pay the lease even if its basketball program no longer plays at Rupp.

Another key element of the redesign of Rupp Arena is widening High Street behind Rupp. That's a state road which could require state funding. That cost is not included in the $351 million price tag. Planning Commissioner Derek Paulsen said the city is working with the state to determine the costs.

Lobbying the state

Now that the financial plan has been made public, the group will return to legislative leaders this summer to start to lobby again for $80 million in state aid, Butler said.

The Urban County Council will be asked to authorize the $40 million in bonds in the coming fiscal year, which begins after July 1. But the council will not have to authorize the $40 million unless the legislature also agrees to fund the project. Debt payments of roughly $2.4 million will not have to be made until 2016.

The Urban County Council voted this week to designate an entire meeting to the Rupp project in June because council members raised so many questions about it. The council has not yet been fully briefed on the details of the financial plan and has not had a chance to vet the proposal, council members said last week.

Butler declined to say when construction would begin if the project got a green light from city and state officials.

Butler and others have said the project needs to move forward quickly. The uncertainty of what will happen to the convention center in coming years is already affecting business. Conventions typically book three to five years in advance.

Project officials have not decided whether the convention center would be closed during construction.

"We're still trying to work through that with the hospitality industry and our other partners," said Harvey, a consultant for the project.

But the longer the project takes to build, the more expensive the project becomes, Harvey said.

Beth Musgrave: (859)231-3205. Twitter:@HLCityhall

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