Sunday, June 18, 2006

Memphis' Agreement With Grizzlies Trumps Nashville's Negotiation

It is the fundamental nature of negotiations that they are always susceptible to second guessing by anyone not involved directly in them. That’s the case whether the negotiation is for the sale of a business or for construction of a new arena for the Memphis Grizzlies.

That’s because negotiations are always about give and take, and perhaps the best indicator of a successful one is when both sides walk away somewhat unhappy, because both sides have compromised in what they had hoped to get.

It is because of this fact that it’s easy for us to look at an agreement in the cold, dispassionate light that distance and time gives us. While this is easy enough to do when second guessing our brother-in-law’s purchase of a company, it’s a given when it’s an agreement negotiated within a political environment.

So, it should be no surprise that the recent controversy about the New Arena Public Building Authority and Tennessee Department of Transportation misleading federal highway officials to qualify for $20 million in federal funds has sparked renewed complaints by some that Memphis and Shelby County Governments gave away the store to get the Grizzlies in the first place.

Hindsight

Now, five years after the city and county signed their agreement with the Grizzlies, we all are blessed with 20-20 hindsight. What’s not so easily remembered now is that our political and business leaders had sought a professional sports team for decades, and there was general consensus that our best bet would be a franchise with the National Basketball League.

In the face of this consensus was the stark reality that in negotiations with the Grizzlies, Memphis would be trying to convince the team to move to the smallest (some NBA executives said weakest) market for a team.

Despite all this, city and county staffers who negotiated the contract with the Grizzlies had a list of “deal breakers.” If the team refused any one of them, the public sector planned to break off the sessions in keeping with the first rule of negotiation: if you’re not prepared to walk out, you shouldn’t ever walk in.

On the deal breaker list was the city-county’s demand for a long-term contract with severe financial penalties for early termination if the team left before the term was reached. There were about five other deal breakers on the city-county list, but none had greater importance than this: city and county government wanted the team to pay all operating expenses for the new arena.

Toughest Negotiation Point

It was expected that the Grizzlies would object strenuously to this requirement, and the team did. On several occasions, it appeared that this single item would keep an agreement from ever being consummated. From the team’s perspective, they were already taking big risks in relocating to Memphis and wanted to protect themselves from additional losses. City and county, on the other hand, understood fully the political benefits of winning this single point and also avoiding the yearly political spectacle of budget hearings on the subsidies.

In the end, however, the Grizzlies blinked, agreeing to pay the yearly operating deficit for its new arena. It was the single most important concession won by city and county governments in their negotiations with the Grizzlies.

After all, 210 miles up I-40, Nashville turned over management of its arena, the Gaylord Entertainment Center, to the owners of its NHL team – Predators – and also agreed to pay its operating deficits.

All of this comes to mind, because of the proposed budget for 2006-2007 recently submitted by Nashville Mayor Bill Purcell. It includes $4.1 million to cover the operating deficit for Gaylord Entertainment Center, which is managed by Powers Management, a Predators-related company. Nashville Metro Government pays the company $235,092 in management fees, minus bonuses.

And the public subsidy has been higher. Just last year it was $5.3 million.

Operating Losses

Sources in the arena management industry predict that the operating losses of FedExForum covered by the Grizzlies are likely to be even higher than $5 million a year.

Meanwhile, in Nashville, the relationship between metro government and its NHL team have gotten so bad that the Predators are threatening to file a lawsuit to force Metro Government to pay $1 million for bonuses it claims the city owes its management company and for equipment for the arena.
Powers Management has also asked for $7.85 in capital improvements to Gaylord Entertainment Center, and Mayor Purcell’s budget fully funds that amount.

The relationship has gotten so bad that Metro Government and the Predators have been arguing for more than a year about terms of their contract.

While the team is asking for the $1 million payment, Nashville complains that the Predators’ “tangible net worth” is lower than the amount required in the contract under which Nashville contributed $35 million to recruit the team to the city in the first place.

The Grizzlies and FedExForum seem always destined to produce spirited debate about everything from the financing plan for the arena to the team’s playoffs implosion. Maybe, there's only one thing we should be able to agree on: we’re all glad that it’s the Grizzlies, not the taxpayers, who are paying operating deficits for the new arena.

3 comments:

LeftWingCracker said...

look at this from Field of Schemes.com...
http://www.fieldofschemes.com/news/archives/2006/06/minneapolis_to.html

The city of Minneapolis has agreed to subsidize the Target Center operating losses of the Timberwolves, who have a management contract there, like the Griz have at the FedExForum.

If Heisley is losing money at the rate he claims, how long before HOOPS, Inc. comes hat in hand to the Council and Commission asking for the same deal, hinting that it may determine whether they can stay in Memphis or not?

"Nice NBA team ya got there, it'd be a SHAME if anything happened to it..."

mike said...

Actually, Memphis/Shelby Co. may have to make some subsidy payments. If average attendance at games falls below a certain target number (either 12K or 15K, I can't quite remember) then the City and County agreed to make payments to Hoops.

It's the real reason why attendance was in the news (ie, the daily paper) recently.

Smart City Consulting said...

Mike: We think the attendance-related subsidy was in the first contract with the Grizzlies, but not the last. We'll check on it.