Friday, August 21, 2009

Dispensing With the Lies Told About the Simons' Right to Terminate the CIB-Pacers Conseco Fieldhouse Contract

This morning I take a closer look at the Pacers-CIB Conseco Fieldhouse Contract. What I have tried to do is take it apart and simplify it so that lay people can understand a very complex and poorly written contract. Still the analysis is terribly dry and I apologize for that.

As an initial side note, one thing I have not heard discussed is that even thought Pat Early of the Capital Improvement Board signed the contract on November 1, 1999 it wasn't until 7 1/2 months later, on or about June 15, 2000 that the Simons finally signed the agreement. I just think it rather odd that a contract of this magnitude would not be signed contemporaneously. Oddly though they wrote the contract (actually there is a financial agreement and operating agreement which I'll often refer to as a "contract" for simplicity sake) in such a way that the effective date was the date on the agreement, not the date the last party signed the contract, which is the norm. They also don't have dates next to the parties signature which a good attorney would have included, especially in a situation like this where the parties are not in the same room signing the agreement on the same day.

Now let's examine more closely that "Early Termination Right" contained in Section 4 of the Financial Agreement

EARLY TERMINATION RIGHT

First there is no right to terminate early in the first 10 years of the contract. I don't think anyone questions that.

Now, let's look at how the early termination right in Section 4 of the Financial Services Agreement works. For the erlyy termination right to apply it requires:

Written Notice to the CIB within 30 days of the Pacers notifying the NBA of its intent to relocate the Indiana Pacers. First though ALL of the following conditions must be met:

(1) Pacers have experienced a "significant net cash flow loss" for the fiscal year for the previous season
(2) Pacers reasonably expect that they will produce a "significant net cash flow loss" for the following fiscal year;
(3) Pacers reasonably believe it will produce a cumulative "net cash flow" from July 1, 1997 through the end of the contract.
(4) the CIB does not within 60 days of the "early termination notice" agree to subsidize the Pacers in an amount which covers the "net cash flow loss" for the following fiscal year;
(5) the Pacers intend to structure a sale which triggers the CIB's First Refusal Rights or the Pacers intend to sell or transfer all or a substantial portion of its assets

Thus it is critical to look at the CIB's "First Refusal Rights." That is contained not in the Financial Agreement but in the Operating Agreement. In that provision, it says that if the Simons or the Pacers notify the CIB of "meaningful negotiations" and is prepared to accept an offer to sell the Pacers stock, or all or a substantial portion of the Pacers' assets, then the CIB has 45 days to basically match that offer.

To simplify there are three conditions that must be met before the Early Termination Right kicks in: 1) notice of intent to relocate the team; 2) proof of financial loss ; and 3) a sale of the team.

Repeatedly the tall tale has been told that since the Pacers (allegedly) are losing money, the Simons simply have a right to cancel the contract and relocate the team. Not true. To terminate the contract they also have to be selling the team.

But even if the Pacers were to exercise the Early Termination Right, they still have to pay the penalty outlined in Section 5 of the financial agreement. Contrary to the claim that first appeared in the State audit review of the CIB, the contract says nothing about agreeing to a mutually agreed penalty for early termination. Rather two formulas are provided.

THE PENALTY FOR EARLY TERMINATION

There are two formulas which we will label "A" and "B."

A: Penalty is 1) Aggregate Advance Amount not yet forgiven (basically the CIB advanced utilities at Market Square Arena that is being forgiven on a declining basis every year); and 2) an amount equal to the "applicable termination percentage" (which is in Exhibit B of the Financial Agreement) multiplied by the net sales proceeds. That applicable termination percentage starts out at 50% in 2009 and declines about 3% to 6% every year.

Here's how that formula for "A" works: If the Pacers sell for $300 million in 2009 (the Pacers franchise was valued at $303 million by Forbes in December of 2008), then the penalty under "A" is:

$15 million (approximate balance of Unforgiven Utilities from MSA) + $150 million ($300 million x 50%). PACERS EARLY TERMINATION PENALTY UNDER "A" = $165 million.

B: Penalty is $50,000,000 plus "Applicable Scale Amount" which is located in Exhibit A. This is an amount that starts out at $184 million in 2009 and 2010 and then declines about $9 to $10 million every year.

Here's how the formula for "B" works: If the Pacers exercise the early termination provision in 2009 or 2010, the PACERS EARLY TERMINATION PENALTY UNDER "B" is $50 million + $184 million = $234 million.

Under the contract you are supposed to Use "A" for the penalty, unless "B" is less. Thus the penalty the Pacers would owe to the CIB and the taxpayers, should they sell the team for $300 million and terminate the contract in 2009, would be $165 million.

Translation? The penalties are so substantial the Simons have absolutely no leverage to demand $15 million from the CIB/City. People who keep peddling the notion that the Pacers can simply pick up and move if they are losing money apparently do not understand the contract or have another agenda.

See the Star's take on the meeting by clicking here.

3 comments:

Downtown Indy said...
This comment has been removed by the author.
Downtown Indy said...

June 15, 2000? Was that some bizarre sort of 42nd birthday present to the then-new mayor Bart Peterson?

Unigov said...

Paul, thank you for doing this work, I was just thinking yesterday of getting a copy of the contract and trying to figure it out. I learn more from your website than I do reading indystar.com - they have more stories but they seldom say anything substantive.