SHADOW OF A DOUBT
Tim Leiweke was whistling Dixie last March. When the boyish 38-year-old former president of the Denver Nuggets unveiled the Pepsi Center, the team's planned $132 million sports arena across the railroad tracks from Elitch's in downtown Denver, a Dixieland band tooted its horns at the conference room in the Westin Hotel. The choice of music was appropriate: Those present at the glitzy ceremony were offered a vision of downtown Denver as a Rocky Mountain Disneyland.
A scale model of the Central Platte Valley stood at the center of the hotel conference room, showing the Pepsi Center, a fortress-like 610,000-square-foot building with windowless walls that loomed over the heart of Denver's new entertainment district. Other displays highlighted Colorado's Ocean Journey, a $64 million public aquarium planned just across the South Platte river from Elitch's, and a $20 million television production center slated to be part of the Pepsi Center development.
Leiweke had been in Denver little more than three years at the time, having arrived in town after a stint as vice-president of sales and marketing for the Minnesota Timberwolves. But he'd already established a reputation as a showman with a flair for the dramatic. Half a dozen Pepsi corporate brass squirmed nervously next to him at the press conference, understandably anxious since their company had just signed off on a deal worth nearly $68 million. Leiweke barely broke a sweat. As smiling hostesses in denim skirts passed out Pepsi and cotton candy, he placed his hand on a black drape covering a scale drawing of the arena and lifted it off with the flourish of a matador.
It was a moment of personal triumph for Leiweke. He'd been in negotiations with city officials for months, hinting that the Nuggets might have to leave town if the city didn't let them out of their lease at McNichols Sports Arena. The team was offering the city what it described as a risk-free compromise: It would build a new arena itself and then sell it to taxpayers for $1. The team, in return, would control the revenue stream at the facility and kick back a couple of million a year to the city. As they prepared to sell their plan to the public, Leiweke and the unlikely consortium of other big players in the valley he had assembled to back the Pepsi Center--including Denver billionaire Philip Anschutz and Tele-Communications Inc., the Englewood-based cable television giant--were almost giddy, undoubtedly dreaming of Disney-sized profits coming their way.
Just five days later, a tearful Leiweke would hold another press conference to announce his resignation from Comsat, the Maryland-based satellite communications company that owns the Nuggets. That was the start of a run of bad luck for the Pepsi Center, culminating in last week's blockbuster announcement that Anschutz--who had pledged to provide the land for the arena--was backing out of the deal.
Today Leiweke is in Utah, working as president of the United States Ski Team and wondering if the project would still be on track if he hadn't left. Anschutz, angry that he didn't get a piece of the Colorado Avalanche hockey franchise Comsat bought earlier this year for $75 million, has packed his moneybags and headed to California, where he and L.A. developer Edward Roski Jr. plan to buy the Los Angeles Kings for $100 million and possibly put up a new state-of-the-art arena of their own. Comsat, meanwhile, remains determined to erect a posh new venue for its Nuggets and Avalanche somewhere in downtown Denver.
There's still a Pepsi Center in Denver's future. But will the deal really be risk-free? All one need do is look to Minneapolis--the city, ironically, where the idea for the Pepsi Center was spawned--to see that sports arenas, just like soda pop, can easily go flat.
If the idea of a privately funded arena being sold to taxpayers for $1 sounds too good to be true, it probably is. The experience of Minneapolis has shown how quickly privately funded arenas can become public burdens.
Privately financed arenas are something of a trend these days. New arenas in Boston and Seattle are being built with private funds, although public guarantees and tax breaks are part of those deals. But Minneapolis's experience with a privately funded arena, the ill-fated Target Center, was disastrous enough to make some wonder what Denver may be getting itself into.
The owners of the Minnesota Timberwolves, Marv Wolfenson and Harvey Ratner, opened the Target Center in 1990, loudly trumpeting the fact that they had paid for it themselves. However, the 20,000-seat arena ran into trouble almost as soon as construction started. Construction workers hit bedrock at the site in downtown Minneapolis, an inexperienced architect and faulty design led to huge cost overruns, and the Target Center's final price soared from a planned $60 million to $100 million.
To make matters worse, Ratner and Wolfenson--known sardonically around Minneapolis as "Harv and Marv"--lost money on several other real estate ventures. The expansion Timberwolves had a series of losing seasons, and ticket sales plummeted.
By the fall of 1993, the co-owners announced they would sell the team to out-of-town investors and leave the Target Center empty unless the city agreed to buy the arena. Months of private negotiations and public threats followed. In May 1994 Ratner and Wolfenson agreed to sell the Timberwolves to a group from New Orleans who planned to move the team to Louisiana. However, NBA commissioner David Stern nixed that $152 million deal and made it clear it was up to Minnesota's public officials to find a way to keep professional basketball in Minneapolis.
Bailing out the Target Center with public funds was unpopular with voters, and the team was soon dubbed the "Minnesota Timbertantrums" by talk-radio wags. But downtown business interests were convinced that losing the team would be a blow to the city, and they lobbied hard for a public takeover of the Target Center.
"People bought the argument that professional sports teams are economic generators," says Minneapolis city councilman Jim Niland, an opponent of the bailout. "They thought Minneapolis would become a cold Omaha without a basketball team."
Eventually, the city council approved a deal to buy the Target Center, issuing $72 million in taxpayer-backed bonds. The local business community raised $12.7 million toward the buyout, selling private bonds to several Minneapolis-based companies.
As part of the deal, businessman Glen Taylor, a prominent figure in Minnesota's Republican party, agreed to buy the Timberwolves for $88.5 million--in exchange for a break on his property taxes that could end up costing the city millions.
Niland was one of three councilmembers who opposed the buyout, and he still bristles over the use of public funds to pay for the Timberwolves' bungled new arena.
"Harv and Marv were using the blackmail tactic to stampede the city," he says. "They said, `We'll be able to do it ourselves.' Then they went over budget and had a marginal team. You have the interests of a few millionaire team owners dominating the agenda. It's a national trend; we can't afford anything for our cities, but we can bail out the wealthy."
To repay the bonds, Minneapolis will use revenues from a parking fund the city has periodically dipped into during lean years. Niland predicts that vital city services will be slashed to keep the lights on at the Target Center. "They're spending money that could pay for cops on the street and childhood immunizations," he says.
Minneapolis city council president Jackie Cherryhomes defends the buyout, saying the Target Center anchors part of the city's downtown. "It was important from an economic standpoint," she says. "There's a lot of jobs involved."
But the Target Center bailout also apparently set a frightening precedent. Recently, professional baseball's Minnesota Twins threatened to leave the city if they don't get a new ballpark. And even Cherryhomes believes the demand for new stadiums and arenas has gotten out of hand.
"There are 65 teams in the U.S. asking for new stadiums," she says. "The public is getting tired of it. We can't continue with this madness of cities trying to steal away each other's teams."
The days when ticket sales alone were enough to keep the owner of a professional sports franchise happy are long gone. In order to pay athletes million-dollar salaries and still maintain large profit margins, owners have become increasingly dependent on luxury boxes and club seating rented at premium prices to corporate clients. Most older arenas lack those amenities, and teams are telling cash-strapped cities they can either build them new venues or lose beloved franchises.
Since many cities want professional sports teams, owners can play cities off against each other. The result is a bidding war that's given North American sports teams remarkable access to public funds. To win an expansion National Football League team, the city of Jacksonville, Florida, issued $160 million in bonds to rebuild the Gator Bowl, guaranteed the sale of 1,500 club seats every season and even promised to buy the new team's office furniture.
St. Louis came up with an even more lucrative deal to lure the Los Angeles Rams from Southern California. The city spent $260 million to build a domed stadium before it even had a team, guaranteed the Rams a new $15 million practice facility, coughed up another $15 million to help the team relocate, and even retired $30 million in debt the Rams had accumulated in California. Since cities like these are willing to do virtually anything to attract sports teams, towns with well-established and profitable franchises--like Denver--feel vulnerable when a local team demands new facilities.
"I think blackmail is a word for it," says Ford Frick, a sports analyst with BBC Research and Consulting in Denver. "There's no question professional sports teams have figured out they have leverage over these communities. How any community could take the St. Louis football deal, I don't know. They handed things over lock, stock and barrel."
The fever for new sports venues also may be drawing cities into an unending cycle no one can really win. Since each new arena is technologically more advanced than the last, arenas only a decade old are regarded as outmoded--and a 21-year-old model like McNichols Arena is treated like an antique.
"As you build these new arenas, the team at the bottom goes to the city and says, `We can't compete, we need a new arena or we'll leave the city,'" says Arthur Johnson, a professor of political science at the University of Maryland-Baltimore County. "Then there's another team that suddenly finds itself on the low end of the totem pole and that makes the same argument. It's a self-perpetuating process."
The 1990s certainly will be remembered as the decade of the sports palace in Denver. The opening of Coors Field and the lucrative lease the Colorado Rockies negotiated at the ballpark prompted the Nuggets and the Denver Broncos to insist that McNichols Sports Arena and Mile High Stadium be replaced. The Nuggets continue to insinuate that they will leave Denver if they don't get a more upscale arena. And Comsat has a proud history of playing hardball with the city.
The Maryland firm stumbled into ownership of the Nuggets in 1989, buying into the team with two partners who were on the verge of embarrassing the NBA with their financial difficulties. NBA boss Stern, an old friend of one of Comsat's top executives, asked his buddy to bail the team out. That transaction was heralded as the deal that kept the Nuggets in Denver. But after suffering through a series of dismal seasons, Comsat came close to moving the team to Toronto in 1992.
Leiweke, known as a master marketer, was widely credited with turning around the Nuggets' fortunes. He came to Denver in 1991 and, like his new bosses, didn't hesitate to use whatever leverage he had available. He soon challenged fans to show their support for professional basketball by averaging 14,000 a game during a four-game home stand. If they didn't, Leiweke implied, the Nuggets might leave Denver. Ticket sales climbed past 15,000 for each game, marking a turnaround in the Nuggets' fortunes.
The Nuggets' 1992 season opener against the San Antonio Spurs was the team's first sellout in years. Enthusiastic crowds and much-improved players like Dikembe Mutombo led to several strong seasons. Comsat's 1994 financial reports glowingly noted the success of the company's fast-growing entertainment division, which had revenues of $157 million last year. The company attributed most of the division's $11 million in profits--a 62 percent jump over 1993--to the Nuggets.
In professional sports, though, all profits are relative, and Comsat has never been satisfied with its earnings at McNichols. While games regularly sell out, McNichols has a mere eighteen luxury suites and no club seating. The big money today is in the exclusive suites and club concourses that cater to corporate fat cats, and the Nuggets have turned a jealous eye to Coors Field, which has 58 taxpayer-financed luxury suites where Denver's high and mighty rest in mahogany chairs, sipping champagne and spearing veal cutlets out of silver chafing dishes.
Special services available to suite holders at Coors Field include a valet, fax and copy machines, a boardroom for between-inning business meetings, fully catered meals and a private entrance away from the mob. From Boston Market to KUSA-TV, dozens of Denver's best-known companies shell out a minimum of $70,000 a season to lease suites at the ballpark. Those private suites earn the Rockies millions every year and have helped make the team enormously profitable.
Comsat sees a similar gold mine in the Pepsi Center, which it envisions as the hub of a new regional entertainment zone. But with public tolerance for team bailouts apparently on the wane--Denver fans were outraged when the Broncos made noises about extending the Coors Field sales tax to build a new football stadium--the company was hesitant to ask for a direct taxpayer subsidy. Instead, Comsat and Leiweke turned to the Target Center model of a "public-private partnership" fueled--on the front end, at least--by their own funds. And true to the old maxim that it takes money to make money, the company has been sodding the entire Central Platte Valley with greenbacks. In addition to shelling out millions for the hockey Avalanche, which it expects to play in its new arena, it has invested $7 million in Elitch Gardens, given $250,000 to Colorado's Ocean Journey and even chipped in $50,000 to the struggling Children's Museum.
One of the key players in Comsat's original scenario was Anschutz, the oil-and-railroad tycoon who owns 43 acres of former railyards in the valley and has been waiting for years to cash in. Anschutz knew that construction of the arena would make the rest of his property more valuable when he entered into a partnership with Comsat last year. He also salivated at the prospect of getting a 50 percent interest in the expansion hockey franchise Comsat was then in the process of wooing. And both he and Comsat were encouraged by the inclusion in the deal of cable giant TCI, which agreed to fund a $20 million TV production studio on the Pepsi Center site.
"There's a great synergy in the Central Platte Valley, with the aquarium, Children's Museum, Coors Field and Elitch's," says Gary Hunter, the Comsat executive charged with negotiating a Pepsi Center deal. "We're excited about it. I think we're looking at the entertainment industry as a whole. We want to provide an entire menu of entertainment assets. That's the wave of the future."
In fact, Comsat is so convinced that it stands to make a killing on the deal that it apparently had second thoughts about letting Anschutz--a shrewd investor who a few years ago got his hands on the Southern Pacific Railroad in a deal where he put up hardly any of his own money--walk away with half of its hockey franchise. Contrary to expectations, Comsat bought an existing franchise, the Quebec Nordiques, rather than waiting to purchase an expansion team. And the company--which at one point reportedly began refusing to take Anschutz's phone calls--apparently used that fine print to squeeze the rail tycoon out of a share in the newly christened Colorado Avalanche.
Ironically, the millions Comsat shelled out for the Avalanche has hurt the company's earnings. Citing a $16 million loss in the third quarter of 1995, the company recently laid off 106 employees, though it predicts revenues will rebound once the Avalanche hits the ice. And after the falling out with Anschutz--who claimed to be "devastated" by the deal's collapse even as he floated the idea of a multimillion-dollar sports arena of his own in Los Angeles--the Pepsi Center is relegated to looking for a new home.
Comsat already has a shopping list of other Central Platte Valley landowners, and speculation has centered on the property behind Union Station, owned by the Trillium Corporation of Bellingham, Washington. Marilee Utter, Trillium's regional vice president, confirms that her company is engaged in "discussions" with Comsat. But putting an arena on Trillium's land would be controversial, since a growing number of lower downtown loft dwellers, already swamped by the cars and crowds at Coors Field, are clamoring for lower-density development at their front door.
"Public sentiment wouldn't let them build on Trillium's land," predicts LoDo developer Charles Woolley. "The best site is where it is now. I believe it's the best site for that arena to connect it with all the other things happening downtown."
It's still possible, Woolley notes, that Comsat could simply buy the original site near Speer Boulevard and the Auraria Parkway from Anschutz. And while the Maryland company tries to find a place for the Pepsi Center to land, the company and its cadre of high-priced attorneys also will continue to push for a financial agreement with the other major players in the deal: Denver's taxpayers.
Denver has been negotiating with Comsat over the Pepsi Center proposal since the spring of 1994. That's when Mayor Wellington Webb appointed a task force to study the Nuggets' plan and determine if renovating McNichols for the Nuggets was a viable alternative.
The task force concluded that McNichols could be remodeled with new luxury suites and a second concourse for $55 million but would still fall short of what the Nuggets wanted. Since the shell of McNichols was continuing to age, the task force said it would be foolish to spend millions renovating McNichols' interior only to lose the arena's main tenant when the team's lease expires in 2008.
Months of negotiations followed, pitting Comsat and attorneys from the Denver firm of Brownstein Hyatt Farber & Strickland against a team of City Hall numbers crunchers. After several dramatic moments, including an angry Leiweke storming out of one session at McNichols, a tentative agreement was reached in January. That deal, still the only one officially on the table, calls for Comsat to pay all construction costs and sell the arena to Denver for $1. The Nuggets would sign a thirty-year lease, in return for which Comsat would be allowed to manage not only the new arena, but McNichols and the Denver Coliseum as well. A decision on whether or not to tear down McNichols would be made at a later date, and Denver would receive an annual payment of $2 million from Comsat.
"I don't see this contract being renegotiated any time in the near future," Webb told the Denver Post. "That's why we wanted to tie them up for thirty years."
The plan was met enthusiastically in some circles; Post sports columnist Woody Paige extolled its virtues in a rare foray into political commentary. Critics, however, attacked the Webb administration for negotiating the deal behind closed doors--and noted that by giving Comsat control over McNichols and the Coliseum, the city was giving away a lot more than a dollar.
Even so, by last spring the Pepsi Center deal was moving at supersonic speed and seemed all but certain to win city council approval. But Comsat and its heavyweight partners soon ran into trouble.
Just a few days after the lavish press conference that heralded the birth of the arena, an emotional Leiweke told reporters he was stepping down, blaming burnout and a desire to spend more time with his wife and daughter. While Denver's dailies ran sentimental stories about Leiweke's new commitment to his family, inside reports hinted at increasing tension between the publicity-loving Nuggets executive and his button-down boss, Charles Lyons, president of the Comsat division that owns the Nuggets.
But Leiweke's departure was a blip on the radar screen compared with the surface-to-air missile the Colorado Supreme Court sent Comsat's way. In an obscure case that had attracted little attention, remote Montezuma County had been pressing the courts for the right to collect property taxes on concessions at Mesa Verde National Park. Colorado didn't levy property taxes on private companies using public facilities--a little-known loophole that Comsat was counting on to make the Pepsi Center property-tax free. By ruling in Montezuma County's favor, the Supreme Court turned Colorado law upside down, and the Pepsi Center deal came in for a crash landing.
Suddenly Comsat faced the prospect of being liable for $2 million a year in property taxes over and above the $2 million it had promised to pay the city. With Brownstein Hyatt, the panicked corporation already had the law firm of choice for companies needing a quick tax break in its corner--and it snagged a victory in the last hours of the Colorado legislative session as obliging lawmakers passed a bill restoring the property-tax exemption. The legislation sailed through just minutes before midnight on the last day of the session, an example of backroom dealmaking that was too much even for Governor Roy Romer. Noting that the law looked like "chicanery" to voters, Romer vetoed the tax break in June.
To keep the Pepsi Center project alive, Comsat headed back to the city this summer, making it clear Denver would have to find a way to make up the $2 million a year in taxes for which the company was now liable. The city could have told the team to take a hike--but, afraid of losing the NBA franchise, it began a new series of negotiations, which have been under way now for weeks. At least one attorney from Brownstein Hyatt is present at all of those sessions. City officials and Comsat executives won't say what new tax breaks they're considering, but letting Comsat keep the sales tax collected at the arena is reportedly one option under discussion.
Former Denver auditor Bob Crider hasn't seen the latest Pepsi Center deal. But he's a forceful critic of the agreement announced last January, the terms of which aren't likely to change radically in the latest round of bargaining. According to Crider, the deal forged earlier this year was sweeter than a Pepsi for the Nuggets' wealthy owners.
"[Comsat] was going to get the seat tax, concessions and parking," says Crider. "They were going to get it all. There was no way they could lose. It was a godsend for them. The city made $4.5 million in 1993 with McNichols and the Coliseum. What we were getting was $2 million for thirty years."
Crider also is skeptical of Comsat's claim that it will pull the Nuggets and Avalanche out of Denver if it can't get a new arena. And he has another question: "If they make this deal for the Nuggets, what are they going to do for the Broncos?"
Leiweke now watches events in Denver from a safe distance. Ensconced at the U.S. Ski Team headquarters in Park City, Utah, he says he's surprised by the falling-out between Anschutz and Comsat and wonders if the deal would have come apart if he were still leading the charge for a new arena. "I feel terrible, because I feel partly responsible," he says. "I hope my leaving didn't cause it."
But Leiweke, who acknowledges being "intimately involved" in the opening of the Target Center, remains an ardent booster of Denver's arena project. Huge debt on poor terms sunk the arena in Minneapolis, he says. "There may be some comparisons, but the Pepsi Center is a different situation. I've seen the financial side of both of those projects. I think the Pepsi Center is a much better deal."
Better financing, a resident hockey team and the incredible $68 million that Pepsi agreed to pay for naming rights--an amount that ensures rival Coca-Cola will be nowhere in sight at the arena--will make Denver's new arena profitable, claims Leiweke. And city officials also downplay the prospect of a Minneapolis-style fiasco.
"When we started this process that whole experience was in the headlines," says city finance director Liz Orr, Denver's chief negotiator on the Pepsi Center. "The way this deal is structured is to make sure what happened there couldn't happen here."
The biggest difference, Orr says, is that Denver will take possession of the Pepsi Center and assume no debt. Minneapolis had a lease on the land under the Target Center, but otherwise had no control over the arena.
"What has to be delivered to us is clear title on the arena with no debt," Orr says. "We'll also have a new thirty-year lease with the Nuggets that's independent of that. It's a very different deal than Minneapolis."
Comsat and its partners will use revenues from the arena and whatever profit they make managing the other city facilities to pay off the debt taken on to build the $132 million project. The city would have no legal responsibility for that debt. But as Denver's past dealings with the Nuggets make clear, the team's problems have a way of becoming the city's problems.
For example, though Mayor Webb has made much of the Nuggets' willingness to sign a thirty-year lease at the Pepsi Center, the mayor himself has already demonstrated that the team's leases are made to be broken. Webb renegotiated an earlier lease the Nuggets had with the city in 1992, when the team was performing poorly and asked Denver for help. The new lease Webb signed runs well into the 21st century--and it, too, will have to be broken in order for the Pepsi Center deal to go through. What would prevent the Nuggets from trying to break their third lease if attendance at Nuggets and Avalanche games falls off a cliff? Nothing, acknowledge city officials.
"We'd all be kidding ourselves if we didn't say over time a team could come and ask for a renegotiation of the terms," says Orr. But she insists that the risk in the Pepsi Center deal is "overwhelmingly" on Comsat and its partners.
And any risk Denver may incur, Orr adds, is worth it. The city has a vital interest in keeping the Nuggets and the Avalanche in town, she says: "Look at what cities that have lost teams have done to get them back. The Nordiques asked for a new arena in Quebec and didn't get it. It's not an idle threat."
Orr says local sports teams are important to Denverites and bring money-spending suburban residents into the city. "People in this area see sports teams as a source of civic pride; that's the principal reason you should do these things," she says. "Estimating the economic impact is sometimes difficult, but those impacts are real. You get a lot of national coverage and media attention. A lot of businesses think it's a major amenity whenever they're making relocation decisions."
Arthur Johnson at the University of Maryland has been studying the economic impact of the national arena craze. He predicts the construction of the Pepsi Center will simply shift dollars now spent at McNichols to the new arena, and there will be no net gain. "The arena itself won't be the economic generator the boosters claim, but that doesn't mean the project is not worth it," he says. "You have to look at the spinoffs it might produce."
To hear Comsat tell it, those spinoffs may be of nearly mythic proportions. Gary Hunter says the Pepsi Center will play host to everything from the Ringling Bros. and Barnum & Bailey Circus to Disney on Ice. That combined with the Nuggets and Avalanche games, he says, will keep the arena in constant use--and keep it profitable.
"We'll have anywhere from 180 to 250 event nights a year," he claims. "We'll have concerts, circuses and conventions. We'd control the revenue streams within the arena. We'd control our own destiny."
The players in the Denver deal have learned from the mistakes that were made in Minneapolis, adds Hunter. Still, he's not making any guarantees. "I would never be so bold as to say it would never happen here," he says of the Target Center disaster. "But we have a number of safeguards to make sure that doesn't happen. They overextended themselves in Minnesota.
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