CHICAGO -- A crucial test of the financial feasibility of a bond-financed baseball stadium in Cleveland began this week when officials kicked off a marketing drive to sell $20 million of luxury seat and suite leases by Jan. 15.
The seating leases are needed to satisfy financing requirements contained in a lease agreement signed this summer by the Cleveland Indians baseball team and the Gateway Economic Development Corp. That lease agreement is an integral component of escrow release conditions governing $31 million of stadium revenue bonds issued last year by Gateway.
Martin Gates, an associate at the law firm of Calfee, Halter & Griswold, which represented Gateway in the lease negotiations with the Indians, said getting commitments from businesses willing to pay the $20 million up from for the 10-year leases for the luxury seating could determine the viability of the project, under the terms of the Indians's lease.
"If we can't get enough seats sold then we would question how viable the project is," he said.
The 42,800-seat stadium is part of a $350 million sports complex, planned for downtown Cleveland, that also will include an arena. Gateway, a private, nonprofit organization set up by Cleveland and Cuyahoga County to plan, finance, and construct the facility, issued $146.7 million of tax-exempt revenue bonds for the stadium on Dec. 18.
About $115 million of the bonds are backed by revenues from county-wide excise taxes on cigarettes and liquor, while the remaining $31 million of bonds is secured by stadium rents and sales of luxury seating and is backed with a short-term letter of credit from Fuji Bank.
David Goodman, a partner at Calfee Halter, the co-bond counsel for the financing, explained that in order to get the proceeds from the stadium revenue bonds out of escrow, Gateway must obtain a long-term letter of credit to replace the Fuji Bank letter of credit that is due to expire Dec. 31, 1992.
But to get the second letter of credit from Fuji Bank or any other credit supplier, Gateway would have to demonstrate "the feasibility and creditworthiness of the project," Mr. Goodman said.
"One concern is the adequacy of available revenue to fund the project. And one requirement of that is the presale of loges," he explained, referring to the luxury seating.
He traced that requirement to the lease between Gateway and the Indians organization which calls for the Indians to pay $20 million from premium seating revenues toward the stadium construction. Harry Howell, Gateway's vice president of marketing, said the Jan. 15 deadline was set "as a milestone to gauge the income" for the project in order to satisfy Fuji Bank. At that time, Gateway's goal is to have committments from about two dozen major businesses for $20 million as payment for 10-year leases on luxury suites and seating.
If the $20 million goal is not reached by the deadline, Mr. Gates said Gateway could waive the condition, extend the deadline, or terminate the lease.
Without a lease, Mr. Goodman said Gateway would have "great difficulty" in obtaining a long-term letter of credit. He added that if the escrow release conditions are not met by the Dec. 31, 1992, letter-of-credit expiration date, the bonds would be redeemed with the unspent proceeds.
But, Mr. Howell was optimistic Gateway and the Indians would reach the $20 million goal by the Jan. 15 deadline. He said that Cleveland's corporate community could be sold the luxury leases on both an entertainment value and on civic responsibility basis. He added that the current recession should not cut cut too deeply into the lease sales.
"The recession is a factor, but there is a point of view that sometimes in rough times companies might see this as an ideal one-on-one opportunity to be with a client," Mr. Howell explained.
Interest in the Indians team, which currently holds the worst record in baseball this year, may be another factor. Attendance at the existing 74,483-seat stadium totaled 977,211 so far this season, and only 1,695 people came to a make-up gaime Monday to see the Boston Red Sox beat the Indians.
Planning for Cleveland's sports complex picked up steam in recent months with the signing in July of a 20-year lease with the Indians and the unveiling last week of the design for the $160.7 milion stadium. Still, Gateway has yet to complete lease negotiations with the Cleveland Cavaliers basketball team for the use of a 21,000-seat arena. While a Sept. 30 deadline has been set for an agreement, Gateway officials said the financing issues for the $120.9 million arena have been resolved with the team.
The project had been facing at least a $40 million deficit earlier this year that officials said would be cured with $24 million from Cleveland's share of Ohio's two-year capital building budget and with money from local business groups and foundations.
Gateway was able to beat the Dec. 31 deadline for issuing tax-exempt bonds for sports facilities that were grandfathered under the transition rules contained in the 1986 Tax Reform Act.