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Published May 24 2012

Operators of Scheels Arena trying to cut deal with creditors to reverse slide toward insolvency

FARGO - The revenue that was supposed to make Scheels Arena profitable never came. The mountain of debt cobbled together in a last-minute financing deal barely budged.

Now, the operators of the $25 million southwest Fargo facility are trying to hammer out a deal with their creditors to reverse the arena’s slide toward insolvency.

And if those talks falter, the creditors could end up haggling with the public – which owns the arena – over the building’s fate.

Money-losing proposition

Since its completion in 2008, Scheels Arena – home of the Fargo Force junior hockey team and host to a number of other events – has consistently generated about $1.6 million in annual operating revenue, tax documents show. That’s less than half of the $3.6 million to $4 million in expenses it incurs each year, according to the same documents.

“We had some overenthusiastic estimates on revenue for seat revenue and ad revenue,” said Bruce Furness, the former Fargo mayor who is now treasurer of the Metro Sports Foundation board.

Infusions of money such as donations and one-time deals have kept huge losses off the balance sheet. And officials with the Metro Sports Foundation, the nonprofit organization that runs the arena, say the gap isn’t as big as it looks.

But the foundation also concluded about seven months ago that the facility’s financial trajectory was untenable.

“We determined we could not continue to operate as we have been operating,” Furness said.

Al Hintz, the foundation’s president, said the arena can operate for two more years before running afoul of creditors.

“We meet day-to-day expenses, but not enough to service debt,” he said.

A long list of creditors

In its most recent tax forms, filed a year ago, the foundation said it owed about $23 million on the arena.

The bulk of that – about $18.5 million – is owed to a consortium of more than a dozen banks and other groups that financed the project. The foundation is negotiating with those lenders to restructure its payments down to a level it can manage.

Foundation leaders, citing a confidentiality agreement, would not discuss the nature or terms of the proposed plan, or identify the creditors involved.

In late April, Furness said he hoped to have a deal finalized by early May. He said this week that a deal is still coming but has taken longer than anticipated.

“It’s still going forward, but for whatever reason, it just is slow, slow, slow,” he said.

As of last year, the foundation also owed about

$4.7 million to four board members who backed the project, including $4.5 million to Hintz that had yet to be repaid. He declined to discuss the loan, again citing the confidentiality agreement.

At one point, Furness lent $50,000 to the foundation, which was repaid.

The hodgepodge of creditors was itself the product of financing struggles from the project’s earliest days. The group came together after the original financier for the project, an East Coast investment firm, pulled out after construction began.

With the Force already set to come to town and the International Ice Hockey Federation’s Under-18 Championship tournament on the calendar for 2009, the foundation plowed ahead with new backers.

Furness now says rushing the process was likely a mistake. Given the chance to do the project over, he said, “we wouldn’t have crashed this fundraising program. We would’ve taken another year. But everybody was excited.”

Park District ownership

Furness said the arena’s creditors are largely on board with the proposed restructuring plan. He said it’s in their best interests to work out a deal rather than see the foundation go belly-up.

“They’re going to get something instead of nothing,” he said.

As a privately funded entity, the Metro Sports Foundation has long resisted past Forum requests to review its finances. Fargo voters resoundingly rejected attempts to build publicly funded hockey arenas in both 2000 and 2005.

But the public is wedded to Scheels Arena in one crucial respect: the Fargo Park District owns it.

The land for the project, worth about $3 million, was donated to the foundation by Fargo developer and Force owner Ace Brandt. The foundation, in turn, gave the land and the arena to the Park District to shield it from property taxes.

The Park District leases it back to the foundation for $100 a year.

Jim Larson, director of finance and human resources for the Park District and a former Metro Sports Foundation board member, said the district’s ownership agreement was “carefully crafted” to keep the public off the hook should the arena falter.

“The lease agreement is very clear: We do not have any financial responsibility,” Larson said. “The asset would not come back to the obligation of the taxpayer.”

That very scenario is currently playing out with the embattled Bluestem Center for the Arts in Moorhead, where fundraising shortfalls have put nearly $5 million in Fargo School District taxpayer funds at risk.

If the Metro Sports Foundation fails, the arena’s creditors would assume control of the building as collateral for their loans. Essentially, they would assume the foundation’s position on the lease.

“They would be able to operate it,” Larson said. But “that doesn’t mean they would be able to go out and sell it” because it’s still under Park District ownership.

He said the Park District has no oversight over the foundation’s books and has only heard rumors of its recent talks with creditors.

Although the costs of the arena wouldn’t fall to the public if Metro Sports collapses, Furness said the Park District would still have to work with creditors to figure out what to do with the facility.

“The debt holders and the Park District would have to sit down and work out a solution,” he said.

If that happens, it won’t be the first time the foundation’s public ties have become an issue.

At one point, two key Fargo School District officials – Dan Huffman, then the district’s business manager, and Ed Lockwood, the School District’s activities director – were both on the foundation’s board while the foundation was negotiating a lease agreement worth hundreds of thousands of dollars with the School District.

Huffman resigned from the foundation board shortly thereafter, but said there was no conflict of interest.

Later, the Park Board agreed to provide volunteers, facilities, equipment and other support for the Under-18 championship event at the arena. Then-Park Board President Ron Sorvaag was a former Metro Sports board member.

Still ‘a great asset’

Larson said the arena is still a boon to the area.

“We think Scheels Arena is a great asset to the community,” he said, citing the youth and high school teams that use it.

Original plans for the arena called for four additional ice sheets for youth hockey and recreational skating. That phase of the project has been shelved, though Furness said it could be revived if the arena finds its financial footing.

“There is a need there for more rinks for youth hockey,” he said.

Larson and Furness say the arena is still a valuable asset to the public.

“We think it is meeting a need in the community,” said Furness, who also said the arena is coming off a year of record attendance.

He said the arena recently paid off debts to a number of vendors, and is working to rebuild a reputation tarnished at times by cash-flow problems. One vendor sued the arena for more than $100,000 in unpaid bills for its geo-thermal heating system. The lawsuit has since been resolved.

Hintz, the Metro Sports board president, said the foundation is working to find new sources of revenue in the arena, particularly in the summer months.

“From Oct. 1 to April 1, that place is just busy every night,” he said.

But he also said the foundation, wary of relying on overly rosy projections again, won’t count on those sources to solve its problems.

“We did that the first time,” he said.

Readers can reach Forum reporter Marino Eccher at (701) 241-5502