It strikes me that the situation now facing FedExForum – with the NBA lockout hurting the revenue streams that pay the forum’s bonds – resemble the one the housing market faced a few years ago.
In both cases, systems were set up to try and minimize risk. But as the housing market shows, when your operating assumption gets interrupted, it throws everything amiss.
Here’s what I mean.
Bonds authorized in 2002 that helped develop Memphis’ NBA arena are paid for thanks to several revenue streams.
The people who set up the arrangement wanted to minimize the risk that any one revenue source would dry up and leave the city on the hook to make up the difference. So they spread it out – revenue comes from things like tickets and concessions sold at Grizzlies games as well as county car rental and hotel/motel taxes.
We’ll come back to that in a second.
Remember the structured mortgage products that threatened to collapse the banking system a few years ago? Risk mitigators thought they could minimize the risk of mortgages going belly-up by pooling mortgages together, then slicing those pools up and selling them off to different investors. What ultimately happened, though, is the collapse of the housing market almost all at once and very nearly in its entirety – rendering moot the plans to avoid the risk.
Now we come back to the danger associated with FedExForum because of the protracted NBA lockout.
Weeks and weeks of missed games potentially affect almost all of the half a dozen revenue streams set up to pay the arena’s bonds.
Supporters of the arena wisely thought game attendance might go down or fluctuate from one season to the next, for example, so they added other things like the hotel/motel tax and an MLGW PILOT payment.
But no games potentially affects everything – no ticket sales, no purchases at games, perhaps fewer car rentals to get patrons to games and fewer hotel rooms sold to fans and players.
And that’s why the City Council has decided the city needs to explore its options as the lockout continues – possibly leading to a lawsuit of the NBA.