Is the Convention Center Billboard Deal Good Financially For the City? Read On

Did the city council make a good business deal when it voted last week to sell the rights to advertising signs on the exterior of the L.A. convention center for a guaranteed $2 million a year?  The only dissenter, Councilman Bill Rosendahl, said, “I don’t think it’s a great business deal for the city at all, I think it’s a great business deal for this private vendor.”

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The agreement between the city and AEG, the owner of Staples Center and L.A. Live, requires AEG to pay the city a minimum of $2 million per year, with an inflation escalator of 3 per cent.  Additionally, AEG is required to pay the city 25% of the first $5 million in net revenue from the signs, with a 3% inflation escalator; 50% of the next $5 million, and 75% of net revenue over $10 million, both without any increase for inflation.   The agreement runs for 10 years, with AEG holding an option to renew for two additional 10-year periods.

Leaving aside for a moment the very important question of how “net” revenue is defined, we’ll start with an abritrary assumption that in the first year of the agreement, AEG would earn a total of $5 million in net revenue.  By the terms of the agreement, the city would get the $2 million guarantee, plus an additional $1.25 million, for a total of $3.25 million, or 65% of the total earned by AEG.

However, the average inflation rate over the past 30 years has been 4.1%, and inflation is now running at 5.3%.  If we assume that AEG would be able to raise its rates to keep pace with inflation, and inflation runs at the historic rate, what would those figures look like at the end of the ten-year period?  AEG’s net revenue would rise to $7.2 million, with the city getting a guaranteed $2.6 million ($2 million plus 3%) and $1.6 million in revenue sharing, for a total of $4.2 million.  Because of inflation, however, the city’s share of of AEG’s net revenue would drop from 65 to 58 per cent.  If AEG exercised its option to renew the agreement for another ten years, the city’s revenue would rise to $5.7 million, but if AEG’s income from the signs kept pace with inflation, the city’s share would actually drop to just over 50 per cent.

Supporters of the deal may argue that it will look better for the city if AEG’s net income from the signs rises to the point that the city’s share reaches the 50% and even 75% levels.  But how likely is that to happen?  The agreement allows AEG to deduct from its gross revenue operating and maintenance costs, as well as amortization of any capital expenses involved in installing the signs.  What will be counted as these costs?  We’re all familiar with stories of the movie industry, where directors and actors taking a percentage of net proceeds have ended up with nothing, even when the movie was a blockbuster. Will anyone really be surprised if the city gets little more than the $2 million annual guarantee?

Some people who are leery of the idea of plastering the outsides of a public building with 50,000 square feet of commercial advertising have nevertheless supported it on the grounds that the city desperately needs the revenue.  Would they feel the same if they knew what a bad deal, revenue-wise, it really could be for the city, and how generous it could be to an already deep-pocketed corporation?

For the agreement and documents regarding the city council’s action, click here. For a look at the actual convention center signage plan, see L.A. Convention Center Signage Diagram

Leaving aside for a moment the very important question of how “net” revenue is defined, we’ll start with an abritrary assumption that in the first year of the agreement, AEG would earn a total of $5 million in net revenue.  By the terms of the agreement, the city would get the $2 million guarantee, plus an additional $1.25 million, for a total of $3.25 million, or 65% of the total earned by AEG.

However, the average inflation rate over the past 30 years has been 4.1%, and inflation is now running at 5.3%.  If we assume that AEG would be able to raise its rates to keep pace with inflation, and inflation runs at the historic rate, what would those figures look like at the end of the ten-year period?  AEG’s net revenue would rise to $7.2 million, with the city getting a guaranteed $2.6 million ($2 million plus 3%) and $1.6 million in revenue sharing, for a total of $4.2 million.  Because of inflation, however, the city’s share of of AEG’s net revenue would drop from 65 to 58 per cent.  If AEG exercised its option to renew the agreement for another ten years, the city’s revenue would rise to $5.7 million, but if AEG’s income from the signs kept pace with inflation, the city’s share would actually drop to just over 50 per cent.

Supporters of the deal may argue that it will look better for the city if AEG’s net income from the signs rises to the point that the city’s share reaches the 50% and even 75% levels.  But how likely is that to happen?  The agreement allows AEG to deduct from its gross revenue operating and maintenance costs, as well as amortization of any capital expenses involved in installing the signs.  What will be counted as these costs?  We’re all familiar with stories of the movie industry, where directors and actors taking a percentage of net proceeds have ended up with nothing, even when the movie was a blockbuster. Will anyone really be surprised if the city gets little more than the $2 million annual guarantee?

Some people who are leery of the idea of plastering the outsides of a public building with 50,000 square feet of commercial advertising have nevertheless supported it on the grounds that the city desperately needs the revenue.  Would they feel the same if they knew what a bad deal, revenue-wise, it really could be for the city, and how generous it could be to an already deep-pocketed corporation?

For the agreement and documents regarding the city council’s action, click here. For a look at the actual convention center signage plan, see L.A. Convention Center Signage Diagram< -->

Dennis Hathaway

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