Thunder - Smg Lease Inquiry

Bob Weeks Inquiry The Thunder – SMG Lease May, 2009

Issue # 1: Since SMG has committed to a contract/lease agreement with the Thunder in which there is a major revenue stream for the facility and with terms greater than one year, does the County have to approve the Thunder contract/lease agreement? Response: No, the County does not have to approve the Thunder contract/lease agreement because it is in the sole discretion of the Contract Administrator whether or not to approve the agreement, and even then such approval cannot be unreasonably withheld. It is important to understand that there are two types of contracts covered by section 2.3 (c) of the agreement—contracts that involve paying money out (Section 2.3 (c) i), and contracts involving a revenue stream for SMG (Section 2.3 (c) ii). Contracts that involve paying money out, such as a contract to provide security for the facility, must be approved in writing by the County if it involves a term beyond the management term of SMG. As will be discussed later, this approval can be a simple letter from the Contract Administrator and such approval cannot be unreasonably withheld. The Thunder agreement involves a revenue stream and Section 2.3 (c) ii provides that “SMG and the County will have joint approval rights (which approval right shall be at each party’s sole discretion, not to be unreasonably withheld) for all major revenue streams that can impact the profitability of any Facility …with terms of greater than one year.” Section 2.1 (d) provides that “to the extent that the approval of the County is required under the terms of this Agreement, the written approval of the Contract Administrator shall constitute the approval of the County,” Under the definitions in Section 1, the “Contract Administrator” is defined as – the senior administrative official of the County as from time to time appointed by the County Manager, or such individual person as may from time to time be authorized in writing by such administrative official to act fro him/her with respect to any or all matters pertaining to this Agreement. So to address the first issue, it is in the discretion of the Contract Administrator whether or not to approve the agreement with the Thunder. This approval could take many forms and could be established by policies within the County Manager’s Office. While the initial review of the Thunder contract/lease agreement was limited to a discussion between the Contract Administrator and the SMG’s General Manager, subsequently a more thorough review by the Contract Administrator and an Assistant County Counselor with the SMG General Manager revealed the following notable provisions of the agreement: 1.) The term of the agreement is for 10 ½ years with provisions to terminate in the event of default by either party.

2.) There is a provision for a base rental that we agree is standard in the market with accelerators for future years based upon established indicators. 3.) There are other provisions in the agreement for revenue to be derived by SMG to cover staffing costs and other maintenance considerations. 4.) There is appropriate insurance coverage to protect the operator of the facility. After such subsequent review it is our opinion that the agreement provides adequate protection for the County for the entire term of the agreement and there is no reasonable basis for exercising our discretion to disapprove the agreement. For future contracts/lease agreements that fall under the conditions of the SMG Agreement as identified above, the Contract Administrator will meet with the SMG General Manager of the INTRUST Bank Arena and review any agreement in order to understand the terms and conditions of the agreement and how this might affect the County’s interest. Issue # 2: How can Sedgwick County give its approval to a contract/lease agreement that SMG will not let the county see (wouldn’t approval in a meaningful way mean that the commissioners and the public can read the contract/lease agreement)? Response: Obviously the County can’t give meaningful approval to a contract that we can’t see, but our agreement with SMG specifically allows us to review any agreement in order to understand the terms and conditions of the agreement and how this might affect the County’s interest. See Section 2.6 (a) (i) which provides:. (i)

To the extent that SMG has any confidential or proprietary information that it reasonably believes is a privileged trade secret and/or should not be disclosed to a third party to protect the privileged, confidential and/or proprietary nature of such information, and upon the approval of the Contract Administrator, which shall not be unreasonably withheld, SMG shall not be required hereunder to deliver such information to the County, but instead, will afford the County an opportunity to review such information at the Facility during reasonable business hours and upon reasonable advance notice, or on terms mutually agreed upon by the parties in order to protect the privileged, confidential and/or proprietary nature of such information.

As mentioned above, we have had the opportunity to review this agreement with SMG in a meeting with the General Manager of the Intrust Bank Arena. In our negotiations with SMG, we intended to give SMG significant authority to run the business of the new arena as they deem necessary as a means for them to sign off on an agreement that puts the risk of losses solely on them. The only reason we wanted the authority to review/approve long term agreements was for the purpose of making sure that SMG wasn’t putting the County in a bad financial position for years that they might not be operating the arena. While initially this is a five year agreement, we have

provisions in the agreement that will automatically extend the agreement for an additional five years if they meet certain performance criteria. In other words, there is no reason at this point in our business dealings to think that SMG is operating in anything but the best interest of SMG and the County and such there would be little reason to formally approve the Thunder agreement – let alone have a reasonable basis to withhold approval. With Hartman Arena and Sprint Center (non SMG operated facilities) as competitors in this market, it is of high importance to SMG of keeping their proprietary information from being disclosed publicly. In addition, the County’s financial interest is protected with a provision in the agreement requiring SMG to maintain a system of bookkeeping adequate for its operations and for the use of our auditors. SMG is furthermore required to give the County’s authorized representative access to such books and records. The County has the right at any time, and from time to time, to audit and/or cause nationally recognized independent auditors to audit all the books of SMG relating to the operating revenues and operating expenses of the arena.