Forgive me in advance for the denseness of this post. The purpose of this post isvto respond to criticisms raised regarding Arenaco SPE LLC, the entity that will be the county’s tenant of the Coliseum property namely. Many have raised this as an issue, including Desmond Ryan, NIFA and Comptroller Maragos. The criticism is, what if Arenaco defaults on its obligations under the lease? Doesn’t that leave the County holding the bag? As I have explained earlier, the answer is that the Islanders entity is ultimately responsible for the rents under the lease. However, I thought it made sense to map out exactly how the lease provides for this.
1. The Arenaco/Islanders Sublease. Under Section 4(n) of the lease, as a condition of the lease becoming effective, Arenaco is required to enter a sublease with the Islanders. The Islanders “shall pay to [Arenaco] each year as rent under the Sublease an amount equal to or greater than the Annual Rent…due hereunder.” The lease defines “Annual Rent” as “an amount equal to the greater of (a) 11.5% of all Coliseum Revenues received for such Lease Year, or (b) $14,000,000…less any credits to which Arenaco is entitled pursuant to the terms of this Lease.” Coliseum Revenues is defined to include gross revenues related to “the operation of, or the activities conducted at, the Coliseum Improvements and any and all other improvements or businesses from time to time located upon the Land, including without limitation, pre-season, regular season and post season hockey ticket revenues, ticket revenues from other sports and ticket revenues from family events, concerts and other entertainment…radio broadcast, sponsorships (including signage and other advertising), internet…,naming rights, publications, parking and personal seat licenses…” In sum, the Islanders will have to enter a sublease with Arenaco requiring payment of the greater of $14 million minimum rent or 11.5% of all Coliseum revenues, whether or not Islander-related.
2. The Islanders’ Obligations to the County. OK, but the sublease is between Arenaco and the Islanders. How is the County protected? The answer is that the lease contains provisions that have the effect of directing the Islanders’ rent obligation directly to the County.
Section 25.1 provides:
“as security for the performance of its obligations under [the] Lease”, [Arenaco] shall execute and deliver to [the County] (a) an assignment of leases and rents in a form and content reasonably acceptable to [the County]…pursuant to which [Arenaco] shall collaterally assign to [the County] as security for the performance of Tenant’s obligation hereunder any and all subleases….and the rents, issues and profits collectable by the Tenant thereunder… [T]he Islanders shall…agree to pay to [the County] all sums due from the Islander to Arenaco upon receipt of Notice form the County of the occurrence of an Event of Default…and to the right of the County to enforce the Sublease directly against the Islanders.”
The above language means that (1) while the Islanders’ sublease is with Arenaco, as a legal matter, the County stands in the shoes of Arenaco under the sublease and the County can therefore sue the team directly for failing to pay rent, and (2) if Arenaco goes bankrupt or defaults, the Islanders are obligated to pay rent directly to the County. Thus, with respect to the rent/revenue sharing under the Lease, Arenaco’s financial status is irrelevant.
3. Cost Overruns Not Guaranteed by Islanders. Note that the provisions above – that amount to a virtual guarantee by the Islanders – are limited to the rent. Arenaco’s obligations to fund cost overruns are not backed up by the team. This is a point Comptroller Maragos identified and Wang may need to remedy this to get the lease approved.