Wednesday, August 28, 2019

If you're wondering what went wrong at Oshkosh's shiny new arena, here are 10 things to know

Photo by Adam Jungwirth
Greg Pierce, president of Fox Valley Pro Basketball, also runs investment firm Windward Wealth Strategies.

By Miles Maguire
What the heck happened?

The financial implosion that occurred this summer at the Menominee Nation Arena has left a lot of Oshkosh residents asking that question. The $21.5 million showcase has been considered one of the best things to happen to the city in a very long time, but now the trail of unpaid bills and lawsuits stretches from Green Bay to Milwaukee.

While the parties to the dispute have been tight-lipped, a review of court records provides some clues to where the project got off track and what’s been going on behind the scenes. The following material is drawn from official documents and/or statements made under penalty of perjury.

Here are 10 things to know about the arena project.

1. Individual investors walked away.
The original idea had been to sell shares to wealthy individuals in a company called Fox Valley Pro Basketball Inc., which built the arena and also owns a portion of the Wisconsin Herd, the Milwaukee Bucks’ minor league affiliate.

But “many individuals that had supported and orally [committed] to financially support the project backed out,” said 
Greg Pierce, the president of Fox Valley. “That left us significantly short of the amount we expected to raise.” (The original has the word commitment instead of committed.)

According to paperwork filed with the U.S. Securities and Exchange Commission, the original goal had been to raise $27.2 million. But as of May 5, 2017, only one investor had come forward, kicking in $5 million. By May of this year, SEC filings say there were 75 investors who had contributed $19.7 million.

2. Local banks took a pass. 
As construction costs rose and investor support evaporated, Pierce approached “area banks.” Unfortunately, “they all turned us down,” Pierce said. “The most often cited reason was that the arena was perceived as a single-use property, leaving the banks with a lack of a clear understanding of what the collateral value of it would be.”

3. Everyone knew there was risk.
Bayland Buildings Inc., the Green Bay company that served as general contractor for the arena, started work on the project before any money had been raised. “The Milwaukee Bucks required Bayland to guarantee that it would complete construction regardless of [Fox Valley’s] ability to pay for it,” Pierce said. “Bayland agreed to do so.”

4. Larger banks were willing to lend but not as much as needed.
Bayland’s bill came to $21.5 million, and Fox Valley paid $9.6 million of that amount. That left an $11.9 million gap. “Due to the specialty nature of the building, bank lenders were only willing to go to a maximum of 40 to 50% loan to value,” Pierce said. At best this would mean a loan of only about $10.75 million, and that would be assuming the banks would value the building at cost and not at its lower assessment.

5. Timing was always a problem. So were environmental issues. 

Because the city was in a race with other communities to have a facility available for the Herd by late 2017, decisions were made without complete information. The project went ahead even though the full extent of the environmental problems at the site were not completely understood. Later, when Pierce attempted to work out a special securities offering to fill the loan gap, he got hung up on a different environmental issue that had not been anticipated. By the time a solution had been found, “the lender had backed out,” Pierce said.

6. Sponsorships and refreshments have been supplying much of the cash.
Ticket sales are dependent on bookings, and event revenue fluctuates dramatically at the arena. For November, the facility is expecting to take in just $15,900, but that number jumps to $143,500 in December. A steadier flow of income derives from food and beverage sales, which are projected to bring in $80,000 in October and go all the way up to $145,000 in January. Sponsorships, which include payments for the advertisements that cover the inside walls, are the arena’s best revenue source. For the four months from October through January, sponsorship income is projected to total $669,720.

7. City incentive payments are critical.
The single largest revenue source that the arena is looking at from October through January is a tax incentive payment that could arrive in November. That amount is expected to be about $430,000, and similar annual payments could be made through 2036.

8. City taxpayers shouldn’t complain about the incentives because they are already enjoying the benefits.
The incentive program is perhaps one of the most misunderstood aspects of this project, and the idea that the city will be paying a private developer so much money infuriates some local residents. But the city is only reimbursing the developer for money it has already spent on improvements that the public enjoys today. The incentive payments are capped at $5.5 million, covering $3 million of environmental remediation at the site, which the city still owns, and $2.5 million for street repairs on South Main Street as well as “upgrades on sewers and stop lights in front of the building.”

9. Interest costs are killer.
The lack of permanent financing is the biggest challenge for this project. Because the developer was not able to get conventional long-term loans, it has had to pay extremely high rates to investors. Local businessman Eric Hoopman charged the project 18%, and the contractor, Bayland, started its mortgage loan at 12% and then boosted the rate to 24% when the arena went into default. Already the developer says it has paid $2.2 million in interest to Bayland.

10. It’s personal.
In some cases court filings are are almost too dull to read. But the lawsuits that have been filed in the last few weeks are full of raw emotions. Bayland’s extreme frustration comes through in references to its “numerous requests … via email, via telephone and via in-person meetings for payment” as well as its allegation that Pierce has “provided creditors and investors with false financial information in an attempt to raise capital.” 

For his part Pierce describes his shock at the turn of events that landed him in court. “I was surprised by Bayland’s filings,” he said, because he thought he was in the midst of negotiations about “some ideas ... for Bayland’s consideration involving long-term financing.” Their last conversation was just days before Bayland filed suit, according to Pierce, and another discussion was planned for the following week.

Anger and mistrust are evident in the available documents, which include some contradictions. SEC filings say that Pierce and other insiders proposed to pay themselves $1.4 million in management fees. But in court papers, Pierce says that he and other insiders have taken no money out except for incidental reimbursements and instead have put more than $600,000 in cash into the arena to keep it operating.

Pierce was the big winner in the first round in the fight for control of the arena. He not only secured bankruptcy protection but also got permission to be the short-term lender of last resort, through another company he owns, to the project. Unlike other creditors, he is essentially guaranteed to get his money back along with 9% interest and a $6,000 fee. The loan will be in the form of a revolving line of credit for up to $200,000.

While Pierce is arguing that everyone will be better off if he keeps control of the project, Bayland is not backing down. Even if Pierce’s company emerges from bankruptcy, he personally guaranteed some of the loans outstanding, and it looks like his creditors have no intention of letting him off the hook. On Wednesday, Bayland filed a letter in Winnebago County Circuit Court pointing out that while the U.S. Bankruptcy Court has kept creditors away from Fox Valley Pro Basketball, the “proceedings related to Gregory Pierce are not stayed.”

1 comment:

  1. Another white elephant in Oshberg...color ME surprised (not really). Oshberg can't even support itself (note the streets in town) let alone an arena. Mr. Pierce, and his co-investors, need to be held FULLY accountable...I'LL NEVER go to that venue.