Kent City Council committee extends ShoWare Center operator’s contract

A Kent City Council committee approved a proposal to extend for as many as 10 years a contract with Philadelphia-based SMG to market and operate the city-owned ShoWare Center.

The council’s Operations Committee voted 3-0 on Tuesday to recommend that the full seven-member council approve the agreement that will pay SMG $135,000 a year to run the $84.5 million arena that seats 6,025. The council will consider the agreement at its Nov. 4 meeting.

SMG received strong support from the committee despite the arena losing $3 million since it opened in 2009. The city covers those losses with money out of its general fund.

“We would be worse than where we are now if we didn’t have them,” Councilman Bill Boyce said about the company.

SMG manages the day-to-day operations of the arena, including event booking, the budget, vendor selection, public relations and marketing, and event staffing. The company also has the food and beverage contract.

“SMG has been a fantastic partner with us from the very beginning,” Council President Dana Ralph said. “I feel like anything other than continuing this contract would be a huge setback. I feel SMG is committed to making this building successful and without that kind of commitment we just don’t have a chance. I think changing now would be catastrophic.”

The proposed contract includes two five-year terms. The city will have the option to end the agreement after year three in each of the five-year contracts. The previous contract was for three years.

City officials also agreed to give SMG an incentive clause.

“A new element in the agreement is a new incentive fee structure,” said Ben Wolters, city economic and community development director who oversees the arena. “SMG can earn up to $50,000 in incentive per year based upon the amount of additional gross revenue they generate above a baseline of $2.15 million. The way they would earn that is they would be entitled to 20 percent of the revenue generated over that benchmark up to a $50,000 cap.

“The $2.15 million is the equivalent of our two best years at ShoWare Center. Our best year was 2013 when we had a loss of about $370,000 and had revenues at just over $2.1 million. The point with the incentive is to encourage and provide incentive for SMG to help grow our revenue above where we are today.”

Boyce questioned Wolters about raising the bar even higher than $2.1 million since that mark already has been hit.

“The negotiation with SMG on this was related to where is their willingness and ability to at least have some shot at that incentive,” Wolters said. “And I didn’t want the incentive to be for just repeating performance. So what we came up with is something that’s a little bit above where they’ve been in the past but not so far above where they felt they didn’t have a shot to claim that incentive.”

Ralph had hoped for a better incentive deal.

“In 2013 we had $2.15 million (gross revenue) and still had a $300,000 operating loss so we very easily could be in a situation where we are paying an incentive and still losing money,” Ralph said. “It causes me some concern that we’re losing money, so instead of a $300,000 loss we would have had a $350,000 loss.”

“You are absolutely right,” Wolters said. “They have the potential to earn in this scenario even though the building would not be in the black.”

Councilman Les Thomas asked Wolters why the incentive couldn’t be tied to net revenue rather than gross revenue. Wolters said the Internal Revenue Service prohibits that in the contract.

Tim Higgins, ShoWare general manager, came away pleased with the proposed agreement.

“It’s great,” Higgins said. “It’s giving us the ability to continue what we started six years ago. We came into a building in a very competitive market and we’re starting to see some traction where more promoters and agents are interested in the building. SMG is making a mark for itself in this market.”

The deal, if approved, also includes SMG paying $500,000 for capital improvements to the facility. Wolters said those changes could include updated and refreshed concession stands to create more revenue and possibly the addition of a pizza oven in the kitchen. SMG would recommend the changes and Wolters would have the final say on what is done.

“The $500,000 is SMG showing how they believe in this building and what this building can do going forward and we believe will be more successful as the years go by,” Higgins said.

SMG also proposes to waive the $200,000 final loan payment due to the company from the city at the end of this year. That is part of an original $700,000 loan from SMG as part of the initial food and beverage contract that allowed the city to purchase food and beverage equipment for the arena.

The company manages about 230 facilities throughout the world and 80 percent are arenas. The firm also manages the Lynnwood Convention Center, its only other facility in the Pacific Northwest.

“This market is one of the most competitive markets I’ve seen when it comes to venues,” Higgins said. “We compete with 24 venues in a 50-mile radius for shows.”

An increased number of concerts would boost revenue, partly because music fans spend a lot on food and beverages.

“We do 10 to 12 concerts a year right now but we’re seeing more interest from outside promoters for more touring shows,” Higgins said about promoters who line up numerous venues for one tour.

Higgins appreciates the city’s support.

“SMG would like to thank the city for their vote of confidence in trying to push this forward,” he said.