Conseco Fieldhouse and Lucas Oil Stadium and Investment Losses and Circle Centre and Institutional Investors and Investing and Capital Improvement Board and Banking & Finance and Government & Economic Development and Real Estate & Retail and Sports Business

CIB could ask for $34 million in write-offs from Circle Centre investors to ease deficit

February 16, 2009

A group of mostly local companies that made big investments to help launch Circle Centre mall soon could be asked to write off a portion of profits they agreed to redirect into the construction of Conseco Fieldhouse.

The Capital Improvement Board has floated the possibility of asking the 13 investors—including Conseco, American United Life, Duke Energy, Clarian Health and The Indianapolis Star—to forgive $34 million they are owed by 2017.

The request is one of several possibilities the CIB is considering as it seeks to address a host of financial challenges—including anticipated annual deficits stemming primarily from covering operating costs for both Lucas Oil Stadium and Conseco Fieldhouse.

CIB says it's facing annual shortfalls topping $37 million, as well as other daunting longer-term challenges. Though it's not required to pay off the Circle Centre investors for eight years, CIB is on the hook to pay them millions of dollars in interest on what they're owed between now and then.

The mall investors that could be asked to write off principal and interest are among the partners in Circle Centre Development Co., a private entity that put up $75 million of the downtown mall's $320 million cost. The group, led by Simon Property Group Inc., owns the 13-year -old mall and leases the land from the city.

All but a few of the investors agreed in 1997 to send their mall dividends to the quasi-governmental CIB to help finance the construction of Conseco Fieldhouse, a $183 million venue that opened in 1999. Simon did not elect to invest its own Circle Centre mall income into the fieldhouse, so the publicly traded mall giant likely would not be asked to take a loss to help save CIB.

From 1997 to 2007, the mall investors funneled about $34 million in dividends to CIB in the form of a loan. But instead of paying back the loan from reserves when it came due in 2007, CIB pushed back the debt to 2017 and continued making interest-only payments. One reason: Lucas Oil Stadium was on the way, and CIB knew it would need the cash for that project.

The stadium was one part of a "perfect storm"—including 10 years of operating deficits, flat excise and hospitality tax revenue, and financial market turmoil—that conspired to put CIB deep into the red, said Ann Lathrop, the group's treasurer.

The low-profile CIB has opened up as it seeks a bailout of sorts, potentially from the Legislature or city. The board raised the specter of mall investor write-offs in materials shared at a board meeting Jan. 27.

Financing the fieldhouse

Mall investors were one of many funding sources for the 18,345-seat fieldhouse. Under a plan negotiated by then-Mayor Stephen Goldsmith in the mid-1990s, other sources included $50 million from a special "sports tax zone," $10 million each from Eli Lilly and Co. and the General Assembly, and $57 million from the Pacers, which are owned by the founders of Simon Property Group.

CIB officials could not say whether the Pacers have made good on their promised contribution, which carried some conditions based on team revenue. The team did get to keep the $40 million Conseco paid for naming rights.

After CIB pushed back the payments in 2007, the board expected to pay off the mall investors from reserves or new financing, Lathrop said. CIB does not have an ownership interest or a role in managing Circle Centre.

The city can scarcely afford to kick in money to pay back the mall investors. Taxpayers still owe $229 million on bonds for the mall, Indianapolis Bond Bank officials said. And Simon, which holds a 99-year ground lease on the Circle Centre property and owns 15 percent of the mall itself, is no longer paying rent.

After collecting about $15 million during the first few years of the lease, the city had to stop accepting lease revenue so it could preserve the tax-exempt status of its bonds.

City leaders determined that refinancing with traditional bonds would have more than erased the potential profits. The bonds are being funded through a tax-increment financing district, or TIF, that spans much of downtown.

"It's almost punishing the city for making too good of a deal," said Deron Kintner, the bond bank's deputy director and general counsel. "At the time, no one had any idea how successful it would be and how large these lease payments would be."

The city does continue to receive revenue from Circle Centre's World Wonders parking garage, but that income is diverted toward paying for the city's $25 million contribution to the $100 million Conrad Indianapolis hotel.

No harm in asking?

None of the mall investors IBJ could reach would discuss whether they'd consider writing off the balance CIB owes them.

But one of the business leaders who led the mall effort, former Eli Lilly CEO Dick Wood, knows how he would react. "Well, I wouldn't be very happy," he said.

Wood led an effort among business leaders that involved putting up money from their own companies and securing financing from European banks to get the mall off the ground after several fits and starts.

All told, Circle Centre took 15 years to materialize after Mayor William Hudnut in 1980 challenged the business community to "join hands" with the city to build the downtown mall.

The original investors put their necks out and should have a right to participate in the mall's success, but Wood said there's no harm in CIB's asking for voluntary writeoffs. The current financial strength of the investors certainly would be a factor in whether they oblige.

There also are intangible dividends for investors in Circle Centre mall. Thanks in large part to the mall's construction, downtown is thriving. New restaurants and shops have opened. Street life has returned.

"You've got to look at the amount of private investment downtown since the mall was built," said Evert Hauser, a former official with the bond bank.

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