Originally published May 22, 2018 at 04:51p.m., updated May 23, 2018 at 06:18a.m.
Former Kansas Athletic Director Sheahon Zenger agreed to a contract change that could cost KU tens of millions of dollars in additional lease payments at Rock Chalk Park, a review by the Journal-World has found.
Zenger, who was fired on Monday, agreed in 2013 to void a lease Kansas Athletics already had signed with Lawrence businessman, builder and KU donor Thomas Fritzel as part of a public-private partnership to develop Rock Chalk Park, which houses KU track, soccer and softball facilities in northwest Lawrence.
The original lease, signed in October 2012, gave Kansas Athletics complete control over whether to end its partnership with Bliss Sports, Fritzel’s for-profit company that developed Rock Chalk Park, after 30 years. At the end of the lease, KU had the option to extend its lease for 20 more years or walk away if it didn’t like any of the terms.
When KU announced in September plans to build $350 million in new facilities, primarily for football, it marked the beginning of one of the biggest financial bets the program has ever made. The Journal-World decided to study the financial books, talk to leaders and give readers a better understanding of the money game that is constantly a part of big-time college athletics. To see more articles go to: ljworld.com/kuath
That lease was signed by both Kansas Athletics and Bliss Sports in October 2012. But just four months later, both parties agreed to void the original and sign a new lease. Under the new lease, Kansas Athletics does not have the option to exit the lease after 30 years. Instead, Bliss Sports has complete control over whether to extend the lease.
Based on the lease rate KU currently pays, a 20-year extension would cost Kansas Athletics an additional $44 million in lease payments.
In addition, Kansas Athletics agreed to a larger lease payment. Bliss Sports — the landlord — was required to pay a Kansas University Endowment Association entity a ground lease because the facilities are located on property owned by the KU Endowment entity. But in the new lease — which was signed in February 2013 — Kansas Athletics agreed to reimburse Bliss for its costs related to the ground lease. The exact costs remain unclear, but lease documents indicate they were between $3 million and $4.5 million.
The Journal-World began asking Kansas Athletics officials why the department would voluntarily void a lease that gave KU significant leverage over the future of Rock Chalk Park in favor of one that limited KU’s options. Pat Kaufman, chief financial officer for Kansas Athletics, acknowledged the lease was changed at the request of the landlord, which had become concerned that its interests weren’t adequately protected by the original lease.
Kaufman said via email that it had been determined that “Bliss needed 50 years of rent to make them whole.
“So, in fairness to the landlord, both parties agreed the best-faith approach was this change in option and for (Kansas Athletics) to cover the ground lease costs,” Kaufman said via email.
Jacob Fowles, an associate professor who teaches public finance at KU’s top-ranked school of public administration, said KU’s decision to give up control of the lease extension is significant because KU is giving up a large amount of flexibility for the future.
“I would say there has to be give and take when it comes to the flexibility,” Fowles said. “If the university is giving up some of that flexibility, what is the university getting in return? That is a fair question to ask, because certainly that flexibility isn’t free.”
Zenger — who was fired on Monday by KU Chancellor Douglas Girod for a lack of progress in the department — discussed the lease situation briefly with the Journal-World in April. During that interview, Zenger did not acknowledge the key change in lease terms that he had signed off on. Rather, he touted the flexibility the lease would give future administrations in the athletic department.
“At the end of the day, we don’t know what 30 years from now looks like,” Zenger said. “We are trying not to hamstring anybody 30 years from now with anything we can’t project.”
When a Journal-World reporter asked how that was the case given that the lease terms give the landlord the ability to extend the lease at its sole discretion, Zenger demurred and said that is a “whole other conversation.”
When the Journal-World followed up with Kaufman at a later date, the CFO also initially denied that KU had agreed to such a change in lease terms, and touted the flexibility the lease provided to the athletic department. But when the Journal-World pointed out the changes between the October 2012 lease and the February 2013 lease, Kaufman acknowledged that the lease terms had changed. Kaufman later said it had been several years since he had reviewed the leases, and he had forgotten the change in terms.
It is unclear whether the board of directors for Kansas Athletics Inc., which is its own nonprofit corporation, approved the lease changes or were made aware of them beforehand. The Journal-World on Tuesday asked for documentation of any such meeting where the board acted on the lease issue.
The Journal-World reached out to Fritzel for comment, but he did not answer a list of questions that were emailed to him.
The lease creates a fair amount of uncertainty for Kansas Athletics in future years. The lease does not provide a specific lease rate that KU would be obligated to pay during the last 20 years of the lease. Rather, it says KU shall pay at a rate equal to the fair market value of the facilities, as determined by a trio of independent appraisers.
It is possible the lease rate could be lower than the current rate of $2.2 million per year, given that the facilities will have aged. However, it also is possible that the lease rate could be higher. The current lease rate was set in 2013 and does not adjust for inflation. In essence, KU is paying the first 30 years in 2013 dollars. When the lease is subject to be renewed in 2044, the lease rate will be set using 2044 dollars. The impacts of inflation on the lease rate could be significant.
Further complicating matters is Kansas Athletics — not the landlord — is responsible for making all types of improvements to the facilities. That includes major items such as replacing the track surface, repairing any structural defects of the buildings, plus more standard items like roof replacements or mechanical repairs.
Any improvements that Kansas Athletics makes during the first 30 years of the lease, theoretically, will improve the fair market value of the facilities. That enhanced fair market value, in turn, will be used to set the lease rate for the final 20 years of the agreement. That arrangement puts Kansas Athletics in a position where the improvements it pays for may cause its future lease payments to also increase.
Fowles, the public finance professor, said public-private partnerships — while having some value — also have been known to create such complications. He said the Government Finance Officers Association has issued several advisories warning governments to be very cautious with public-private partnerships because it is easy for such projects to change in scope and value.
“Honestly, I think municipalities end up at a comparative disadvantage because they are working with businesses who are doing these type of deals all the time that understand the context of it and the scope of it,” Fowles said.
A $100 million deal?
When the Rock Chalk Park idea became public in 2013, it was touted that KU would pay $39 million for the facilities as part of the unique public-private partnership. Today, KU Athletics has committed to $66 million in lease payments over a 30-year period. If the landlord chooses to extend the lease for another 20 years, the total cost could grow to more than $100 million.
How the 30-year portion of the lease grew from $39 million to $66 million isn’t entirely clear. About $10 million is easy to account for: a new tennis center that wasn’t part of the original plan was constructed. Part of the increase also involves KU’s decision to pick up the tab on the ground lease.
But several million dollars of the increase is attributable to the indoor softball facility at the park. KU officials contend it wasn’t originally envisioned as part of the project, and thus its cost wasn’t factored into the February 2013 lease. However, site plan documents on file at City Hall — dated Nov. 2, 2012 — show the indoor softball facility as part of the Phase 1 portion of the project. Regardless, KU in May 2014 agreed to amend the lease and pay more to cover the cost of the softball facility.
The total price tag of Rock Chalk Park has raised questions about whether it would have been cheaper for Kansas Athletics to simply finance the project traditionally through university and state bonds.
Kaufman, though, said university officials at the time didn’t think bonding the project was a feasible option.
“(Kansas Athletics)-specific bonds would have become part of the university’s overall debt portfolio, which factored into why bonding was not an option,” Kaufman said via email.
Kaufman didn’t provide additional detail on that point, such as whether KU officials felt the entire university was at risk of becoming over-leveraged.
A consideration easier to understand has to do with football. Kaufman said Kansas Athletics, at the time, wanted to maintain a maximum amount of borrowing authority to put towards a football stadium renovation. The lease, because it is categorized as an operating lease, is not required to be shown on Kansas Athletics’ balance sheet as debt. KU officials now say they are not planning to issue much debt as part of any future football stadium improvements.
Kaufman said the public-private partnership was successful in creating first-class facilities that helped the university address critical Title IX issues — issues related to adequate facilities for women's sports programs — at a time traditional financing methods were going to be challenging. And he noted the facility has benefited both the university and the community by attracting national events, such as the Junior Olympics last year.
Whether KU could have more cheaply financed the project through bonds is tough to say because the actual construction costs for Rock Chalk Park aren’t known. Kansas Athletics has an independent report that estimates the value of the construction at about $51 million. But at other times, KU officials have said Fritzel, who is a builder by trade, was making a donation to the university by constructing the facilities at a cost far below market value.
But one thing that is clear is that traditional bond financing would have resulted in Kansas Athletics owning the facilities much sooner. Bond financing is normally 20 years, although sometimes it stretches to 30 years.
The 50-year term that KU has with the current lease is potentially problematic, Fowles said. It creates a question of whether KU will still be paying on the lease at a time when the buildings have reached the end of their useful life or need to be completely refurbished. Common accounting standards generally consider a building fully depreciated after 39 years.
“It is just a core principle in public finance, just like with your mortgage, you want to match up the useful life of the asset with the terms of the financing,” Fowles said.