MONEY CONCERNS: A city audit suggests Memphis and Shelby County might be owed more than half a million dollars because of ambiguity in the financing scheme for FedExForum. -- PHOTO COURTESY OF THE MEMPHIS CONVENTION AND VISITORS BUREAU

An internal city audit suggests Memphis and Shelby County might be due more than half a million dollars because of a gray area in the $250 million FedExForum’s complex financing scheme.

The Memphis City Council will discuss the audit today during a committee meeting. The full council will meet at 3:30 p.m. at City Hall, 125 N. Main St. (See Page 10 for full meeting agenda.)

The reason both local governments may be owed money has to do with how the arena’s operating agreement treats tickets sold and tickets given away.

Anyone who buys a ticket to a Grizzlies game at the Downtown arena will enjoy a little more than two hours of professional basketball. Part of the ticket purchases also will help make the arena’s annual debt service payments.

A seat-use fee of $1.15 for every ticket sold will go toward paying bonds issued to develop the city-owned arena.

That was part of the scenario envisioned years ago when a funding plan for the arena was put together. To hedge against a shortfall in one revenue stream, other funding sources such as a hotel-motel tax and car rental tax were added to the mix.

Building a plan with several layers of financing was designed to prevent taxpayers from directly shouldering the burden of paying for the arena.

In hindsight, it was probably a good idea the seat-use fee wasn’t the only revenue source.

That fee by its nature fluctuates based on crowd size at FedExForum events. And last year, the Grizzlies had the second-worst home attendance record among the NBA’s 30 teams, averaging a little more than 12,000 fans.

Complimentary issues

For basketball games, the arena is configured to seat a little more than 18,000 people. But that doesn’t tell the whole ticket revenue story.

The central issue in a recent seat revenue audit – the results of which were delivered to city officials this summer – is not explicitly spelled out in the arena’s operating agreement: Each time complimentary tickets are given out for basketball games, concerts and other public events held at FedExForum, the per-ticket fee of $1.15 is not going to help pay the arena bonds.

And there’s apparently no contractual requirement that HOOPS LP, which operates FedExForum, pay the $1.15 fee for tickets given away.

A little more than 511,000 complimentary tickets were given out in fiscal years 2005 through 2008, according to the city audit. Nearly $588,000 in seat-use fee revenue went uncollected because of those free tickets.

The free ticket totals and uncollected seat-use revenue don’t include complimentary tickets given out by the University of Memphis for its basketball games played at the arena.

From 2005 through 2008, the number of free tickets given away for each of those years totaled, in order, 114,504, 139,218, 138,164 and 119,147.

Action to consider

The audit recommends the City Attorney’s Office decide whether action should be taken to recover the unpaid seat-use fees from tickets given away since the arena opened in late 2004.

“The operating agreement did not clearly state whether a seat rental fee should be charged for complimentary seats,” reads one finding of the city audit. “As a result, we obtained a legal opinion regarding seat rental revenue for complimentary seats. The legal opinion stated that ‘because seat rental fees are characterized as a charge on the use of a seat during a paid arena event, it follows that seat rental fees should be collected on every seat used at a paid arena event.’”

Meanwhile, the audit and its finding have landed in the lap of Memphis City Council members, who are scheduled to consider the material this morning.

The audit will be discussed during the council’s 9 a.m. audit committee meeting.

The Shelby County Commission also might be dealing with the issue soon. Commissioner Mike Ritz has requested the matter be brought before the commission’s budget committee.

“It appears to me we have an opportunity to collect some fees here,” Ritz said.

Included with information about the audit council members will discuss today is an outside attorney’s opinion sent in March to Shelby County Attorney Brian Kuhn about the matter.

Florida attorney Richard Miller wrote to Kuhn that whether a ticket is bought or given away should not matter to the collection of the seat rental fee.

“The imposition and collection of seat rental fees are therefore qualified by the nature of the event and not by the nature of the ticket or admission,” he wrote. “A paid event triggers the imposition and payment of seat rental fees.”