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Details of billboard deal raise questions

Company to recover upfront payments and installation costs in no-bid 20-year deal with city

By John Chase, Chicago Tribune reporter

3:09 AM EDT, June 15, 2013

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Mayor Rahm Emanuel's no-bid deal for new expressway billboards guarantees the city far less than half the $700 million the private vendor expects to make and essentially requires Chicago to repay all the upfront cash the mayor touted as a key selling point.

A Tribune examination found the city also has to cover $41.8 million in "capital costs" for the vendor, despite the Emanuel administration's assertion the city wouldn't have to pay to install or maintain the digital signs under the 20-year agreement.

Even the city's guaranteed minimum take of $155 million could be in jeopardy, if Gov. Pat Quinn doesn't sign off on City Hall's request to waive state regulations governing where — and how close — the towering commercial signs can be placed along Chicago expressways.

The details bolster critics who contend the mayor made a hasty deal late last year with a joint venture run by Interstate Outdoor Advertising, a billboard company whose CEO is an Emanuel political donor, and the French firm JCDecaux, whose Chicago political ties date to the administration of Mayor Richard M. Daley.

"We are getting totally ripped off," said Ald. Scott Waguespack, 32nd, who was one of six aldermen to vote against the plan. "Why in the world would we create an asset and hand it off to a third party that would reap all the profits?"

The contract is the first big venture to come from Emanuel's "municipal marketing initiative," which he says will raise much-needed revenue by inviting private companies to come up with innovative ways to place advertising on taxpayer-owned property —then pay the city for the privilege.

Emanuel unveiled the billboard deal in October and won City Council approval on a 43-6 vote Dec. 12, challenging skeptical aldermen to come up with a better alternative for raising the $15 million in upfront cash that the deal provides for the city's 2013 budget.

But Ald. John Arena, 45th, said last week that before the vote he repeatedly asked administration officials for an estimate on how much the private firm stood to gain but never got the answer.

"It was asked and never answered in the charade of testimony on this," Arena said. "Now that we know what that number is, it just bears out and affirms for me my no vote."

Lois Scott, the chief financial officer for the city, told the Tribune the details of the agreement were all available for aldermen before they voted, including the provisions about the upfront money and capital cost recovery. She said the city struck a strong arrangement that at the end of the deal could get the city about 42 percent of the gross revenues.

The lengthy contract with Interstate-JCDecaux LLC, which is available on the city website, includes a complicated revenue-sharing exhibit that estimates the company could make up to $663 million over 20 years if all goes well. Under that long-range estimate for annual revenue, the city's total share could rise to $276 million. But only $155 million is guaranteed to the city.

In a March conference call with investors, JCDecaux executives said the deal was the first public-private partnership for large-scale, cutting-edge digital billboards on public land and would be worth up to $700 million. They highlighted a unique advantage — the signs will be placed closer to the road than commercial billboards can typically be placed.

The billboard signs "are going to be built right at the edge of the expressways whereby most states, private billboards cannot be built at a distance which is less than 500 feet from the expressway. And in some instances, in some cities it has to be 1,000 feet which applies to the private location," JCDecaux co-CEO Jean-Francois Decaux told investors.

"In this case, since we are on public land we can build right at the edge of the expressway, therefore enhancing the visibility of the advertising message," Decaux said.

If Interstate-JCDecaux LLC does indeed make $700 million over the course of the deal, that will be good news for the city because of the revenue-sharing arrangement that would boost the city's take, Scott said.

"When they do better, the taxpayers do better. Our interests are aligned," she said.

In selling the plan to citizens and aldermen, Emanuel's administration said a big advantage would be the $25 million in upfront payments from the firm — $15 million in 2013 and $10 million in 2014.

"There are 1,300 billboards up. … That 1,300 produced $1 million," Emanuel told aldermen in December, describing the fees the city now receives from standard billboards across the city. "I think you should be asking yourselves how did we let them get away with $1 million when somebody else with 34 can give us $15 (million)."

But those upfront payments essentially amount to a loan. Under the contract, Interstate-JCDecaux begins recouping that $25 million in 2015, collecting $5 million a year for five years. The firm gets that money before the city begins collecting a dime of its share of gross revenues, according to the contract.

The details of the agreement also contradict the administration's statements about who pays for the signs.

In a summary of the deal handed out to aldermen, the city stated that, "Interstate, at no cost to the city, will install, maintain and operate the network" adding later that "initial installation costs are approximately $30 million, all of which will be paid by Interstate."

Although Interstate-JCDecaux will spend the money initially, the contract shows that beginning in 2014, the joint venture begins collecting more than $3.4 million a year for eight years to regain its capital investment. A few years later, according to the contract, the firm begins collecting more than $2 million a year to recoup the costs of replacing the signs, which it must do every nine years.

In all, the firm stands to collect $41.8 million in "capitalized cost recovery," which also will be taken off the top by the firm before the city sees any share of gross revenues.

Scott said there is no contradiction because "there are no dollars coming out of the city's pocket, there is no cash."

As with other parts of the agreement, the city's $25 million in upfront cash and the guaranteed $155 million spread over 20 years are based on how many signs the company is allowed to put up.

But so far, the city doesn't have final approval for its program from Illinois officials who enforce both the state's regulations on highway advertising as well as the sign restrictions under the federal Highway Beautification Act. The various regulations govern everything from the type of property that signs can be placed upon to their size and how far apart they have to be from each other and from roadways.

Late last month, officials with the state Department of Transportation and the city reached an agreement under which the state would approve placement of 25 of the 34 billboards, though neither side has explained which sign locations would get the go-ahead. City officials have said they expect to ultimately get approval for all the signs.

However the deal is contingent on Quinn signing legislation that waives the state's billboard regulations for Chicago's program, as long as there is no conflict with the federal law. The state's billboard trade group opposed the special legislation for Chicago because it would create an unlevel playing field for everyone else, said Rose Trader, executive director of the Outdoor Advertising Association of Illinois.

Some Emanuel supporters have contended that opposition to the deal is being stoked by competing billboard operators. And the administration has pushed back hard at criticism from some aldermen who compared the deal with the notorious agreement Daley reached in 2008 with a private firm to lease the city's parking meters, which was rushed through City Council with little time for examination.

Emanuel officials say the billboard deal was more transparent in part because it came out of the city's 2011 open invitation to about 6,000 city vendors to pitch any ideas they had for marketing on city property.

Interstate-JCDecaux was one of five companies that came up with a digital billboard plan in response to that request, and their proposal was selected as the best one, Emanuel spokeswoman Kathleen Strand has said. But that invitation bypassed the city's competitive bidding process. The administration rejected the Tribune's public records request for communications between the potential vendors and the city.

The newspaper has previously reported that executives with Interstate donated $10,000 to Emanuel's campaign for mayor, half coming from CEO Drew Katz, a frequent donor to Democrats, according to state and federal records.

Interstate's Chicago lobbyist is Neal & Leroy, the firm headed by Langdon Neal, who is chairman of the Chicago Board of Election Commissioners. Neal was an attorney representing JCDecaux when it won a much-criticized contract from the Daley administration in 2001 to put up bus shelters around the city.

Tribune reporter John Byrne contributed.

jchase@tribune.com