The NHL in Seattle: The Financial Risks

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There are a lot of risks related to the construction of a facility home to a professional sports team (or two). Financially, the city the facility is located in and its associated taxpayers are often footed with the bill, while the team’s owner can minimize or avoid losses and the local politicians who signed off on the contribution of public funds typically escape criticism. These facilities can have a significant impact on surrounding businesses, traffic flow, and the environment for good and bad.

How is Chris Hansen minimizing these risks with his proposed arena for the SoDo (south of downtown) Seattle arena?

Taxpayer Dollars at ‘Work’

As mentioned in the introduction, arenas are often a poor investment for cities. Over and over again we see owners construct gorgeous world-class facilities only to hand the bill over to the taxpayers. The Miami Marlins have a brand new stadium that was financed largely through taxpayer dollars. And it has been a total flop.

The change in name, the colour scheme and the stadium has not changed the typical pattern the Miami Marlins are known for following every season. They have traded players as their doom prevailed and they have performed as badly usual. It seems that some in the coaching and management staff are possibly vulnerable to get fired.

21 NFL owners have either renovated existing structures or built new ones using tax-free public borrowing in the last 25 years. In total, 64 teams across the four major sports have used public financing to build stadiums in that time. In theory, the new stadiums are supposed to bring the cities increased revenue through ticket sales, concessions, and retailing. That is rarely the case, though.

Back in 1986, Congress tried to prevent cities and states from building stadiums with tax breaks that were originally designed to help local government cut borrowing costs for infrastructure like roads and schools. However, revisions made by lawmakers had the opposite effect, encouraging teams to borrow even more public money. Since that time, $17 billion of debt has been issued to finance new stadiums in the United States.

“You have the costs spread out, with small losses to hundreds of thousands — maybe millions — of people,” said Zimmerman, who lives in Falls Church, Virginia.

In a 1996 government study, he put the annual cost to taxpayers of 21 publicly financed stadiums at $24.3 million. And that is almost 20 years ago.

The boom to construct new stadiums began in the 1980s. Teams wanted to generate additional revenue with luxury boxes, naming rights, parking, and more. One reason – this type of revenue is typically exempt from revenue sharing. It is also a point of contention in the ongoing NHL labor negotiations (the owners don’t want to include these revenues under the umbrella of ‘Hockey Related Revenue’).

A study conducted in 1990 discovered that new stadiums are almost always poor investments for taxpayers.

More and more cities are being encouraged to subsidize sports stadiums as an economic development tool.  In this paper regression analysis using census data on nine different metropolitan areas is employed to evaluate the impact of stadiums and professional sports teams on area development. Previous attempts to estimate the effectiveness of sports-based development have used assumption-driven trade multiplier models.

The evidence presented here is that the presence of a new or renovated stadium has an uncertain impact on  the levels of personal income and possibly a negative impact on local development relative to the region. These results should serve as a caution to those who assume or assert a large positive stadium impact.

Minnesota residents recently went through a lot of this with the (now approved) new arena for the NFL’s Vikings. Edmonton residents are all too familiar with this scenario as well right now, as Oilers owner Daryl Katz is trying to secure more public funding for a proposed downtown arena.

The NFL and Viking ownership promised that a new stadium (costing almost $1 million)would theoretically bring about the following:

The stadium will attract investment to the area; local establishments will see a rise in game-day sales of $145 million; jobs will be created, including 1,600 in construction worth $300 million ($187,500 per job?!); tax revenues will increase $26 million; property values will rise; and, of course, the perennially underachieving team’s fortunes will improve.

The odds of the situation playing out as outlined above? Somewhere between zero and zero.

The point is that these deals benefit team owners and the politicians who get to wrap themselves in team colors to the exclusion of taxpayers or fans (who are priced out of the games their increased taxes support).  If luxury stadiums were hugely profitable, why would the savvy businessmen who own the teams let the politicians in on the windfall?

In perhaps the most comprehensive study on the issue, Dennis Coates and Brad Humpheys studied 37 sports franchises who constructed new stadiums between 1969 and 1996. Their findings – the new stadiums had no measurable impact on per capita income. Most situations led to negative financial results, as politicians ignored other potentially successful ventures (opportunity cost) to pour taxpayer dollars into these facilities.

What’s Different with Seattle?

Now that I have painted a picture of doom and gloom, what is different in Seattle?

A lot.

Chris Hansen’s arena has an associated price tag of $490 million. Up to $200 million of that will come from the public (with Hansen’s ArenaCo contributing the other $290 million), but Hansen has personally guaranteed to cover the city’s debt if the arena’s finances don’t work out. This guarantee isn’t the kind of guarantee you make to pay a friend back – Hansen is on the hook for the city’s financial commitment if arena revenues don’t cover them. This move by Hansen isn’t just rare – it is almost unheard of.

“The fact that we have a personal guarantee from Mr. Hansen…that makes a big difference. At the end, we’re going to have something the city is proud of,” commented Councilwoman Sally Bagshaw.

Hansen has also agreed to contribute funds to improve transportation around the stadium, to revitalize Key Arena, and to give the city the option of selling the arena to Hansen in 30 years for $200 million. He has gone above and beyond the typical measures to bring basketball back (and potentially hockey) to Seattle.

A common sight on Seattle roads.

By guaranteeing to cover any public financing that doesn’t get paid back, Hansen is extremely incentivized to make this project a success. He also has to double his security reserves if the arena revenue is not performing as expected. His ArenaCo holding company also must keep at least three months of operating and maintenance cash on hand at all times.

Hansen had to ensure that his proposed arena didn’t violate I-91 – an initiative introduced by Seattle legislation in 2006.

I-91 would prohibit Seattle from supporting teams with city tax dollars unless such investments yield a profit on par with a 30-year U.S. Treasury bond, currently about 4.75 percent.

The numbers can be looked at in different ways, but Hansen believes his project will be a winning one for Seattle taxpayers.

“Even if we were to use the City Central Staff’s unfounded assumption that the land and Arena are worthless at the end of the lease and that ZERO incremental taxes are created, the return to the City/County is still 7%! While the (memorandum of understanding) is no doubt complex, the math here is not. If we just divide the $14 million in GUARANTEED taxes and rent the City/County will receive per year by their $200 million investment, we get annual return of 7.0%.”

Seattle’s Financing

The city of Seattle and King County would sell bonds of $200 million if Hansen secures both an NBA and NHL team, with the city giving $120 million with the county giving $80 million.

If there is only an NBA team involved, the city will commit $115 million with the county giving only $5 million. The arena would still be built, with Hansen bearing the extra cost. This is where the motivation to secure an NHL team comes in. Not surprisingly, there is no plan for an NHL-only arena:

“There is no provision for an NHL-only scenario. I don’t think we would move forward, [an arena] is certainly not contemplated in any of our discussions with just an NHL team.”

Seattle Mayor Mike McGinn:

“I welcome the news that the City Council has decided to support bringing basketball back to Seattle. Executive Constantine and I negotiated a proposal with Chris Hansen, an Arena Review Panel vetted it and the County Council approved it. The City Council was the last piece of the puzzle. We haven’t gotten a team yet, but Sonics fans have a reason to smile today.”

There is a lot of reason for optimism and hope in Seattle with Hansen and ArenaCo. But the challenges and hurdles are far from gone.

Can Hansen actually procure an NBA franchise at a price that will let him pay for both the team and the arena on the slim profits that are generated by a sports arena in a mid-sized market? I appear in the Seattle Times article in my now-accustomed role as voice of “this’ll be great if it works out, but my Spidey-sense is deeply skeptical that the math can add up.”

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