D.C. United, Mayor Gray propose $200 million in public stadium subsidies

It took a few months longer than expected, but D.C. Mayor Vincent Gray has finally finalized his stadium plan for D.C. United, according to the Washington Post. The city would still put up about $150 million of the cost of the project (which is now estimated at $300 million instead of $290 million, maybe to make for a nicer “going halfsies” image?), and would now also provide the team with sales and property tax breaks as well:

According to sources, the team would pay no property taxes for the first five years, 25 percent property taxes for the next five years, then 50 percent for five years, 75 percent for five years and finally full property taxes.

United would also pay no sales taxes for the first five years, then 50 percent sales tax for five years and then full sales taxes. At that point the team would begin collecting a surcharge on tickets that would begin at $2 and increase with the Consumer Price Index. Proceeds from the surcharge would go to the District.

The Post doesn’t specify how much the tax breaks would be worth, though it earlier estimated a sales tax abatement alone as being worth $2.6 million a year, if we use the District’s 1.85% property-tax rate and a valuation of $300 million, that’d be an additional $5.5 million a year in property-tax breaks, for a total tax break present value of … I get $63.64 million (at a 5% discount rate), but let’s wait for the D.C. Fiscal Policy Institute to do a full assessment to determine the precise value.

Property and sales tax breaks were previously planned as part of the team’s profit guarantee (if D.C. United wasn’t turning a “reasonable profit” it would get the tax abatements), so it looks like this new system would wipe out that one, with United just getting a fixed tax subsidy, and the District getting back that ticket surcharge (which with MLS teams selling about 300,000 tickets a year would amount to maybe $600,000 a year in revenue, or only a few million in present value) starting ten years in. It’s hard to tell whether that’s better or worse than the original deal, but it’s still right around $200 million in public cost, which would be easily the most expensive public subsidy for an MLS stadium in history.

Anyway, now that Gray and United’s shifty web of owners have agreed on a deal, it only has to be okayed by the D.C. city council, where there’s significant opposition. Not to mention that most city residents hate the deal, and Gray is out of office at the end of the year. All of which I’m sure will mean an agreement that will be rushed through and then have to be amended later when it turns out to have giant holes in it, because that’s how things get done around there.


15 comments on “D.C. United, Mayor Gray propose $200 million in public stadium subsidies

  1. An interesting twist is potential internal strife within the United’s leadership. Mincberg, their lead attorney in the stadium deal, just played a major role in ousting Levien, their managing partner, from his job as CEO for the Timberwolves. That will certainly make things awkward at the United’s next board meeting.

    I’m expecting that this whole deal falls through, with questions about shadow owners buying into the team with embezzled money and a lame duck mayor who is waiting to be charged with campaign fraud, I can’t see any way that the city pays nine figures for a team that draws poorly for less than twenty games a year.

  2. You’d think that a $300m stadium would be valued at $300m for property tax purposes, wouldn’t you? I don’t know how it works in DC, but in most districts sports arenas and facilities are typically valued not on their construction or replacement cost, but on their actual market value.

    In such a market transaction, who other than DCU would buy it? And what would they pay for it (beyond the 50% they are allegedly putting in)?

    I assume since property tax considerations were included DCU will be the stadium owner for the term of the deal. But I wouldn’t count on the stadium assessment being anything over $100m… possibly quite a bit less.

  3. Wile Powerboater’s conjecture is interesting, I’d prefer to stick to the deal itself, which is the subject of the post. First off, I don’t ever remember it being cited at $290 million — the halfsies figure has always been in there. The apparent changes in the deal are interesting — substituting taxes and fees in lieu of a profit-sharing. This leads to a wildly mischaracterized “tax break.” Yes, the team won’t be paying the lion’s share of the property taxes over the first half of the 30-year lease. It’s hard to call that a tax break, though. Tenants are not typically responsible for property taxes, and are never legally responsible for paying them. They’re the legal obligation of the property owner — in this case, that would be the District itself. What this deal contemplates is essentially a rent payment that is to be measured by a percentage of the property tax, which may vary because of rate changes or fluctuation in valuation. You can question the wisdom of the deal, if you’d like, but it’s flat-out wrong to say that United wil be getting a break on property taxes. The fact is the team will be assuming an increasingly larger share of the property taxes, which is odd for a tenant. Given that the stadium can’t really have a different tenant, this arrangement would reflect that the team would be more akin to the owner of the property, since they will build and own the facility.

    Of course, the team might otherwise be liable for taxes on the stadium, but they would not be liable for taxes on the land, which will be owned by the city — so, even if one were to accept your premise that this is a tax break, your baseline figure is way off — twice the cost of the stadium…and way more than its value, which will be depreciating over time.

  4. Right, that’s how property tax breaks on stadiums work: The city takes on nominal ownership of the stadium (but not control of how it’s used or any revenues that result) in order to free the team owner from paying property taxes. I’m not saying it’s illegal or anything, but it’s undeniably a tax break.

    I’ll acknowledge that the value of the property tax break could be lower than I estimated (though the sales tax break will be slightly higher, since I didn’t account for inflation there). My actual total was around $210 million, so even if you knock off $10-20m, that’s still going to be $190-200m, which is “right around $200 million” in my book.

    These are all rough guesses, though, as I noted in the original piece. DCFPI has the chops to crunch the numbers more precisely.

  5. “Nominal ownership.” That’s a curious phrase. The city keeps actual ownership of the land. There’s no provision here for ownership of the real estate to move to United.That works to keep United on the property, since they would get literally nothing in return if they decided to move at the end of the lease-term. If United were to fold or move on, the city would get the land back and get the benefit of any increase in the value of the land. In the meantime, United will pay property taxes even though they will have no real equity in the property. They will own a stadium, but it would have no value for any other concern, even if the city would have an interest in seeking another tenant. That’s why I say it’s not really a tax break. In economic opportunity zones, tax breaks are really tax breaks. In this case, the mechanism is more in the way of a rent break that phases out over time.

    As for the calculation — if this really is a property tax, then it can only be based on the value of the stadium and not the real estate. Your calculation starts with a baseline value that includes the initial cost of the stadium and the land, as well as the cost of surrounding infrastructure and environmental remediation. You’re not off by 5%. You’re off by at least 50%.

  6. I’m still not clear on how this will do anything to address the need for affordable housing in the District.

    http://www.washingtonpost.com/local/number-of-homeless-in-dc-region-rises-as-rents-increase/2014/05/14/db4638e4-dac4-11e3-b745-87d39690c5c0_story.html

  7. It’s ‘nominal’ in the sense that cities and states building infrastructure for professional sports teams aren’t traditional property-owner/renter relationships that you analogize to. Deals are structured with these arrangements precisely to help private entities avoid taxes (see: public authorities that sell PSLs so that the private sports teams don’t pay taxes).

    If the city were interested in developing this property for the purpose of being a profit-maximizing landlord, then a stadium is probably the last thing they would want to build on the site.

  8. fischy: Even if I were off by 50% of the property tax’s present value, that would be $24 million. $210 million (my estimate if you assume about $4m in value for the future ticket taxes) minus $24 million equals $186 million. It’s still a bunch of money.

  9. This “value added” argument has been used in Washington quite a lot, as if lots of cities are going around demolishing old stadiums and reaping vast profits. So far as I can tell, most old stadium locations seem to be turned into parking lots/garages. With all the pylons and plumbing in the ground, it becomes rather expensive to turn a stadium into, say, apartments. (Atlanta will likely learn this too).

    What holds Buzzards Point back isn’t a lack of things to do or a lack of soccer stadiums, but a lack of transportation infrastructure. If DC wanted to increase the value of the land, it would likely do better to spend this money on building bus rapid transit or some other form of transit to connect the neighborhood to Metro and express buses. But that likely would be too boring for DCU fans and sportswriters.

  10. When you pay property taxes, you pay on both the value of the land and ‘improvements’. Generally, improvements are buildings… but they can also include improvements to the land itself. A “Capability Brown” style garden would not be taxed at the same rate as raw land, for instance.

    Neil: If DCU is not going to be the owner of the facility, would it be more correct to refer to their payments as PILOTs instead of property taxes? Or have they agreed to pay the property taxes directly? (which, incidentally, fischy, often happens in commercial property leases… it’s called triple net. The tenant pays rent, utilities and the property taxes attributable to the space they occupy. You are correct in that the registered owner gets the bill in the mail, but the tenant is legally responsible for the expense through their lease agreement).

  11. John: Good question about property taxes vs PILOTs, and I don’t know. I talked to DCFPI, and they’re looking into it, so hopefully we’ll have more answers to lots of things soonish.

  12. I don’t understand why DC views this as a profitable deal for the tax payers. You have what, 10 or so home games a year?

    The govt threatens eminent domain over legitimate companies who are paying outrageous property taxes, yet wants to under value the property when they want to purchase it? And the stadium gets a break on paying taxes?
    The city threatens eminent domain on the two remaining land owners which I might add, are getting shafted by the city, by offering a fraction of what the property is worth, according to their own property tax assessments imposed.

    Corruption at its finest. You take our tax money for crap we don’t need, take property from people on a whim. For a stadium? What about education? DC public school system is probably the worst in the country. The homeless population? The police force. Crime in DC is rampant. Way bigger issues pressing the city than soccer.
    How many people are we going to be paying unemployment to from the jobs that are being lost? The stadium has less than 20 games a year. Sounds like more tax dollars being sucked up in the wrong places yet again.

    I know that scrapyard has been there for 50 plus years. Longer than the mayor and Mr. Lew have been there. It’s companies like that, which built this city.

    It sickens me to know that hands are in pockets they shouldn’t be in. You’ll see, if anyone cares to follow up, I’d put money down that whoever is awarded the contract to build the stadium, has a connection or direct relation to the mayor or his office. Id venture to say, that goes for most projects coming from the mayors office.

    Just venting…too much government really does make for bad government.

  13. Has any thought been given to just renovating RFK? Saw a ball game there a few years back, it’s not fantastic, but it does the trick.

  14. The United claim that they can’t make a profit at RFK, in fact they claim that they can’t make a profit in any venue not significantly funded by the local government.

  15. 200 million? Chump change. Think bigger, my sports-owning compadres in D.C. The taxpaying public is hungry to serve you, so why not take them on a big, long, expensive ride– a ride where you roll in a stretch limo and they hitchhike!