Calgary just bought itself a new Flames hockey arena, but at what cost?

Welp, that went about as expected: The Calgary city council voted 11-4 yesterday to build a new Flames arena, just eight days after most of them learned about the plan and following just a few hours of debate. The estimate construction price tag is $550 million, with the city and team owners splitting the costs, and the team getting the vast majority of the revenues.

Among the highlights from yesterday’s council meeting:

  • Several councillors asked for a delay until September so that they could fully vet the arena plan — as one remarked, he’s spent more time researching buying a car than he got to on this deal — but the Flames owners said no. And since the deal itself contained a poison pill where it would self-destruct if not approved by yesterday, the council had no choice but to vote it up or down, with no opportunity even to suggest changes.
  • Many of those voting yes cited a figure, provided by the city’s CFO, that the net present value cost of the deal to the city would be just $47 million, thanks to ticket tax money from the arena and incremental property taxes from the surrounding development that would help defray costs over 35 years. This puzzled me at first because the lowest figure I could come up with was $138.9 million, but it turns out the CFO used the city’s projected bond interest rate of 2.5% as the discount rate for calculating the future value of money, which makes taxes that won’t be collected until the 2050s somewhat less worthless. This is not necessarily the best way of choosing a discount rate, and there are other questions about whether all those revenues should really be counted as defraying the public’s cost (see below), but at least the math checks out a bit better. (I still get at least $60 million for the net present value cost, even using the 2.5% discount rate.)
  • There was some concern expressed about the Flames owners’ exclusive option to buy two parcels of city land valued at an estimated $100 million, but it didn’t get much debate in the limited time available.
  • Calgary Mayor Naheed Nenshi said the deal is better than most other North American sports venue deals — a pretty low bar, as regular readers of this site will already know — adding: “It was important [that] we have a great financial deal and I think we did, but it was also important for us to think about the intangibles that we are investing in. I wanted to make sure we had a great balance of social and financial return, and I think we’ve accomplished that here.”

Okay, so it’s impossible to put a value on “intangibles” like ensuring that the Flames stick around for 35 years without move threats (not that the team owners were threatening to leave, except when they were). But what about that financial return?

The biggest problem is counting future property taxes on the surrounding development as paying back the city’s costs. This would only be new development, yes, but there’s no way to guarantee that it would be new development that wouldn’t happen without the arena, at least somewhere in the city. (Studies of whether new arenas spur increased economic growth come down decidedly on the side of “What, are you high?”) Plus, as discussed here previously, property taxes on new development aren’t a windfall, because they’re already needed to pay the costs of all the city services new development requires — police and fire protection, schools for any children living in new housing, etc. — so counting them as available to pay off an arena is double-dipping. If we throw out the property tax revenues, even using the city’s lowball 2.5% discount rate, suddenly the city’s present-value costs balloon to $165 million. (And probably much more than that, since the ticket-tax money would be significantly back-loaded thanks to ticket prices rising over time, but the city hasn’t provided a breakdown of how those revenues would change over time.)

Then there’s the fact that the Flames would get the land for free — as a swap for the site of the Saddledome — and would pay no property taxes on the arena itself, which is typical for U.S. city-owned arena deals but much less so in Canada. These should both be considered subsidies to the team, but there’s no way to put a dollar value on them without more number-crunching, which there wasn’t time for in the past eight days.

So we’re looking at a city net cost of probably somewhere close to $200 million, at minimum. Meanwhile, the Flames owners would put up the same $275 million up front as the city, but would get way, way more in return: All the revenues from selling tickets (except for that 2% ticket tax carveout) and concessions and ad signage and most of the naming-rights money, and so on. A recently revealed study from 2016-17 by University of Michigan sports economist Mark Rosentraub estimated that the Flames could see increased revenues of $48.7 million per year — even if that’s before deducting their debt payments for the new arena, it would leave Murray Edwards and his fellow owners clearing about $30 million a year in new profits, while the city is losing millions of dollars a year on its share.

And that’s the most damning perspective on this deal: Not that it will bankrupt the city of Calgary (it won’t) or that it’s significantly worse than other awful arena deals out there (it’s not), but that the city council has entered into a partnership with a private sports team where they split the costs roughly down the middle, but the private team owners collect virtually all of the resulting revenues. That is a huge gift to the rich dudes who own the local hockey team, and saying well, at least the city won’t take too much of a bath on its part, if you squint at the numbers right is pretty cold comfort.

None of which matters much now, as the deal is done, with Calgary taking its place alongside Minneapolis and Miami and a whole bunch of other cities that were the poster children for holding the line on sports subsidies, until suddenly they weren’t. Can we please stop pretending that the stadium subsidy racket is drying up now? It may require jumping through a few more hoops these days, but owning a pro sports team remains one of the best ways, short of becoming a defense contractor, to make money off of the public till.

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10 comments on “Calgary just bought itself a new Flames hockey arena, but at what cost?

  1. I mean sure, it’s bad… but the officials elected by the residents of Calgary to represent them have found a way to funnel $30-50m annually into the pockets of the Flames ownership group (including the billionaire who became a non resident for income tax purposes just three years ago) without any of the idiot voters apparently noticing.

    Isn’t that the most important thing? That we as a society continue to funnel hundreds of millions of dollars (or $1.4Bn over the 35 year term of the agreement, if you prefer…) into the pockets of billionaires while laying off emergency services personnel?

    I say bravo, Calgary. Even if you have to close that brand new $250m library you just built to help pay for the Flames new arena, or fully close a couple of police or fire stations… you’ve kept your eye on the ball and clearly understand what is really important in life.

    Now, about that Football stadium….

  2. Whether you think this is a good or a bad deal, you have to keep long-term capital investments and yearly operating investments separate. You should never say “we shouldn’t plan to build X which will last 35 years because we are cutting Y from our budget THIS year” Otherwise you would never build anything

    1. Well sure, but this is the team’s investment not the city. The city sees really tertiary benefits from the team being in a new place. It is not remotely clear Calgary needed a new hockey palace.

    2. The problem with that approach to this specific case, Aqib, is that the city is cutting $60m from it’s operating budget to address shortfalls related to a drop in property tax revenues (I would expect this is due to a large number of assessment appeals based on half empty office buildings, Hotels or other commercial properties).

      The city’s contribution to the arena will not “pay for itself” based on the anticipated ancillary revenues accruing to the city (even if you count the expected new property taxes, which as Neil notes above, are not windfall profits… they are the cost of providing government services to the new buildings, just as they are the cost to provide those same services to individual homes or condos). So the arena will make the city’s operating budget shortfall WORSE.

      While I agree that capital and operating budgets are rightly kept separate, in this case the capital contribution to the arena project will most definitely affect the city’s operating budget (at least for the foreseeable future: 10-15 years out)

      1. I am not saying this is a particularly good capital investment, just that decisions on capital projects that you’re planning to have intact for 30 years shouldn’t be viewed in light of the fact you are in a down cycle at that moment. It would be equally bad if they were running a budget surplus and said “sure lets do it! we’ve got extra cash right now” Calgary is always going to have swings given that its pretty much a one industry town.

        1. Fair enough. However, “Hey! We’ve got a budget surplus this year so why not build something crazy rather than put $40m away for the inevitable but non-sexy water or sewage treatment plant upgrades we are going to need within the next 7 years!” is pretty much how all municipalities operate…

  3. A Canadian taxpayer’s lament

    I don’t go to ice hockey games.
    The players, I don’t know their names.
    My tax bill, why spoil it.
    Don’t flush down the toilet.
    Let’s just watch it go up in Flames..

  4. Mayor Nenshi is a crony capitalist flake; although, he is a well educated one who helped secure the sweetheart deal for the billionaire owners.

    Remember when Nenshi said. “I’ve said many, many times that I don’t believe in public funds going after private money,”–

    Or, when he said the following, The goal of building a new arena is to make more money,” Nenshi said. “We’ve engaged sports economists who are the best in the world to give us a look at what a new arena makes. It makes a lot of money.” “As a result, there is profit here. And our argument is that the city needs to share in the upside, if we’re going to share in the cost,” he said.–

    And then, the tune suddenly changes to, “Not all public benefit is about dollars and cents,” said the mayor, who supports the deal.–

    It is my opinion that Cal Wenzel schooled the academic Nenshi in the realities of civic politics by taking Nenshi out to the woodshed to the tune of $300,000.00 in legal fees. Ouch!! Lesson learned. Further, if one is seeking some nice private sector employment after one retires form public life, it is certainly dangerous to grievously insult potential patrons and their network of very welthy friends.

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