KeyArena renovation plan may duck “return on investment” analysis, should anybody care?

Since I lauded Seattle’s Initiative 91 recently for its influence on getting the city to strike a hard bargain with would-be arena developers, I should probably also note that the language of the initiative itself kind of sucks. Declaring that any public sports subsidies need to provide a return on taxpayer investment equal to the rate provided by a treasury bill sounded simple at the time, but when you don’t define “investment” (is it just upfront cash, or money over time, or tax breaks?), the math breaks down to the point where nobody knows anything anymore.

This is coming up again because nobody can decide whether I-91 should apply to Oak View Group’s plan to renovate KeyArena, since there’s no actual city bonds in play, just tax breaks. That’s either an acceptable loophole or a violation of the spirit of the law, depending on which I-91 progenitor you ask:

Former city councilmember [Nick] Licata notes the city put entrepreneur Chris Hansen’s proposed-arena plan for Sodo through a detailed financial formula in 2012 before declaring it I-91 compliant. He figures the same should happen this time.

“The last time, our goal was, ‘Does it meet the intent, even if it’s not necessarily the mechanism that’s perfect?’ ” Licata said. “You can calculate that.”

But Van Dyk, onetime leader of the activist group Citizens for More Important Things, said the biggest test of I-91 already was met during a Request for Proposals phase and the drafting of a Memorandum of Understanding (MOU) that had input from various community leaders and groups.

“I’m just glad to see them spending a lot of their money,” he said of OVG. “Because there was an open, transparent, public-bidding process … I think the probability that the public was snookered is extremely low.”

In the end, it probably doesn’t matter much: The amount of public money at stake is low enough, and the wording of I-91 is loosey-goosey enough, that there’s probably a way to rule that the OVG plan meets its standards, just as Chris Hansen’s SoDo arena plan was determined to despite involving a bunch of public money. (The trick is mostly in assigning lots of value to “new” tax revenues that are projected to result from an arena, which is a handwavy enough notion that you can cook a lot of books with it without outright lying.) I-91 showed that establishing the principle that taxpayers shouldn’t take a bath on sports subsidy deals can be hugely valuable for holding the line on team owner demands — just as we’re seeing right now in Calgary — but we have a long way to go in figuring out how to make these restrictions into legally enforceable documents. “You can’t just change the letter of the law, you have to change the culture” is a pretty good credo for all occasions, but it’s always nice to have another reminder.

Seattle mayor cancels arena MOU announcement so he can resign in disgrace instead

Well, I don’t think anyone saw quite that coming: Seattle Mayor Ed Murray was all set to hold a press conference announcing a memorandum of understanding for a KeyArena renovation, when staffers abruptly took down the renderings and canceled the event so that Murray could instead resign as mayor after a fifth (!) person accused him of sexually abusing them as a child:

He announced his resignation Tuesday, hours after news emerged that a younger cousin was publicly accusing Murray of molesting him in New York in the 1970s.

Murray, a former Democratic state legislator elected mayor in 2013, didn’t appear in public to make the announcement. Instead, he issued a statement saying his resignation would be effective 5 p.m. Wednesday.

“While the allegations against me are not true, it is important that my personal issues do not affect the ability of our city government to conduct the public’s business,” the mayor said.

The MOU was still sent by the mayor’s office — which will now be temporarily run by city council president Bruce Harrell until previously scheduled elections in November — to the council, which will have a much more interesting time discussing it than expected. Early reports (the mayor’s office’s web site doesn’t appear to have the actual agreement posted yet, but then it also still hasn’t caught up to the news that the mayor isn’t mayor anymore) are that Tim Leiweke’s Oak View Group has:

  • sweetened the pot with $40 million in money for traffic mitigation in the notoriously car-crowded area around the arena, plus $20 million for a “community fund”
  • agreed to pay rent on KeyArena equal to what the city currently earns from the building, with a similar deal in place for associated parking garages
  • promised to pay all cost overruns and all operating expenses, “including day-to-day and long-term capital upkeep”

I still want to read the fine print — presumably OVG is still looking for $40 million in tax breaks as part of the deal — but this certainly looks like an improvement for taxpayers on the initial proposal, and further evidence that starting a bidding war between two developers for your city’s arena affections is a promising strategy. In particular, that $40 million in transportation money isn’t just a bone to throw to Seattleites worried that the Key neighborhood would get too choked with cars if a pro sports team again played there, but also a commitment by OVG to match Chris Hansen’s similar pledge for transit improvements around his proposed Sodo arena. Whether this is a good deal is still to be determined; but it’s a way better deal than most cities get, and that’s to Seattle officials’ credit.

It’s also a deal that loses its biggest booster with the departure of Murray, who was trying to fast-track the Key plan so he could have some legacy other than “mayor who was forced to resign for abusing teenagers.” That’s not a bad thing at all, necessarily: The council can now take its time to beat on the plan with sticks to make sure there are no hidden pitfalls, and even do an in-depth comparison to Hansen’s latest ante-upping plan to build a Sodo arena and renovate Key himself as a concert venue, if it wants. But either way, it will be considering two plans that are at worst pretty close to break-even for taxpayers, and that’s unheard of in modern sports venue politics.

As for any of this getting an NBA team back to replace the Sonics, that’s still in the distantish future: The league has been clear that no expansion teams are forthcoming anytime soon, and there aren’t any teams immediately looking to move, either. Hansen is a committed hoops fan, but he also may have cheesed off the NBA by giving money to block an arena in Sacramento for the Kings so he could try to buy them instead; Leiweke may be more interested in concerts than sports, but he also should have a good relationship with the leagues from his time at AEG, operators of the Staples Center, among other arenas. Really, the main obstacle to getting an NBA (or NHL) team in Seattle is that the league has been holding out for a new or renovated arena, since to do otherwise would mean admitting that allowing the Sonics to move just because they had to play in a building renovated way back in 1994 was a mistake, so adopting either of these plans should get the leagues willing to talk, at least.

Either a Sodo arena or a renovated Key would come with lots of construction debt that a sports team would have to help pay off via rent if nothing else, so there’s still a chance of a Sprint Center outcome with an arena so busy with concerts that it doesn’t need teams (though without the tons of public debt part, and also Seattle is twice as big a TV market as Kansas City). But if the goal here was to give the city a shot at new sports teams without saddling taxpayers with the costs, Seattle is doing a bang-up negotiating job so far.

Hansen proposes to redo KeyArena as concert venue with own money, Seattle mayor says “meh”

I had a long article published at Deadspin on Wednesday, in which I examined the ongoing negotiations between the city of Seattle and various would-be arena builders or renovators, and determined that whatever the outcome, all things considered this could be better than a poke in the eye with a sharp stick:

In coming weeks, the city council is set to decide between two plans for new or refurbished arenas, both of which would involve some public money, but in either case far, far less than the 75 percent that is typical of modern sports facility deals. Whatever happens, Seattle is not going to get royally hosed, and as things go these days, that’s a not insignificant accomplishment.

The current frontrunner, as I discuss in the article, is almost certainly Oak View Group’s proposal to renovate KeyArena in exchange for $40 million in tax breaks (and $50 million in historic preservation credits), which is slated to have a formal MOU submitted by the mayor next week. That would leave Chris Hansen’s plan to build a new arena in the Sodo district (for $70 million or so in tax breaks) out in the cold.

And Hansen apparently sees the writing on the wall, and doesn’t like it, because yesterday he dropped a bombshell announcement: If his new arena is approved, he’ll spend $90 million of his own money to convert KeyArena into two theaters, one indoor, one outdoor:

There are some obvious questions here, like: Is $90 million really enough to do this kind of major retrofit? And, are there enough concerts to go around in the Seattle area to fill both a new arena and a pair of smaller theater spaces? And, who’d be collecting the revenue from these new theaters, and who would pay for maintenance and operations on them? You get the idea.

Still, if you’re running a bidding war for the right to be Seattle’s arena proprietors — which is very much what Seattle should be doing, to get the best deal possible — it’s something you absolutely have to at least look at, if only so you can go back to OVG and say, “Okay, now top this.” Seattle Mayor Ed Murray, though, seems less than enthused, as his development office issued a statement saying, in effect, “too little, too late”:

If the SODO Arena Group was interested in redeveloping KeyArena, they should have submitted their proposal during the RFP process, which would have shown a willingness to work with the City on this project. They did not submit a proposal and continue to show no interest in working in partnership with the City.

This is not how I would play it, needless to say, even if taking a look at Hansen’s latest plan might delay putting the finishing touches on that OVG MOU. And it certainly seems to validate complaints by Hansen’s backers that Murray is trying to grease the skids for the OVG deal, less for reasons of hard cold economics than just because it’s politically easier to get it passed before the mayor leaves office in disgrace at the end of the year. Hopefully the Seattle city council will at least vet all the plans on the table before signing off on anything — at this point it’s likely a decision between one problematic-but-not-awful plan and another, but that still doesn’t mean you shouldn’t stop to consider if one arena proposal is more equal than the other.

Seattle study showing SoDo arena fiscal winner actually doesn’t show that, says study author

I’ve had this study of the projected economic impact of the two competing Seattle arena proposals bookmarked for a couple of weeks now, waiting for a chance to dig into it to see what it actually says. Since I’m on the road now, I’m especially glad that the Seattle Times’ Geoff Baker has gone and done it for me, with the upshot of: Even the economists who conducted the study say it doesn’t really declare either plan the winner.

Chris Hansen and his Sodo arena group paid $16,000 for the “Seattle Arena Public Finance Analysis” study by UW Evans School of Public Policy and Governance professor Justin Marlowe and three graduate students. Sodo arena backers trumpeted the 3-to-1 advantage.

But a review by The Seattle Times found a high potential for fluctuation in the study — including use of raw property and sales-tax data without deeper “opportunity cost” context, an approach two sports economists say favors the Sodo group’s proposal

Up to now, though, the study’s claimed 3-to-1 advantage for the Sodo site — a gap Marlowe pegs at $68 million — has garnered the most attention.

“I get why everyone is focused on that number,” Marlowe said. “But again, the second part is the really important part. What if what’s on the table changes? Then you get different numbers.”

In short: The “opportunity cost” bit is that the study assumes nothing else would be built on the Sodo site without an arena, and if something were, that would generate tax revenue that would make redoing KeyArena look better by comparison. Also, the study didn’t account for payments in lieu of property taxes that the Key developers would be responsible for on the value of their improvements to the property — which could be as much as $657,000 a year (present value in the neighborhood of $10 million), or could be less, nobody really knows.

In short: Who the hell knows? This is one problem with economic projections: They’re inherently guesswork, and sometimes the error bars overlap to such a point that there’s no clear winner. This is actually kind of a good sign — it means that having a bidding process for a new/renovated arena has both developers upping their packages to be in the same range — but it also doesn’t make the decision any easier. It may come down to which site city officials decide is the best location from a planning standpoint for an arena, since the cost will be roughly the same; or to which site has the most politically connected people pulling for it, which would be disappointing but typical, and really not the worst thing since at least neither plan is much worse than the other. (Though it’s still entirely possible they’d both be mild money losers for the city — which would also be disappointing but typical.)

FC Cincy mulling Kentucky tax kickbacks to pay its entire stadium cost, and other week’s news

All the news that wasn’t fit to print this week:

  • FC Cincinnati now wants the Port Authority of Greater Cincinnati to own its stadium since Hamilton County doesn’t want to. (Does “own” mean “pay for”? Reply hazy, ask again later.) Or maybe Newport, Kentucky, since, according to team president and former city council members Jeff Berding, that would allow the team to recoup its entire $100 million through tax increment financing kickbacks of property taxes paid on the property. How would it generate a whole $100 million in TIFs? Reply hazy, ask again later.
  • Would-be Seattle arena builder Chris Hansen hired University of Washington public finance professor Justin Marlowe in May to compare the economic impact of his Sodo arena proposal to that of the KeyArena renovation plan, and he has issued his report, which says that the Sodo plan would create three times as much tax revenue for Seattle ($103 million over 35 years vs. $34 million for Key). On the other hand, the Key plan would include some kind of sharing of arena revenues, though that wouldn’t kick in until the Key developers got their share, and, yeah, basically it’s a muddle. On the whole, it seems to give the edge to Hansen’s plan, if only because that arena would pay property taxes, but I’d need to sit and break down the math to say exactly by how much, and I’ve been waiting for time to do that all week, so clearly it’s not happening. Reader exercise!
  • Oakland A’s executive VP Billy Beane promised that once the team gets a new stadium, it will stop trading all its decent players once they start to get expensive: “There’s only one way to open a stadium successfully, and that’s with a good, young team. … Really what’s been missing the last 20 years is keeping these players. We need to change that narrative by creating a good team and ultimately committing to keep them around so that when people buy a ticket, they know that the team is going to be around for a few years.” Which could make sense if a new stadium draws enough fans that having a winning team boosts revenues enough to pay for player salaries, though we’ve heard this song and dance before elsewhere.
  • The Nashville Sounds‘ new stadium was supposed to cost taxpayers $37 million, but it ended up costing $91 million.
  • What does $74 million in public subsidies buy Minnesota Timberwolves fans and staff? New seats, new restrooms, new locker rooms, an ice floor that doesn’t leak, two new loading docks, and a big glass wall, because everybody’s gotta have one of those.
  • The athletes’ village from the 2016 Rio Olympics is now a wasteland of unsold condos, because everything the Olympics touches turns to trash.
  • A homeless camp has arisen on the site of the planned Las Vegas Raiders stadium. Make your own metaphors.

Seattle mayoral candidates all like hoops, mostly favor Hansen arena plan over Key remodel

KCPQ-TV in Seattle has polled this fall’s umpteen mayoral candidates on where they stand on a new arena, and if you don’t want to bother with clicking through, the survey says: They all want the Sonics to return (and, presumably, are against kicking puppies) and almost all prefer Chris Hansen’s Sodo arena plan to Oak View’s KeyArena remodel, including early frontrunner Mike McGinn (who, if he sounds familiar, it’s because he was already mayor of Seattle once from 2009-2013). Though the other reported frontrunner, Jenny Durkan, had only this to say:

I grew up a Sonics fan and I’m still a Sonics fan. I want an NBA team back in Seattle. I am for whatever proposal gets the Sonics here the fastest.

Of course, this could all be moot by then if current mayor Ed Murray and the city council finalize an arena deal before November, which may or may not happen. At least the city of Seattle is hiring some professional help to negotiate its memorandum of understanding with Oak View, which is always a good idea, as those sports developer lawyers will eat you for lunch otherwise.

Seattle mayor calls Hansen arena plan “technically alive,” no, that’s not a compliment

There’s been a lot of back and forth lately about whether Seattle Mayor Ed Murray has really decided on renovating KeyArena over approving Chris Hansen’s plan for a new SoDo arena or is just keeping his options open, but this latest quote from Murray sounds pretty decisive:

“The SODO plan is still technically alive and the council, [street] vacations are in the council’s purview, not ours. Work could be done on doing it. If we were going to send it back down to the council though, I would want a very different process than was used the first time,” Murray said.

“Technically alive” is about like “mostly dead,” and while that means Hansen can still hold out some hope, it’s a pretty clear sign that a Key renovation is Murray’s first choice. Which may not matter all that much — the council still has to weigh in, and with Murray not running for re-election his opinion may not carry as much importance — but it’s still not good news for Hansen (who yesterday said he’s still willing to “be patient” in his quest for his own arena).

I’m not so sure that tipping the city’s hand is the best way to go about this — one of the two Key renovation bidders has already dropped out, meaning that the other bidder Oak View Group and Hansen are the only two developers left to play off against each other in an attempt to get the best deal possible for taxpayers. This may not matter too much in terms of getting a new NBA or NHL team — OVG’s Tim Leiweke is a veteran sports guy, and besides which has already invited Hansen to join any ownership group — but it could make a difference in, say, lease terms, which is a very big deal indeed. You’d think any mayor worth his salt would know how to say, “We’re still keeping an open mind to all options,” but then, mayors about to leave office often are thinking more of their next jobs than their current ones, so maybe not.

Would-be KeyArena renovators seeking $40m in city tax kickbacks, $50m in federal tax credits

The day after arena managers AEG pulled out of bidding to overhaul Seattle’s KeyArena on the grounds that it was unfair their competitors hadn’t had to reveal financial details of their bid, lookee what happened: The city of Seattle went and released some of Oak View Group’s financials, including this:

The key lines are under “Sources,” where it’s revealed that OVG would be seeking a $50 million federal historic tax credit (previously reported as $70 million), plus $40 million in “city tax reinvestment of NASC revenues,” which presumably is bureaucratese for “tax money kicked back from arena property, sales, ticket, etc. taxes.” By comparison, AEG was looking at closer to $100 million or so in kicked-back taxes, so this is less than that, and possibly a small enough amount that the city can earn it back by stealing business from entertainment venues outside of city limits, though without a real economic analysis that’s more than one sheet of paper — as well as a lease explanation that guarantees that OVG would pay all maintenance, operations, and future upgrade costs, as the city itself requested — it’s tough to tell exactly how this would work out for the public purse.

It’s at least possibly not a terrible deal, though, which is better than most cases — as I always say, there’s a price point where the value of a new arena and the presence of a team (assuming OVG can get one, which seems a pretty good bet eventually) can make a small enough subsidy worth it. Here’s hoping the city of Seattle can stick to its guns, and be ready to walk away if the fine print on OVG’s plan turns out to make it too rich for their blood.

AEG drops out of Seattle arena renovation bidding, says city was unfair to them

With a decision expected in later this month by the Seattle city council on which competing developer was going to be selected to enter negotiations on a renovation of KeyArena, one of the two bidders made the whole thing moot yesterday by withdrawing its bid, saying the city’s financing plans were “unrealistic”:

In a letter to Seattle Mayor Ed Murray, Seattle Partners said it believes it has the best plan, but it raised significant questions about whether the project can be completed by either group.

“We fear the City is driving toward an unrealistic financing structure, and we believe the City has failed to conduct a sufficiently thorough, objective and transparent process to properly evaluate the respective strengths and weaknesses of the two proposals and, most significantly, to identify the proposal best positioned to deliver a project consistent with the community’s interests,” the letter read.

Okay, let’s read between the lines a bit here. That bit about an “unrealistic financing structure” may refer to pushback on the proposal by Seattle Partners (a group led by arena management giants AEG) to use $250 million in city bonds to raise money for the renovation, to be repaid partly by $5 million a year (increasing by 2% each year) in rent, and partly by ticket, business, and parking taxes that would normally go to the city’s general fund. The other bidders, Oak View Group (led by Tim Leiweke, AEG’s former head), have similarly asked to “identify a mechanism for reinvestment of new revenue streams back into the project,” but didn’t get as far as publicly identifying exactly what they would be asking for.

Lack of a “thorough, objective and transparent process” sounds like whining that Oak View was getting treated nicer than AEG just because AEG spelled out in advance its subsidy demands, which is kind of a fair gripe, honestly. Though taking your ball and going home because you’re expecting to lose is never a good look.

Anyway, sounds like Oak View will now get to try to work out a deal with Seattle over Key renovations, though they still (in theory, anyway) need to compete with Chris Hansen’s proposal to build a new arena in SoDo. One hopes that by the time that decision is made, more of the financial details of the Oak View plan will be made public, since it sounds like there would be some tax kickbacks involved (as there would be for Hansen’s plan) — the idea to leverage better offers by starting a bidding war for Seattle arena plans remains a good one, but whether any of the proposals will be actually good for Seattle residents has yet to be determined.

KeyArena reno would use $70m in historic tax credits, sparking economist catfight

More details are filtering out about how the two KeyArena renovation plans would be funded, in addition to the $90 million or so in tax kickbacks that each would require. Today, its that Oak View Group would be seeking to get the arena declared a national historical landmark, which would allow them to request $70 million in federal historic tax credits.

This led to a rare occasion where two sports economists disagree on the meaning of the tax credits, though it’s less a matter of economics than of semantics. In this corner, Holy Cross economist Victor Matheson, who tells the Seattle Times:

“I would not consider that a subsidy for the arena. Because I think that’s a subsidy that you would grant to anything you designate as an historical thing. In which case, it’s not the fact that it’s an arena that gets (the federal tax credits), it’s the fact that it’s historical that gets it.’’

In the other, West Virginia University economist Brad Humphreys, who counters:

“Absolutely, it’s a public subsidy. It’s tax dollars. Forgone federal taxes collected is an implicit subsidy. The only difference between this sort of subsidy and something from the state or county is whose pocket is this coming out of? It’s coming out of the pockets of everybody in the country.”

So who’s right? We’ve been through this before, both with Fenway Park and Wrigley Field, each of which got federal historic preservation tax credits for their renovations. Probably the best way to think of it is that historic tax credits aren’t a special subsidy, but they are a general subsidy — much like apartment buyers getting to deduce mortgage interest on their taxes isn’t a special subsidy to condo developers, but it still does help their bottom line. The only questions then are whether you consider historic preservation to be important enough to be worthy of a tax credit, and whether you consider KeyArena to be historic enough to be worthy of preservation — Matheson isn’t even so sure of that, noting, “I think it’s probably a crock that it should be a historical monument. “I mean, for God’s sake, this isn’t Soldier Field, or Ebbets Field or something. It’s KeyArena. I mean, come on.’’ (Matheson gives the best quotes.)

In any case, this probably won’t enter into the question of which of three arena plans (the two Key ones plus Chris Hansen’s SoDo arena) the city of Seattle rates as best, since it’d be money coming out of federal taxpayers’ pockets, not Seattle citizens’ in particular. But it is a good reminder that there are tons of ways for people who build stuff to use other people’s money to pay for the stuff they build.