Field of Schemes: Follow the D.C. money

November 13, 2004

Follow the D.C. money

I got on Washington Post columnist Steven Pearlstein's case last month for buying into MLB's cries of competitive imbalance, but all is forgiven with yesterday's excellent rundown of D.C.'s "private" stadium finance plan. The condensed version:

Though D.C. council chair Linda Cropp has sold her latest plan as substantially privately financed - $350 million in private funding for the stadium, $150 million public funding for land and infrastructure - the main elements of Mayor Anthony Williams' original sweetheart deal would remain in place. The gross-receipts tax on businesses (slightly reduced) would now be directed to pay the land and infrastructure costs, while the in-stadium taxes on tickets, concessions, and parking would, according to Pearlstein, "go to the [private] partnership to cover interest payments on the money borrowed to build the stadium at rates 3 percentage points above what the city would pay."

So where's the "privately funded" aspect, you ask? The private developers - fronted by a guy, one might want to note, who was formerly attorney for a developer who got into a lawsuit war over another public-private development partnership - would be putting up $70 million in cash as well. But as we discussed on Thursday, through the magic of depreciation, that investment would be more than paid back through the largesse of the federal treasury. Pearlstein again:

But here's the really beautiful part of this deal: The rent the partnership would pay the city for the land on which the stadium sits would be recorded on its books as an expense even though no cash would change hands. Instead, payments could be deferred for 25 years until the expiration of the lease, at which point the partnership would either have to cough up the rent in its entirety, with interest, or turn the stadium over to the city for "free," which is what certainly would happen.

Why would investors want to put up $70 million in equity for a piece of what even its promoters promise will be a money-losing stadium partnership? According to the financial script outlined to city officials this week, the annual depreciation for the stadium, along with the deferred rent payments -- both non-cash expenses -- would magically generate about $250 million in tax savings for the partners over the 25-year term of the ground lease. And that works out to a 10 percent annual return on their investment.

The main difference between Williams' plan and Cropp's, in other words, is that Cropp's would deflect about $10 million a year in expenses from D.C. area businesses to federal taxpayers - all while creating a guaranteed 10% return on investment for a private developer, and higher interest rates for the banks handling the stadium loans.

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