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May 17, 2012

Seattle arena plan relies heavily on TIF subsidies

The city of Seattle, King County, and would-be team owner Chris Hansen released their memorandum of understanding for a new downtown arena yesterday (PDF here), and it looks a lot like the outline released back in February — only much, much more complicated. I'm still trying to decipher some of the more abstruse details of the MOU (such as why Hansen would pay the city $1 million a year in rent on the land under the arena — but only until the arena opens), but here are the main points:

  • The entire project, including land acquisition, is priced at $500 million.
  • The city will provide Hansen with $120 million: part of it (how much still to be determined, but not more than $100 million) as a lump-sum payment for Hansen's arena land, the rest in annual payments that will escalate at 1% a year for the first ten years. The county, meanwhile, will kick in $80 million — but only if Hansen lands an NHL team as well as an NBA team.
  • To help pay off the city's and county's costs, Hansen will pay $2 million a year in rent. In addition, all "sales tax, property tax, leasehold excise tax, and admission tax revenues, as well as other tax revenues attributable to the Arena and Arena Tenant Improvements" will get intercepted before they reach the general fund and used to pay off remaining costs. If there's still not enough money, Hansen will pay additional rent to cover the difference.
  • Hansen will cover all remaining construction costs, as well as the operating expenses and the cost of any future arena upgrades.
  • Any teams playing in the arena will be required to sign (as yet unwritten) relocation agreements vowing to remain there for 30 years. If an NBA team, it will be called the Supersonics.

That's hardly a horrible deal for taxpayers, especially compared to, oh, I don't know, mortgaging your city's future parking revenues in order to pay for an arena. But it's also not, as King5's Art Thiel calls it, "a loan" because "no new taxes will be sought, nor old taxes diverted."

What it is, in essence if not in name, is tax-increment financing — our old friend TIF: Instead of paying sales, property, and other taxes like a normal corporation, Hansen's teams would get to use those to pay off the public's share of arena costs. Unless every single Neo-Sonics fan comes from outside the city limits and would otherwise be spending their money elsewhere — and all the concerts at the new arena don't diminish sales at the existing KeyArena one iota — this means existing tax money will too end up being diverted for the project, at least if you count "the general fund gets depleted, and an equal amount of tax money goes to pay for Hansen's arena" to be diversion.

How much will the diverted tax revenues come to? That's hard to say, since we don't know how much the arena will end up owing in taxes, nor the interest rate that the city and county will pay on their arena bonds. Assuming a 5% rate on $200 million, though, the city and county's combined cost could come to about $13 million a year — meaning if Hansen pays only $2 million in base rent, the other $11 million would come out of redirected tax revenues. In that case, as much as $169 million out of the $500 million arena cost would be paid by the public.

Now, it could end being a whole lot less than that: Some of the arena tax money would genuinely be new (or at least, siphoned off from neighboring areas); and if tax proceeds are lower, then Hansen's rent goes up, and his subsidy goes down. But even a fraction of $169 million promises to be a problem, because of Initiative 91, which bars the city from spending any public money on a sports facility unless the public gets a positive return on its investment.

Clearly, Hansen's (and the city's) argument will be the same as Thiel's: It's all new tax money, so the public is made whole. They'll have a tough time finding any economists to back them up on that, though, which should make the inevitable city council hearings very, very interesting. Somewhere, Chris Van Dyk probably has his lawyers on speed dial.


Posts like this are exactly why I visit this site often. Thanks for this kind of information.

Posted by Dan on May 17, 2012 01:43 PM

For reference purposes, I think your estimate of $169M of $500M is a pretty good one. And in that light, I'd say this is probably an above-average deal for the taxpayers these days. It's less than 40% -- closer to 35%.

That's what it takes in 2012. So if Seattle taxpayers reject this deal, it probably will not happen.

This probably would have been a good deal for Sacramento. Had they followed this model, there would have been little controversy. But the Maloofs would have completely rejected the idea.

Now, add these two fuzzy things together, and you begin to wonder... Maybe the Kings really will become the Supersonics soon?

How can this be considered a far-fetched question?

You have a deal Seattle taxpayers would probably accept, a new arena, a better market, and willing partners. Not saying this is a done deal, but they are several steps of Sac now, for sure.

Posted by MikeM on May 17, 2012 03:10 PM

The Stadium Review Panel heard the city finance people quote a "15%" substitution rate with regard to revenue streams from other entertainment venues. Assuming this is not grossly understated, how would that look in your model?

Posted by facebook_SaveOurSoDoJobs on May 17, 2012 04:10 PM

Dear Seattle,

Take the Maloofs, the Sacramento Kings, and while you're at it- take KJ with you.


Posted by jjo916 on May 17, 2012 05:32 PM

If 15% of the arena spending is substituting for existing spending, then the public subsidy would be $25 million. That does sound grossly understated, though - do you know if the city finance people provided any backup for those numbers?

Posted by Neil deMause on May 17, 2012 07:17 PM

And Mike: The thing is, whether Seattle residents would vote for this doesn't matter. I-91 doesn't require that the city hold a referendum for arena deals that don't turn a profit for taxpayers, a la Minneapolis; it says that the city *can't spend any money* on an arena unless it turns a profit - the same profit as a 30-year US Treasury bond, in fact, so about 3% a year at present.

I suppose if this deal were really popular, Hansen could put his own initiative on the ballot to overturn I-91, and then if it passes he's got a deal. But it's going to be very complicated to get this approved, even if it is a good bit less of a ripoff than many other arena deals.

Posted by Neil deMause on May 17, 2012 07:32 PM

@Neil: Not really. This figure was thrown out at the third Panel meeting. The video is at the city's arena link. The finance people are sitting on the left.

Maybe Valiant can issue debt insurance on the whole deal, with a no frills payout in cash, if the default is more then 30 days. That would show some confidence.

Posted by facebook_SaveOurSoDoJobs on May 17, 2012 09:30 PM

The problem with tax increment financing is the irrefutable fact that MOST of the revenue attributed to the Arena will be SUBSTITUTION not net new revenue. That means that money from somewhere else in this region - probably within 30 miles of the arena - will be spent there instead of where it would have been previously spent. Read the Municipal League's analysis for a quick primer on how this works. The issue is that the arena may generate SPENDING - but it will not generate net INCOME. Meals purchased are meals that would have been purchased anyway. Entertainment dollars will move from another recipient to the arena. Yes, there will be spending in SoDo - but it might be just moving from downtown Seattle to Sodo. The sales taxes in Downtown Seattle go to The City. The sales taxes at the Arena go to paying for a palace that benefits a small number of people. AND LET'sNOT FORGET that by building it in SoDo, they make it much more difficult to keep good Port/Maritime jobs. Anything that slows the transfer of freight to and from the Port's docks makes the economics of shipping through Seattle less attractive - to the benefit of Vancouver, Oakland, and LA.

Posted by Charles on June 14, 2012 03:36 PM

Agreed on substitution, but most of the public's share would actually be paid off by rent payments and admissions surcharges. See this post, and the long discussion in comments:

Even if that leaves $50m to be paid off by taxpayers, not *all* of the spending will be substituted. So we're talking at worst something in the lower tens of millions for public expense - which is still tens of millions of dollars, sure, but might be closer to many people's price point on "What is an NBA team worth?" than the usual hundreds of millions of dollars.

Posted by Neil deMause on June 14, 2012 03:50 PM

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