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June 01, 2012
Estimating Seattle arena's total public outlay: $22m-53m, depending how you count
If you recall, the big question for determining how much public subsidy will be required for the proposed $500 million Seattle basketball arena project is what share of the costs will be paid by different revenue streams? With a little help from my friends, I've now located the city's official estimates of the various revenue streams that would pay off the public's $200 million share (see way at the bottom of the page), which amount to this (all figures in present value):
Arena admissions taxes: $71.8 million
Team business taxes: $15.7 million
Arena incremental property taxes: $11.6 million
Arena sales taxes: $4.9 million
Leasehold excise tax: $2.9 million
Arena incremental property taxes: $3.5 million
Leasehold excise tax: $1.5 million
Arena sales taxes: $0.9 million
Base rent: $28 million
Imputed additional rent: $57.6 million
What does all that mean? Well, the rent payments are rent payments: Chris Hansen's new Supersonics would be paying for those, so they're not really public costs. (The "imputed" rent is to cover Hansen's promise that the team will cover any shortfall in tax revenues toward paying off the full $200 million.)
On the taxes, the big-ticket item is the admissions tax, and that's generally something that's considered to come out of a team's pocket as well — the argument being that if fans are willing to pay no more than (say) $50 a ticket, then the team will charge $50 a ticket regardless of whether a chunk of that has to go toward admissions taxes or not. And since it's a special tax not levied on other entertainment options, the city doesn't have to worry about losing tax revenue elsewhere from places where Seattleites will no longer be spending their money once there's an NBA team in town to blow it on.
Not levied on other entertainment options except for the Mariners and Seahawks, that is, who have admission taxes that help the state stadium authority pay off their respective stadiums. So to the extent that fans will be spending money on the Sonics that they'd otherwise spend on the M's or Seahawks, that would be admission tax money lost to the state. If that's one-quarter of all fans (I'm just guessing here, but all these numbers are just more or less educated guesses), then the state would end up losing $18 million on this deal.
Team business and property taxes, as discussed earlier, are dicier topics: They're inarguably new money, but it's new money that the city and county are voluntarily giving up to make this deal happen. So that $30.8 million is a public subsidy, but not a public cost.
The big item that's likely to be coming out of the public coffers is sales taxes on arena concessions, since it's really tough to argue that people buying a hot dog at a Sonics game wouldn't have eaten anything (at least, not anything subject to city or county taxes) if the team didn't exist. I don't have good figures for what a reasonable substitution figure would be here (and it's going to change depending on whether you count money cannibalized from elsewhere in the county or just in the state), but even if you assume it's something high like 75%, that's only going to come to $4.4 million in lost public revenue.
In the end, then, assuming that all these layered assumptions are reasonable, we're looking at somewhere between $22 million (if you only count losses to the city/county) and $53 million (if you include kicking back money that the public doesn't currently receive) in public subsidies for this arena deal, much of which would hit the state or county, not the city. That's not the city turning a profit, as is required by I-91, but it would still be one of the most taxpayer-friendly sports facility deals in recent memory. There could still be more shoes to drop, but right now Hansen's deal looks a lot more promising than it did a couple of weeks ago.
I sometimes laugh in amazement at the stark contrast between the Seattle city council and Sacramento city council. In Sacramento, you had two parties, mayor and the Maloofs, negotiate a deal that would have just given away the future parking revenue of the city worth close to $300MM, with close to zero actual contribution by the Maloofs. The Maloofs are some of the shadiest characters around and we are not even sure if they can go another year without going bankrupt. And yet, the Sacramento city council members were tripping over themselves in the rush to approve the deal.
On the other end, we have the Seattle City council. Here is a guy in Hansen, who in Neil�s own words, has presented a deal that may be one of the most taxpayer-friendly sports facility deals in recent memory. Neil�s top end estimate puts the cost to taxpayers at around $55MM. With the cost of the arena totaling $500MM + $400-500MM to secure a franchise, Hansen�s group will be making close to a BILLION dollars of private investments in Seattle. And yet, this deal will barely pass a 5-4 vote, if it passes at all. I am all for protecting taxpayers, but don�t we have to recognize a good deal when it hits us over the head? Just burying our heads in the sand and punishing Hansen for transgressions of other Sports owners that came before him or making him responsible of solving all traffic problems in Seattle hardly seems fair.
There is some very real risk to the Seattle and King County finances with the Hansen arena deal, and the councils are right on in taking a very hard look at what Hansen is proposing. What Jack seems to be saying is our elected officials should ignore past history and the city's traffic problems. It's our elected officials' job to pay attention to these things. Chris Hansen does not come to our elected officials looking for a taxpayer handout in a vacuum.
We should also keep in mind that two-thirds of Seattle-area voters do not want to use any public funding to pay for the arena. With that kind of voter skepticism, our council members are only reflecting public opinion. Again, that's their job.
The other side of the coin is:
What does the city stand to gain from spending public money ?
It seems to me that if the teams are successful or not, there is very limited upside to the public. Whereas many local arena deals include some amount of profit sharing in concessions, team profits, etc this deal is very heavily structured to provide no profit sharing of arena operations (despite putting down 40% of the costs) and a very fixed payout schedule.
Is it better than many arena deals, yes... is it a great investment by the city, I don't really see it.
Dear Neil deMause for one I think you are missing the point that this is a multi-purpose arena that not only will hold basketball games and potentially hockey. Major concerts that often skip Seattle because of location of Key Arena and lack of a big enough venue for the bigger acts. There will be more than enough revenue stream to cover the 200 million contribution and more because that revenue does not go away I believe as the team will having a binding 30 year lease even after the 200 million is payed back. That is compliance with I-91.
@Jack we are very different from the sac city council because they are/were trying to rush this through after threats from the Maloof ownership group to move their team. We want to quickly go through our process so that we might have a shot at landing a team like the Kings.
I think at the end of the day that we are getting a great deal from Chris Hansen. He is putting private money up on the arena and purchasing a team and trying to secure an NHL team. Its great for Seattle sports and could increase access to music for the people of Seattle without driving to Tacoma or The Gorge.
I would be ok with a safety net from ownership in way of TV revenue perhaps.
Brian: Hansen would get concert revenues, not the city, so that's no help there. The city would get admissions and sales taxes from concerts, but those would be kicked back to pay for the public's $200m - and even then, that's only new money if those concertgoers aren't reducing their spending elsewhere in the city to pay for their big night out.
I've had a chance to go through the MOU in detail as well as look through the deal points on Hansen's SonicsArena.com site, and I am positive you are missing three VERY major things in your analysis here.
1. Impact of tax payers from outside of Seattle and King County. Neil, it is is undeniable that some percentage of patrons for Arena Events (concerts, NBA Games, and NHL Games# will come from outside of Seattle and King County's tax base. This is fact. The only question is what the percentage will be. Given that the city lies within the county, it is also clear that the "out of tax jursidiction" patrons will be much higher for the city than the county# I read in an article that 50% of the Sonics season ticket holders came from the east side, and I'm sure that others come from areas to the North and South of seattle as well# So I think its a pretty safe assumption that 50%+ of arena patron will come from outside the city# The county portion is much harder to quantify, and I'd have to really take a wild guess here, but lets say just 5% of the taxes come from outside of the County#
If we make these assumptions, the impact to the city is simply massive# Why? Because not only does the substitution effect drop by half for the sales tax on merch and consessions inside of the arena, the city also gets to keep 100% of the sales tax on merch, dining, and alcohol sales outside of the arena#In addition, the city is keeping 100% of the Hotel Taxes that are generated by out of town patrons #estimate for the out of town teams alone to be 4,000 hotel nights - and that does not include out of the patrons traveling to the city for games and concerts#
While you would be correct to point out that these are entertainment dollars being re-directed from other sources, the fact that 50%+ of the patrons come from outside of seattle would mean that 50%+ of those taxes are incremental to the city #and to the detriment of the taxing locality they came from## Thus while this is more nuetral for the county, it is a huge windfall to Seattle#
To try to put numbers to this you would need to try to guess the per cap spent outside the arena by the cumulative visitors to the arena and then apply the city's portion of the sales tax rate# To that you would then need to take the incremental hotel stays and apply the city's tax rate on both #15#6% on hotels plus a $2 flat per night tax##
Finally, since these would be annual numbers, you would need take the NPV of all of the stream over the life of the arena and discount it back at risk free rate #these are taxes, so there is no risk of default on the stream##
I'll leave this math to you neil, but I calculate
Add back of 50% substitution rate on sales tax of merch on "In Arena Sales" - $2 million per year
Incremental sales tax on out of arena spend by non-seattle arena patrons
150 events x 15,000 patrons, x 50% #amount coming per year# x $20 Per cap spend #remember these are out of towners# x 50% = $22#5 million in incremental spend in Seattle from out of towners #which has knoock on tax benefits# x city tax rate of 2#6% = 585K per year#
We then take the lodging taxes# I am going to assume a total of 14,000 hotel nights #4,000 for the teams and 10,000 for patrons# x $250 RevPAR x tax rate of 15#6% + $2 per night tax x 14,000 nights = $574,000
Add these three together $2 million + $585,000 + $574,000 = $3,159,000 per year# Assuming this amount grows by 2% per year and then discounting at the city's borrowing rate of 4%, this would yield and NPV of $69#8 million in INCREMENTAL TAXES TO SEATTLE over the life of the arena#
Considering that the debt service is guranteed by the investor group with huge collateral posted against it, I think te way to look at it from an I-91 perspective is that the city is getting its 1-91 return in that taxes that are a part of the deal combined with the base rent, easily exceed the Long-Term treasury return #2% on city's $120 million# which is evidenced by the fact that the city's 4% debt service is being paid back without existing taxes# You then add the incremental taxes described above, and the hurdle reate is cleared by 3x#
The other way to look at it is the city basically gets the arena #maybe not worth much# and the land #worth a lot in this lo#ation in downtown# at the end of the lease, and has its debt repaid by the investor group and new taxes, plus it gets to keep $70,000,000 in incremental taxes and has probably $25,000,000 plus in annual spending circulationg through the city from out of towners #$22#5 million on food and beverage, $3,5000,000 hotels##
2# Don't feel sorry for the state here# Lets say the public stadium authorities lose $18 million over the life of the arena through substitution from admissions taxes #again these do not got to the city for Century link and Safeco as you pointed out##
Neil, the state will get $20 million is sales tax on construction #$300 million in taxable construction costs x states portion of the sales tax = $19.5 million#
In addition, the state will get to keep its portion of the incremental property taxes on the arena. Assuming the incremental taxable value is $400,000 that would amount to about $3.5 million PER YEAR. On an NPV basis based on no increased assesed value over time and a 4% discount rate this would amount to another $60 million in NPV.
3. To do this analysis correctly you would then have to factor in:
a. the incremental rental car taxes the state and county would get to keep
b. the county's portion of the incremental sales tax from out of county patrons by similar methodoligy to the above for the city #much smaller numbers#.
c. the incremental parking tax the arena nights generate for the city
d. Perhaps most important would be the multiplier to use on the total incremental revenues to the City #and lesser extent the county# and then the annual tax revenues resulting from those revenues.
I guess my main points here are two fold.
1. This would be a big win for the city of seattle, while a minor negative for the surrounding cities tax revenues - and that is precisely why it is such a great deal for the city.
2. I think people just love to hate on stadium projects in general. If you do the math, and look at the gurantees put up by the investor group here #all of their equity in the team and arena plus the city owns the land and building in any cirumstance!# this looks like one hell of a deal - and it would just be nice to see the skeptics and cynics aknowledge a good deal when one IS OFFERED instead of just going into "Hater mode."
Steve: Your logic isn't wrong, but there's one big problem with your math: My estimated cost to the city in lost sales tax revenues wasn't $4.4 million a year, it was $4.4 million *total* in present value. Annual sales tax money is more like $200k/year. So even if all your other assumptions are correct, the NPV benefit to Seattle drops to around $25 million, not $69.8 million.
I could totally see this deal as ending up with Seattle ending up slightly ahead or break-even, and the county and state taking an eight-figure loss - basically, you're giving a sports team $55 million to get people to spend their money in Seattle rather than elsewhere in the county/state. That's far from the worst deal in the world, but it's still worth debating - as well as investigating thoroughly to ensure that all of the numbers being thrown around are correct.
OK agreed on the city $4.4 million piece.
Even then the benefit to the city is $25 million. And again, we agree that we are excluding the rental car tax, parking tax, and the multiplier effect - all of which are "bonus" tax revenues to the city beyond this.
So you have to agree that this is a HIGHLY proifitable deal for the City.
And I TOTALLY disagree with the fact that it is a $55 million hit for the State and County. You stating it does not make it true Neil.
You still did not offset your $55 million "cost to the county and state" estimate with the incremental proerty tax the state is getting and the sales tax on the construction cost that the state is getting.
By my estimate those are $80 million - did you want to weigh in there? DO you think my analysis is wrong? If so how?
My Motto - don't hate investigate!
Steve, I really appreciated reading your initial analysis, but your follow up comment was a bit over the top and unnecessary. I agree, don't hate, investigate... but that goes both ways.
It's midnight here and I just got back from watching Johan Santana pitch a no-hitter, so I'm going to keep this short, but:
If you're going to count things like incremental property values and construction sales taxes, then you have to take into account opportunity cost: What else could the city and state do with $55 million, and how much economic activity would it generate? Plus, if building a new arena increases property values in SoDo, does it make them sink elsewhere (by KeyArena, say)?
It's all extremely complicated, and I would dearly love for an independent economist (which I'm not) to take a crack at a real study. But your argument seems to be that the city and state can give $55 million in tax breaks to Hansen, and through the magic of development deals, everyone comes out ahead. I'm a believer in economic stimulus and all, but this sounds dubious to me.
Santana's NH was a bit like some stadium deals... it's NH, if you squint and ignore the double down the third baseline... (sorry).
As to Hansen's deal, there is still an element of public subsidy. But frankly, if I'm a taxpayer in Seattle, I jump on this deal. Yes, it will cost the taxpayers something. But they "get" a professional franchise (as long as it isn't the Hornets, Grizzlies or Bobcats they buy) for what even subsidy critics (like me) have to consider a very modest cost.
There are certainly traffic concerns to be worked out (particularly with the M's & scheduling, at least for 6-8 wks of the year), but as arena deals go (at least in the last 25 years), this is a good one.
I hope someone sends a copy of it to Glendale (and Cincinatti, St. Louis, Oakland, and Indianapolis and....)
First of all, I was just trying to crack a joke. . . not be snide.
But more importantly, I would just like to say that I really thought your last post did not address the key issues here. In fact you completely avoided it. Your response of "But your argument seems to be that the city and state can give $55 million in tax breaks to Hansen, and through the magic of development deals, everyone comes out ahead" was a really avoided the analysis that we were debating here - and that is whether the city, county, or state taxpers are liklely to be paying incremental taxes.
In reading through your prior postsyou clearly jumped the gun in your initial analysis and assumed that this was a classic TIF in which the taxpayers were on the hook for a very significant amount of money - $100 million plus.
Now after some better insights from the city, a better reading of the MOU, and some analysis from me you are avoiding recanting your analysis and stating what appears to be true - that NEITHER the seattle city or county/state taxpayers are on the hook.
Again, if you disagree with the analysis I would ask you to try to refute it. I am 99% positive the state is getting the best deal in this whole process. The state is clearly collecting incremental property taxes and sales tax on construction of a development that would not otherwise exist. That is a fact neal. And there is no subsidy from the state at all - they get there full boat load of taxes. If you disagree with my estimate, please provide a competing analysis. Given the certainty of the sales and property tax, I am fairly certain that my analysis is very close.
In summary, we have a deal in which:
The city is going to benefit by $25 million plus - remember we are not counting the incremental parking taxes from out of city visitors or the multiplier effect on out of town spending.
The county is probably pretty nuetral in that it is forgoing some income from the stadium authority but picking up its portion of the sales tax from out of county visitors per cap spend on out of arena merch and concessions as well as its share of the incremental rental car tax - but these are really small numbers in the grand scheme of this deal.
The State is going to come out way ahead. Even if I use your analysis for the cost associated with the stadium authority and attribute it all to the state, $60 million- $18 million still leaves the state $42 million better off.
ANd lastly, you have scarecly even mentioned the security provisions that Hansen is putting in place to backstop the debt. That is perhaps the most unprecedented part of the deal. They allowing the city to own the land and arena and are pledging the equity in the Arena AND NBA franchise as collateral.
Thus while you may be strongly opposed to a developer getting any public subsidy, I THINK THE FACT HERE IS THAT THE PUBLIC TAXPAYERS HERE WILL BENEFIT BY OVER $65 MILLION IN AGGREGATE WITH VIRTUALLY NO RISK OF LOSS OF PRINCIPAL...and that sounds like a pretty damn good deal on a relative and absolute basis.
Neil, if you are really going to be intellectually honest about this deal, I would think another post is in order in which you factor in these benefits to the city and state that you left out of your last post.
I do appreciate your efforts and insights Neil, and am anxiously awaiting your response.
You also did not mention my point on I-91 analysis. Again, that seems to be easily covered.
Steve, how does the city benefit from parking taxes and arena merch/sales taxes that are used to pay the arena bonds ? Or are you just itemizing your earlier point of "visitors will pay it" . Do you have any numbers on how many out-of-county attendees there are at a Safeco/Clink event to help inform those numbers ?
Also, while collecting those incremental taxes to pay the bonds the city services needed for the arena increase. In TIF-like fashion, the rest of the taxpayers will have to help cover the increase in services needed, above what the warehouses and former strip club required.
In terms of the taxes, the city benefits from the parking tax assessed on all parking lots that are not controlled by the arena or other stadium districts. The lot for the building across the street from the strip club has 900 new spots and there are numerous small lots owned by various entities. I am leave the
Mariners garage out of this, because I don't think there are taxes on that lot as it is controlled by the PFD. But for the no. Arena/PFD lots the city will collect and keep the Parking tax from arena patrons and not share any of it with Hansen. While the amount of this revenue is up for debate that is a fact.
As far as the sales tax goes, I am referring to the sales tax collected outside of the arena. For example at neighboring restaurants and bars. Again things not owned by the arena and thus not rebated to them.
And while there is definitely substitution here for the Seattle patrons, there is not for out of city patrons. That is all incremental taxes to Seattle not rebates to the arena. I arrived at 50% because it has been mentioned in numerous articles that 50% is Sonic season ticket holders came from the Eastside-which is outside of Seattle tax jurisdiction. I don't know if this is correct or not. But I would guess its close. Wouldn't you think that half of fans come from the Eastside, south Seattle - kent, auburn, etc, and North of 145ths street in north Seattle?
And lastly, on the unaccounted for city services, look in the MOU. The arena co is forced to pay back the city for police, security, clean up, administrative costs, etc. Are they costs beyond that, sure I'm quite sure there are. Are they that significant, probably not. If you want to pin the entire traffic problem of Sodo on them when the arena is only open from 6-10pm after the port is closed, and force them to fix all of sodo's traffic issues, then yes you can come up with a monstrous number-like the $150 million lander street bridge. But I think any rational person knows that is not valid. You should read the crosscut piece on the port from yesterday if you are buying into that logic.
So you're describing how patrons will reduce spending on the eastside (king county still) or kent, auburn, n of 145th (all areas in king county) where the general tax rates are... 3% but, if those patrons live in the cities there, 3% that goes to the city and they come to the city of Seattle where 3% goes into that city. Still sounds like substitution to me when everyone in Seattle avoids restaurants/being near the stadium district on gamedays.
If ArenaCo contracts with any nearby parking garages (hey, we'll put you on a map as where to park) then *bam* that's parking tax money that goes to pay off their loan. Seems like both garage and arena would benefit from those arrangements and any hedge fund manager with a brain would go for it. I'll take a look for the crosscut piece but I'm not concerned about increasing volumes of traffic in the area like the port is, just increasing frequency of traffic events. Still, 20k seats doesn't sound too crazy to me as a traffic thing.
I just see limited upside for the residents of seattle/king county if viewing this as purely an "investment". It seems like the return to Seattle/King county is very heavily capped, despite being a 40% partner in the facility. Where's the revenue sharing, 40% of concessions profits, seat license fees ?
On the parking taxes, in looking through the MOU again I don't see a provision for leased lots. By It could be possible. But then again arenaco will certainly NOT control 100% of the parking inventory so the city will get some benefit-it's just a question of how much. And again I HAVE NOT included it my analysis anyway! This deal is a net positive to the city/county/state without any parking tax benefit.
And chef joe. You are partially correct. This deal is a huge positive for Seattle and the state, and probably slightly positive for the county-but there is no question it is a slight negative for the tax jurisdictions outside of Seattle. That is also a fact. If you are a Seattle taxpayer this is a great deal for you. If you are a Bellevue taxpayer this is likely a slight negative for you EVEN THOUGH YOU HAVE NOT MADE ANY CONTRIBUTION TO THE ARENA. That is a key part of this people don't get. In this case Seattle is benefiting at Kent, Redmond, Bothell, and places as far away as Bellingham and even Vancouver BC's expense.
But it is also true that if this is not built in Seattle, it almost certainly will be built in Bellevue. And again that would HURT Seattle and benefit Bellevue.
If I am a Seattle resident, this is a no brainier.
And chef joe. It is unrealistic the think the city will ever invest in any arena project as a true profit partner. It's just not what they do. Hansens investment group has taken all the risk, fronted the money, paid all the costs, is responsible for getting the teams, hiring the organization and securing the financing. The city is all about minimizing risk, not being involved in managing the arena and team, and just getting insuring tax payers are paid back.
And I have to say that I personally find it amusing that building an opera house, symphony hall, or art Musium does not draw the same critical analysis. Political types somehow think that sports don't add the same cultural value as the arts. . . A position that is dubious at best.
And Neil. I'm still awaiting your response. It's the weekend. So maybe that will come Monday.
You know the mariners' deal has them paying 10% of team profits to the city/county. The other sports also pay sales taxes and parking/admissions taxes in exchange for their public financing (sales tax bump and restaurant tax), which results in long term direct income to the city.
Re: Parking tax -
Only parking taxes collected directly by ArenaCo or an affiliate that can be directly tied to activity at the arena are included.
It doesn't define affiliate... just establish a contract with area parking lots for cross-promotion and possibly some minor payments and you've got an affiliate.
If you look through the proposal from Hansen for what to do with the key arena it suggests converting it to things that compete with the convention center or make it a performance hall and coordinate so as not to compete with ArenaCo for events. Sounds like the Key's ability to just cover expenses may get damaged.
Okay: First off, everyone understands that there's a difference between public *cost* and public *subsidy*, right? Public cost is "If the arena is built, how much will the public purse be poorer relative to if it's not built?" Public subsidy is "In this arena deal, how much money will the developers save at public expense, relative to if they did it with no government involvement at all?"
I don't think there's any question that the public *subsidy* is in the neighborhood of $55 million. As I discussed in my original post, kickbacks of admission taxes, business and property taxes, and arena sales taxes are special concessions that someone building, say, a clam shack wouldn't be eligible for. Actually, it's higher than that because we should then count the full sales tax break, not just 75% of it, as a subsidy - and also, I hadn't realized that the city collects admissions taxes on concerts and movies and the like, so there's a loss (probably no higher than a few million in NPV) there as well. But $55-60 millionish in subsidies, anyway.
Steve, though, is interested in public *cost* (as is I-91). So let's go through his points one at a time and see what we get:
"The city is going to benefit by $25 million plus - remember we are not counting the incremental parking taxes from out of city visitors or the multiplier effect on out of town spending."
Steve, I can't figure out your math here. I projected $4.4 million in NPV worth of sales tax costs (from spending redirected from other Seattle businesses that actually pay sales taxes); you want to knock that down to $2.2 million because half of arena visitors will come from outside Seattle, which is fine. Then you add back in $1.15 million a year in new taxes from hotel and other spending outside the arena by fans from out of town - you don't say where you got your figures from, but they seem in the ballpark (no pun intended) - which comes to about $17.6 million in NPV. $17.6 million minus $2.2 million equals $15.4 million. Where are you getting $25 million plus?
On top of this, there are additional potential costs to the city that we haven't accounted for yet. A new arena is going to add public costs for police, fire, and sanitation relative to if it were left a bunch of warehouses, especially if the KeyArena is left standing as well so that the city has to pay for services for both. (This isn't a *subsidy*, mind you, since everybody is eligible for police, etc., but it is a cost.) I don't have the relevant section of Judith Grant Long's work handy, but I'm pretty sure her cost estimate for new sports facilities was around $2 million a year. That'd be $30 million in NPV, or enough to kick the city's part of the deal back into the red.
If we add back things like car rental taxes, then we could potentially get back to break-even or better. But I still think the most reasonable conclusion - at least until someone with better economic projections than our weighs in - is that this looks like a deal that would be anywhere from a small loss for the city to a small gain.
Now, on to the other jurisdictions. The county, as you note correctly, is small potatoes either way. For the state, you assume $60m in new property taxes and $20m in construction sales taxes (I actually doubt you'd have $300m in taxable construction sales, but that's not a huge deal either way), less $18m from lost admission taxes. That would put the state up $62m. However, putting a new arena in LoDo doesn't only affect property taxes there. It also affects the value of land around KeyArena (which will suddenly be an event backwater), and - assuming you're figuring that the new arena will attract development to its surrounding area - the value of whatever land people would have been opening restaurants and such in if not lured to LoDo by the arena. So we'd need to knock that $60m figure down a fair bit.
That leaves the surrounding towns (Bellevue, etc.), whose local businesses and local tax receipts would take a hit from more people traveling downtown to see Sonics games. I don't have sales tax rates for all those places, let alone estimates of what it would cost in terms of overall economic activity. (If Bellevue restaurateurs lose customers, they spend less at local supermarkets, etc.) But I think you and I both agree that taxpayers there would be taking a loss.
So add it all up and what do we have? $55 million or so in tax breaks to a developer in order to shift some consumer spending from the suburbs to the city. The city and county might or might not break even, the state would do fine (assuming economic activity and property taxes go up overall as a result of there being new stuff being built), and taxpayers in surrounding communities would take a loss. That's hardly a clear win for taxpayers overall.
It's still a pretty low cost at worst, though. Is it a low enough price to be worth it to get an NBA team back in town? I'd imagine that most Seattle residents would say yes, but really the only way to tell is to put it up for a vote, with all the economics of it laid out.
Incidentally, it occurs to me that there's one way to skip all of our guesstimating and use empirical data for how bringing the Sonics back would affect tax receipts: What happened to sales taxes, property taxes, etc., when the team *left*? Building a new arena isn't precisely running the clock backwards, but it'd at least give us some sense of what the substitution effects look like. Anyone have the data handy?
On the first point, we are in agreement. There is definitely a difference between a public cost and subsidy and there is no question there is a public subsidy here (essentially the abating of taxes) that most other businesses would not receive. I have never debated that.
My point is that you initially claimed the public COST here was as high as $165 million and then even in this post revised that to $23-$53 million. And it now sounds like you are conceding that point and acknowledging that it looks more like a positive for Seattle and the state and negative for surrounding communities and net neutral as a whole.
But before we get into that lets clarify a few things which you again seemed to state as fact, which are not.
On the NPV for the city, if you look back at my original post I put all of the assumptions for the calculations for the city and the NPV, so just look back at that post. But the thing you are missing Neil is the annual inflation adjustment of the $1,159 in revenue. I am assuming a 2%, which is what the effectively forecast in the swap curve for 30 year US treasury bonds. This is the way you do this Neil, and it is common sense that restaurant, drink, and hotel prices will rise over 30 years. And again, I am then discounting back by the 4% rate, which is the city's 30 year cost of capital right now. The NPV of this fund flow is thus $25.6 million. I agree on deducting the $2.2 million, and we get $23.4 million.
On the second point, you are missing the fact that Hansen has agreed to pay the city for most of the cost you mentioned - security, police, fire, clean up, administrative. I am sure there could be some outside cost, but no way are they $2 million per year. And remember, Seattle is keeping its portion of the parking tax, and we have not even accounted for the multiplier on the gross spending (which is likely between 1.5-2.0x, on which we would then make an assumption for the annual tax increment on that to the city. Again, the logic on this is if someone from out of town comes in and spends a dollar at a restaurant and tips a waiter, that revenue recycles through the local economy as the restaurant owner and waiter spend their incremental profit). So again, I think the city will be highly profitable.
We agree on the county, so I will leave that as is.
On the property taxes, I disagree again. I am not sure if you have been to Seattle, but the property values around Key are more likely to go UP than down. First of all, the Sonics are gone, and Key Arena has struggled since the departure. While this has clearly hurt some of the restaurants since the team departed in 2008, locating a new arena in SODO would only modestly impact those restaurants as Key is only hosting a handful of concerts that would go to the new Arena. In fact you could argue that a re-purpose of Key, would actually help the area after the new arena is built. But at a minimum the are DEFINITELY not much worse off. The big impact to local businesses already happened when the team left
But the key you are really missing here, is that Key is located in lower Queen Anne, and there was very little parking around the arena. As such, fans parked all over the nearby neighborhoods on surface streets. As any lower Queen Anne Homeowner would tell you this was a miserable experience for them 42 nights a year and likely HURT property values.
While it is obviously hard to draw conclusions given the impact of the housing bubble and recession on home prices dwarfs everything else, your logic definitely does not hold in this neighborhood.
And in fact when you look at the impact on SODO, a reasonable person would say my estimates ARE WAY TO LOW. Why, because the Arena will bring in 150+ event nights into a decrepit warehouse area. As such, this area will likely see other developers come in and by these properties and re-purpose them for a higher use - like a bar or a restaurant. And when they bid up land prices in an attempt to do so, property taxes on will go up for the city, county, and state on all of these ancillary properties. This is just common sense Neil. The only way you could deny this is if you have not been to this area of Seattle.
I think if someone did an in depth analysis of the impact of the arena on property prices in the SODO area it would probably yield in excess of $5 million in taxes compared to my $3.5 million estimate on the arena only - which would drive the NPV to close to $100 million.
Unless you want to try to put some further analysis or opinion forward, you are going to have to consed this point.
Will other outside communities all take some slight tax loss. Of course they will. But arguing that Seattlelites should care is ludicris from an economic standpoint Neil. Saying that Seattle should not do what is in its best interest to attract visitors because it may hurt some other communities taxes is effectively the same as saying that Seattle should not let amazon build its new headquarters downtown because it would hurt Bellevue's tax base as someone may relocate from Bellevue to work in their new office building and buy a downtown condo. Or that Boeing should not bid on a defense order because winning it from Northrup Gruman would result in lost jobs and taxes in Northrup's home state.
You have to agree, that all we can do is analyze this from the standpoint of the taxpayers to the party of this agreement - the city, county, and state. And in that case it is a $23 million PLUS positive for the city, neutral to modestly positive for the county, and VERY positive ($60 million plus) for the State.
Unless you want to try to refute this again, you should at a minimum repost the headline to this article - as even you acknowledge that $23-55 million COST is not accurate. Again I am no9t debating the subsidy.
And on I-91, you are still missing the point Neal. In addition to these tax benefits we described, the city is GETTING THE LAND AND ARENA. They own it NOW. While the value of the Arena in 30 years may be dubious, this land, located this close to downtown, and in the direct path of the city's expansion, should appreciate by at least 4% per year. Even you have to acknowledge that. The value of urban land goes up over time.
And for people who point to key - come on now. the land under the Seattle center is probably worth $1 billion. If the city of Seattle sold the land to a private developer to build condos, hotels, etc, the land under key would be tremendously valuable. They city is choosing not to do that for civic reasons - but that is a conscious choice they are making.
I actually support the concept of I-91. It is why we are actually getting a deal like this. But make no mistake about it. The fact that new taxes and rent cover the debt service (5% per year including amortization), there is $23 million plus in incremental taxes (18% return on city's $125 million investment) and the fact that the city owns land of $100 million appreciating at 4% per year over 30 years means they are getting way north of 20% on their investment.
People. Critical analysis goes both ways. If you want to be a skeptic or critic, that is fine. But if you dig in an learn the facts do not support your initial opinion and you then disregard them anyway and resort to bashing for the sake of it, you are no better than the gullible sports fans you seem to decry. Hopefully I have made my point here.
I thought the stadium 0.5% restaurant tax was retired last year. Are you claiming they will reinstate that or just proposing there will be increased tax revenue as people eat before an arena event ?
The key will still be functioning with or without Hansen, so I'm not sure why you're saying values will go up beyond what they are currently. For a few years before a new arena can be erected the QA area may end up hosting 150+ events so that could certainly impact parking.
What sort of additional development would go on in an area that is surrounded by functioning railyards, the port, and the waterfront and already has a 40k seating baseball stadium and a 75k seating football field ? We're not revitalizing a warehouse area, we're building on top of a few warehouses already squeezed down by arenas.
"But the thing you are missing Neil is the annual inflation adjustment of the $1,159 in revenue. I am assuming a 2%, which is what the effectively forecast in the swap curve for 30 year US treasury bonds. This is the way you do this Neil, and it is common sense that restaurant, drink, and hotel prices will rise over 30 years. And again, I am then discounting back by the 4% rate, which is the city's 30 year cost of capital right now. The NPV of this fund flow is thus $25.6 million. I agree on deducting the $2.2 million, and we get $23.4 million."
We must have different versions of Excel, because I get $22.4m on a 4% discount rate, or $19.9m on a 5% discount rate (rates won't stay this low forever, and the city can't get a 4% rate if it waits to make balloon payments in the year 2041). Subtract $2.2m, and then we're at $17.7m to $20.2m.
I'm still skeptical of those figures, though - even if 50% of fans *live* outside of Seattle city limits, does that mean that 50% of their current *spending* is outside of Seattle city limits? If they live in Redmond but work in Seattle, and typically go out to dinner in Seattle anyway before heading home (or just drive in across the lake), then that's not new spending.
"On the second point, you are missing the fact that Hansen has agreed to pay the city for most of the cost you mentioned - security, police, fire, clean up, administrative."
Aha - that I did indeed miss, thanks to it being buried in the middle of an "arena operating expenses" clause that runs for almost a full page. That is indeed huge, and is no doubt a direct result of I-91 - Hansen clearly wanted to be sure that no one raised this as a challenge.
With police and fire services no longer a concern, I now agree that it looks like the city will end up with a small net surplus from this deal.
On the state issue: I have been to Seattle multiple times (I've stayed - and parked - in Queen Anne, and visited LoDo), and let's just say I find it hard to believe that one district will see massive property value increases as a result of an arena being built, while another will see massive property value increases as a result of an arena being taken away. There's some empirical evidence here as well: Rob Baade did a study years ago of the impact of the construction of the Kingdome on LoDo, and found that any positive impact disappeared once you got more than a block or so from the stadium. An arena will be open more nights, so should do a bit better, but I'm still dubious of a massive state windfall when all you're doing is moving economic activity from one part of the state to another.
I've edited the headline here (to "outlay," since I think that's more accurate than either "cost" or "subsidy" - the whole point of the $22m to $53m range is that it depends whether you're counting costs or subsidies, after all), and will post a fuller analysis of all the items we've discussed here once I have the time, which may not be for a couple of days. (Tight schedule today and tomorrow.)
And thanks for taking the time to calculate all the numbers and share them here, even if we still disagree on some of the details. My goal certainly isn't to oppose good stadium and arena deals when they do come up. But this site is in the business of looking gift horses in the mouth, and given how unusual it is to find a deal where the public is made whole, most are going to be assumed guilty until proven innocent. This one has an excellent chance of being acquitted, though - especially if you're only looking from the perspective of Seattle taxpayers, not all of Washington, or if you consider the public paying 10% of the cost of an arena a reasonable price, which most people would say it was when San Francisco put up 10% of the cost of the Giants' stadium.
I'd still like to see what happened to tax receipts when the Sonics left, though...
On the NPV, I am not sure what you are doing. Its pretty straightforward. You just start with the $1,159 in year one, and put in a formula for each subsequent year out to 30 to increase by 2% (so mulitply by 1.02) and then doscount the whole stream back by 1.04% (via the NPV formulat in excel). You will get $25.6 million in NPV.
On the 50% coming from outside of Seattle - I agree, we will never be able to define this with anything that comes close to precesion. It is educated guesswork. I think it is probably higher than 50% because again 50% of ticket holders were just from the eastside. If we take the suburbs to the north and south and consider that the seattle city limits are small, I would guess its probably more like 60%. And while you are correct that some people would come to seattle anyway to spend their leisure/entertainment dollars, I would argue that most people that live in Bellevue work in Bellevue not is Seattle as that is where most of the big corporate campuses like microsoft are. But you are again right that this number probably should be haircut a bit - maybe from 60% to 40%. But definately not in half - there is not that much subsitution.
And on the prpoerty values, I am not saying Queen Anne will see some massive property value increase. I am just saying that the businesses around Key Arena have already taken the majority of the hit from the sonics leaving and that a repurposed Key probably and a new arena in SODO is probably net nuetral to these businesse and probably a slight positive to home values (definately not a negative).
And in SODO (not LODO), my only point is that land values immediately surrounding the arena will go up for the simple fact that arena patrons will undoubtedly spill over into surrounding bars and restaurants 150+ nights a year. You're right that it will not transalte beyond 3-4 blocks away (in fact this is already happening). IBut its certaintly not a negative.
And I do appreciate the honesty in the process here is that this is what it is all about.
I need to put a post-it on my computer: LoDo = Denver, SoDo = Seattle. This is why NYC has moved on to three-syllable neighborhood names, like (I kid you not) BoCoCa.
I missed this thread until last night, and now that I've read it over (no, I didn't read every word), this is a great deal for Seattle. $55M in public funding against over $900M from the private sector? This is a deal that will pay for itself.
Had something similar been proposed in Sacramento, there's no chance I'd have opposed it. Our proposal was in stark contrast to this Seattle proposal.
I just can't see this not getting done.
Furthermore, I think the connection will be more than just the contrast between the arena proposals. I think it'll be the team as well. As soon as Hansen comes knocking on the Maloofs' door with up to $500M, it's a done deal. They'll take it.
On a side note, Joe Benvenuti, one of the original people who brought the Kings to Sacramento, recently died. He was 91. This is significant here because between Benvenuti and Bob Cook, that's 30% of ownership shares. I just think that if some billionaire was intent on purchasing the Kings and keeping them in Sacramento, he or she would be lobbying hard to buy these shares. Since I'm not seeing it, I doubt it'll happen. It'll be interesting to see if Hansen will bid on those shares.
Neil, I thought you might be interested in this new UBS report:
Does anyone know how to type on this site without getting scripting errors? - �Like this one� ?
Bob, email me with details of what browser, etc., you're using, and I'll try to help you out.
When estimating how many fans would stop attending Mariners and Seahawks games (to try and imply substitution) why are you not pointing out that ticket sales for those two teams have not increased since the Sonics left. Therefore, your substitution argument seems tenuous at best...
The Mariners have also been awful since the Sonics left, so it's going to be pretty tough to separate the signal from the noise of an overall attendance plunge. Meanwhile, Sounders attendance is through the roof - should we credit that to the Sonics leaving?
That said, I doubt that most of the substitution is from people not attending sporting events - a lot of it is going to come from other entertainment options like going to movies, concerts, dining out, etc. Some of those pay admissions tax (movies and concerts), some don't. The $18m in admissions tax lost to substitution was a guesstimate - if you want to argue that it's half that, or double that, you could make a legitimate case for either.
this whole substitution effect argument really doesn't sit right with me. I don't do much entertainment here in Seattle where I live. I go out for drinks once and a while, but that activity won't change when the Sonics return, even including the extra costs of going to games and spending $10 per drink at the arena (argh). I rarely go to Ms games, no Sounders games, and only go to seahawks if I get a free ticket or something. I actually like watching football on TV better than being in the arena.
I rarely go to the theater, maybe once a year. I do attend a few events like Folklife or streetfairs, block parties, and the like. But this was exactly the same behavior as when the Sonics were in town and I was attending Sonics games.
I guess I have been saving money since the Sonics left in 2008. So the opportunity cost to me is possibly some miniscule interest payment on my savings account. The opportunity cost to Seattle is the tax revenues they are not making off my Sonics game excursions. From my point of view, there is zero substitution effect related to my Sonics game expenditures.
Funny I attended the joint City County public meeting on the arena proposal yesterday. I was blown away by the number of fans who came all the way from Yakima, BC, Olympia, Bellingham, Spanaway, Federal Way, Everett, Lynnwood, etc etc. who all were just pleading "please let me spend my money in Seattle." More than one guy said they live in Seattle but actually travel elsewhere (Denver, Phoenix, Portland, BC, etc) to see NBA and hockey. So there's currently a reverse substitution effect, outbound from City of Seattle.
Neil, overall I think you have a penchant for inflating the alleged substitution effect, without any real data showing that it could be as big as you routinely describe it to be. I don't mean to be confrontational or anything, just trying to be as accurate as we can be with these numbers and effects.
The best data we have on the substitution effect comes from studies of what happens to local economic activity (or sales tax receipts) when a team moves to or from a town. (Robert Baade has done several of these, as have a few other economists.) The answer is invariably: Not a whole lot of anything. At one point Baade looked at 30 cities that had gained teams, and found that in 27 cases there was no measurable effect on local economic activity - and in the other three cases activity appeared to go *down*. (See Chapter 2 of Field of Schemes for more on these.)
Could these studies be missing some small effect that was swamped by bigger economic trends? Sure. Can attracting a team shift spending from one neighborhood to another, or one town to another? Definitely. But ask just about any economist and they'll say that on the scale of a large city, or certainly a county or state, the vast majority of fans aren't saving their ticket money when a team leaves like you are - they're spending it on something else in town.
I'm actually a pretty good example of this: In recent years I've been going to more MLS and WNBA games, which has cut into the number of MLB games that I go to. (As have rising MLB ticket prices - when I was in college I'd go sit in the Yankee Stadium bleachers 30-40 times a year for $1.50 a pop, but now I go to 5-6 games a year for $20 each.) And I've completely stopped going to Knicks games, because I don't have the time or money to follow them.
Anyway, the best way of trying to estimate this would be to do a study of Seattle tax receipts in the years the Sonics were there vs the years since they left, and try to control for outside economic factors (maybe by comparing with a similar city that didn't lose a team?). If somebody has access to the sales tax data, this would be an excellent time to take a look at it...