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July 11, 2012
Hansen: Breaking even is a $14 million a year profit! Why won't anyone believe me?
Would-be Seattle arena builder Chris Hansen has taken to his own website again to explain how his financing plan would meet the demands of Initiative 91, the Seattle law that requires that the city get a return on its investment above what it would get from a treasury bond. And this time, he's getting snarky on us:
While the MOU is no doubt complex, the math here is not. If we just divide the $14 million in GUARANTEED taxes and rent the City/County will receive per year by their $200 million investment, we get an annual return of 7.0%.
With this in mind, the simple "common sense" question we would just ask all Seattleites is "How does a 7% return not exceed the 30 year Treasury rate of 2.7%, which is what is required by I-91?"
This is indeed simple — it's just completely the wrong way to calculate a return on investment. For example, let's say you buy a share of stock for, oh, say, $200 million. (It's very expensive stock. In Stark Industries.) But because you don't have $200 million, you have to borrow it from a bank, at 5.5% interest. Your stock then returns dividends of 7% a year. Have you turned a profit of more than 2.7% a year?
Actually, it's worse than that, because you can sell your stock when you're done with it — hopefully at a profit — but at the end of Hansen's deal the city will be left with a 30-year-old arena, which is worth pretty much nothing. Hansen appears to be including the repayment of the initial investment as "return," which is not how most investments (or, indeed, treasury bonds) work.
In fact, it's worse than even that: Unless the bond cost numbers have changed dramatically since the spring, the city is going to be spending more than $14 million a year to pay off the bonds, which means it would barely break even from Hansen's payments. Much of which are actually kicked-back city taxes, let's not forget, though Hansen insists that they're "new tax receipts that would not exist if our proposal does not move forward" and so should count as a return on investment — though he then notes that even counting only his rent payments, the city would get a 3.2% annual return on its investment. A return that wouldn't be enough to pay off the city's annual bond costs, mind you, but Hansen terms this a win for the city.
The problem here is that I-91 was crappily written, assuming that the city would put up cash up front, and not considering that it might have to borrow money and then pay back both itself and bondholders. As a result, you have Hansen arguing that a deal in which every penny of taxes and rent payments supplied by the arena — even by his own numbers — would get poured into paying off annual bond payments is a net positive return for the city. That may be true according to the letter of I-91, and it's certainly better than the usual poke in the eye with a sharp stick that Seattle has gotten from its stadium deals. But to say, as Hansen does, that his plan meets "both the definition and intent" of the positive-return-on-public-investment assumes that people in Seattle have a really, really weird notion of positive return.
'but at the end of Hansen's deal the city will be left with a 30-year-old arena, which is worth pretty much nothing.'
Probably so, but the land that it sits on cerainly won't depreciate down to nothing - in fact it will probably grow significantly in value. Shouldn't that estimate be rolled into the future value of your estimated return?
Of course nobody knows what will happen but it's not too crazy to think that in 30 years there will have been considerable retail/business development that will have transformed the area much like the Paul Allen projects transformed South Lake Union.
Come on Mr. G, you can't expect Neil to mention the increasing value of land underneath and the incremental taxes out of towners would produce. That would have hurt the narrative of his negative blog post. I am surprised the Seattle Time Editorial Board hasn't reached out to Neil with a job offer.
Come on Mr. G, you can't expect Neil to mention the increasing value of land underneath and the incremental taxes out of towners would produce. That would have hurt the narrative of his negative blog post. I am surprised the Seattle Time Editorial Board hasn't reached out to Neil with a job offer.
Hansen: "Even if we were to use the City Central Staff's unfounded assumption that the land and Arena are worthless at the end of the lease and that ZERO incremental taxes are created, the return to the City/County is still 7%!"
Using his rules here, not mine.
Isn't your analogy a little off here? Why not compare it to buying a house instead of buying stock since you are paying off the principle every year? We can even assume that the house value is worth nothing at the end but the land is worth the same in which you paid for it 30 years earlier. In an attempt to simplify it more (maybe incorrectly), the Internal Rate of Return on 200M up front payment with 14M/year payments gets a 6% IRR. Can we use IRR here?
You also need to factor that you are paying down the principle and thus can't just deduct the 5.5 from the 6% and say it doesn't meet I-91 requirement.
Yes, you're paying off the principal, but that part shouldn't count as return on investment. Nor does paying off the interest. The intent of I-91 was that the city would clear a profit on an arena — all that Hansen has shown is that investing in an arena is better than borrowing money at 5.5% and investing it at 2.7%, which isn't exactly the same thing.
Look, I would love to see Hansen show that he can build an arena without costing Seattle taxpayers a dime — among other things, it'd be a great rallying point for other cities to then ask why their team owners can't do the same. But pointing at $14m a year in expenses and $14m a year in revenues and shouting "Profit!" isn't a very impressive argument.
Hey Neil, can you direct me to the blog post you wrote about this story. How Seattle Times has been receiving a government handouts for 3 years and how using bond capacity for evil sports arenas is unacceptable.
Sadly, newspaper subsidies (and aerospace industry subsidies) are outside this site's mission. It's certainly something the Times should be disclosing in its own editorials, though.
"Look, I would love to see Hansen show that he can build an arena without costing Seattle taxpayers a dime"
Correct me if I am wrong Neil, and I very well might be here, but I have heard you in the past cite studies by Judith Grant Long and mention that Long actually advocates a small amount of public participation since you cannot argue that Arenas do provide at least some benefit to the community, whether it is tangible or intangible such as pride etc... I even thought I heard you mention it was around 20 percent. Am I interpreting what you said accurately. I could be way off here and I do not mean to misrepresent what you said so do correct me.
I don't think Judith has made that argument, but others certainly have. And I've said in the past that there's a price point for public expenditure where a new arena is worth it — hell, I said it right here the first time I estimated the public cost of Hansen's plan (see the concluding paragraph):
If Hansen were saying, "Look, this could end up costing Seattle a few tens of millions of dollars, but that's a small price to pay to get an NBA franchise back," I'd be inclined to say, sure, if Seattleites think that's a fair deal, who am I to argue? But it's tough to defend him when he's instead resorting to, as one business journalist who I consulted on these numbers just put it, "how to lie with math."
Neil, I apologize if you thought I was attacking your post/analogy here. That is not my intent. I am just trying to understand it a bit better so thought a house payment would be a better analogy. I come to this site every day to learn from you and other posts. The work you do and the dialogue all your readers provide is greatly appreciated & enjoyed so I hope you know that.
There might be something wrong with my logic so I would like to understand why it isn't at a high-level this simple:
If I take out a loan for $200 at a 5.5% interest rate and make a $14 annual payment in year one, $11 goes to interest and $3 goes to the principle and the interest cascades down and principle goes up. Then in exactly year 30, the loan is paid off (and then some ~$4). So how it is currently structured, that appears to break even. So add in I-91 and that is where I need to determine the t-bill rate of return. Should I assume a 2.7% up lift in year one on the Initial $200 and then 2.7% interest in year 2 on the $197 remaining in principle? Also where does this amount get added? At the end or do I simply take it out of the $14 annual payment I am making? If the later, I never really pay down any of my principle since 5.5% on 200 is $11 + the 2.7% on the 200 = $5.4 thus equaling $16.4 which last I checked was greater than 14. (so that can't be right, or can it?)
There was some reference to double dipping with the 5.5 and the 2.7 so I am guessing that's why the numbers aren't footing.
Thanks Neil. I am not going to go into all the financial detials to prove this is a good deal. Plenty of people have already posted on this site showing how this may very well end up being a good deal for city and how it CLEARLY passes I 91. In fact, Dave has recently been posting on this topic. I was actually curious about what you thought of his analysis.
Dave raises another way of calculating rate of return: Start with the $200m, and then subtract out the financing costs. (This is, in fact, what I-91 appears to spell out, though it's really badly worded.) He doesn't do the math, though, that I can tell, so let's try it really quickly:
Paying off $200m in principal over 30 years costs $6.7m a year. Annual bond costs are $14.5m a year. That means about $7.8m a year is going to financing costs. (That's only an interest rate of 3.9%, though - anyone know why the discrepancy?)
$14.5m minus $7.8m means $6.7m a year return, all of which is being used to pay down the principal on the loans. $6.7m a year on $200m in investment is a 3.35% return - which is marginally better than the Treasury rate, but still not the 7% return that both Hansen and Dave are arguing for.
It does look to clear the "letter of I-91," as I indicated in this post. But in real numbers, it means that the city would be (according to Hansen's own figures) spending exactly the same amount on debt service every year as it would be bringing in in rent and new taxes. That's not a tragedy (assuming the taxes really are new, which is a separate argument), but it's what elected officials and voters should be presented with, not "this will provide a 7% a year return."
Whoops, just realized I missed JB's question. JB, does my last comment answer it?
Thanks Neil. That helps...appreciate it.
Not sure why 3.9% would be used when the city/county says the estimated bond rates of 5.5 percent.
pg 53 outlines the bond interest rate for the county's share, city staff presented the same number
Aha, I see the reason - interest only applies to the outstanding balance on the loan, so by the latter years the city is only paying a small % of the original loan amount. The effective rate does end up 3.9% a year.
Also, they're anticipating two bond issues, one taxable at 5.5% and one tax-exempt at 4.5%. Presumably the taxable would be funded by the rent payments, and the tax-exempt by the tax revenues, to get around IRS requirements. Though not sure how that's going to work, actually, given that extra rent payments may be needed to supplement the taxes, which would be a big IRS no-no.
I'm appreciative of everyone here slicing and dicing the numbers. It's impressive and smart and economics experts could learn a thing or two here.
My question, I fear, renders all of this moot: why on earth are taxpayers being forced to shovel $200 million into the pockets of an arena ownership syndicate with one member alone (Steve Ballmer) with a $16 billion fortune?
If Ballmer alone pays for the entire deal -- let's say it's $800 million, for the entire arena and the purchase of an NBA team -- that leaves 95% of his fortune intact.
Somehow this keeps getting subsumed by conjectural discussions of I-91 and return rates and 30-year appreciation/depreciation formulae. This is important, to be sure. But if Hansen's ridiculously wealthy syndicate pays for it themselves, this is all moot.
Can you explain your argument as it responds to Dave's double counting point? My understanding is that if the city only provides bonds, it actually is providing zero principal in cash. Therefore, to break even, all that has to happen is for Hansen's group to pay the financing cost, which you determined to be 3.9% If that's the case, the guaranteed funds would provide a 3.1% return (plus any bump from other incremental taxes and land/arena value). I am not an economist and so have a limited understanding of these issues--any guidance would be appreciated.
Following this conversation all day, and it occurs to me is that what's needed here is a best-case/worst-case evaluation.
Take the numbers that have been thrown out so far and ask, "How far underwater can Seattle get if they accept this deal? And what's the best they can possibly do?". Then proceed or not based on the answers.
What I'm seeing so far is that if they go with the worst-case assumptions, it doesn't look like that bad a deal to me. It really doesn't. But I don't have an exact number. Neil, I think at one point, you said $50M? And sorry, I can't cite that.
Where I'd be encouraged if I was a Seattle fan: The best and worst cases don't seem that far apart. If this cost "only" $100M in taxpayer subsidies over 30 years, that wouldn't be a bad deal at all. We're arguing about 2% or 7%, not negative 30% and positive 50%. I think both sides can be commended for this approach.
This deal is closer to being completed than people generally believe. That's the way it looks, anyway. But, seriously, if the people of Seattle don't want it, then don't proceed. Why would you do something the majority don't want?
Neil, Neil, Neil,
Here we go again. I really suggest you pull a finance textbook off the shelf and have a look at calculating NPV, IRR, and cost of capital. There are so many things wrong with your post above from a finance standpoint, I honestly don't even know where to start. I thought I laid this out pretty clearly, but I will try again.
While Hansen's anlaysis maybe oversimplified, and he has indicated in his presentation that you need to do an IRR analysis with the precise flow of funds to get the true return, it is 100% factually the right way to look at it.
Hansen is saying you should judge the investment as if it is all cash from the city and the City's investment is thus $200 million, and that the return on that amount should then be compared to the city's cost of capital to judge if it is an appropriate return.
While what this hurdle rate should be may be up for debate, but I can tell you with 100% certainty it is more than 2.6% and less than 7.0% in today's interest rate environment.
This is the correct way to eveluate the proposal Neil.
Neil, "investing" $200 million in bond proceeds is not investing# The second you assume the city borrow's the whole amount, and has ZERO cash equity invested in the project, it would have an infinate return as we discussed#
To this point you say:
"This is indeed simple � it's just completely the wrong way to calculate a return on investment# For example, let's say you buy a share of stock for, oh, say, $200 million# #It's very expensive stock# In Stark Industries## But because you don't have $200 million, you have to borrow it from a bank, at 5#5% interest# Your stock then returns dividends of 7% a year# Have you turned a profit of more than 2#7% a year?"
Neil, you do realize what a ridiculous mistatement this is# If you borrow $200 million and at 5#5% and invest in in a stock that pays a 7% dividend yield it would be an incredible investment assuming the stocks face value does not decline - you would be making $3 million a year without investing any of your own capital # # # and yes, the return would again be infinate as you would be dividing $3 million by zero# Your argument here is just plain wrong#
Lets make it a better example# Lets say you invested $50 million and then borrowed $200 million# In this case you would collect the same $14 million in dividends, and you would own interest of 5#5% x 150M = 8.25M. This would leave you with a profit of $5.75M on your investment.
But the mistake that you are making Neil, and one everyone else keeps making is that you would then divide this $5.75M profit by $200 million and get a return of 2.875%.
THIS IS 100% WRONG!
You would divide the $5.75M profit by the $50 million in cash invested and you would get a annual return of 11.5%.
This is the mistake the city staff is making, neil just made, and nearly every other skeptic has made.
You then state:
"Actually, it's worse than that, because you can sell your stock when you're done with it � hopefully at a profit � but at the end of Hansen's deal the city will be left with a 30-year-old arena, which is worth pretty much nothing.
The first thing Neil is that hansen has only argued that the land will be worth something. To argue that this land ajacent to downtown will be worth less than the demolition cost of the arena is absolutely baseless. Any rational financial analyst would assume this land will appreciate by some value, with the correct methodology to assume that it appreciated at some risk premium to the risk free rate as hansen stated.
You then say:
"Hansen appears to be including the repayment of the initial investment as "return," which is not how most investments #or, indeed, treasury bonds# work. "
Uhh. Wrong again. Hansen is assuming in his analysis the investment is made in cash, so there is no debt service, and then calculating the project return. Again they city could just invest $200 million in cash here, and for that they would get a guranteed return stream of $14 million in rent and taxes. That is a 7% "cash on cash" return Neil.
And it is EXACTLY THE WAY YOU LOOK AT INVESTING IN STOCKS, BONDS, TREASURIES OR REAL ESTATE.
Lastly you state:
In fact, it's worse than even that: Unless the bond cost numbers have changed dramatically since the spring, the city is going to be spending more than $14 million a year to pay off the bonds, which means it would barely break even from Hansen's payments. Much of which are actually kicked-back city taxes, let's not forget, though Hansen insists that they're "new tax receipts that would not exist if our proposal does not move forward" and so should count as a return on investment � though he then notes that even counting only his rent payments, the city would get a 3.2% annual return on its investment. A return that wouldn't be enough to pay off the city's annual bond costs, mind you, but Hansen terms this a win for the city."
While it is your perogative to disagree with whether or not "new taxes that would not exist if the Arena was not built" should be counted, Hansen correctly notes that there is no differation in I-91 between taxes and rent - both are cash that show up in the general fund just the same.
But more importatnly, you have again made the same mistake with the rent payments as you made above. If the City were to invest $200 million in cash, and not issue bonds, it would recieve $7 million in rent which is a 3.5% annual return. THIS IS A FACT NEIL.
If you want to assume that the city is investing zero, and borrowing $200 millio and then you want to exlude all of the taxes from the analysis, then yes, there would be a shortfall to payback the debt service by $7 million per year. That is a fair point, but it is a different one than Hansen is making.
The main point I have tried to make here is people need to distinguish between "debt" and "cash" when caclulating returns, or you are going to make some big mistakes in calculating returns and thus reach totally innacurate conclusions.
I don't know if you were just upset when you wrote this Neil, but hopefully after you read this you will see it is absolutely not a fair take on the stituation.
Skeptics and Supporters deserve to have the anlysis done correctly.
Dave, you like to talk a lot.
Did you look at the bond payment schedule Neil linked to ?
Added up the Taxable debt service is 203,766,591 and the untaxed debt service is 199,652,101 . If the total debt service payments listed in that table (which jibes with the city's documents on tax streams, etc) are $403.4M then ArenaCo's payments of $406M represent a whopping return of about $3M over 30 years above debt service.
Yes, Dave, if the city were putting up $200 million in cash, it would be getting $14 million a year that it could use for anything it wanted. But it's not. You know why? Because then it wouldn't have $200 million in cash. And would have a giant budget hole. A giant budget hole it would need to fill with *that $14 million a year in rent and tax proceeds*. We're back to break-even.
And that's my problem with this whole 7% "cash on cash return" thing. If you count the city's investment as $200m up front, and count all of Hansen's payments as a return, yes, you get 7% a year. You're then arguing, though, that a project that has *zero cash flow for the city* - precisely the same amount of money is coming in as going out - is returning 7% on the city's investment. That's a pretty nonsensical way of defining "return."
Or let's try looking at this a different way: Not as an arena deal, but as a loan. The city would be lending Hansen $200 million, which he would pay back (partly with rent, partly with kicked-back taxes) at 3.9% effective interest. The city would at the same time be borrowing $200 million, at the same 3.9% effective interest rate, which it would pay off by using every penny supplied by Hansen. You can think that's a good deal or not, but to call it a 7% rate of return on the city's money is the kind of thing that makes people think that all financiers are flimflam artists.
Even if they've gone slightly different in the debt service payment structure, the latest (attached to the MOU) version of the tax table still lines up with the spreadsheet you have linked to.
The total debt service payments don't match up perfectly with the latest city presentation on total debt service payments, although the 1% escalating debt service over 10 years may be responsible for inflating the total by pushing up the back end.
I am not trying to say this is a 7% NET return to the City after factoring in its borrowing costs, I am simply trying to point out how off track this analysis this gone by the skeptics have gone.
Keep in mind the City is actually investing $200 million in cash in the arena. Hansen's investors are not taking out the bonds. They are GO bonds from the city.
Thus there are two seperate and distinct transactions.
1. The city is borrowing $200 million at 5.5% - atlhough today's current rate is around 4.0-4.5% depending on the type of bond issue
2. The City is then investing $200 million in the Arena for which it gets a guranteed return stream of $14 million per year plus it will own the Arena at the end and keep incremental taxes - these are facts. You can asign a zero value to the last two - but they exist.
So it is definately true that the arena's return just from the guranteed return stream is 7% per year.
And it is also true that the City's debt service cost to finance its investment is 7%.
When you combine the two you have a transaction where the city's net cash investment was ZERO, and it's net cash flow was ZERO, and it owns the Arena for free at the end.
But this is where the skeptics, including Chefjoe, keep going wrong. The City without question earned a 7% return on its gross invesment. It simply used the 7% annual cash flows to finance 100% of its investment, which again left it with a zero percent return.
If want to net all of this out and assume the city's net investment is zero, and its net cash flow, YOU CAN NOT ASSUME THE CITY IS ENTITLED TO EARN A 2.6% TREASURY RETURN ON $200 MILLION
The City has ZERO Cash investment under this analysis and thus is definately NOT entitled under I-91 to earn a treasury return on $200 million. Again, this would imply a total investment of $400 million, not $200 million. By the numbers this would imply the city is getting a $14 million return on $200 million, and then on top of that another $5.2 Million on $200 million.
The point here is that if you try to look at this on a NET basis as you are suggesting Neil, or Chejoe, if the Arena generates even $1 in incremental taxes or $1 in land sale at the end, its return is infinate - even you have to acknowledge that Neil.
Again the easiest way to see this point would be if the city were investing 10%, or $20 million in cash and borrowing $180 million. In this case its debt service on its $180 million in debt would be $12.6 million per year, and it would be left with $1.4 million is cash, which divided by its $20 million cash investment would be 7%.
This is not flim flam anlysis, it is just corporate finance Neil.
And just one other point that you made Neil.
If you want to consider that the City is a lender in this analysis, and borrowing at 5.5%, and then re-lending to Hansen as a bank would, the net credit spread would definately not be a 2.6% treasure spread. Banks in the US are luck to earn a 1% NIM - net interest margin - on their corporate lending activities.
If you doubt this is the case all you need to do is look at the yields on corporate bond mutual funds or on loans to individual borrowers. While the rates vary by duration and risk profile of the borrower, the credit spread for non junk corporate borrowings is in the 0.25% to 1.25% range.
Clear enough evidence of that is also in simply looking at the 30 year jumbo mortgage rates - which are in the 4% range.
Again, it is completely ridiculous to suggest a credit spread of 2.6% on the entire investment amount.
That Neil, is flim flam analysis by the skeptics.
I'm not disagreeing with your math, Dave - obviously $14m is 7% of $200 million. I'm just saying that's a silly way to establish whether this is a good deal for Seattle taxpayers - by the "net gross return on initial investment" formula, Seattle would be even better off if it were borrowing $200m at 20% interest and then getting $20m a year from Hansen, because hey, now that's a 10% return!
In fact, even I-91 acknowledges that it's silly, since it uses the formula "net cash on cash return, after interest and any financing costs." Of course, that's really sloppy language, because you're subtracting apples from oranges to some degree. (If you have to account for interest costs, then there is technically no upfront cash investment, because it's borrowed money.) But at least it tried.
The point that everyone needs to understand here is: Seattle would lend a bunch of money to Hansen, and he would pay it back, including interest - every penny but not one dime more - half out of his own pocket and half through taxes collected at the arena. If you think that's an okay deal, I won't argue with you. But claiming a 7% rate of return, calculated as Hansen has, only confuses the matter.
Whether corporate finance = flimflam I will leave for another forum....
Why should cities even be thinking about taking an equity risk of this kind? This is exactly what private capital is for: take a risk in hopes of making money. Sometimes you win, sometimes you lose. But at least it's your own money on the table. Sports arenas are all about pushing the risk away from the 'investor' and onto the taxpayer. Commenter Dave can give you all the wonderful reasons why this is a money maker, but the smart people #the ones who could, but won't, pay for it# don't think it's that good a deal. As noted, Steve Ballmer won't risk even 5% of his capital on this thing. #Ask anyone in Glendale AZ if building a sports arena is a low-risk venture.#
We are in agreement on that, the only point I was trying to make is that you have a group of skeptics here that are mixing apples and oranges and demanding a 2.6% treasury return on the $200 million in borrowing. And that methodology is completely incorrect as it is double counting the investment amount.
And the only thing you keep leaving out of your summary is that the city will own the Arena and land from the outset and at conclusion of the lease.
Given that there is a requirement in the MOU for the investors to maintain the Arena at industry standards or face arbitration, you could aregue that it is likely the Arena will have value in 30 years.
But more importantly the land will have some value here - even you have to acknowledge that. This is prime land adjacent to downtown. Just look at the City's expansion over the last 30 years!
The City will also keep all incremental taxes generated outside of the Arena. While I agree that this is economically nuetral for the region, it will certainly generate some incremental taxes for seattle - its just the amount that is up for debate.
So a more fair take on this is that while the city is not making a profit off of its net investment from the guranteed revenue stream of taxes and rent, it is not loosing any money or making and direct investment from the general fund either.
But for this net neutral investment, the city gets a new arena which will add to the cultural vibrancy of the city, AND will get the value of the land at the end, any incremenatl taxes generated, and the job creation from temporary construction jobs and lower paying arena jobs as gravy. True, right?
The simple question I would ask you Neil is this. In looking at all of the deals you see for Arena's in this country, how does this compare and are you suggesting this is a bad deal for taxpayers . . .or just upset with Hansen's I-91 response.
I think it's safe to assume that there is more of a demand for basketball and hockey in Seattle than there is for hockey in Arizona, so a Glendale comparison probably isn't valuable.
But one thing I'm definitely (two i's, no a's) sure of is that the best way of getting an infinite return is to keep your outlay at zero. You know, the same level of subsidy given to most other businesses. The whole idea of using tax revenues for debt repayment is disturbing on many levels, but the unfairness to others who are competing for a piece of the discretionary income pie is the one that bothers me the most.
I assume that a new arena would also cannibalize all/most of the revenue being generated at the city's existing arena, a non-zero amount that should be deducted from the city's "return" on this investment.
I think the people demanding 2.7% over and above paying off the annual bond costs are just misreading I-91. But it's a perfectly reasonable misreading, since to normal humans "we'll earn at least as much as with a treasury bond" means that you actually end up with a profit, not breaking even.
On the land value, I did mention it in my initial post (albeit as "pretty much nothing"), and Hansen has said it's not part of his calculations in any case. It definitely should be part of any overall cost/benefit analysis, though. (At a discounted rate, of course, because you don't get it until 30 years from now.)
And yes, I'm just arguing that Hansen is misleading people here. In the end, after all the substitution effects and incremental non-arena taxes and residual land value, I'm sticking with my original guesstimate from a few weeks ago: this would be somewhere between break-even and a loss of $50m, and probably closer to the former than the latter.
Would I suggest that this is a bad deal for taxpayers? Compared to most other deals, this is an awesome one for taxpayers - but that's like saying a toothache is better than decapitation. Is it a toothache I would recommend taking as the price of getting the NBA back? It's close enough that I could live with it.
Maybe it would help if I put this another way: At the time the Giants built Pac Bell Park, there was a huge hue and cry over the fact that there were hidden public costs even though the Giants were claiming it was an all private deal. And the critics were right: There were some public costs, on the order of $30 million. But today we still talk about the Giants deal as one of the few that were actually maybe worth doing from the public's perspective. I think if the Seattle deal happens, we'll look at it the same way: not perfect, not as good as Hansen claimed, but still way better than some of the alternatives.
Though you could also make the case that the best deals of all were the ones in Portland to build NFL and MLB stadiums, since they never happened...
While it is a philosphical question of whether or not a private business should get a public subsidy, the second point you raise is flat out wrong.
Its is true from a statewide basis that all this entertainment $ is just slushing around and cnabalizing each other. However from Seattle's point this is a tax win as more than half of the NBA/NHL/Concert fans will be coming from outside seattle and thus canablaizing entertainment dollars from the communities they come from to Seattles net benefit. That is new spending to seattle, some of which will stay in this deal and be invested in the arena, and some which will not - like bar, restaurant, hotel sales from these fans.
Keith snuck in:
"I assume that a new arena would also cannibalize all/most of the revenue being generated at the city's existing arena, a non-zero amount that should be deducted from the city's 'return' on this investment."
Yeah, that too. My kingdom for a good spreadsheet accounting for all this!
"Hansen's deal the city will be left with a 30-year-old arena, which is worth pretty much nothing."
Here in Kansas City that's less than nothing. The powers want to tear down the old Kemper Arena for $5 million while we still have about $8 million in bonds outstanding from the last remodel.
Dave said... "However from Seattle's point this is a tax win as more than half of the NBA/NHL/Concert fans will be coming from outside seattle and thus canablaizing entertainment dollars from the communities they come from to Seattles net benefit."
Sure, any NBA/NHL-related activity will be new, but I was talking about the events currently at the existing arena that would just move across town. Have no idea what that would be, but it's not nothing and it's not new.
The County just released their report on their share of the Seattle arena. The King County does not need to comply with I-91 but there's some more data about the economic impacts predicted in the ungodly amalgam of powerpoint, letters, tables, and charts. There may be more supporting info in the public records, but normally not unless specifically called out in the report.
Thanks, ChefJoe. From my initial reading, the bit in the economic impact section on whether the arena tax revenues being kicked back to pay for construction are "new" comes down to: "Good question. Somebody should do a study."
More on this once I've read the whole thing.
I've learned a lot here too.
However, having been to Seattle, I'm a bit puzzled by this debate. here you have one of America's, if not the world's, most beautiful cities. Great culture, great food, spectacular natural beauty.
And for some reason people seem to think that without a two-bit barnstorming basketball league like the NBA in town, Seattle is a dump to live in.
Really? Given a choice between Seattle and Sacramento, how many people are picking the 2nd?
Kansas City ? Amateurs. :-) I like to think Seattle set the bar on tearing down stadia by throwing money at them with the Kingdome.
A stadium that cost $67M in 1972, we repair the roof for $51M in 1994, and then we paid another $9M to implode it in 2000 with $120M in debt outstanding. Even in 2010 there was still $80M outstanding so we must have virtually no payoff schedule.
Since I last posted, not one person has tried to answer this very, very simple question.
I'll ask again. Slowly.
Why do taxpayers need to float a $200 million loan to a syndicate worth over $16 billion?
It's all very macho, swimming through fiscal waters dodging piranhas and sharks. Just climb out, towel off, sip a mojito, and please answer that question.
Scott Turner: we've already explained this to you. It's because shut up.
How do you think the syndicate became worth $16 billion anyway?
SMXT asked: "Why do taxpayers need to float a $200 million loan to a syndicate worth over $16 billion?"
Obviously, they don't --need-- to, but being able to redirect your taxes to pay for your mortgage is a very nice thing. As mentioned previously, it's a nice way of turning that $16B into more than $16B.
And doing it on your own won't make you any friends among the guys who currently own NHL and NBA teams - guys from whom you need approval to join their fraternity. Bad precedent, you know. So even if somehow your agreement with your city/county/state was "revenue neutral", it would still be viewed more positively by your future peers than doing it by raiding your personal petty cash fund.
Also, the city can get a better interest rate than the syndicate can. But paying your taxes and eating them too is the main reason.