Fine print shows: Coyotes’ privately funded arena could cost taxpayers over $500m

The Tempe city council may have voted to hold a public vote next May on a $2.1 billion Arizona Coyotes arena and surrounding development, but it hasn’t voted yet on what the public will vote on; that will come tomorrow, when the council votes to approve a development and disposition agreement (see p. 123) with team owner Alex Meruelo. That DDA was just released last week, so let’s take a look at it and see if it holds any surprises.

First, a recap of what we already knew. Meruelo, whose team is currently playing in a 5,000-seat college arena after getting evicted from its former home in Glendale after Meruelo didn’t make his rent payments even though he was getting paid to play there, had promised to foot the bill for the arena, a hotel, retail, and housing. In exchange, he would receive a pile of non-up-front payments that, as I wrote was the plan was first announced in September of last year, would come to “$200m in tax kickbacks, free land, [plus] property tax breaks,” which was about as specific as anyone could be at the time. Does the DDA shed any more light on those numbers? Let’s see:

  • Tempe plans to sell $220 million in bonds for land prep and infrastructure. This, according to the development agreement (section 7.5.4), would be paid off with a bunch of future tax money: 0.9% in city sales taxes on every dollar spent at the site, 3.75% in city hotel taxes, and 22.8% of future payments in lieu of property taxes collected by the city. (More on that in the next bullet point.) There could be additional bonds sold, but the total city debt is capped at $247 million.
  • In place of property taxes, the Coyotes would pay government property lease excise taxes, or GPLET. This is an Arizona-specific thing where public land is leased to a private entity in exchange for those PILOTs, which are less than what they would pay if they owned the land and paid regular property taxes. The total value of the tax break over 30 years isn’t provided in the DDA, but it’s previously been estimated at $649 million over 30 years; in present value, depending on how backloaded the lost property taxes are, that’s worth about $300 million.
  • The Coyotes would pay $50 million for the land, but that would actually go for cleanup costs on top of the $220 million in city bonds, so it’s debatable whether that’s actually free land or what.

There are other, smaller items covered in the DDA — for one thing, the city would get to sell naming rights for the arena, which is nice, though it’s, again, debatable whether that’s something Meruelo would be giving to the city or something the city should have anyway on a building it would own. But it definitely looks like Meruelo is seeking somewhere around $500 million in total tax breaks.

Here’s where I should probably stop and address the usual counterargument: But if the arena project isn’t built, the city wouldn’t get any tax money from the site, so this doesn’t really cost the city anything, does it? This is wrong in a couple of ways:

First off, a chunk of that tax money would be collected by the city even without a new arena district, if Tempe area residents spent their entertainment dollars elsewhere in the city. How big a chunk, we don’t know, but it’s undeniably more than zero.

Second, and more important, tax breaks are functionally the same thing as cash expenses. To illustrate this, let’s do a thought experiment: Say I’m an obscenely rich guy who is considering moving to your city, but I’m not going to do it for free, because that’s not how obscenely rich guys roll. I will move to your city, I announce, for a suitcase full of $1 million in unmarked bills. City leaders are appalled: They can’t be seen giving city cash to obscenely rich guys, plus have you seen the price of suitcases these days? Okay, okay, I reply, but what about this: Since I’m going to owe more than $1 million in city taxes over the years, just give me $1 million in tax rebates instead — and you’ll get to keep anything over that!

Regular FoS readers will recognize this as the Casino Night Fallacy, where letting someone keep money they would otherwise owe somehow becomes different than cutting them a check for the same amount. (For new readers, watch Felix Unger and Oscar Madison explain it here.) The ultimate impact on the rich guy’s bank account is identical — he gets a pile of money that he otherwise wouldn’t — but it’s magically transformed by virtue of him having held it in his hands at one point.

Anyway, the upshot here is: Coyotes owner Alex Meruelo wants around half a billion in tax breaks for his $2.1 billion development project — or, looked at another way, wants $500 million in tax breaks for a $700 million arena, plus is promising to build (or get someone to build) $1.4 billion in other stuff without any public money. From what my fine-print-bleary eyes can tell, it doesn’t look like the DDA actually imposes any penalties on Meruelo for failing to build the non-arena stuff, so maybe that’s actually a better way of looking at it? Tune in tomorrow at 6 pm Mountain Time to discover how the Tempe council views it; and, maybe more important, Wednesday morning to see how the local media plans to report on it, since that’s likely to be the only perspective Tempe voters hear before next May’s vote that isn’t a paid campaign ad.

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38 comments on “Fine print shows: Coyotes’ privately funded arena could cost taxpayers over $500m

  1. even if this made sense economically, and of course it doesn’t, elected officials have to ask if this is the best use of taxpayers’ money or if residents even want this. Arizonians have shown they’re not interested in hockey. Their current building is only 4,600 capacity so sellouts prove nothing. And they don’t have other problems to throw money at, housing, crime, etc., they’ve solved it all? I know they have a water problem with less water coming from the Colorado. Tempe only has a population of 180,000 so that’s a lot of tax to throw on a small amount of people.

  2. Love the odd couple reference.

    And to the point of fine print, I’m reminded of the current ticket master fiasco and how there’s some language about how they have to behave in order to “be allowed to act as a monopoly” and the accompanying handshake agreement …. Which they are currently ignoring and to which everyone just shrugs.

    Enforcement? What’s that?

  3. If I live in Tempe – and I do live close by – and my choices are 1) allow the site to remain a dump for free or 2) have someone do something nice with the land but they get tax abatements to do it…

    …sorry buddy, I’m picking #2 every time. This is just another amateur shade-throwing on Arizona.

    1. If it’s worth it to you to kick back $500 million in taxes to get something built on that site, that is a perfectly legit position to take. But Tempe voters should be going into this with their eyes open that that’s what’s going on.

      1. You paint this as if it’s going to cost the average taxpayer in tempe (assume 1/2 the population pays taxes) 5000 dollars. And it just isn’t. It’s deceptive.

        1. Everyone in Tempe pays taxes, especially when you include sales taxes, which this financing plan does.

          As for the average cost, that’s going to depend on how you calculate “cost.” Is it how much less money taxpayers would get from Meruelo compared to any other developer, which normally would be going to the government to use on other services, cutting taxes, etc.? That’s $500 million, no question. Is it how much less money taxpayers would get compared to the deal not happening at all? That will be something less than $500 million, depending on how much economic activity gets cannibalized from elsewhere in the city by this project.

          Doing the latter, though — “Sure I don’t want to pay taxes that I would normally owe, but I wouldn’t pay them if I didn’t earn all this money from this project, so really it’s no cost at all!” — isn’t really how city budgeting is normally calculated. For exactly the reason Oscar gives: Just because it’s money he’s only getting because of someone else’s windfall doesn’t mean it’s not money he’s owed.

    2. Every other property in Tempe (and the world) was at one point a dumpy piece of dirt. Should the taxpayers have subsidized each one of those projects as well? If you wait, eventually someone will propose a tax-generating use for this property as well…

    3. “This is just another amateur shade-throwing on Arizona”

      With climate change zeroing in on the South West, you should be grateful for the shade.

    4. John, The 46 acres of land is not a dump (that is the Coyotes’ messaging) but is the site of the Tempe Transporation Yard — Tempe’s transportation facility, with a few hundred employees. Only one part of it is the site of a compost yard, where Tempe turns organic waste into compost for city parks. The cost of moving the yard (which was slated for 3 years from now, so it’s being sped up) is $90M for Tempe taxpayers. With all the threat of lawsuits from the airport and others, it is likely that this Coyotes development will be delayed.

      The salient argument relates to opportunity cost. What would an alternative industrial or commercial development bring in tax monies? Taxpayers won’t have to wait 30 years to see an ROI for this land, which represents over 1/2 of all of the City’s remaining undeveloped land.

    5. First, the site is currently operated by Tempe as a maintenance and storage facility. Tempe would have to find another location for the facility. The site is surrounded by office and industrial uses, which is appropriate for a site one mile from a major airport. Third, Mill Avenue has been in decline for a decade since Tempe Marketplace opened, if the Tempe Entertainment District succeeds, Mill Avenue will become a ghost town.

    6. 20 yr AZ resident here. I agree with your comment, “someone else” doing something “nice” is of greater utility to you and me–i like sports, i like sports stadiums.

      The Tempe Marketplace already destroyed the Mill Ave/college area as an attraction–why go to the same mall we have 20 of on the Valley? Already 3 other arenas in town, counting ASU’s. Tempe is a “landlocked” municipality with no geographic area to expand and has one of the highest property tax loads in the state.

      There is zero indication it creates greater utility broadly, and while mildy addressing the issue of location (glendale was always a poor choice for 41 games, esp weekdays) does nothing to improve Tempe’s standing but cost $500m to the team, plus the associated airport disruptions (noise ordinance meetings, anyone!?!) and cost to move an active municipal staging facility.

      and again–Glendale is doing cartwheels that Merulo is gone, and if Im not mistaken that arena is turning an actual profit now that the residents arent handing cash to the NHL.

  4. Nice analysis, Neil.

    But I am afraid that this council will vote, shirking their actual duties, to put it on a referendum for the citizens to vote, instead, then an all out marketing blitzkrieg will commence from Mr Meruelo and the Coyotes organization.

    Heaven help the taxpayers of Tempe, but they have been warned.

    1. There’s nothing wrong with putting deals like this up to a public vote. The trick is making sure the vote is fair — which is where the marketing blitzkrieg complicates things, as does the continuing death of journalism

      For anyone who missed it at the time:

      https://globalsportmatters.com/business/2022/06/28/why-politicians-subsidize-unpopular-sports-stadiums/

  5. Entre-temps, en Québec:
    [youtube https://www.youtube.com/watch?v=4SKDeEsuh9M?version=3&rel=1&showsearch=0&showinfo=1&iv_load_policy=1&fs=1&hl=en-US&autohide=2&wmode=transparent&w=640&h=360]

    1. That’s seven years old, so the temps isn’t exactly entre. But yes, Quebec and its arena still exist.

  6. I do live in Tempe and intend for the council and mayor to know that this is an issue that will be part of how they are measured in the next election. If they are in bed with the Coyotes on this, we’ll we know what they are. And if they insist that they are getting the Coyotes to do stuff and that is why they are there, we’ll we know they are just haggling about the price. Tempe desperately needs homeless housing. What they’ve done to date is not enough. Tempe needs housing affordable for middle class employees of schools, hospitals, businesses. We don’t need to give away or abate tax money to organizations that got kicked out of a perfectly fine Glendale hockey stadium for nonpayment of rent and taxes. Let them return to Edmonton or wherever it was they original came from
    If the city goes forward, I for one, will be more than happy to circulate referendum petitions. I will also circulate nominations petitions for opponents of any currently elected member of the council and mayor of they are aye votes on this boondoggle.

    1. They came from Winnipeg. But close enough.

      I don’t think Glendale gave up just because they didn’t pay their bills on time. Glendale gave up because, even if they had paid their bills on time, they thought they could find more lucrative tennants.

  7. I read the two links you included (which is the extent of my “research”), but I’m still not clear on how the $300mil in tax breaks has been calculated.

    The AZCommerce link says that the purpose of a GPLET is “a redevelopment tool to initiate development by reducing a project’s operating costs by replacing the real property tax with an excise tax.” Since the IRS defines an excise tax as a tax on the sale of a commodity (like fuel), I’m not sure how the local jurisdiction can impose such a tax on a development. But I’m sure that these things have been worked out in Arizona.

    Also per AZCommerce, GPLET’s last for 25 years (not 30, as state rep Salman wrote in the linked AZCentral OpEd), with a possible 8-year abatement. Nowhere do we get an inkling of the GPLET rate, which would be necessary to figure out how much less a GPLET is than a regular property tax rate. Given the legislative intent of a GPLET, it is obviously less, but we don’t know how much less.

    No doubt this is a giveaway, in keeping with the state legislative intent, but I wish Salman had given us some details. Personally I get nervous when politicians start throwing around numbers, as they seem to be the most cavalier about their use, as well as the least able to understand them.

    Her other point about getting into bed with someone like Meruelo is well taken. You have to generate a lot of ill-will before every single councilmember agrees to literally kick you out of town.

    1. I think the GPLET is formulated as an excise tax on the lease of the land. But honestly I don’t understand the mechanics of it that well either, except that it acts like a PILOT.

      And yes, I’m going by Salman’s figures for the cost of the tax break, since it’s all we have. (If it’s 25 or 33 years instead of 30, it doesn’t change the present value significantly.) I’ll drop her office a line to see if I can get any more details.

        1. Meaning is there an initial property tax break as part of the CFD? That’s a good question, and hopefully one Salman can answer.

    2. The Mereulo Group IS demanding a 30-year GPLET on the stadium and practice facility and 8-yr GPLET on retail, office space, and luxury housing. Note that sports team owners typically ask for major renovations (and threaten to take the team elsewhere) between 20 and 30 years. Meruelo argues that other stadiums in AZ had 30-yr GPLETs, but the last stadiums were built decades ago, and public appetite for tax giveaways to billionaire sports owners has evolved.

  8. I’ve heard similar arguments used in Scottsdale, where I live: subsidies don’t cost anything because the revenue wouldn’t exist otherwise. Do you believe that land in one of the most desirable suburbs in America would go unused if it weren’t for subsidies? Of course not, it’s an idiotic notion that can’t be taken seriously.

    1. That might actually be true in some cases, but only because all of the developers know that the local politicians will eventually give up and agree to a bad deal just to get something built there. The politics and optics are more important to them than the economics.

  9. Coyotes Owner Alex Meruelo Strikes Again – Purposefully Neglects Historic Miami Hotel He Owns and is Busted for a Sham Legal Move to Avoid Paying Debts.

    https://www.reddit.com/r/Tempe/comments/wm21gg/coyotes_owner_alex_meruelo_strikes_again/

    1. Maybe Alex Meruelo isn’t showing up at Tempe Council meetings because he doesn’t want to answer questions about his business dealings with his brother, Richard. Richard Meruelo deliberately neglected the historic Deauville Hotel in Miami Beach so it would be so run down he could have it demolished. Over a decade of litigation with the City of Miami Beach continues to drag on regarding the Deauville Hotel, which was recently imploded. The Meruelo Maddux group filed bankruptcy in 2008 with an array of properties in Los Angeles in foreclosure. Alex Meruelo claimed losses from a fraudulent tax shelter through an LLC and finally lost a decade long case against the IRS at the 9th Circuit. Add in the 20 year saga in Glendale and Tempe thinks their fate will be any different?

  10. Sorry about all those tears Tempe, but you have nothing to cry about. Tempe is one of 20 cities to have hosted a Superbowl, the Cardinals played in Tempe for 18 years and the only reason the Cardinals still aren’t in Tempe is it’s too close to Sky Harbor. Did I mention Arizona State University, the Fiesta Bowl for 40 years, Angels spring training, Arizona Mills, Tempe Marketplace, more jobs than residents and Tempe Town Lake. Marriott at the Buttes, and brand new Westin and Omni hotels. Whew, Tempe would be nothing without the Coyotes.

  11. I would get it if this deal was for the Suns but I don’t get it for the Coyotes given how little traction they have gotten in the market in almost 30 years in the market

    1. Because a better location could make a huge difference, especially if the team were any good. NHL teams attendances can swing wildly with the fortunes of the team on the ice and the desirability of their arena.

      Coyotes fans, such as they are, and hockey writers in the area seem fairly convinced that a more accessible arena will make a huge difference. I don’t know if that’s true, but that’s what Meruelo and the other NHL owners are betting on and I suspect they’ve done more actual research on it than any of us.

      If they didn’t think it could work in Tempe, they’d be trying to find an owner in another city. Maybe that’s actually happening already, but as stubborn as they are, I don’t think they’d be investing this much – subsidized or not – if they didn’t have good reasons to think it could work.

      Maybe they’re right or maybe they’re wrong. But it’s not for the people of Tempe to figure out how the Coyotes or the NHL should run their business. They have to decide if it it’s worth it to the people of their city to give this much money away or, depending on how you look at it, forego this much potential tax revenue. Because that number is going to probably be the same whether the team is successful or not, unless there’s something about profit participation in this deal that hasn’t been mentioned.

      1. I’ve been following the fiasco that is the Coyotes since the team filed bankruptcy in 2009. All along we were told that there is this huge fan base on the other side of the valley, if only the Coyotes were over there instead of in Glendale there would be no conversation about relocation. However, if there was such a large fan base over there, they would at least be watching on TV wouldn’t they?

        1. No, TV ratings are and have been low for the Coyotes for years.

          BTW, the council has voted 7-0 to kick the final decision to Tempe voters, washing their hands of the whole situation.

          1. Neilsen numbers for the Coyotes in the 2007-09 period on occasion showed an avg of 7,000 households watching.

            In a market of 5-6M.

            You could get that many people watching a test pattern (you remember them, don’t you?) in that size of market.

        2. The premise is that they can build their fanbase.

          That does seem to be true, anecdotally. The best way – the only way, maybe – to get people interested in hockey is to show it to them live. Then maybe they’ll keep up with it on TV. Not the other way around.

        3. I have followed this mess since they moved from Winnipeg. Even the first owners, Burke & co admitted they would have lost less money if they had just stayed in Winnipeg.

          NHL hockey has been played in the Phx area for more than a quarter century. Yet there is still no legitimate NHL sized fan base willing to pay NHL prices.

          That is not a problem a new arena is going to change significantly.

          1. The Coyotes ratings were on the rise pre-pandemic, but have since declined. I can’t find any recent numbers showing total households, but the most recent rating is 0.16. A huge drop from the previous season.

            There have been a lot of ratings declines across the league because so many carriers are dropping the RSNs and there tend to be huge swings in these local ratings based on teams’ performances.

            But anyway you look at it, 0.16 compares very unfavorably to some other really bad teams like Philadelphia (1.54) or Buffalo (3.78).

            https://sportsbusinessjournal.com/Journal/Issues/2022/05/09/Insiders/Sports-media.aspx

  12. 26 seasons in the desert. 26 seasons of losing money. Owner after owner after owner (including the league itself, which lost almost $75m running the team for two seasons.

    It doesn’t matter who the owner has been, this franchise absolutely bleeds cash. And looking at Mr. Merulo’s background and history, I don’t think we can expect any legitimate improvement in the next decade, new arena or otherwise.

    This is a guy, after all, who effectively suggested “we could improve operations by hiring cheaper players”.

    Just what every sports league needs… a bargain bin franchise that has to trade it’s draft picks every year for retired players in order to reach the salary floor.

    Keep livin’ the dream, Alex, keep livin the dream….

    1. All of that makes me think that he doesn’t really want to own an NHL team and this is all just part of a bigger real estate and gambling play.

    2. And how are Meruelo’s 2 casinos doing? Will the EB-5 investors that funded the $400 million SLS renovation ever get paid? With Tesla catering and Reno always being a weak gaming market and the MGM/Grand Sierra Resort’s string of foreclosures survive when Harrahs pulled the plug in Reno.

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