Category: Washington Capitals

An email from Anu Rangappa, senior VP for communications for Ted Leonsis’ Monumental Sports & Entertainment, rolled in this morning, claiming a bunch of inaccuracies in yesterday’s post about the proposed arena sale and lease-back deal between Washington, D.C. and the Wizards and Capitals. Some of his objections were correct, some were not, and some are in between, so let’s address them one by one (all of the italic quotes below were provided by Rangappa and cited to Monica Dixon, President of External Affairs & Chief Administrative Officer for Monumental Sports):

DC mayor’s lease-back plan could add $110m in public costs to Caps/Wizards arena

Inaccurate: this is not additional funding on top of the $515M. That $515M was split across 3 payments: Year 1 = $117.8M, Year 2 = $171.8M and Year 3 = $171.3M. Upon approval by Council, $87.5M would be counted as funds to pay for the sale, and added to that is the remainder $84.3M ($171.8M total), which is the Year 1 disbursement amount.

After going back and forth with Rangappa and reading over the proposed sale legislation, which he kindly sent over, I can confirm: He’s right, the $87.5 million sale price would be part of the $515 million already approved by the city council, not on top of it. This is explained in the legislation in the most obscure way possible:

It is understood and agreed between DCALP and the District that, except as set forth below, the Project is being funded pari passu by the District Contribution and the Minimum Developer Contribution in accordance with the Project Budget (up to the respective limits of each), and the District shall have no obligation to disburse any amount of the District Contribution until a corresponding amount of the Minimum Developer Contribution has been spent by DCALP for Costs of the Project.

In other words, the district will indeed pay $87.5 million to Monumental — but not until Monumental first pays $87.5 million (“a corresponding amount”) back to the district as a “Minimum Developer Contribution.” That term “Minimum Developer Contribution” doesn’t actually appear to be defined anywhere in the legislation, but Monumental has confirmed that this is the upshot of what would be happening.

Obviously, removing that $87.5 million as an added cost makes this deal a lot less detrimental to D.C. Whether it’s actually good, let’s wait until we’ve reviewed some of the other pieces:

Economist Geoffrey Propheter, the guru of all things sports and property tax, notes that by a previous agreement, all of the arena’s real property (the building itself) is already exempt from property tax. What would be exempted would be personal property (all the stuff in the arena), which Propheter estimates would make the new tax break worth about $1-1.5 million a year, or $18-27 million in present value.

Inaccurate: Geoffrey Propheter assumes that tangible personal property is included in the possessory interest exemption under the lease. A tangible personal property exemption is part of neither the Existing Lease nor the A&R Lease’s real estate tax exemption. Transferring ownership of the personal property to the District will not reduce MSE’s liability under the tax since it applies to leasehold property.

Propheter replies: “Finally I get an answer to this question??” As he said to me in his original email — and I should have made clearer above, which was my bad — he was speculating about what the personal property tax exemption would amount to if there was one, which multiple people with knowledge of the deal hadn’t been able to provide him with an answer about. Monumental has now confirmed that it won’t be leasing back any personal property (the stuff in the arena), so there’s no additional tax break here.

Propheter further notes that Leonsis would get rights to an alleyway and a strip of street frontage as part of the deal, plus arena air rights. Total value: “chump change but still non-zero.”

Inaccurate: This is not free. MSE is paying additional rent. The strip of street frontage is the only new air rights being granted to MSE. The lease always included air rights to the extent on the Arena land.

Nobody said it was free. Both the existing air rights and the new strip of street frontage would be provided to Monumental in exchange for no increased rent, so the subsidy here is indeed “chump change but still non-zero.”

Also, though the teams’ rent would go up under the new deal, it would go up slightly more under the old deal, costing the city about $5 million in present value.

Inaccurate: The math is wrong. From 2024 through 2047 (the end of the Existing Lease term including renewals), the total Rent is $37.2M. From 2024 through 2047 under the A&R Lease, total Rent is $43.6M.

Propheter says this is apples and oranges: The $5 million discount in the new lease is because the lease term is reduced by five years, so the city gets less money overall. Whether that’s a benefit or not depends on whether you think the teams are likely to sign a deal that’s better for taxpayers for years 46-50, or an even worse one.

There’s also the issue of how much of a sweetheart lease Leonsis’s teams were set to get in their existing deal — Propheter estimates they’re getting about a $22-74 million discount in present value dollars over the course of the lease compared to other comparable teams. Most of that, though, Leonsis would be getting under either the new sweetheart deal or the old one; the main difference is that the teams would be getting more square footage now for roughly the same money.

Add it all up, and you’re probably only talking a few million additional dollars that Monumental would gain from D.C. as part of this latest deal. So that’s certainly not terrible, but it still may be WTF: The district has now approved $515 million in taxpayer renovation spending on Leonsis’ private arena — plus around another $50 million in rent breaks —in exchange for a new lease deal that at best is no better for city taxpayers than the one it replaced. Verdict: Mayor Muriel Bowser isn’t throwing good money after bad, but she does appear to be doubling down on making sure the bad money stays bad.

Six months after the Washington, D.C. council approved spending $515 million on upgrades to the Capitals and Wizards arena, Mayor Muriel Bowser has finally come up with a proposal for that last step — and it involves a lease-back deal where the city would buy the arena for $87.5 million and lease it back to owner Ted Leonsis for between $1.5 million and $2.3 million a year in rent.

“The deal was always written, if we left, the city was going to get the building,” Leonsis said. “This was a way for us to, I think, cement the partnership. … This is a way to say if we’re going to spend $800 million, we want all of the dollars going into it.”

There’s a lot going on here, so let’s recap:

• The city already owns the land under the arena, which is the whole reason for needing a lease to begin with. It also means Leonsis does not currently pay property taxes on the land itself — just $1.3 million a year in rent.
• By buying the arena itself from Leonsis, Bowser would not only give the team owner $87.5 million, she would remove the building from the tax rolls as well.

[UPDATE 10/23/24 1 pm ET: After emailing with a team representative and Propheter and going through the proposed arena purchase legislation, I’m now satisfied that the $87.5 million purchase price would actually come out of the $515 million already approved by the council, not on top of it. (The wording of both the legislation and the media coverage is super-convoluted, but the Leonsis rep confirmed that this is correct.) I’m putting together an update post to run either later today or tomorrow morning — I’ll post a link here once that’s live. (FURTHER UPDATE: It’s up.)]

• Economist Geoffrey Propheter, the guru of all things sports and property tax, notes that by a previous agreement, all of the arena’s real property (the building itself) is already exempt from property tax. What would be exempted would be personal property (all the stuff in the arena), which Propheter estimates would make the new tax break worth about $1-1.5 million a year, or $18-27 million in present value.

[NOTE: That was assuming the sale of personal property, which Monumental has finally confirmed is not happening.]

• Propheter further notes that Leonsis would get rights to an alleyway and a strip of street frontage as part of the deal, plus arena air rights. Total value: “chump change but still non-zero.”
• Also, though the teams’ rent would go up under the new deal, it would go up slightly more under the old deal, costing the city about $5 million in present value.
• That bit Leonsis said about “if we left, the city was going to get the building” refers to a clause the city got in exchange for previous publicly funded renovations in 2007, which guaranteed that if the teams moved or their existing lease expired, D.C. would be able to take possession of the arena for free. So spending $87.5 million to get Leonsis to sign a new lease that costs the city at least $23 million worth of lost taxes and rent is awfully WTF.

[NOTE: As noted above, it’s not really $87.5 million in new spending if it’s coming from the money the council already approved. As for the value of the lost taxes and rent, see the followup post.]

(D.C. deputy mayor Nina Albert also said, in the Washington Post’s paraphrase, that “the sale-leaseback model is good for the District because it ensures the money planned for the project will be used as intended and not subject to taxes.” That doesn’t make any sense — taxes are good for the District, since it collects them — nor does the Post’s claim that “the company would have to pay hundreds of millions of taxes back to the District on the renovation money it would receive” without the new lease — as noted above, there’s only about $18-27 million worth of taxes owed now — but an Important Person and an Important Newspaper said it, so I’m passing it along.)

Bowser’s plan still has to go through the D.C. council, so there’s at least the possibility someone will raise some questions here. But right now it looks like the mayor is looking to pile an additional $110 million of public money on top of the $515 million that was already approved. Which, yes, is a way of guaranteeing Leonsis gets “all of the dollars going into” the deal, but one would think a mayor’s priority would be to get some of the dollars for her constituents, too.

It’s been six whole days since D.C. Mayor Muriel Bowser announced an agreement to spend $515 million on upgrades to the Washington Capitals and Wizards arena to keep the teams in town, so is it time yet to release the details of the city’s term sheet with team owner Ted Leonsis? No? The D.C. council is just going to go ahead and vote on it without seeing the details? Cool, cool:

The D.C. Council will vote on Tuesday on a half-billion dollars to rebuild Capital One Arena as part of the deal to keep the Capitals and Wizards in the city.

Then on Wednesday, Mayor Muriel Bowser will present her budget, which is expected to include tax increases and deep cuts to government programs.

Council chair Phil Mendelson said he hasn’t even asked to see the mayor’s term sheet, on the grounds that it’s not binding, and all the binding parts like an actual lease will need to be approved by the council later anyway:

“We are not voting on the lease, which will have to come to the council. We’re not voting on any other documents that, depending upon what they are, will have to come to the council. And that’s where the District will be bound,” he said.

Today’s vote, then, which Mendelson says he expects to be approved, just socks away $515 million in the district’s capital budget to be reserved for Leonsis, should a lease be agreed on. That’s not entirely unreasonable, but also it’s worth wondering why the rush, especially since Leonsis’s only other option in Virginia just crashed and burned and then had people jump up and down on its ashes, and besides the city’s own lawyer says the teams are locked into their current D.C. lease through 2047. The council meeting is slated to start at noon today — we’ll see whether any more details are revealed there, but I wouldn’t get my hopes up.

UPDATE, 6:11 pm ET: Unanimously approved! So much for concerns about “a rubber stamp of terms that we don’t yet know.”

I know this breaks protocol with an end-of-day post, but I’m going to be busy in the morning and it’s breaking news, so let’s roll with it:

On Friday just before noon, D.C. journalist Tom Sherwood broke the news that the city’s attorney general, Brian Schwalb, had sent a letter earlier in the week to Washington Capitals and Wizards owner Ted Leonsis telling him his lease prohibits him from moving the teams out of the city before 2047:

The fine print here gets a little complicated, but here’s what it looks like Schwalb is claiming:

• In 1995, then-team owner Abe Pollin signed a ground lease with D.C. for his then-new arena, which he built on his own dime but built on district-owned land, which he was allowed to lease for $100 million less than its market value. (D.C. also seized some of the land by eminent domain and put up $60 million for infrastructure improvements to the site.) The lease ran through 2027.
• In 2007, the D.C. council approved another $50 million in bonds for upgrades to the arena, in exchange for which Pollin agreed to extend his ground lease through 2047.
• Pollin later that same year signed a side agreement with the district to be able to opt out of his lease early if he paid off the $50 million in advance — but that, according to Schwalb, “illegally exceeded” what the 2007 law provided for, and so is “ultra vires” (beyond the district’s legal authority),”void ab initio” (invalid from the start) and “unenforceable.”
• Ditto a 2019 lease amendment, which likewise was signed by D.C. officials but wasn’t a law that could override the 2007 bond agreement.

There are a couple of big questions here. First, which most of the subsequent back-and-forth between Leonsis (who bought the Capitals from Pollin in 1999 and the Wizards in 2010) and Schwalb has focused on, is whether the 2007 bond law trumps any of the later side agreements. But there’s also the question of what the original lease actually binds Leonsis to doing — presumably there’s some kind of clause promising that the teams will play home games in D.C. throughout the course of the lease, but what’s the penalty if they don’t? Without seeing the original lease we don’t know, and that document has so far eluded my web searches; if anyone knows where to find a copy, please drop me a line.

As for why Schwalb is only raising this now, after a months-long campaign by Leonsis to build a new arena in Alexandria, Virginia with $1 billion or so in public money, D.C. Mayor Muriel Bowser did hint at trying to force the teams to stay last month, though she didn’t provide legal details at the time. In that light, Schwalb’s letter is the other shoe dropping, with the clear intent of trying to get Leonsis to drop his mostly dead Alexandria plan and instead take Bowser’s offer for $500 million in upgrades to the existing arena — in exchange for which Leonsis would extend his lease through 2052, which is a long way off but also only five years longer than the Bowser and Schwalb claim he’s bound by the current lease, so not really much of an extension if so.

The legal niceties aside, this is very much an indication that we’re entering the throwing-shit-at-the-wall stage of the Wizards and Capitals arena talks: We already heard last that Leonsis has talked to Maryland state officials about building an arena there, and over the weekend Virginia state senate majority leader Scott Surovell and two local business leaders proposed combining the arena with a stalled casino plan for Tysons, Virginia, to the west of D.C. The easiest route would clearly be for Leonsis to take Bowser’s $500 million and run, but he may still want to extract more concessions — you have to think he would love an actual enforceable opt-out before 2052, for one, so he has leverage for future upgrade demands — so he has no incentive to agree to anything just yet, certainly not before the lawyers hash out what he can and can’t do under existing law. Find a comfortable seat, we’re likely to be here for a while.