July 14, 2012 – The Art of the Deal: What are the Sonics worth?

In case you’ve been living under a rock for the last few months, you know that another sports arena is proposed for the SODO area. Fueled by intense emotion and embarrassment around the “theft” of the SuperSonics in 2008 after a publicly funded stadium was refused to their new out-of-state owners, the lure of “bringing back the Sonics” has created a wide opening for the wealthy investors, led by hedge fund magnate Chris Hansen, to offer a deal that has some salivating and others upset.

While this deal was originally portrayed as a requiring no public monies, a few months of scrutiny by the City and County reveals a complicated arrangement that uses City and County bonding capacity, diverted tax revenues, and land transfers to strike an agreement which can then be used as the basis to attract an NBA franchise (and possibly a hockey team) to Seattle.

This 30 year agreement (defined by the Memorandum of Understanding, or MOU) would guarantee the Sonics basketball team stays in Seattle for the duration. The City will construct the arena using a combination of investor monies ($290M) and City and County bonds ($200M), for a total cost of $490M (In this discussion we assume both sports teams. Seattle would issue bonds in the amount o $120M, the amount McGinn was willing to “put in” and therefore shaping the current proposal. If just a basketball team is acquired, there is a different financing scheme, with King County putting in less.). Before construction begins, the City will buy the land at a price not to exceed $100M (Hansen has purchased some of the parcels and would acquire the remaining parcels for a total of about $50M). When completed, the City will own the arena and rent it to Hansen. This rent, along with arena generated taxes diverted from the general fund (about $7M annually), will over 30 years go towards paying back the bond and interest ($454M). Over the life of the deal, almost $260M of tax revenue is used to finance the arena.

After the 30 years, the city has an arena for its investment, perhaps without the team. Hansen posits that owning the land and building should be important to city. Others counter that while the stadium will be maintained, older stadiums are just really not that valuable. The Kingdome was not even 25 years old when taken down, and Hansen says KeyArena, the former home to the Sonics which was wholly renovated in 1995 at a cost almost $100M, is totally inadequate for their needs.

Hansen contends that the $260M in tax revenues going towards building the arena would not exist without this project and that additional tax revenue would accrue from fans spending money outside of the arena. Others counter that the moneys that would be spent on basketball would just be spent elsewhere, say the Mariners, and therefore it’s not really new tax revenue. In fact, since it is projected that the majority of the fans would come from outside of Seattle, the redistribution of those dollars to Seattle and then diverted to build a stadium is arguably not good regional policy. And it appears any new money into the regional economy would largely come from broadcast rights of the games, and that goes to Hansen alone.

Initiative 91 limits taxpayer-funded subsidies for professional sports teams and the deal is structured in a way to perhaps skirt the intent of the legislation. But why use the City and County to finance the deal? First their bonding capacity lowers the financing costs significantly and allows a 30 year amortization of those costs making the venture far more profitable. Justin Marlowe at the UW Evans School states: “without the public financing ArenaCo would likely not agree to a binding non-relocation agreement” for the team. And other privately financed stadiums typically seek various tax breaks, infrastructure improvements and other concessions. But Marlowe suggests that the current deal leaves open the possibility to seek more from ArenaCo to address potential impacts and costs.

So what will be the City’s total “investment” and costs? Certainly the initial land purchase. And likely more. Peter Goldman, Director of the Washington Forest Law Center suggests a SEPA analysis before signing any MOU: “the MOU’s terms do not require ArenaCo to specifically finance any project mitigation arising out of a future SEPA analysis and mitigation package”. The Port complains that freight traffic will be impacted. Game days are projected to clog downtown traffic (Hansen’s study shows 81% of fans will drive to games). And the occasional multiple stadium event days will be even more congested. It’s clear that significant SODO infrastructure investment is required. From a bigger picture perspective, the encroachment into the manufacturing and industrial lands of SODO concerns those interested in protecting and expanding that jobs base – particularly since Hansen envisions more entertainment options for his patrons around the arena.

While to many the deal looks solid (i.e. ArenaCo will be able to make payments, and the financial risks to the City and County are low) the larger policy issues remain. Profit and tax advantages clearly fall in ArenaCo’s favor, with the City and County losing out on millions in tax revenues every year. The fact the investors themselves are worth billions suggests that they could finance the deal themselves. But pressed for greater benefits to Seattle, Hansen could seek another jurisdiction hungry for a team and willing to cut a deal (Hansen had once suggested that this is a take it or leave it offer). If no better deal for the City can be achieved, Council must assess whether the non-monetary public benefits of a reborn Sonics is worth $260M, the potential impacts to SODO’s industries, and what may be yet another sports-oriented white elephant for the next generation.

“Every good con man offers their mark the illusion that they understand and are ahead of the con.”

This week’s speaker is Peter Steinbrueck, who has tracking this issue on behalf of the Port of Seattle.

by Bill Bradburd 7/13/2012

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