Open Letter from Chris Hansen to the Community

I am writing this letter to address certain concerns and correct several misconceptions and inaccuracies about my proposal to build a state-of-the-art, multi-purpose Arena in Seattle’s Stadium District and bring NBA basketball and professional hockey back to the Pacific Northwest.

While this is no doubt a highly complex transaction that requires careful and thoughtful analysis, I remain convinced that if people take the time to evaluate its merits they will see that it is, as a local newspaper columnist recently claimed, “the best deal for the public of any sports stadium built around here in nearly 75 years.”

I think a good place to start is with the recent report published by the King County Municipal League. In their analysis the League said the following:

“This may well be the best deal the City and County are offered for bringing professional basketball back to Seattle. The question is, is it good enough? To help frame that question, the City and County have set forth three criteria that a proposal must satisfy:

  • Existing and General Fund resources are protected;
  • The City and County should be significantly protected from any financial risks; and
  • The partnership should result in an investment into the community and region.

1) Issues related to whether ‘existing General Fund resources are protected'

  • Substitution
  • Externalities
  • Future General Fund resources

2) Issues related to whether the City and County are ‘significantly protected from any financial risks’

  • Demand – whether Seattle can support two more top tier professional sports teams
  • Risk during the 30-year tenure of the partnership of Arena economic obsolescence and provisions for paying for major remodels, and

3) Issues related to the extent to which the partnership ‘results in an investment into the community and the region’

  • How to incorporate broad City/County social justice and environmental values and how we will know that benefits outweigh potential costs of the proposal.”

The MOU currently under consideration by the City and County Councils was negotiated over several months between experts specializing in municipal and stadium finance representing both my investor group and the City and County. With this in mind, I will, on behalf of our investor group, do my best to respond to the questions/concerns raised, as well as attempt to correct some of the factual errors which have been published about the MOU terms.

DOES THE PROPOSAL PROTECT EXISTING GENERAL FUND RESOURCES?

In regard to the first issue, “whether existing General Fund resources are protected,” I would make a couple of points. The first is that the Municipal League’s opinion that the substitution effect was too low was based upon a slight but critical oversight. Their conclusion was based on the substitution of entertainment dollars, rather than the TAXES on those entertainment dollars - which is what matters in the context of this transaction. The second, and equally important point, is that in order to properly factor in the substitution effect, you must do so from each of the tax jurisdictions in question here (Seattle, King County, Washington State), as the impact on each is going to be different.

While I will leave the specifics of the substitution analysis to the City staff, as outlined below, the substitution effect on the City of Seattle’s incremental taxes attributable to our agreement should be minimal (less than 15%) and the City will generate incremental new taxes that are not a part of our deal. The main reasons for this are as follows:

1. There is minimal substitution for admissions taxes: The City does not collect admissions taxes for events at Safeco or CenturyLink, and the vast majority of competing entertainment options (restaurants, bars, etc.) do not charge admissions tax. The only direct substitution from an admissions tax standpoint is from other events that charge admissions tax, like concerts at other venues within the region – and that is minimal. While other forms of entertainment would be subject to sales tax, the City’s General Fund’s portion of sales is just 0.85%, or one-sixth the admissions tax rate.

We then need to consider that a large portion of Arena patrons will be coming from outside of the City of Seattle. While it is impossible to come up with a precise percentage without hard data from the former ownership group, considering the City’s tight boundaries and the fact that many of the former season ticket holders reside outside of the City limits, we believe a conservative assumption would be that 50-60% of the attendance from all events will come from communities outside of the City’s tax base. By way of example, the Mariners have publicly stated that over 60% of their fans come from not only outside of the City, but outside of KING COUNTY. Obviously from the perspective of the City’s General Fund, there is virtually no substitution for tax dollars brought to it from neighboring communities.

When these two factors are combined, it is clear the vast majority of Arena admissions taxes collected by the City of Seattle will be truly new to the City and thus should not be “marked down” due to substitution effects.

2. Sales of merchandise and concessions generate significant incremental tax revenue: While there will be a substitution effect on the sales taxes of merchandise and concessions sales in the Arena from “Seattleites,” as described above such substitution does not apply to the patrons that come from outside of the City’s limits – and again, we think out-of-city attendees of the Arena will likely be greater than 50%.

Furthermore, the City of Seattle will keep 100% of the incremental sales tax that out of town guests spend on ancillary goods and services outside of the Arena (in particular bars, restaurants, hotels and rental cars), as such taxes will not be reinvested in the Arena. This is in stark contrast to the financing methods for the other sports facilities in SoDo, which relied heavily on hotel and rental car taxes which taxed all visitors to the Puget Sound region, not just those visiting for the sole purpose of using these facilities.

3. Sales tax on construction is all incremental: There is no substitution of sales tax on the construction of the Arena.

4. B&O taxes are all incremental: There is no substitution of “business and occupation” taxes that would not exist without this project.

5. Increased property taxes: While the Arena will not pay taxes once it is owned by the City/County, as is the case with other public venues (Benaroya Hall, McCaw Hall), there will be no substitution effect on the incremental property taxes collected by the City.

6. The City will receive incremental tax streams that are not a part of the MOU: In addition to the incremental sales tax on spending outside the Arena by out-of-town guests, the City of Seattle will also receive taxes from:

a. Hotel taxes: The City of Seattle receives 0.85% of the sales tax, although that amount is currently deferred until the PFD bonds are paid off on Safeco and CenturyLink.

b. Increased property values: The City will see a further increase in its property tax revenue resulting from increased property values of land surrounding the new Arena. Our group alone has already purchased ancillary real estate surrounding the Arena at a significant premium to its appraised value.

c. Parking taxes on street parking and non-affiliated lots: The City will receive parking tax revenues from Arena patrons for lots not covered under the MOU.

d. Multiplier effect: In total, the salaries from the direct jobs created by the construction and operations of the Arena and incremental spending brought to the City from out-of-town Arena guests will recycle through the local community and create further incremental revenues (as when Arena employees and construction workers spend their income), and thus new taxes for the City of Seattle. While opinions as to the correct multiplier to use vary, the typical range assumed by most economists is 1.5-2.0x.

When one factors in all of the incremental tax benefits that the City of Seattle will be receiving and combine it with the security provisions that we are providing to insure that the debt service is covered through direct Arena tax revenues, it is abundantly clear that not only are the City of Seattle General Funds protected, but our proposal is actually likely to result in a net-positive contribution to the General Fund.

FINANCIAL IMPACT ON COUNTY AND STATE

As discussed above, the MOU transaction virtually guarantees the SoDo Arena will have a positive net impact on the General Fund of Seattle. It is also demonstrably clear that it will be a net-positive to both the County and the State.

The County, in the same manner as the City, is reinvesting certain tax streams to finance its ownership of the Arena, and will be repaid by a priority share of certain Arena revenues. Apart from this, the County will benefit from its portion of incremental sales tax generated that Arena patrons spend on “out-of-arena” dining, entertainment, and retail sales. While we are hesitant to put an estimate to the percentage of “out-of-county” Arena patrons, the Mariners have publicly stated that over 60% of their fan base comes from outside of King County. Additionally, like the City, the County will also benefit from its portion of the increased property tax valuations in the broader stadium zone that are likely to occur as a result of the Arena’s operations.

From the State’s perspective, the Arena clearly represents a windfall. The State will directly benefit from the sales tax on the construction and the rise in property valuations of both the Arena and the ancillary real estate. Additionally, like the City and the County, the State will benefit from any guests that come to Arena events from outside of Washington. While again tough to quantify, it is inevitable that some out-of-state tourists will come to NBA and NHL games, as well as the concert and family events the new Arena will host.

FUTURE OF KEYARENA AND ECONOMIC IMPACT

With respect to the impact of the proposed SoDo Arena on KeyArena, and thus the City’s General Fund, the aspect many have failed to account for is the gain in efficiency from operating two Arenas and the reduction in operating expenses we would thus be able to offer the City. While it is true that KeyArena operated at breakeven the last couple of years, this success was achieved in the absence of adequate investment in the Arena to keep it functioning at anything approaching modern Arena standards. The business plan of KeyArena readily acknowledges this fact, and forecasts a need for $20 million to be invested over the next 5 years for “basic asset preservation” and another $56 million for even the most basic modernization.

By bringing the NBA back to KeyArena for the 2-3 year new Arena construction period, our team’s games would generate enough incremental tax revenue to at least partially address the capital improvement requirements and, at a minimum, leave KeyArena in better status than it is currently.

However, the key point that was not raised in the Municipal League report is that after the new Arena is operational, we would have a second booking, promotional, ticketing and operations staff dedicated to a publicly owned Arena in Seattle. With our operation up and running, we would be able to effectively operate KeyArena at minimal incremental cost. As such, while KeyArena may lose some of its “major concert” business to the new Arena, we would likely be able to lower the operating costs of KeyArena to a point that the City would be in an improved financial position compared to today.

Additionally, as the Municipal League correctly points out, KeyArena is considered by most concert promoters to be sub-par due to its configuration, poor “load-in, load-out” capabilities, and antiquated data and A/V infrastructure. If KeyArena can be successfully re-purposed to a smaller venue, we believe there is a good chance that, in addition to being a better asset for the City, it will be more economically viable as the operating cost reductions and incremental dates from smaller events would outweigh the loss of the select few large concert dates the KeyArena is currently able to attract.

But most important to the City should be the fact that a new Arena will undoubtedly be built in this region at some point, and if it is built outside of Seattle’s tax base the negative consequences to Seattle’s General Fund will clearly be much higher.

EXTERNALITIES (TRAFFIC)

Our investor group recently funded a detailed independent analysis of the traffic and parking situation in the SoDo area, which concluded that the impact on traffic and parking in the area would be manageable. The major facts supporting this conclusion are (1) the adequate parking in the area as a result of the inventory built to accommodate the larger Mariners and Seahawks/Sounders crowds, (2) the minimal date overlap with Safeco and CenturyLink events, and (3) most importantly, that Arena patrons would tend to arrive well after Terminal 46 and 30’s scheduled 4:30 pm closing time, minimizing the impact on Port and industrial traffic.

Despite the findings, several constituencies have derided the results as inaccurate, and claimed that as with Mariners games, Arena traffic will begin arriving as early as 3:00 pm, thus stifling SoDo traffic from 3-5 pm while the Port is still open.

While such critics have yet to provide any substantive, independent analysis of their own to support such a point of view, common sense would tell us that people are simply not going to arrive at 3:00-4:00 pm for an Arena event that starts after 7:00 pm. On the contrary, we believe most of our attendees will be at work until at least 5:00 pm. But equally important is the fact that the Arena will not even open its doors to the public earlier than 5:30 pm for weekday NBA and NHL games and most concerts. While some may choose to come to the SoDo area early for a drink or a bite to eat, many Arena patrons are in a rush to make tip-off/face-off and arrive just prior to game time — a fact that is clearly evidenced by a simple glance at the stands of an NBA or NHL game for the first half of the first period. Thus, the assumption that all of our patrons and their 5,000-6,000 vehicles will descend on the Arena site between 3-5 pm is grossly inaccurate.

And while we are confident in our argument outlined above, we are all the more comfortable letting reality speak for itself. SDOT has recently begun broadcasting live traffic cameras in the Seattle area that are updated in real time. A link can be found here, which provides numerous camera angles of the Arena site. I would encourage the Municipal League, the Seattle Times Editorial Board, City and County officials, and everyone in the City to have a look at these cameras and judge the traffic conditions for themselves.

After monitoring these cameras for a few weeks, our experts have drawn several conclusions. The first is that there are certainly traffic issues in the area in the late afternoon, though the traffic tends to diminish soon after the port closes at 4:30 pm. The traffic also seems to exist in a similar pattern whether or not the Mariners are playing -- a fact that can be verified by looking at the traffic cams during the time when the Mariners are on the road. The second is that there is LITTLE CONGESTION during the 6:00-7:15 pm range when most of our fans would be arriving and after 9:00 pm, when our events would be concluding. And once again, we would prefer that residents do not take our word for it and instead keep an eye on the traffic cameras and draw their own conclusions.

While we are confident that the facts speak for themselves and that there has been no credible research provided to conclude that the Arena will cause freight mobility problems for Port businesses, we would also remind our detractors that an extensive traffic study and traffic management plan will be part of the required SEPA process.

DOES THE PROPOSAL “SIGNIFICANTLY PROTECT THE CITY FROM FINANCIAL RISKS?”

As a reminder, the basis for our transaction is that the City and County have agreed to reinvest certain tax streams generated by the Arena to fund its construction. As such, we would like to remind the citizens of Seattle and King County of the myriad levels of protection that have been afforded to them in the Arena MOU.

There are three clearly defined sources of revenue that guarantee the debt service on the City and County bonds:

1. Guaranteed minimum rent paid to the City and the County by the investor group.

2. The incremental tax revenue generated by the Arena and teams that would not be available to either the City or the County were it not for the Arena being built.

3. If the revenues from the two previous sources are not enough to cover the cost of repaying the bonds, the investor group has agreed to pay additional rent to make up the difference.

In addition, we have built into the Memorandum of Understanding further guarantees which include:

1. Agreeing to a 30 year specific performance lease with the City, ensuring the team will stay for the entire life of the lease.

2. Agreeing to cover any cost overruns of the Arena construction.

3. Agreeing to fund a major maintenance and capital investment fund to insure that the facility’s long-term capital maintenance needs are met.

4. Agreeing to apply any excess tax streams to a separate reserve fund which can be used only to fund Arena repairs and improvements (which will be owned by the City and County) or to retire the public debt early.

5. Agreeing to pay Arena base rent and additional rent ahead of other Arena lenders and investors.

6. Agreeing to maintain a reserve fund of one year’s debt service for the City and County’s protection in the event we fail to pay base rent or additional rent.

7. Agreeing to maintain a level of Arena profitability (EBITDA) that would provide 2x debt service coverage (two times the total public debt service payments, not simply the base rent or additional rent, and thus a MUCH higher multiple of actual debt service).

8. Agreeing to increase the reserve fund by a proportional amount if the Arena profitability (EBITDA) totals less than 2x debt service.

9. In the extremely unlikely case of a default that requires the ownership group to sell the team, the City and County also have first right to the proceeds of the sale after obligations to the NBA are satisfied (capped at 40% of the franchise’s present value).

10. Agreeing to sell the City/County the land and shell (the most valuable and enduring assets), which they will hold directly as security in the unlikely event of a default by investors.

In a final appeal to reason, I would just like to remind the public that the investor group will be putting up well in excess of $300 million in equity into the project and it is just unrealistic to assume that in any scenario the group would jeopardize a $300 million equity position in an attempt to avoid a payment that is under any realistic scenario going to be less than $8 million.

CAN SEATTLE SUPPORT TWO MORE FIRST TIER SPORTS TEAMS?

Again, I would prefer to let the facts speak for themselves here. As shown in the table below, Seattle is clearly the top market in the US in which to put a new major sports franchise. It is the 13th largest TV market, one of the fastest growing, one of the most affluent, and one of the economically strongest. In terms of numbers, Seattle would rank 4th in the US in terms of TV users per the top four major sports leagues, and 6th if you include MLS.

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However, equally important to consider is the fundamental change in the professional sports business. Due to the escalation in media rights fees (both nationally and locally), professional sports franchises in major markets are much less reliant on attendance revenues than they were in the past. In fact, we would predict that well over half of team/Arena revenue streams will be contracted on a multi-year basis. This obviously helps to significantly reduce the "cyclicality” of the business, driving to near-zero the likelihood of a team insolvency in such a strong media market.

IS ENOUGH BEING SET ASIDE TO KEEP THE ARENA FIRST CLASS FOR 30 YEARS?

Before delving into this question, it’s first worth noting the debt outstanding will be declining over the 30 year period, just as a homeowner’s mortgage does. At the same time, the value of the land, which the City holds DIRECTLY, will under even the most draconian of assumptions be worth more than $100 million, giving it great protection in the event that the Arena is struggling.

However, even if this reality is completely ignored, our investor group has agreed to privately fund all capital repairs and improvements. In addition to setting aside $2 million per year for such expenses, we have agreed to quarantine all future tax surpluses toward those costs or toward paying down the public sector debt on the project.

We also vehemently disagree with the inferences that the Muni-League and Arena critics have attempted to draw from the history of KeyArena. Far from being an indicator of the short life of sports Arenas, KeyArena was built in 1962 and was home to the NBA for over 40 years.

While KeyArena was remodeled in 1994 at a cost of $95 million, it is now common knowledge that that remodel was poorly conceived and did not result in the building being “First Class,” as has been asserted. The remodel left KeyArena without proper loading, premium parking, adequate suites, and other modern amenities. Additionally, KeyArena has an offset ice rink, which makes it incompatible for the NHL due to the limited seating capacity for hockey (just 10,000-11,000 unobstructed view seats). But either way, KeyArena had a 50 year life with one major remodel. This is far from an Arena needing to be replaced every 13 years.

To further this point, we would also just highlight that virtually all of NBA Arenas built in the last 20 years are operating just fine. The Arenas in the table below have been in operation for more than 10 years, and in none of these markets are the teams lobbying for a new Arena. There is absolutely no factual analysis to support the claim that the average life of an NBA/NHL Arena is just 10-15 years.

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IS THERE INCREASED RISK FROM HAVING JUST THE NBA?

The first thing to note is that the MOU mandates that the Arena be capable of hosting an NHL team. This means my investment group—as we are responsible for all costs in excess of the fixed public investment — will be funding several million dollars in improvements which will only benefit an NHL tenant, giving us huge financial incentive to attract an NHL team. But in the unlikely event that we are unable to bring an NHL team, the risks to the City and County would go DOWN, not up. The amount of public sector funding would decline to $125 million, with the $75 million difference becoming the sole responsibility of the investor group until the NHL team is located and brought to Seattle.

If the new Arena should open prior to bringing an NHL tenant, the NHL regular season dates would indeed be lost, but many of those dates would be replaced with concerts and other events, and the sole Arena operators would keep 100% of all revenue streams (naming rights, suite sales, sponsorship, concerts, etc.) instead of splitting them with a second tenant.

WHAT IS THE IMPACT ON SEATTLE PROPERTY TAXES?

Because of the method used by the State of Washington for levying property taxes, and because the City and County (two non-taxpaying entities) will ultimately own the Arena, other King County landowners will absorb the taxes associated with the increased valuation. These property tax payments flow directly to the City and County, and total approximately one million dollars per year. That amount is spread among the owners of the other $300 billion in real property in King County. This means the property tax increase due to the public ownership of the Arena is approximately 33 cents per $100,000 of assessed value. Thus a family living in a $300,000 home would pay roughly one dollar per year extra, so that the City and County can retain ownership of the Arena. The one dollar amount is the worst case scenario, and assumes that land in SoDo and Pioneer Square does not increase in value whatsoever due to the development of the Arena. In reality, land prices in the vicinity have already risen due to the possibility of an Arena and would likely increase much more if the Arena and surrounding development are completed. If land within a 10-minute walk of the Arena increases in value by even 10%, then the property tax impact to other King County residents will be more like 10 or 20 cents per $100,000 of value.

WHY NOT REBUILD KEYARENA?

There are three key reasons we do not believe a rebuild/remodel of KeyArena is a viable solution:

1. The cost would be too high: Given the limitations of the current structure, the lack of parking in the area, the excavation that would be required to solve these issues, and the incremental time and cost that would be required to attempt a construction project of this magnitude at this publicly owned location, we believe the cost to rebuild KeyArena at the existing site would be prohibitively expensive.

2. The traffic and load-in problems would be too severe: Given the limited ingress and egress and the lack of parking stock, we believe the site would be permanently challenged from a traffic/logistics standpoint. Even if a significant amount of excavation was done to create improved load-in and load-out for concerts and underground parking, patrons would still be faced with the challenge of trying to exit onto 1st Ave or Mercer, which could result in delays of as long as an hour to get out of a new, large underground garage.

3. We need KeyArena as an interim solution: Even if the above two challenges could be solved, it would not change the fact that we need KeyArena as an interim solution to play in while the new Arena is constructed. Our current transaction is structured so that the City is not required to put up any funds until we have secured an NBA team (and the team has signed a binding non-relocation agreement). However, the NBA team would obviously need a place to play and if we tear down KeyArena, there would not be an acceptable alternative for the NBA team to play in until the KeyArena rebuild is complete. The only way around this “chicken and egg” scenario is thus to play in KeyArena while we build a new Arena in another location.

While some have proposed Hec Ed Pavilion could serve as a similar “interim solution,” given the limited seating capacity (10,000) and possible scheduling conflicts between the UW and NBA teams, I can assure you that this is not a solution that would be acceptable to the NBA.

WHY IS THE CITY BUYING LAND FOR $100 MILLION THAT WE PAID $40 MILLION FOR?

First, it is important to understand that my investors and I are paying in excess of $50 million for the property and will be spending an additional $15 million in soft costs in the entitlement process prior to selling the property to the City – which will likely push our total cost well in excess of $70 million. Second, we have agreed to sell the property to the City at appraised value, not any contractually fixed amount. Additionally, the $100 million valuation is the MAXIMUM possible amount – not the agreed upon price as some have speculated.

But most critical to understand is that the stipulated land price has no bearing on the underlying economics of the City/County’s investment. The City and County’s total investment into the project is contractually capped at $200 million. For this price we are selling the City/County the land and the building. If the land is appraised at $100 million, we will sell the building (when it is completed) for $100 million. If the land appraises at $40 million, the City’s price for the building is fixed at $160 million. If the land appraises at $90 million, we will sell the building for $110 million and so on. Thus the only thing the land appraisal impacts is the timing of the City’s contribution, as the land is being purchased up front, and the balance of funding occurs only upon satisfactory completion of the project.

In fact, from a pure cost point of view, we will be selling the City assets that cost us much more than $200 million. As such, we are not profiting in any way from the land sale. The funds received from the City in exchange for the assembled land may only be used to fund construction of the Arena and count dollar-for-dollar against the City and County’s maximum contribution of $200 million toward its construction.