Over the course of the last week, the question has been raised as to why public financing is needed for the Arena project. As discussed below, we believe there are three key reasons:
- It improves the economics of the project to an acceptable level
- It reduces the upfront equity commitment required
- It is fair given the public benefits the Arena will provide
Public support improves the economics of the project: The first reason why a public contribution is necessary to the Arena project is that it meaningfully improves the economics of the project. In our proposal, we have not asked the City or County for any existing funds or tax revenue streams. Rather, we have simply asked the City and County to reinvest the direct tax revenues that the Arena generates into the project.
As almost everyone is surely aware, building and operating a sports Arena is not and has never been a high return-on-investment endeavor. This is the reason most modern arenas have had some level of municipal/public investment.
While we are confident that we can consistently operate the NBA franchise together with the Arena at a sufficient level of profitability to protect the public investment in the project (and have created numerous safeguards in the MOU to insulate the public’s exposure to risk), the City and County Councils must appreciate that there is a significant difference between operating profitably and earning an adequate return on our investment. While we will again state that investment returns are not the primary motivation of our group, we do believe it is fair to ask that the project meet a minimum return threshold.
In this regard, while it is true that there is a financial benefit to us from using the City’s and County’s bonding capacity—as these public entities currently have a lower cost of borrowing than would be afforded us by the private sector—the primary benefit to us is that the City and County are contributing back the direct tax revenues from the project, as opposed to the interest rate differential between the public and private financing rate.
Given the significant financial risks the investor group is shouldering and the amount of equity financing required for the team and Arena (well over $300 million), the investor group believes that the public contribution requested is required to make the project financially viable — with “viable” being the key word here. Even after taking into account the public support we are asking for, we do not believe the expected return on this project would be comparable to the expected return on a typical private sector investment opportunity with a similar risk profile. The public sector contribution merely raises the return profile to a “minimum threshold” under which we — as long time supporters of Seattle sports — are willing to move forward with the project.
It reduces the upfront equity commitment required: The second reason public financing is necessary for the project is that it reduces the amount of equity required to be put into the project up front. By agreeing to lend back to the Arena its future tax revenues, the City and County have agreed to commit up to $100 million to the project the day an NBA franchise is secured and another $100 million upon completion and the commencement of Arena operations ($25 million without an NHL franchise).
Again, the total cost of the Arena and NBA franchise is projected to be in excess of $800 million, and if we add an NHL franchise, the total investment is expected to be in excess of $1 billion. Thus, even though the private sector contribution will still be in excess of $600 million ($800 million with hockey), the $200 million public contribution meaningfully reduces the significant capital required to fund the Arena construction.
We would also just like to clarify one other point. Contrary to recent speculation from some journalists that our group plans to use debt to finance the entire private contribution, the NBA investor group is planning to invest $300-400 million in “cash equity” into the project (Arena and NBA Franchise), and additional equity will be contributed if an NHL franchise is acquired. The private debt financing contemplated for the project is less than $300 million ($150 million for the Arena, $125 million for the NBA franchise).
It is fair: The last, and perhaps most important reason we have requested a public sector contribution to the Arena project is simply because we believe it is a fair and reasonable request of the City and County.
Our investor group has offered to invest over $600 million in private funds into the project. In doing so, the Seattle City and King County Councils must appreciate that each investor in our group will be making a significant cash investment into the project at the expense of alternative, higher return investment opportunities. Again, I don’t think anyone would question that there are many higher return investment opportunities available than an Arena or NBA franchise.
As detailed in the MOU, the public sector contribution is limited to the direct taxes attributable to the Arena, with the City of Seattle and King County keeping their respective share of all of the ancillary tax revenues generated from Arena patrons outside of the Arena. As we highlighted in detail in our recent open letter to the community, the ancillary tax revenues that the City and County will keep include:
- The sales tax from out of City/County Arena patrons on out of Arena merchandise
- Hotel taxes from traveling Arena patrons
- Increased property taxes on ancillary real estate
- Parking taxes on street parking and non-affiliated Arena lots
- The multiplier effect on the income from the new jobs and spending
In this regard, we would just highlight that public/private partnerships are increasingly common in the U.S. In an attempt to promote economic development and job creation, local governments around the country have realized the positive results that can be achieved by providing reasonable tax and financing incentives to those private businesses that produce tangible and intangible benefits for their communities.
The incremental tax revenue and new jobs that the Arena can generate for the City of Seattle, King County and the State are clear. But there are public benefits beyond those and beyond providing an opportunity to heal the wounds of 2008 and bring back our beloved Sonics. The Arena will host a wide array of concerts, family shows and other community events; it will bring visitors to our wonderful downtown core; and it will give our youth exposure to two wonderful sports that promote hard work and team cooperation.
Given the amount of private capital required to finance this project and the economic and public benefits the Arena project will afford the City and County, we think it is more than fair to ask for the public sector to contribute back into the project a portion of the taxes that will be generated by this community asset - none of which would exist if it were not built.