Latest News

Public Subsidies in the OVG Proposal

The Seattle City Council is currently working to finalize an agreement with Los Angeles based Oak View Group (OVG) regarding their proposal to renovate KeyArena as a sports and concert venue. Their proposal has been promoted as being 100% privately financed, but our own financial analysis has identified a taxpayer subsidy of $464,890,000 over the initial 39-year term of the proposed lease at KeyArena.

A transparent, public process to thoroughly vet any project of this magnitude is critical to protect the interests of the public, and it’s an appropriate expectation by Seattle taxpayers. It may be that after a public discussion of this public subsidy, our elected leaders will choose to enter into a formal agreement with OVG.

But we ask why the council is rushing the approval process before a thorough and transparent review of their proposal’s financial details can be conducted. And we ask why they inserted “exclusivity” language into the MOU, stating the city shall not support any live entertainment venue with a capacity of more than 15,000 seats within Seattle. This clause hands OVG a monopoly and diminishes the city’s negotiating power and chances to attract an NBA team.

We believe our own proposal to build a 100% privately financed, multi-purpose arena in Seattle’s Stadium District has benefited from such a thorough review. And the time the city has taken to conduct a robust and transparent vetting process has created a better deal for the public.

For example, our proposal now includes a privately financed plan to remodel KeyArena as a mid-size music and arts venue. A plan we believe better fits the Uptown neighborhood, the mission of Seattle Center, and the long term transportation goals for our region. And our proposed arena in SoDo will be built on private land, which, unlike the OVG proposal, means we will pay property tax. Those taxes should generate over $300 of property tax revenue, over half of which would go to Washington State Public Schools.

Here’s a breakdown of our analysis of the publicly available details of Oak View Group’s proposal:

Analysis of the Oak View Group MOU for the Redevelopment of KeyArena

OVG has publicly described their redevelopment as 100% privately financed. Technically, this is a true statement because the lenders and investors will be private. But, this fails to acknowledge the source of the revenue streams that will pay off the financing. The MOU reveals that the redevelopment will be publicly funded to a large extent.

The MOU includes public funding streams totaling more than $460 million to be paid by the City to OVG to subsidize its operations over the life of the lease. A summary of the streams is in this table:

The amounts of each subsidy are based on “incremental revenue” according to the MOU, which suggests that the City is being “made whole” on its revenue sources from KeyArena (via a Baseline Rent payment). But OVG negotiated inflation-only (CPI) increases to the City’s “make whole” payment, rather than increases based on performance of the Arena or financial needs of Seattle Center. The City’s “make whole” revenue streams are capped, while OVG’s upside is unlimited.

Based on the MOU, in year one of operations, the subsidy streams should yield a $7.4 million payment to OVG. The $464 million assumption is based on that $7.4 million and a best case scenario for the City (inflation and growth both fixed at 3% for 39 years). The more likely outcome is a continuation of the historical trends (summarized in the table above), meaning the CPI-adjusted Baseline Rent will increase only modestly, (3% or less) while Arena and Team revenues increase at a much higher rate. The MOU has the City assuming this risk for a full 39 years, plus the potential for another 16 years.

What happens if historical trends hold true? If Arena revenue increases by 4% and CPI averages 2%, by the 10th year of 39, the City subsidy to OVG will have increased by approximately $5 million to over $12.3 million per year, while the Baseline Rent that the City keeps will increase by only $1 million per year. By the later years of the MOU, the City will be providing massive subsidies to OVG decades after most other public entities have stopped providing these large subsidies.

Some financial elements of the MOU are not included above. 100% of Arena naming rights that historically have been shared with the City, as the owner of the facility, will go to Oak View Group under the terms of the proposed MOU. Recent naming rights’ deals suggest that this means the city is forgoing between $4 and $6 million annually (contracted escalator clauses take it much higher), or about $195 million (at the midpoint) over the course of the proposed lease.

Oak View Group will pay no property taxes despite being a for-profit Limited Liability Company based in Los Angeles. While this is not a direct public subsidy, it is a very large opportunity cost to the City, its taxpayers and our schools. A $600 million private arena should generate hundreds of millions of property tax dollars over 39 years, over half of which would go to Washington State Public Schools.

The City receives an inflation adjusted baseline rent which begins with a baseline calculated from recent four years’ operation at Key – a baseline significantly lower than what was generated for the City when the Sonics were a tenant or would be if the stated goal of securing an NHL franchise to play at the facility is achieved. In other words, the baseline rent is being calculated from the recent, relatively depressed KeyArena levels.

Additionally, over the first ten-years of the MOU term the City is shorted on the baseline rent payment by $3.5 million. (MOU – Page 9 – “Baseline Rent Payment” provided, with respect to each of the first ten (10) full calendar years after the initial calendar year in which a Baseline Rent Payment is due, such amount shall then be reduced by Three Hundred Fifty Thousand Dollars ($350,000))

The City is obligated to make up to $2.6 million annual relocation payment to the Seattle Storm during any KeyArena renovation that could take 2-3 years – that’s $5.2 to $7.8 million, a figure not included in the public subsidy amount.

Finally, the MOU grants a 3-year exclusive option to OVG, but does not charge them any meaningful amount for that option. This could preclude other arena options from being considered during that time.

A Summary of Public Subsidies to the OVG Seattle Center Project

Other Subsidies Not Included:

  • Naming rights revenues previously went 50% to the City, as the owner of KeyArena. This was a $1MM per year payment during the previous Sonics lease (1995-2010), which is not included in the “baseline payment” calculation. The MOU gives 100% naming rights to OVG. This represents a further subsidy of an estimated $4-6MM per year from the City to OVG (based on recent naming rights deals) or $195MM at the midpoint.
  • The OVG baseline payment meant to “make whole” the City is to be shorted by $350K per year for the first 10 years of the MOU.
  • The City of Seattle is obligated to make relocation payments to the Storm in order to facilitate OVG’s renovation efforts, totaling $2.6MM per year of development. Not included in the total public subsidy above.
  • Despite being a private, for-profit entity, OVG pays no property taxes, which would potentially push the property tax bill onto the Seattle taxpayers. This is because the arena may cause total value of taxed real estate to rise, but the number of taxpayers will not. The SoDo Arena may generate over $300MM in property taxes over 39 years, more than half of which would go to Washington State Public Schools.

Footnotes:
• Consistent with the MOU, 3% growth is assumed on each line item, including the City’s baseline share of each line item
• Per the MOU, the subsidy on 1st Ave Garage and Admissions Tax is 100% of incremental revenue for all 39 years of MOU
• Per the MOU, the subsidy on all other streams is 75% of incremental revenue for 10 years, 50% for remaining years