The intricate plan offered for an NBA and NHL arena in Sodo hinges on the untested strategy of building a city-owned, self-supporting arena, without the aid of new taxes, and with team owners — not taxpayers — obligated to absorb any losses.
The phone call was impulsive, Seattle Mayor Mike McGinn calling the New York office of NBA Commissioner David Stern last Wednesday.
Stern wasn’t in town. But McGinn’s exuberance was uncontained. Details of a proposed basketball and hockey arena were leaking out, so McGinn left a message: “We’re serious here.”
He wanted to reinforce that the city’s support for a complex deal was more than an obscure millionaire’s dream.
Stern didn’t call back. But the league’s president — Joel Litvin — contacted McGinn’s office and received a detailed briefing on a proposal that has gone beyond a pipe dream and come to resemble an actual plan.
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And on paper, it’s a heck of a plan.
The intricate proposal hinges on the untested strategy of building a city-owned, self-supporting arena, without the aid of new taxes, and with team owners — not taxpayers — obligated to absorb any losses.
Here’s how it would work: Chris Hansen, a Seattle native and San Francisco hedge-fund manager, and a group of unnamed investors have proposed to pay $290 million to build an 18,000-seat arena in the Sodo District, nestled in the shadow of the Seahawks’ and Mariners’ stadiums.
In return, Seattle and King County would finance $200 million — likely in bonds — to cover construction costs. The city would recoup its money through lease payments and the taxes on everything from tickets to concessions from the arena.
And construction would not start unless Hansen’s group lands an NBA franchise.
Can it really be this straightforward?
After all, Seattle spent nearly a decade wrestling with the question of whether to build a new basketball arena, ultimately losing the city’s longest-tenured professional franchise when the Sonics relocated to Oklahoma City in 2008.
A major catch: The stadium’s financial stability is dependent on also landing a National Hockey League team, which would be acquired by a group of yet-to-be-determined owners.
Seattle has long been a jewel in the eyes of both the NBA and NHL and is likely to be considered a strong candidate, said Andrew Zimbalist, a sports economist and Robert A. Woods Professor of Economics at Smith College.
But Zimbalist cautioned that city leaders should take a breath and not rush into a deal: “I’ve said it a thousand times, but the devil is in the details.”
Too good to be true?
While the deal promises risk-free public investment, success is pinned more to fuzzy estimates than hard numbers.
For example, team owners would repay the city and county’s $200 million debt through rents and taxes, including sales, property, admissions and business-and-occupation taxes generated by the arena.
The annual debt payment is likely to be $15 million to $16 million, based on a 30-year bond financed at market rates, Zimbalist estimated.
But rent payments would likely provide only “several million” dollars a year, city and county officials say.
The balance must come from tax revenue on ticket and concession sales. But no one can predict those sales year-to-year with certainty. Under terms of the arena plan, team owners would operate the arena and receive the proceeds of everything from popcorn and other concessions to the gate from ticket sales, including the luxury suites and premium-seating clubs that are magnets for deep-pocket sponsors.
One of the key safeguards of the plan is a requirement that team owners also would be responsible for construction-cost overruns or for making up the difference if tax revenues from ticket sales and other revenues fall short of what’s needed to pay off the bonds.
Team owners would be required to establish a reserve account equal to the annual debt payment, held in trust by the city and county. The account would have to hold three times the average annual payment after 10 years.
But a string of losing seasons could create catastrophic financial ripples.
Just ask Sacramento, whose Kings are the NBA team thought most likely to move to Seattle.
The Kings hover in last place in the NBA’s Pacific Division. This follows five losing seasons; crowds have dwindled to record lows. Team owners are threatening to move unless the city pays for a new arena.
That city, struggling with a budget deficit, is considering giving up millions of dollars in future revenue by privatizing street meters and parking garages.
KeyArena’s hard lesson
It’s hard to argue against the idea of an arena that pays for itself.
It’s even harder to guarantee it, though.
Seattle tried 20 years ago when it renovated the Seattle Coliseum in the early 1990s. The plan called for all construction debt to be paid off with arena revenues.
Sound familiar? It’s similar to the pitch McGinn and King County Executive Dow Constantine delivered last week regarding Hansen’s proposal.
Sue Donaldson, a former member of Seattle’s City Council, couldn’t help but think that this current proposal echoes the intentions that went into KeyArena.
“It was very much our intent that the users would pay for the facility,” Donaldson said. “And we worked really hard to make that happen.”
At least not after the NBA lockout in 1998 shortened the season to 50 games. The city even considered suing the team for rent during those lost months, and the Sonics missed the playoffs for the first time in almost a decade.
That was the turning point. In 2002, the revenues from the building fell more than $2 million short of covering the repayment of construction bonds.
McGinn and Constantine have portrayed the city and county’s protections in the proposed deal as ironclad. But the city thought it had a long-term commitment from the Sonics in the 1990s, too. The Sonics signed a 15-year lease written with the intent of keeping the team from moving before the agreement expired, and the Sonics still ended up leaving two years early with the settlement of a civil suit.
“We can learn from what we did,” Donaldson said. “And how do you ensure that the team doesn’t go away?”
The Sonics left for Oklahoma City when owner Clay Bennett failed to get a new, public-financed arena.
Other cities have grappled with this challenge in various ways.
Some newer facilities have been privately financed, such as AT&T Park in San Francisco or the new Cowboys Stadium in Arlington, Texas. Others are built with a hefty share of public money, such as Amway Center in Orlando, Fla., which opened in 2010.
According to a 2011 report in The Nation, more than $20 billion in public money has been spent nationally on sports venues since 1990.
While construction of Seattle’s proposed arena would require money from the city and county, a crucial distinction is that the money used to pay off the bonds would come from the venue itself.
“There are a number of revenue sources,” said Jan Drago, former City Council and Metropolitan King County Council member who is part of the arena advisory panel. Drago said her understanding is that “those revenue sources wouldn’t exist if you didn’t have an arena.”
Room for two more?
Can Seattle really support NBA and NHL franchises?
It’s a question worth asking because Seattle not only has NFL and Major League Baseball franchises, but a number of other popular teams. Sounders FC regularly draws more than 30,000 for its soccer matches; the Seattle Storm have won WNBA championships. The University of Washington, with its huge fan base, is undertaking a major rebuilding of Husky Stadium.
David Carter of the Sports Business Group, which focuses on marketing and development, said saturation in terms of a fan base can be a concern. “But I think even more importantly, it’s also about corporate saturation,” he said.
Teams increasingly rely upon corporations not just for sponsorship and advertising, but as customers for premium seating to luxury suites. Yet there are a limited number of corporate customers in any city. Seattle, for example, has eight Fortune 500 companies.
Seattle’s size is a factor.
Currently, there are 11 metro areas in the United States that have a franchise in each of the four major professional sports leagues: the NFL, NBA, NHL and Major League Baseball. Of those, only the Twin Cities, in Minnesota, and Denver are smaller. And only two of those cities — Miami and Phoenix — have fewer Fortune 500 companies.
However, having NHL and NBA franchises using the same facility creates the opportunity to maximize the revenue from that building. There are more dates, more patrons, more opportunities to sell hot dogs, advertising and all the rest.
“In terms of a financing-the-deal perspective, those two teams really help that a lot,” Carter said.
That requires cooperation, though. Two teams trying to share the same space creates the possibility of friction in everything from dates to signage.
“What is critical is to understand what the relationship is between those two teams and the venue operator,” Carter said. “You don’t want one of them feeling they’re not getting what they wanted in the deal.”
Nine NHL teams currently share a venue with an NBA team.
But that hasn’t always been a magic bullet for success. It was a struggle in Atlanta, where the Thrashers shared Philips Arena with the NBA’s Hawks before relocating to Winnipeg last year. The Phoenix Coyotes first shared an arena with the NBA’s Suns, only to later move into their own facility.
Danny O’Neil doneil@seattletimes (206) 464-2364, Michael J. Berens firstname.lastname@example.org (206) 464-2288. Times business reporter Drew DeSilver contributed to this report..