Concept of Seattle getting a ‘free’ arena is unrealistic, despite private funding

Inside sports business

Getting something for nothing doesn’t exist in professional sports, even with private-funded arena deals.

The idea Seattle will get a “free” building has percolated since entrepreneur Chris Hansen in October announced a switch to an all-private funding plan for his proposed arena in the Sodo District. The freebie notion gained further traction days later when the city indicated it would seek private-funded proposals to renovate KeyArena and that California giants Anschutz Entertainment Group (AEG) and Oak View Group (OVG) were interested.

Let’s get something straight: Hansen, AEG and OVG are nothing akin to Santa Claus. They run private businesses seeking as much profit as possible.

Now, that isn’t necessarily bad. It’s likely preferable to pumping tax dollars into arena construction, something decades of studies have shown rarely leads to a net economic gain for municipalities.

When you spend hundreds of millions of dollars on sports venues, the accumulated debt takes decades to overcome. And unless cities and states access the bulk of ancillary revenue from these venues — which rarely happens — the only “payback” is the prestige of having a sports team until owners get antsy and start demanding better facilities.

So, having three Seattle arena candidates vying to take on that debt appears promising.

But accumulating debt to where they’ll never profit is a terrible business strategy. Thus taxpayers inevitably must give these groups something.

Los Angeles-based sports agent Leigh Steinberg — whose professional life was what the movie “Jerry Maguire,” starring Tom Cruise, was modeled on — has worked closely with arena and stadium groups for decades and senses what the NBA will seek. Steinberg says the league will want a decisive arena-location choice by our city — minus political squabbles — before it begins hinting at expanding here.

“The real key is, will that new arena have every facet that now is ancillary revenue for arenas?’’ Steinberg said. “Will it have the right luxury boxes? Will it be part of an entertainment zone with contiguous things to do? It’s about making the experience special. You’re not going to see all winning games, so the arena experience has to be special.’’

Also, Steinberg adds, going top line in profit-maximizing amenities makes the new arena a template other cities seeking teams — or hoping to keep theirs — must follow.

“That will then put them into a situation of saying ‘You see, Seattle’s got this stadium that has X, Y and Z amenities, and we want that, too.’ ’’

Maximizing the seating capacity, he added, isn’t as important as luxury components. Steinberg said a trend toward smaller arenas — such as the 17,500-seat Golden 1 Center in Sacramento, Calif. — is about creating “scarcity of product’’ and driving up ticket costs.

With pro teams engaged in ticket resale via dynamic pricing and sponsorship packages, their profits soar when having fewer seats drives ticket demand and prices higher. So, building a luxury arena would help attract teams.

But those luxury amenities cost big to implement. And if the arena is built privately, some of that money will need to be publicly recouped.

Ultimately, the group taking the smallest “public” piece of this “public-private partnership’’ likely will be given the City of Seattle’s nod.

Calculating the public price tag won’t be easy; there are hidden costs and benefits to consider.

Some groups offer all-private construction but seek tax breaks so large a city might have been better off paying for some building costs.

Hansen potentially is starting from a deficit because the city has accepted the idea a new Sodo arena would render KeyArena unprofitable and hurt Seattle Center. So, any Hansen offer must take KeyArena’s financial future into account.

AEG and OVG would be handed an existing, public-owned facility that is cheaper to renovate than starting from scratch. Meaning, any concessions they seek would be weighed against that initial savings.

Brooklyn-based author Neil deMause, whose 1998 book “Field of Schemes’’ is considered the bible of identifying public-funded stadium swindles, says it’s almost unheard of to have three private-funded arena proposals. But he cautions to beware of hidden public costs.

“If you’re talking about building or renovating something like KeyArena … I think you want to watch out for things where the arena operator — whether it’s AEG, or Oak View, or somebody else — is trying to push costs down the road on to the public,’’ he said.

The city’s proposal request says arena groups would assume operating costs. But deMause says the city should avoid ceding too much in future arena “upgrade costs” or “development rights” in the surrounding area. Parking revenue, he adds, also could be a prime plum.

“I look at something like the (New York) Mets’ new stadium (Citi Field), where they put up the entirety of the cost of building it, but they changed their parking deal with the city,’’ deMause said. “To where, instead of the city getting, I think it was the first $7 off the top of parking fees, suddenly that all went to the Mets.’’

Whichever group is chosen will inevitably be given something.

Pro sports remain highly lucrative.

But as taxpayers increasingly decry what politicians spend, team and venue owners often must front more cash and get creative on recouping it.

That’s why Steinberg says the groups’ backgrounds might play a decisive role.

“You want to look at ‘Do they have a track record of building an arena? Are they in that business? Do they have sufficient financing? Is the money leveraged? Are they using borrowed money or funds they have?’ ’’

All questions our city must ask and have answered as this process unfolds.