Thursday, May 16, 2013

Stern to Seattle: Drop Dead

"This is going to be short for me. I have a game to get to in Oklahoma City"
Christ, what an asshole.
I don't follow basketball that closely, but now that Chris Hansen's bid to move the Sacramento Kings to Seattle is officially dead, it's worth digging into the subtle differences in arena financing that give the NBA a strong reason to stay in California, even if such a move is not in the interest of current Kings' ownership.

On the surface, the two financing packages look fairly similar. The Seattle group would have bought the Kings in a deal valuing the franchise at $561 milllion; the new ownership group in Sacramento (if the Maloof family will sell to them) values the franchise at $525 million. Public financing costs in Seattle would have reached $200 million out of $490 million in total costs, or just over 40%; in Sacramento, the public's bill will hit $250 million out of $447 million, or 55% of costs.

So from the public's perspective, the Seattle financing arrangements are superior, though only slightly--what's $50 million between friends!-- but the story gets more complicated as we dig deeper. Here's a wire report on the signing of Seattle's public financing bill:
The plan calls for a $490 million arena built in the area where Safeco Field and CenturyLink Field are located, with $200 million coming in public financing. The public investment would be paid back with rent money and admissions taxes from the arena, and if that money falls short, Hansen would be responsible for making up the rest. Other investors include Microsoft Chief Executive Steve Ballmer and two members of the Nordstrom department store family.

As part of the renegotiated agreement, Hansen has also agreed to divert a portion of arena revenues into a pool of money to help with transportation projects in the neighborhood around the arenas.
Compare this to what Sacramento will do for the new Kings' ownership, according to the local Business Journal:
Most of the city's $258 million contribution -- $212.5 million -- would come from the city's off-street parking assets. The city would form a nonprofit corporation to own the parking lots and structures; the nonprofit would issue bonds to finance the arena. The bonds would be repaid through the city's hotel taxes and other sources, the city's report said.
The rest of the city's contribution would come from:
  • Sacramento's parking infrastructure fund: $1.5 million
  • A rebate on sales taxes generated by the arena construction: $1 million
  • Funds set aside for downtown development from the city's share of proceeds from sale of the Sheraton Grand: $5 million.
  • Land transfers to the arena investors: $38 million. [The Seattle ownership group has already purchased the land it would need -- ed] This would include 100 acres the city owns near the current arena in Natomas.
Investors would contribute a 5 percent ticket surcharge to the city, cover operating expenses and improvements, and share profits with the city.
The city would agree to help the investors get necessary entitlements to develop up to 1.5 million square feet of commercial and residential space around the Downtown Plaza site -- a project worth more thant $500 million, according to the term sheet. This would include 475,000 square feet of office, 300,000 square feet of retail, 250 hotel rooms, and 600 units of apartments or condominiums.
The city report emphasizes that the city's general fund would not be hurt by the deal. The $9 million that the parking assets now contribute every year to the city's budget would be covered in part by the 5 percent ticket surcharge [would generate $1.5-3 million per year if the Kings sell out every game--ed.], the city's estimated share of arena profits -- $1 million a year -- and various tax revenues that the project would create.
The most charitable thing you can say about the Kings' arrangement is that they might actually turn the arena into a lynchpin of downtown redevelopment. A less charitable framing would be that the city has just given away almost $40 million in prime real estate. But more immediately, it seems likely Sacramento will find it difficult to make up the funding shortfall caused by diverting parking revenues. They're banking on a significant increase in tax revenue resulting from keeping an existing sports team in place. Meanwhile repayments from construction of a new arena in Seattle would basically come straight out of the ownership group's pocket.

In the end, had the NBA let Hansen buy the team and move them to Seattle, whenever the owners Memphis or Charlotte or New Orleans (or perhaps, some day, Oklahoma City) decide that they'd like to move to a more profitable media market like Las Vegas or Baltimore, local officials would be able to point to Seattle and say "we want the deal they got". And that's bad for the NBA, because it means that the surplus generated by sports teams would be more equitably divided between owners and the public.
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