In a feat equal to a dunk by Danny DeVito, I will attempt to explain briefly the proposed arena deal, without using financier-ese or bureaucrat-ese, and in the process offer something perhaps you didn’t know.
Nothing in this column is about the teams who may populate the arena. Also, nothing here about the arena’s controversial location. Won’t touch civic politics — well, maybe one shot, later on. All I ask is that you hang with me: I don’t want to be alone at this elevation.
In summary, based on conversations with principals Wednesday and previously:
Developer Chris Hansen and fellow private investors (ArenaCo) propose to build, operate maintain and improve an arena in SoDo that seats 18,500 for basketball and 17,500 for hockey, for presumably 30 years. ArenaCo will provide $290 million, and ask the city of Seattle ($120 million) and King County ($80 million) to invest a maximum of $200 million via their ability to bond against tax revenues generated by the building’s operations as a first-class facility that will attract events beyond sports.
Since no new taxes will be sought, nor old taxes diverted, the $200 million public contribution essentially is a loan, whose debt will be retired from building taxes as well as up to $2 million in annual rent. Any shortfalls in revenue will be covered by ArenaCo, which will also cover all cost over-runs during construction.
No public funds will be loaned until an NBA franchise is acquired, a binding non-relocation agreement is signed that matches the length of the loan, and all permitting and environmental reviews are done. An NHL franchise can come later, but is not necessary to begin construction, if approved by the city and county councils.
That is the essence of the proposed memorandum of understanding that was agreed to by Hansen, the city and county Wednesday. The entirety is way more complicated. Full documents are available on the county’s site here and the city’s site here.
And it’s only a proposal. The councils must vote to approve. Those meetings will be the first public forums at which hard questions will be asked, and presumably, answered. And if not answered, well, that’s what we have litigation and referenda for.
Getting back to the deal . . . Aside from the fact that the city is using up its bonding capacity that could be used on other projects, of which none exist that also includes $290 million in private money, it would appear that the city is getting such a deal that a fair question — again, setting aside the arguments about traffic, parking and teams — is why would Hansen would do this?
The answer is, primarily, what you haven’t been told — the city and county can borrow money more cheaply than any private investor. That was not mentioned in the press conference Wednesday with Hansen, Mayor Mike McGinn, King County Executive Dow Constantine or anywhere in the MOU.
One had to ask. Which I recommend doing, a lot, for anyone who is interested in this project. If you need a reason, remember that McGinn thought for the longest time that Seattle’s best traffic solution was tearing down the Alaskan Way Viaduct and letting the poor bastards fend for themselves on city streets.
Gotta watch this guy (shot taken).
Back to the deal. According to Dwight Dively, who might be the smartest man working for the county, the good faith and credit of governments in the bond market make them swell partners for rich guys like Hansen. They just don’t like to advertise it. But hedge fund managers like Hansen make a good part of their livings understanding OPM (other people’s money) and federal and local tax laws.
Read here for a better understanding via crosscut.com from Matt Fikse, former CEO and city projects official, of why this arena deal, and pro sports ownership, works for people who know hedge funds.
“It’s no secret,” said Dively, director of the county’s office of performance, strategy and budget. “Hansen won’t share how he’s going to finance his part. He’s going to have equity partners, loans, various structures of debt, maybe refinance it several times over 30 years. He doesn’t want to signal his strategy because he hasn’t worked it all out yet.”
Asked how this particular deal works for Hansen, Dively said governments can borrow at rates four to five percent less than private investors. So a four percent reduction in interest on a $200 million bond can save $8 million in the first year, he said. Even for rich guys, that’s important.
“Using the public capacity lowers the cost of capital for the project,” Dively said. “There’s another reason they want us (the public) in the deal: There are tax revenues that will come out of the facility that they want to use in the facility. Governments normally collect them, but in this case we are committing them to pay the debt service on the bonds. There is no loss to the city and county’s general funds. But there is no gain, either.
“Hansen gets to use the the (redirected) taxes as part of his financing strategy (to induce investment), and the city gets the indirect gain — hotel room taxes, and all of that, for people coming to events. Those benefits are not part of this MOU, because that amount is hard to measure. But we know it’s there.”
The reason I trust Dively on the matter is because he’s been around for all the public-participation deals done for pro sports building here — Kingdome, KeyArena, Safeco and CenturyLink. Each has gotten progressively less onerous on the public for one reason.
“Governments aren’t involved anymore (in building and operating entertainment joints) because, frankly, we’re not good at it,” he said. The football stadium and exhibition center, which were funded from a statewide vote in 1998 and built privately, have been successful partly because they were built and are run by a private operator, Paul Allen’s First & Goal, under state authority.
One of problems with city-owned KeyArena, he said, was that money for maintenance had to come from the city’s budget for all facilities. Just one of the numerous hazards of being the only NBA facility to have been part of a public park.
That won’t be a problem in this deal. If Hansen or his renters break something, he fixes it.
In a thousand words, that’s the deal. It helps explain why the city, county and sports fans are excited. But there’s a million words yet to come on the location, none of which are in the MOU, and some of which will not be usable in child-friendly websites.
The arena is a long way from done, but it’s reached the dispatch room a lot quicker than many would have imagined.