Costs push arena bidders to opposite tactics

The difficulty of shoehorning a world-class sports and concert venue under the old KeyArena roof and still making money from the enterprise was so immense that Oak View Group and Seattle Partners weaved and wobbled under the strain.

Both came up with solutions quite different. It remains to be seen how each plays out.

Six weeks before Wednesday’s deadline to respond to Mayor Ed Murray’s request for proposals, OVG boss Tim Leiweke and his team were hit by sticker shock.

“The original design didn’t go far enough,” said Lance Lopes, the former Seahawks and Huskies executive now OVG’s director of special projects. OVG soon realized the only way to make the ice sheet work with sufficient seating was to dig down another 15 feet, which also created space for more loading bays, locker rooms and back-of-the-house needs, all below grade.

The price: An additional $200 million, making for a $564 million estimate.

Seattle Partners, the name for Anschutz Entertainment Group’s local enterprise, also discovered their costs were way beyond a $250 million target. Their response was to quietly slide in a request to the city of Seattle for $250 million in public bonding, to be paid back from building revenues. Total estimated cost: $520 million.

The idea was similar to Chris Hansen’s original plan in 2012 for up to $200 million in city bonds for his arena project in Sodo.

The business rationale was identical. Instead of asking for new tax money or redirecting current tax revenues, the developer seeks to use the municipality’s ability to borrow money much more cheaply than the rate for private borrowers from commercial lenders. Over a typical length of 30 years, the costs saved between, for example, four percent and eight percent interest, is many millions of dollars.

Hansen, partly in response to progressive Seattle’s demand for little or no funding for sports palaces, as well as the two KeyArena developers’ attempt at 100 percent private financing, withdrew his public bond request in a revised plan for Sodo that he submitted to the city for reconsideration three months ago.

But Seattle Partners went ahead and included the “suggestion” of public bonding as part of the funding package, which contradicts the condition set forth in the RFP.

Thursday, AEG president Bob Newman told the Seattle Times editorial board, a strong backer of a KeyArena solution over Hansen’s plan, that public bonding is “risk-free” and a “win-win” for all.

“This is an option that, if you do it this way, it creates better returns for the project as a whole,” he told the Times. “There is no wool over anyone’s eyes. This is a mechanism that truly will provide better returns to the city in addition to retaining ownership (by the city of the arena).”

That may be true, but it’s also $250 million that the city cannot use toward any other capital project. That borrowing capacity is a public asset whose use in the Hansen project was almost certain to draw litigation by opponents of public participation. And the request was sensitive enough that Seattle Partners was vague about the “suggestion” in the executive summary presented to the city.

Asked for a clarification, Partners spokesperson Aaron Pickus said three revenue streams would be dedicated to debt retirement and fully guaranteed — lease payments, ticket taxes and a facilities fee, but didn’t address why they didn’t explain the bond request.

“There is no risk to the city,” he said. “In addition, an independent financial analysis projects that there will be surplus from these revenues generated by the arena of $144  million over the course of the lease (35 years). That surplus goes straight to the city.”

In contrast to Seattle Partners choosing to save costs, OVG went the other way — increasing revenues. They made a deal with Live Nation, the events promotion company with a global reach. Lopes said the company, which owns Ticketmaster, took a small portion of equity in the arena and committed to making the Seattle venue “a top-10 destination arena” in their scheduling.

As part of the deal, Seattle’s beloved Pearl Jam, recently inducted into the Rock and Roll Hall of Fame, is considering an “extended residency” at the arena that would include regular shows.

The income from more and better touring shows to the building, which is being planned as a concert facility first, without need of an anchor pro winter-sports tenant, is enough to cover the additional excavation expenses that make the renovated version about 660,000 square feet, nearly double the existing size and 60,000 more than the AEG plan.

The music-venue-first plan doesn’t sit very well with some NBA and NHL fans, who prefer Hansen’s plan of sports-first. The problem is revenues.

“The music business is very profitable,” Lopes said. His boss, Leiweke, was more direct.

“If we don’t have (Live Nation’s) partnership here and we’re not able to do 40-plus nights of music and we don’t have Pearl Jam . . . we couldn’t stand on our own two feet and take this risk,’’ Leiweke told the Times. “We’re going to build it, and we believe (teams) will come. And if they don’t come, we’re not going to get killed.’’

Friday, Irving Azoff, the entertainment mogul and part-owner of OVG, was even more blunt in a story in the Wall Street Journal.

“Music is a bigger league than any of the other (sports) leagues,” he told WSJ. His group’s renovation proposal “could turn KeyArena into one of the country’s top 10 moneymaking music venues, while doubling or tripling the size of Seattle’s touring market.”

Typically, revenues from games by pro sports tenants are not as lucrative, and they eat up dates from October to June, including reserving dates for playoffs that may not happen. Touring shows happen when they happen, and Seattle appearances have to book in conjunction with other West Coast sites, unless the tour starts here.

The sports calendar is part of the reason why Kansas City’s Sprint Center, an 18,000-seat arena opened by AEG in 2007 when Leiweke was running the show, is successful financially without an anchor tenant. Which is not to say that Kansas City wouldn’t welcome an NBA or NHL franchise, but neither league has expressed much interest in expanding, especially to a smaller market with an uneven record as a pro sports home.

Lopes emphasized that, given the sales of suites and expensive seating near the action, pro sports brings a constancy that the concert business can’t match.

“You’re still better off to have an anchor tenant,” he said. “The revenue streams and sponsorships are worth more with pro sports.”

Much remains to be learned about the proposals. But regarding the creation of a financially viable enterprise, OVG’s plan has an edge because it seeks no public help.

Newman of Seattle Partners said their project can do all-private funding too. But the fact that it opened the game with a public-funding “suggestion” that was a bit camouflaged likely will cause the select committee on the arena, which meets to consider the plans Monday, to have a collective arch in the eyebrows.