How Seattle arena deal stacks up
Economists say the Seattle arena proposal fits the national trend toward less public financing but may not generate much new money for the local economy. Landing an NHL team as a second major tenant, they add, is also critical to the arena's success.
Seattle Times staff reporter
Public hearing on arena dealThe Seattle City Council and Metropolitan King County Council will hold a joint hearing Thursday to take public testimony on the proposal to build a $490 million sports and entertainment venue with $200 million in public financing.
The hearing begins at 5:30 p.m., Seattle City Council Chambers, 600 Fourth Avenue, Seattle. Sign-in begins at 5 p.m.
The proposal to build a new arena in Sodo comes with a lot of promise:
More private financing than for any previous stadium deal in the city. A boost to the local economy with money from out-of-town visitors who eat at Seattle restaurants and stay in Seattle hotels when they come to watch the Sonics or take in a concert.
Economists agree that the proposed $200 million in public financing for the $490 million arena is a good deal — and in line with the national trend for less taxpayer investment in new facilities.
But they're skeptical that these facilities generate much new spending. Rather, experts say, cities see a "substitution effect" as people spend money on a pro basketball or hockey game rather than a restaurant and movie or a college basketball game.
"The economic impact is approximately zero. All you're doing is recycling fans from one game to another," said Allen Sanderson, a senior lecturer in economics at the University of Chicago who specializes in the business of sports.
Another question surrounds whether investor Chris Hansen can secure an NHL team as a second major tenant, key to his plan to schedule up to 180 events a year and make the arena profitable enough to repay up to $200 million in bonds issued by the city and county.
"That concerns me about the Seattle deal," said Galen Trail, director of the Sports Administration and Leadership program at Seattle University. He notes that the most profitable arenas are in the largest markets, New York and Los Angeles, and book about 250 events a year.
Around the country, costs for state-of-the-art sports and entertainment venues are up, to a high of $637 million for the Barclays Center, to open this fall in Brooklyn as home to the NBA's Nets.
Public contributions to these projects are down — substantially — from 100 percent for most stadiums and arenas built before 1985, such as the Kingdome and KeyArena, to about 64 percent for arenas over the past few years, according to Dennis Howard, a University of Oregon business professor and co-author of the book "Financing Sport."
Some cities have balked at subsidizing lavish facilities for millionaire players and owners, especially as the economy languishes, said Howard.
"The transfer of income from ordinary people to highly paid owners, executives and players is galling to many," he said.
In San Francisco, the owners of the NBA Warriors are proposing to privately finance a new $500 million arena. The city is contributing a derelict waterfront pier on which the new arena would be built, and an additional 2 acres of publicly owned land.
At the other extreme, some small-market cities, such as Oklahoma City and Charlotte, N.C., have taxed themselves to entirely fund new facilities. Hansen is asking that 41 percent of the Sodo arena be publicly financed while he and a group of investors fund the rest.
In Pittsburgh, the city kicked in 15 percent for a new hockey arena. The public share of Brooklyn's Barclays Center is 36 percent.
Hansen has proposed repaying the public financing through admissions taxes, sales taxes and rent from the teams. Howard said the national trend has been toward fewer broad-based taxes such as property taxes to more selective ones.
He called Hansen's proposal, "essentially a user tax. It's the fairest of any arrangement" that relies on some public money.
Hansen disagrees that money spent at the arena will simply replace money now spent on other local entertainment.
In a written presentation to the city and county councils this month, Hansen argued that any substitution effect should be "minimal" because arena admissions taxes would return 5 percent toward the public financing while the city's portion of sales tax on other forms of entertainment is just 0.85 percent.
He further argued that the city and county would get additional taxes from restaurants, bars and hotels, a rise in property taxes around the arena, parking taxes and the multiplier effect from new jobs and spending by out-of-town patrons.
"Combined, we believe these 'additional taxes' would significantly outweigh the modest 'substitution effect,' " Hansen concluded.
Economists are skeptical. Trail, at Seattle University, said taxes generated by the arena will "generally not be new money," but rather "money being moved from one place to another."
The Seattle Sounders have been an exception, he said, drawing fans who, for the most part, weren't regulars at other Seattle sporting events.
"There's a lot of crossover among Seahawks, M's, Sonics and college basketball," Trail said. Based on the experiences of other cities, Howard estimates 70 percent of attendees would come from within the city or county, particularly since many basketball and hockey games would be midweek.
"You're not going to get people driving up from Chehalis on a weeknight. That's not going to happen," Howard said.
An unanswered question about the Seattle proposal is whether an NHL team can be secured in addition to an NBA team. The answer matters, economists say, because Hansen's ability to pay off the public bonds is largely dependent on arena attendance.
Hansen has said that adding hockey to the arena is his goal, but he would look for another investor to own and run the team. He has a strong incentive to do so. King County will contribute $80 million toward construction costs, but only if an NHL team is part of the deal. With no NHL team, the county will contribute only $5 million.
Sports economists say an arena's revenues don't pencil out without guarantees from at least two anchor tenants.
"There aren't enough nights to generate enough rent with just one team," Sanderson said. "You have to have two major tenants."
Hansen argues that his business plan, which projects 180 events a year, would be profitable. And events such as hockey, concerts and family shows would draw more people from out of the area who are more likely to spend more days in town.
"While we do not have precise estimates yet, our preliminary market research tells us that the drawing range for the NHL and concerts would skew these numbers further away from Seattle and King County," Hansen said in an email. He added those estimates are also consistent with the experience of Seattle's other major pro sports teams.
In the end, the decision to publicly subsidize a sports arena may come down to intangible benefits, said the University of Chicago's Sanderson. He compared it to owning a dog or a boat, something that gives a person pleasure, but not a measurable financial boost.
"As long as the citizens, with eyes wide open, are saying it's fun, it's another arrow in Seattle's quiver, that's fine. Is there a net economic benefit? Probably not," he said.
Lynn Thompson: 206-464-8305 or email@example.com. On Twitter @lthompsontimes.
Graphic by THE SEATTLE TIMES staff:
Source: "Financing Sport" by Dennis Howard and John Crompton