Over the last few years, Seattle has been the saddest place on earth to be a basketball fan. After a long battle over whether the city would lavish more than $200 million on renovations to KeyArena (which had just been renovated, at public expense, in 1995), the Sonics headed out of town in 2008, lock, stock, and Kevin Durant, to take up life as the Oklahoma City Thunder. To make matters worse, NBA commissioner David Stern effectively salted the ground behind them, declaring, "If the team moves, there’s not going to be another team there, not in any conceivable future plan that I could envision.”
Stern might have spoken too soon. The Seattle City Council is expected to vote next month on a deal for a new $490 million basketball and hockey arena in the city's SoDo district, near the existing Mariners and Seahawks stadiums. Better yet, local-born, San Francisco-enriched hedge fund magnate Chris Hansen wants to build the venue using almost entirely private funds. It's a deal that would likely bring a new NBA team to town, and possibly an NHL franchise as well, while largely safeguarding the public treasury. For Seattleites—at least, aside from the port workers who are complaining about having to lug cargo through arena traffic—this could be the happiest of endings to a story that seemed destined to end in decades of Baltimore Colts-style bereavement. It would also be a momentous occasion for people nationwide who'd like to see new sports venues built with private dollars instead of public subsidies.
But the story is not that simple. If the ever-affable Hansen succeeds in getting an arena deal through the famously contentious Seattle council, he could face an even more uphill battle. According to experienced venue managers and sports economists, it would be very difficult for Hansen to pay for both an arena and an NBA team without landing in a sea of red ink. Once you scrutinize the financials, the Seattle deal leaves you pondering a difficult question: Is it possible to build any stadium or arena in 2012 without it becoming an economic boondoggle?
Hansen has sold his arena plan by saying it would cost the city nothing—in fact, he claims that taxpayers would turn a profit on the deal. He’s had no choice: A Seattle law, passed by voters in 2006, banned any public sports expenditures unless the city could claim to get a net positive return on its investment. Hansen’s claims are probably overblown. About 20 percent of the cost would be covered by tax increases attributed to the arena, and the latest findings show that basketball arenas don't do squat for their cities' economies. Still, in a world where the Indiana Pacers pay $1 a year in rent to use their publicly funded arena while getting $10 million a year in city subsidies, the Seattle deal is a bargain, comparable only to the San Francisco Giants' AT&T Park for its light touch on the public purse.
If Hansen can build an arena with private funds, then why don't others? One answer is that they don't have to—when everyone is getting public money, you'd be foolish not to ask for it yourself. Ask most sports economists, though, and they'll share the dirty little secret of new sports facilities: Most of them don't make money. Sure, they're great if someone else is paying the bills, but they typically don't generate enough profits to pay their operating costs and $500 milion in construction debt. And that's where Hansen's plan could run into trouble.
Stanford economist Roger Noll pegs the operating profits of a typical arena at somewhere between $20 and $30 million a year. That could be enough—barely—to pay off $400 million or so in arena debt. But then Hansen and his as-yet-unnamed investors will still need to put down a huge amount of money to purchase an NBA franchise to play there. If every penny of revenue is going to pay off construction debts, that will leave nothing to offer his moneymen as return on their investment. "The gross revenues of an NBA team in Seattle could not possibly be sufficient," says Noll, to cover the costs of both building an arena and buying a team.
"He's taking a lot of stuff under his side of the equation," agrees John Christison, a Seattle venue management consultant who previously ran Seattle's convention center and the Orlando Arena. "The question is can he sustain it, and is he being realistic about what [kind of profit] he can turn with that arena given the marketplace right now?"
The marketplace for arenas is not as profitable as it used to be. When it comes to raking in revenues, a basketball/hockey facility has one advantage over baseball and football stadiums: It can be used for bushels of non-sports events, ranging from concerts to circuses to Disney on Ice. “As a rule of thumb, you need around 200 revenue-producing events a year in an arena to start looking at covering your costs—and that doesn't include your debt service operations," Christison says.
But according to Christison, such events aren't nearly as lucrative as they once were. "Ten years ago, if you'd asked any arena manager in the country, even if they had a franchise housed in their building, they'd say that concerts are the bread and butter," he says. But today, with a fragmented music industry that's producing fewer acts that can draw arena-sized crowds and competition from an increasing number of both arenas and casinos, "the concert market has become incredibly difficult," he says. "Nobody's making much money except maybe the artists."
Arena managers can sometimes drive a harder bargain with concert promoters if they're the only game in town. But that wouldn't be the case for Hansen's Seattle arena, which would have not only the Sonics’ former home KeyArena to contend with, but smaller arenas in nearby Everett and Kent. Noll puts it bluntly: "In Seattle, what they need is to bomb some facilities."
That, more or less, is what unfolded in Minneapolis-St. Paul, which Noll calls the "quintessential" case of arena glut. In 1990, the privately built Target Center opened in downtown Minneapolis to host the city’s expansion NBA franchise, the Timberwolves. As in Seattle, there were promises that taxpayers wouldn’t be on the hook for anything. But four years later, after the NHL’s North Stars moved to Dallas, the highly regarded, publicly owned Met Center in Bloomington was demolished, in large part because both it and the Target Center couldn't survive on the limited number of available events. The next year, the T-Wolves owners demanded—and got—the city to buy the money-losing Target Center off them for $74 million, turning the no-taxes-needed arena into an ongoing public albatross.
There are arenas that do enough business to repay their substantial debts. When Brooklyn's Barclays Center opens next month, it will be saddled with about $600 million in construction debt even after getting $260 million in state and city funds. Yet if you believe the projections in the arena bonds' public offering, the new home of the Brooklyn Nets is expected to clear a massive $60 million a year in net profits.
Seattle is no Brooklyn, though—the entire Seattle metro area, in fact, is only a smidge larger than New York's most populous borough. That makes it unlikely that an arena there could come close to matching the $30 million a year in suite revenue or $33 million in annual sponsorships that are expected in Brooklyn. And the precedent from smaller cities isn't promising. Kansas City's Sprint Center, despite being one of the busiest arenas in the United States, nets perhaps $10 million a year. Even worse, most of that money goes to arena manager AEG, leaving only about $2 million for the city to use to pay off its $13.8 million in bond payments.
Could Seattle end up in the same boat as Kansas City or Minneapolis, either unable to lure a team at a decent price or having to bail out an arena owner who’s awash in debt? There are some hopeful signs that neither scenario would come to pass. Hansen has promised that he won’t build the arena unless he’s able to purchase an NBA team to play in it. The city council, meanwhile, has made approval of the arena bonds conditional on there being a plan for the future of KeyArena. And even if Hansen's revenues are disappointing, he may not be able to do much about it. The Timberwolves extracted their public bailout only by threatening to move to New Orleans. Hansen, though, is promising to sign a non-relocation agreement.
But owners aren't forever, and—hello, Phoenix Coyotes!—sports teams have found plenty of ways to demand new subsidies before their leases are up. If nothing else, Hansen's arena plan is a test case of whether modern sports arenas, with their $500 million price tags, can be built without soaking the public. Critics of public sports subsidies may be rooting for its success, but they'll be forgiven if they're hesitant to take that bet.