Municipal Arenas are $$$ Dilemmas

Musings

It is interesting to contemplate the sports arenas and coliseums that are such a large part of our metropolitan areas. I do not believe there is a lot of published information on such facilities.There is very little I have seen. However, of the information I have read it appears to me that these arenas and coliseums are a product of the 20th century. There were apparently athletic fields in the 1800s and theaters where musicians and singersperformed but not the large municipal  arenas we have today. In the early 1900s it appears that the athletic teams that formed professional leagues played on existing fields that were essentially municipal playgrounds. Occasionally there was a larger building within a city such as New York, Chicago or San Francisco that was used for meetings,  conventions and similar events. As the professional sports teams became more prominent with some prosperity a number of them even built their own stadiums. In some instances there was a municipal stadium of which they were a tenant. So after World War I when Jim Thorpe (probably the greatest athlete in US history) played PeteFats Henry ( football hall of fame) and the Canton Bulldogs hedid so on a field that had no special designation. Similarly whenJim Thorpe played Eddie Roush ( baseball hall of fame) and the Cincinnati Red Stockings they played at Crosley Field  a small baseball facility with stands.

This background  evolved into a pattern where all metropolitan areas of any size want an arena both for professional sports teams and to promote concerts, conventions and conferences in their location. As a dual use facility these arenas had  sportsteam as an additional tenant to help make revenue to cover the expense of the building. However, particularly in more densely populated metropolitan areas we now have a scenario in which the owner of an atletic team regularly approaches the city or country government to have the arena rebuilt for that teams use,or a brand new arena built for the team's use, and the negotiation often includes the owner of the team suggesting that it will move to different city if it does not get the facility which it wants for its sports team.

The demand for new arenas is not necessarily just because the existing arena or stadium is outdated or decrepit. That may be the case, but not always. If we look at the instance of San Diego,it had a perfectly good football stadium but the owner wanted a new fancier stadium similar to the one that had just been constructed in Los Angeles and when San Diego refused to build that new football field the owner of the San Diego Chargers moved his team to Los Angeles to play in the same stadium as the Los Angeles Rams. This was in spite of the fact that the San Diego Chargers had been one of the original teams in the American Football League, had always been very popular in San Diego and was well supported by the population. The city was just not willing to give the owner the edifice that he now wanted to match the team in Los Angeles. This brings us to the question of what is a professional team worth to a municipality.

Contemplations

There are no cities or counties I know of that have the money to build an arena or coliseum out of their annual tax revenue that they receive on an annual basis from collecting taxes. They always use bonds to raise the money, for such projects that may take 20, or often 30, years to be paid off. The city or county may want to do that to have an arena for conferences, conventions, concerts and sports teams. That is a normal consideration in todays world. However, the owner that shows up seeking to have a new arena built is often looking for more than just a place to pay rent and locate a team. Normally the existing or new team also wants some number of tax breaks that come in various packages, such as reduced taxes because the new project will supposedly clean up a brownfield site where it will be located. They also seek any number of other tax reductions and favorable monetary packages, as well as the issuance of the bonds to build the arena or coliseum. The proposal is  that the owner will sign a lease to match the bonds and the rent of the lease will pay the bonds. That would suggest that the municipality breaks even. In general that is not the case. There are usually enough tax breaks and reductions in the package that the city or county is simply losing tax revenue to enhance the attractiveness for the ownerand , hopefully the economy of the community will benefit. 

The owner of the sports team puts all the various incentivestogether based on whatever the teams attorneys and consultants can come up with to maximize the money benefit to the owner. But the city must consider  its obligation to use the tax receipts it receives in a responsible manner. There is usually also a rendition of numbers showing how many jobs the arena will create and the spin-off effect in the community based on some type of economic analysis. However I believe it is safe to say that these packages, when proposed by a team owner, are pretty well guaranteed to ensure that the team owner will do well and it is the municipality that is at risk if the benefits  provided costmore than the added tax revenue that  will be collected. If the projections, which are usually generously conceived by the owner, are not met it is to the detriment of the community.

This seems like an odd situation. The owners of the professional teams are constantly trying to get the people in their location to support the team and identify with the team because the team is in their community and is for them. The owner makes money by gaining their loyalty and drawing them into the arena or stadium. However, when there is a better proposed package elsewhere, or the city is not willing to do the upgrades and revisions that the owner feels should occur, the owner is free to leave for another community. The owner's loyalty to the citydisappears in a flash. We have seen a number of these occurrences in locations such as Cleveland, Baltimore, Oakland, Kansas City, Saint Louis, Phoenix and Montreal. 

It is not likely that anything is going to change the sequence of communities wanting large and attractive arenas or coliseums and team owners seeking the best package they can negotiate to put money in their pocket.  However it does seem that the municipalities should develop a better withdrawal provision in their contracts for such facilities which require an owner leaving to compensate the city in a stated  dollar amount, which increases over time, for the withdrawal. The owner is always happy to request a number of favorable provisions from the municipality but the owner will undoubtedly be hesitant to give anything back in return. However, prudence suggests that the city or county should do something to protect themselves. This concept is not unusual. Even in the NCAA the conferences have withdrawal provisions if a team is leaving for another conference. Those fees are now in the tens of millions of dollars. If a college sees something it thinks is  better in anotherconference where it can earn more money for its athletic program it now has to pay to move, particularly if it is a division one school. Florida State University is facing that dilemma right now as it wants to get out of the Atlantic Coast Conference but there is a huge withdrawal cost to do that.

We should not expect the owners of teams to become less inventive or less demanding for the things they want. They're simply trying to better their position as best they can. Salt Lake City now has that dilemma with the owner of their professional basketball team who has purchased a hockey team that was in Phoenix and is moving it to Salt Lake City. However he also now wants new facilities to play in for his teams and has proposed the restructuring of downtown in order to accommodate his goals. The proposal has even suggested that a highly regarded concert hall in the downtown should be demolished to make room for the athletic facility. It is mind boggling that someone could come up with such a proposal.

Another idea which makes great sense to me, but it's not likely to be accepted by  owners, is that when a team asks for a new facility either in the municipality where it is already located or from a new city which is soliciting the move, that city should demand a provision that the team cannot leave the new facility for another location unless it pays a withdrawal fee and the municipality approves of the move in some manner, either by its legislative body or by a vote of its citizens. In essence if these teams want a lot of beneficial tax breaks and bond issuances from a municipality the municipality should get a hook into the team which compels it to stay associated with the municipality.

Thoughts

In the post World War II era owners of professional teams and entertainers and their concert companies have moved to a new concept of facilities. Entertainers no longer perform in the local theaters in small and large towns and evening lounges but go on tour in large coliseums and arenas. Sports teams no longer build their own facilities and are identified with one town or another. They are simply entities owned by people for whom they are mostly just an expensive toy and the owners have figured out how to make a significant amount of money off of the operation of the toy. The facilities in smaller towns do not  perform that way but those in the larger communities  do. Those communities should think twice about what benefits they offer to obtain or keep a professional team. The negotiation equation for these agreements needs to be more balanced, so they are fair to the fans who are also tax paying citizens.

Obadiah Plainman

Copies of prior postings of this blog are available at: thoughtscm.com