August 23 2015 09:29PM
(This is a lengthy post look at the economics and politics surrounding the Flames arena proposal. Fair warning.)
After years of whispers and innuendo, the Calgary Flames finally announced their proposed arena plans last week. The CalgaryNext project is, unfortunately, drawn from the same playbook as the Edmonton Ice District and dozens of other North American arena projects over the last decade: stick the public with most of the cost while keeping most of the profits.
Of course, that reality isn't made explicit in any of the presentations or PR materials you will see as this debate ramps up. In order to make an informed decision here are ways you can bust through the marketing buzz words and purposeful obfuscation around the arena project moving forward.
Don't Accept the Frame
If a man approached you in the street and asked you to give him $100, and you sensibly said no, would you characterize the interaction as a negotiation?
Probably not. But CalgaryNext, like all modern North American stadium deals, is framed as a "negotiation" between the city and the team, even when the project as presented is little more than corporate welfare (i.e.; charity).
The reason this frame works to the team's advantage is it locks in the idea that the two entities are merely haggling over how much each must contribute to the project, essentially guaranteeing the club a non-trivial degree of public subsidy one way or the other.
The appropriate frame would be public as investor - meaning the Flames would approach the city as a partner and would give real value in exchange for dollars. And by value, I don't mean the nebulous "benefits" of "increased economic activity", "civic pride" and "revitalization" that are so easily bandied about in PR materials, but rather some sort of tangible ROI - dollars to be repaid in interest (a loan) or a portion of revenues/ownership (equity).
There are other frames one need not accept either: the Flames next arena doesn't have to be a huge, multi-use facility, it doesn't have to be in the West Village area and it isn't absolutely inevitable as currently conceived - they could, for instance, refurbish the Saddledome or rebuild something on the Stampede grounds. Ken King currently says there is no "plan B" when it comes to the Flames arena plans.
Of course, that wouldn't be keeping with the general pro sports trend of building ever bigger, more opulent sports centres every 20-30 years, of course, but that has become a habit in North America only because the public keeps footing the bill. If teams were forced to build their stadiums based on strict internal budgeting and economic principles (i.e.; what they could afford or what they could convince legitimate investors to help build), they wouldn't be recommending massive, over-the-top, $1 billion+ projects.
Sports Mega-projects ONLY exist because franchises can count on free money from the public.
Don't Listen to the Media
- image from "Lets all give money to the rich man!"
With a few, rare exceptions, the local mainstream media isn't going to help you think critically on this issue. At best, the MSM will accept the frame and implicitly drive the public towards the "this is a negotiation" perspective, even when the project is clearly still merely a public subsidy for a profit seeking entity.
At worse, they will eagerly make the Flames case for them, with no argument too transparent or too spurious.
For example, in the last week alone we've seen articles suggesting:
- Calgary must build the CalgaryNext project in order to attract young, creative professionals to the city and avoid becoming an economic backwater.
- The Flames improved the life of a dying child, so their value to community goes beyond "mere money".
- The Flames could leave town if the city doesn't give in to their vision for CalgaryNext. Not building it could also cost the city an Olympic bid.
@MacSapintosh Journalists have become the vanguards of the status quo and defenders of powerful interests. Supposed to be exact opposite.— Kent Wilson (@Kent_Wilson) August 22, 2015
That is, in rapid succession, economic illiteracy, brazen emotional manipulation and implicit blackmail. It's all nonsense created with the express purpose of cajoling, bullying or guilting the public into handing over their tax dollars.
Don't listen. It's a con. The city of Calgary supports the Flames by cheering for them, attending their games, buying their merchandise and elevating the organization's status in the community. The fans don't also owe the club our infrastructure tax dollars so they can add more zeros to their bottom line.
Consider the Actual Costs to the Taxpayer
Right now, the funding model suggested by the Flames isn't merely disguised corporate welfare - it also grossly underestimates what the project would actually cost.
On top of the $800-900M it would take to build the various structures, CalgaryNext would also need some $200M+ to clean up the creosote contamination in the area and an undetermined amount of money to redesign the traffic and other infrastructure in the West Village to service the area.
Also not mentioned: who would cover any inevitable cost overruns that will occur? (hint: probably not the Flames). All-in, this is likely closer to a $1.3-$1.5 billion price tag. The Flames financial contribution figures to be just 13-15% of the total cost as a result.
It goes further than that. The proposed ticket tax which is said to cover some $250M of the project would have to be paid back over time after the arena is built as a kind of user fee. However, that amount would have to be provided up front in order to actually get it built in the first place. No doubt, the city would be expected to front those dollars.
Next, the CRL (community revitalization levy), is actually a complex gamble cities make where they bet on future development to repay current infrastructure "borrowing" for the area. The bet is potentially risky because if the redevelopment doesn't result in substantially improved property values (and therefore an increased tax base) in the defined area, the investment would be more or less lost.
The other issue is that CRL's can merely "shift" tax dollars from one area of a city to another. Because the amount of demand for new property (ranging from residential to commercial) isn't infinite, the result can simply be development moving from other portions of the city into the CRL's borders. As such, there is no new "net" development or tax increase overall for the municipality.
Keep in mind that city owned properties are tax exempt. So a city technically shouldn't be peppering their CRL area with city property, because it erodes their ability to pay back the investment. Which brings us to the next issue...
The City Owning the Arena Isn't a Benefit
The Flames have been very forward about the land and structures remaining city property should CalgaryNext be built. That sounds generous, but it's actually the exact opposite.
Stadiums and arenas are huge, illiquid, depreciating assets. Like a car, they lose value each and every year of their lifespan. On top of that, you can't simply sell an arena if it has become obsolete or you need the cash. They take up massive parcels of land, must be surrounded by acres of parking lots, only have a handful of uses and are almost as expensive to demolish as they are to build.
As a rule, arenas are terrible investments (which is why team owners don't like to pay for them). The only real reason to build them is their ability to generate revenue during their life cycle. But that benefit often doesn't accrue to the city in whole or in part in many of these deals. The Flames, of course, have been evasive when it comes to the issue of revenue ownership and CalgaryNext.
If Calgary is to own the arena(s) and the Flames are to keep all (or a vast majority) of the revenue, then they will have passed the obligations of ownership to the public while keeping all of its attendant benefits. Assuming a 30-year lifecycle, the Flames will have sucked the asset dry of all value by the time it's time to ask for another (tax payer funded) arena. And because the public will "own" the structure, the Flames will be able to walk away from the obsolete, dried-up husk of a building without blinking.
Imagine your friend asking you to buy him a car because he wants to be an Uber driver. He tells you you will still "own" the car, but he's going to be the only one who can use it and he will keep all the revenues he gets from driving people around. After 10 years, he'll need a new car. This would be an accurate analogy, except a car would still be much easier to sell after your buddy is done with it, in contrast to an old arena, which nobody wants.
CalgaryNext Probably Won't Benefit the City Economically
The biggest lie told in the marketing of these projects is that they will meaningfully "revitalize" cities and result in new, net economic outcomes.
In fact, almost every economic study done on this subject over the last 20 years has come to the opposite conclusion. Here's a tiny sampling from a quick google search on the issue:
Etc. The literature on this topic is unambiguous: the public takes on huge risk when it comes to arena subsidies while the teams are the only entities that consistently, unanimously benefit.
Which isn't to say a project like this won't result in some economic activity. Of course, that's a given whenever hundreds of millions of dollars are poured into anything: you could dump a billion dollars from a helicopter on the streets and "create economic activity".
The issue is if it's a meaningfully efficient way of using the money. Almost all of the academic research says "no".
How Do the Flames Benefit?
You'll notice what is curiously absent from Ken King's public talks, the CalgaryNext website and many of the articles appearing in local papers is what the Calgary Flames organization stands to gain from the CalgaryNext project. That's odd because they are positioned to be the biggest single beneficiary if this project goes forward as conceived.
For the currently proposed $200M, the Flames would get not one but two sports stadiums for their four teams (Flames, Stampeders, Hitment and Roughnecks). They would be the sole operators and proprietors of these buildings, from which they would likely derive ticket, concession, merchandise, advertising, concert and naming rights revenues. They'll also obviously be active in the planning and design of the structures, meaning they'll be able to define important issues like seating capacity, retail and food service rental space, luxury box totals and premium seating volume.
If the buildings are indeed city owned, the Flames will get to operate free of property tax as well.
Let's assume, for instance, that the arena's seating capacity is equal to the Saddledome, but the Flames design the new place to have more lower bowl and luxury box tickets as a ratio of the total seats (which is a fair assumption).
If that move raises ticket prices on average by a modest 15% (about $9 per game), the increase in ticket revenue for Flames regular season home games alone is more than $7.6M per year. Over a 20 year lifecycle, that means an additional $152M in revenue and we haven't even talked about the Stamps, Roughnecks, Hitmen or any of the ancillary revenue like concessions, advertising or naming rights - all of which will likely get an incremental bump from a mega project like this.
Beyond the day-to-day revenue is the improved value this would give to the Flames various sports properties. Billionaires often don't get involved with sports teams simply for the yearly profit and loss statement (which, for many clubs, is either neutral or negative), but for what the teams can garner as overall assets.
Forbes estimates the Flames alone are more than $400 million (they were bought for $16M in 1980), though the valuation is an educated guess at best. We can't really be sure what the Flames would actually be valued at since they don't tend to voluntarily share their books, but given that the NHL is now charging a $500 million expansion fee, it might actually be a lowball. A lopsided deal with the city for brand new buildings would no doubt add value to the Flames group's various sports assets.
On top of all that, team owners also tend to get involved with the development efforts around the arena sites. By taking advantage of sweetheart deals with the city (such as new infrastructure and beneficial CRL's), team owners can strike up fresh real estate investments outside of the sports franchise - a profitable way to "double dip" on the city's subsidy.
This is especially beneficial because it's bonus money beyond the reach of Hockey Related Revenue (HRR) - that is, the stuff that gets split 50/50 with the players. If an owner can leverage arena development to create real estate holdings, then he or she doesn't have to share that new source of profit with the players unions.
As an example,
the Ice District around the new rink in Edmonton is being developed by billionaire team owner Darryl Katz.
I have been a Flames fan since I could walk. I have written thousands of articles about the team over the last decade. I am a die hard fan. Like most fans, I'd really like to see the club in a new, state-of-the-art arena, because that would be awesome.
But I won't let the club use my love of the team nor my excitement about a new rink to manipulate me into accepting bad deals or corporate welfare. If the team wants to approach me as a fan, they only need to put together a solid entertainment product. If they want to approach me as a taxpayer and investor, then they need to propose a solid deal. Not vague promises, buzzwords, implicit blackmail, bad economics or anecdotes designed to illicit guilt or fear.
Fashion a deal where both entities can tangibly benefit from a new multi-purpose, mega project and then we can talk about "negotiations". As it stands, the club is looking to disperse the cost and risks to you, I and the rest of the city's taxpayers, while concentrating the profits for themselves.
Of course, several of these issues deserve a deeper examination, including the ins-and-outs of CRL's and the economics behind arena subsidies, which we can further investigate as things roll along.
For now, I encourage Calgarians to do their own research on the topic. Don't merely accept the word of those who stand to benefit the most from the largesse of this project. Don't let your civic pride or love for the team become a tool through which extremely wealthy people improve their bottom lines at your expense.
Be skeptical, be engaged and don't allow the Flames group or the local media to control the frame. Given Calgary's already significant infrastructure challenges and an uncertain energy economy, this is not the time to be writing private enterprises billion dollar cheques simply because they ask.