What everyone gets from the potential arena deal

Calgary’s city council convenes on Tuesday afternoon at City Hall to determine the fate of the tentative arena deal. If they ratify it, the Calgary Flames could have a new home arena by 2024. Given that there are many parties involved, let’s break down what everyone gets from the potential deal.

The Flames

The Calgary Sports and Entertainment Corporation (“the Flames” for simplicity) chip in $275 million for the construction of the new building, will pay up to $1.5 million for the demolition of the Saddledome, and they’ll pay the provincial portion of property tax after the Rivers District CRL expires in 2047 (it’s unclear how much that will be). They get a few things for their trouble, which we can basically just boil down to reduced expenses and improved revenues.

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Reduced Expenses: The Flames currently operate the Saddledome, which is 36 years old and hasn’t been substantially renovated in a quarter-century. (It also flooded in 2013.) It’s old and it’s reasonable to assume it has fairly high upkeep costs. By contrast, operating a brand-new building would necessarily involve lower operating costs – especially at the beginning – and all things being equal the ongoing costs of the new arena wouldn’t start to approach those of the Saddledome for many, many years.

Increased Revenue: The folks at The Star Calgary got their hands on some analysis that University of Michigan economist Mark Rosentraub did for the Calgary Municipal Land Corporation. Yesterday they reported on some operating implications of the new building – the whole thing is recommended reading and some very interesting context:

In an October 2016 presentation, Rosentraub estimates a new arena in Calgary could generate $151.8 million, in 2020 dollars, of annual operating income — increased by new sponsorship packages and luxury products “that do not exist in the Saddledome.”

In another presentation dated June 26, 2017 — Planning, Monetizing, and Designing a New Arena for Calgary — he estimates that that number means CSEC would see $48.7 million of additional operating income compared to what it gets from the Saddledome. That number doesn’t account for the annual payment the Flames might be making to pay for its share of a new arena.

If we do the math, a potential $48.7 million potential jump in revenue to $151.8 million would suggest that their current revenue is around $103.1 million. (Our analysis of the city’s ticket tax revenue model used $150 million as the starting point for revenue in years 1-5.)

The case for revenue growth is pretty strong, and very much in line with what’s been seen in places like Detroit and Edmonton. The new building would have better amenities and better concessions, which would allow for higher price tags. A shinier building would also likely attract more events (or swankier events), allowing for revenue growth due to frequency or higher priced events. The Flames also get a cut of parking from arena-hosted events at Stampede Park, but that might be a wash considering the parkade will transfer to Stampede ownership.

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More Sustainable Business Model: Way back in October 2017, Flames executive Ken King claimed the team was a recipient of the NHL’s revenue sharing. Based upon how the Canadian dollar had dropped in value and the team’s estimated attendance and ticket prices, we concluded that they probably had. They probably have continued to receive revenue sharing, primarily because the Canadian dollar has stayed in the ditch. With the salary cap nudging up and up (and their player spending hovering around the $80 million park), operating costs for the ‘Dome likely creeping upward, and the Flames’ ability to pay their players in American dollars remaining stagnant, it’s unlikely the club’s making much money.

The big value for the Flames is that – for the low, low price of $275 million – they get a more sustainable business model and probably get themselves out of the bottom half of the NHL in revenue, even with the crappy Canadian dollar.

Other Stuff: They also get the option to purchase some city land at spring 2018 market values – the old Enoch House lot and the land the bus barn is currently on – and shared operation of a community space (built by CMLC) adjacent to the arena.

The City

The value from a municipal government perspective is as much what they won’t have to deal with as it is what they get for their $275 million commitment (plus roughly $14.2 million in costs associated with knocking the ‘Dome down).

What They Avoid:

  • The ongoing saga of talks with the Flames – and the occasional media skirmish – will be over with for the length of the lease, 2059 at the very least.
  • Even if the optics are bad – and they’re bad – the city sends the message that they’re willing to be business-friendly, at least if it’s in service of their development goals. (And happening in a year where they’ve been criticized for running around in circles, it at least shows council can get things done.)
  • Presuming that the sources of funds for the “community sports” money the Flames are contributing – functionally a continuation of their existing lease provisions – the city doesn’t need to step in to ensure continued funding for the Parks Foundation, Winsport or Hockey Canada.
  • They don’t need to come up with a succession plan for a 40-year-old arena, nor do they have to manage it themselves. Similarly, they don’t need to build a new one themselves and then hash out a deal with anybody like AEG or Oak View Group to operate it for them.

What They Get:

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  • Some revenue, in the form of a 2% cut of arena revenues and $2.5 million over 10 years from naming rights. It’s not a colossal windfall and it won’t off-set the initial investment.
  • They get a shiny new city asset and an operator (in the Flames) with experience operating such a facility.
  • They get the potential for increased incremental property taxes if the arena helps attract other investment. Again: this won’t create economic activity, it’ll redistribute it from other parts of the city. But the city’s been concerned about the lack of downtown life for years, and this could help fix that.

The Fans

If you’re a fan of the Flames, you’d probably like to complain about building layouts or bathroom lines or hear about anything but ongoing negotiations, publicity wars or any contractual arena stuff. The good news is that may all be done with, and we can start talking about designs and stuff like that.

If the new arena opens in 2024, the new lease provides a commitment that Flames will be in town at least until 2059 – and perhaps longer. We don’t need to hear about anymore “will they, won’t they” arena debates for three decades. It’ll be great.

Finally, fans will potentially get to experience hockey games (and other “events”) in a new arena – albeit one that will likely be a bit pricier for tickets and concessions.