The proposed arena deal isn’t perfect, but it’s not awful either

In an ideal scenario for the city, the Calgary Flames would pay for their entire new building on their own. Given the state of the franchise and economy, that probably wasn’t in the cards. The worst-case scenario was the city paying for everything.

The tentative arena deal struck a balance in the middle, but some of the little details might sweeten the pot a little bit for the city.

Direct building costs are estimated at $550 million, split evenly between the Flames and the city at $275 million apiece. The design of the arena is obviously still a work in progress, but their aim is to produce an “up to 19,000 seat facility” as well as a secondary (practice) arena – the size of the main building and potential for the smaller area are dependent being able to bring them in on budget. The city’s funding will come from their capital reserves, anticipated interest revenue, leftover funds from previous projects, and a few other bits and pieces.

There’s a land swap involved, as the city will grab the two block parcel of land from the Stampede in exchange for the land the Saddledome is currently on (plus Weadickville in Stampede Park). Other land in the immediate area will be available for the Flames to purchase, including the old Enoch House property and the land where the Victoria Park bus barns are currently located.

The Flames will cover 10% of the costs for the Saddledome’s demolition, to a total of $1.5 million. The city’s estimates are the demolition will cost just under $14 million, with the Flames contributing $1.4 million. The land and transactional costs to the city will be $3 million.

Based on the city’s estimates, the costs for demolishing the ‘Dome and building the new arena would be roughly $290.4 million to the city and $276.4 million to the Flames.

There are a few components that are interesting here.

First is the “facility fee.” We’ll call it a ticket tax, because that’s what it is. The city will levy a fee and receive 2% of all ticket revenue for all events at the event center. Over the 35 year lease, the city’s estimates – conservative estimates based on a probabilistic model of a number of events according to mayor Naheed Nenshi – add up to $155.1 million of revenue to the city, which would somewhat off-set the costs of the initial contribution.

The second part is the lease itself. Once the building opens, the Flames will be locked into a 35 year lease. The city will own the building and receive no rent, but the Flames will commit to contributing $75 million over 35 years to local community sports charities – similar to the level of financial commitment they currently have under their existing lease. The team will also be on the hook for the costs for operating and maintaining the new arena. (The $75 million isn’t really a new expense for the Flames, as they basically pay this much under their existing lease.)

The third part is the naming rights: the Flames will pay the city $2.5 million over 10 years from the revenue from the naming rights.

We’re obviously simplifying things and ignoring the future or present value of money. But combining the simplified cash-flows to both sides, the Flames would be paying $275 million and the city’s contribution would be reduced to around $132.8 million (over 35 years). When you account for the future/present value of things, the cost is a bit more but the bottom line is there is a bit of recapture involved here for the city.

A few tidbits from the city’s report:

Is it a perfect deal for either side? No.

Both sides probably wish they put in less up-front cash. But an important part for the city was that they would need to share in the benefits of the arena if they were sharing in the risk. They’re 50/50 partners in the up-front risk, but they have their initial investment recouped somewhat over time (just as the Flames do from their revenue from operating the building).

The arena deal isn’t as risk-free for the city as we’ve seen in Vegas, Seattle or Long Island – where the governmental bodies have been committed to fairly low capital costs. It’s not quite as good as Detroit’s deal, where up-front funds covered just over a third of costs. But it’s also not Edmonton bad, where public funds covered around 70% of costs. A 50% stake with a recapture mechanism is a pretty reasonable place for this saga to end up.

If all the trumpeted economic development fails to materialize and all this buys is an arena – like what happened when three levels of government bought a shiny new Saddledome in the ’80s – if the arena part of things works out the city at least will get a decent amount of its initial investment paid back in a nominal sense and a fairly substantial investment that they won’t get back in terms of net present value. It’d be like setting well over $60 million ablaze in today’s dollars if the expected investment isn’t attracted to the area – the exact figure isn’t yet available. But in exchange for torching that money, the city would get a shiny piece of new infrastructure, the Flames owners get a renewed ability to generate revenues, while hockey fans get a guarantee that the Flames will be in Calgary until roughly 2058. (If the anticipated investment in the district does materialize, it’d be like burning significantly less money right now – around $47 million.)

It’s not a perfect deal by any stretch of the imagination. But given the alternatives, it’s not a horrible deal, either.

Council will vote on the tentative deal at their July 29 meeting.