by Doug Barnes, David Rusk and Tod Lindberg
The headlines coming out after the unveiling of the cost-benefit report on the DC United stadium deal were neutral to positive in tone:
"Analysis: United stadium would be MLS's priciest but could deliver economic benefits." Washington Post, Nov. 5, 2014. "
"Report says new DC United stadium would be most expensive in MLS history." NBC Sports, Nov. 5. 2014.
"D.C. United stadium deal has plenty of risks and rewards, report reveals." Washington Business Journal, Nov. 5. 2014.
"Akridge agrees to concessions in United stadium deal." Washington Post, Nov 5, 2014.
Behind all these headlines are a ton of data and 400 pages of text entitled Cost-Benefit Analysis of the Soccer Stadium Development Act of 2014, authored by Conventions, Sports and Leisure (CSL), Integra Reality Resources, and The Robert Bobb Group (referred hereafter as CSL report). These organizations are all well-respected consulting firms hired by the DC Council to present a fair and honest assessment of the numbers behind the DC United Stadium Deal. We have read the full report, and Doug Barnes attended the four-hour Council meeting discussing the new study.
Before getting into some of the most important questions answered by the CSL report, let's take a moment to note what the headlines did not say, such as "DC would lose millions on Buzzard Point Stadium" or "Report says DC United stadium is a bad deal for DC taxpayers." Some such headlines would undoubtedly have been generated had the report adhered to the DC Council's original directive to have the analysis cover only the first ten years rather than the 30-year life of the project. DC United fans generally can take great satisfaction in turning the 10-year timeframe into a 30-year timeframe. The many emails, phone calls, and comments on Black and Red United about "a stacked deck," caused Council members to shift their horizon from the short-term to the long-term costs and benefits.
Question: Does the entire deal make good fiscal sense for the District?
The deal makes very good fiscal sense for the District. For the stadium and associated new hotel, the District's investment cost will be $131 million over 32 years (construction takes two years and then 30 years of stadium use). Over the same time period, the stadium and hotel fiscal benefits for the District will be $180 million, for total benefits net of costs of $49 million. Almost everyone agrees, including the CSL report, that accelerated nearby investment will take these benefit numbers to a much higher level. But the CSL report does not factor in nearby investments into their analysis, but they acknowledge that development would be accelerated for the initial 10 years after the opening of the stadium.
For the entire very complex deal (stadium, new hotel, old Reeves Center, new Reeves Center and Pepco Move), the District's total cost will be $256 million, yielding fiscal benefits of $365 million, for total District fiscal benefits net of cost of $109 million. This is an extremely good fiscal return for an infrastructure investment and amounts to additional revenue of $3.4 million per year that can support other much needed District programs. Also, it should be kept in mind that in addition to these fiscal benefits, at the end of the 32-years period the deal covers, the District will still own the land, which will have a much higher value than the $131 million investment.
Note that in calculating the net fiscal benefits, the CSL report doesn't just look at the cash (or equivalent) flowing out of the city's coffers and the cash coming back in over the life of the deal. The report compares the cash coming in under the stadium deal to the return the District could get on an alternative investment of the same amount. The cost and benefits are discounted at 4%, the typical return on an investment such as a bond. A value of $0.00 in fiscal benefits net of costs would mean that the District would be getting approximately a 4% return on its investment--that is, similar to a bond.
Question: Why is the stadium among the most expensive in MLS?
The simple answer is that the stadium will be built in the city, where land is expensive. Any homeowner knows that real estate in Washington, DC is expensive. Most other MLS stadiums have been built in the suburbs, where the cost of land is lower. In addition, the stadium structure itself will be high quality, about on the same level as Kansas City's, which is praised as one of the best soccer stadiums in the country.
Question: Is the price for the land and land swaps the District paying too high? Why is the land valued by the City Administrator at $24 million less than market value in the CSL report?
This is a complicated question with many interrelated parts. The land swaps were necessary to achieve a deal due to borrowing constraints by the District. Unfortunately, the optics of the land swaps have not been good from the start.
The two main areas of difference are (1) the Ein and Super Salvage properties on Buzzard Point and (2) the Reeves Center valuation. The Ein and Super Salvage properties were negotiated deals. They were always considered by the City Administrator's office as too high, given the land appraisals that were done. The Ein and Super Salvage properties were assessed by a three appraiser land value panel at about $30 per sq. ft., and the negotiated price was $50 per sq. ft. Thus, there actually is agreement on this point between the City Administrator and the CSL report. The CSL report raises the possibility that those properties' values could be adjusted by invoking eminent domain. However, this is a lengthy legal process and would entail additional costs to the city. The deal was negotiated by both parties to avoid "taking possession" under eminent domain. In addition, DC United and Akridge contributed $4.9 million to make up half of the difference between the assessed and the negotiated price for the Ein and Super Salvage properties.
The differences in valuation of the Reeves Center by the City Administrator and the CSL report actually are all due to adjustments to the value of the land and not the value of the land itself. The value of the Reeves Center land itself as considered by both the City Administrator and the CSL report is the same, $60.2 million. The City Administrator adjusted the figure downward $4.6 million to take into account demolition costs. The CSL report does the same, except that it uses the net present value of demolition over 3 years, which turns out to be $4.1 million. The CSL analysis also subtracts lost benefits to Akridge of $4 million because of the three-year construction delay before Akridge can begin developing the property. Finally, the CSL report adds to the value of the Reeves Center the lease payments to be made by the District of $14.7 million (net present value) for continued occupancy by District agencies after Akridge takes over ownership of the building.
Thus, the difference between the City Administrator valuation and the CSL valuation is due mainly to the $14.7 million in leaseback payments minus the lost benefits of delaying demolition and redevelopment of the Reeves Center site. Taking into consideration the benefit to Akridge of the leaseback arrangement as well as the loss due to delay, the difference between the value of the Reeves Center property and the value of the land and cash Akridge is providing is $11.2 million in the CSL report. But if Akridge was allowed to just buy the land today without any leaseback agreement, the value considered fair by the CSL report would be $60.2 million, agreeing totally with the 3 appraiser panel.
Is it right to add the leaseback payments into the valuation of the Reeves Center?
There does seem to be a problem due to the uniqueness of the situation. The building would be leased for three years and then demolished for new construction. The main difference between the City Administrator's assessment and the CSL report is the addition of the value of the lease income to the value of the property. The existence of leases does have an impact on the value of real estate; fully-leased buildings are more valuable than unoccupied or partially occupied buildings. However, the Reeves Center situation is unusual because the lease will be terminated in three years and the building will be emptied. This no doubt substantially diminishes the value of the $14.7 million lease as it relates to the building value. In fact, Akridge no doubt would rather buy the building and proceed with the development of the land immediately. Therefore, the value of the lease adds something to the property value, but that something should be substantially lower than the actual lease payments.
Also, viewing this in economic terms, the opportunity cost of the $56 million investment by Akridge must be considered. The annual rate of return of the leaseback income on a $60 million investment turns out to be about 9.4%. This is a good rate of return. The problem is that Akridge could likely do as well or much better if the company invested the same amount of money in its other business interests. It could make a 4 percent return simply by investing the same amount of money in bonds. Adding the leaseback payments into the value of the Reeves Center property wholly neglects the opportunity cost to Akridge of this particular use of its $56 million (delay in construction of new building and opportunity cost of the money). Looked at from this perspective, the District is getting a 3-year loan of $56 million to invest in the stadium deal from Akridge, and in return it is making lease payments.
What's more, although Akridge will receive $14.7 million in leaseback payments, this sum certainly is not an added cost to the District. The DC government has to house the 800 or so employees who work at the Reeves Center somewhere between now and whenever a new facility is ready for them in Ward 8 or anywhere else. If the stadium deal fell through and they stayed in city-owned Reeves Center, the city would be paying itself imputed rent of the amount it would be paying Akridge. If the employees moved somewhere else so Akridge could build now, the city would have to lease space for them until the new building is ready.
To sum all this complicated stuff up, the CSL report agrees with the valuation of the Reeves Center as-is at $60.2 million. In addition, the report values the delay in construction for Akridge at about $4 million (as a deduction) and values demolition of the Reeves Center at $4.1 million (as a deduction). The report fully accounts for the $14.7 million 3-year lease in the value of the building (as an addition), but does not place any value on the 3-year implicit loan to the District by Akridge of $56 million (as a deduction). This might be as high as $6 million to $8 million, depending on the interest rate, or even higher if valued in relation to the forgone business opportunities for Akridge.
Question: Will the stadium spur development in the surrounding area? Will this have an impact on fiscal benefits to the city?
According to the CSL report, without the new stadium, development of Buzzard Point will be delayed from 8 to 10 years. That means really quite a lot of lost tax revenue for the city. The report did not include the fiscal benefits of any type of nearby development in its conclusion that the overall deal would yield $109 million in net fiscal benefits for the District. However, for purposes of illustration, it may be useful to compare the impact of the CSL-projected 8-10 year delay in the development of Buzzard Point in the absence of a new stadium versus development there with the stadium. The following are entirely our own calculations.
Development generally takes place in small, incremental steps of perhaps 3%-5% per year. Let's postulate that for the first 10 years after a stadium is built on Buzzard Point, the value of nearby land increases at a rate of 5% per year. And let's postulate that with no stadium deal and the CSL-projected delay in development there, the value of land increases at 1% a year for the first 10 years. After that first 10 years, let's postulate that both cases have the same rate of development for the next 20 years. This is a rather conservative scenario, because as we have already seen both Ein and Super Salvage are asking much higher prices for their land due to the stadium deal. Anyway, given these two scenarios, over 30 years the District would receive close to 30% more in new incremental property taxes under the scenario in which the stadium is built right away compared to the scenario in which it is not built and Buzzard Point development is delayed 8-10 years. That's a big difference. It should be reemphasized that the CSL report did not include such benefits of nearby economic development in its conclusion that the district would reap a $109 million net benefit from its investments in the new stadium.
What's up with the hotel DC United plans to build on the site? First we've heard of it.
Same with us. Yes, DC United seems to be committed to building a 200-room, $45 million hotel as part of the stadium deal; there is a line item in the CSL report to that effect. This is news to most of us who have been following the stadium deal, but it will add to the value of the stadium property at Buzzard Point and generate added revenues for the city. According to the CSL report, the hotel would provide the district with $70 million in new fiscal benefits, mostly from people from outside of the District.
Question: Will District residents be the only ones paying for the stadium with tax money? Are Maryland and Virginia fans off the hook?
Stadium operations entail three types of direct taxes that will be paid by those from outside of DC, especially those from Maryland and Virginia (80% of fans). This amounts to 80% of $59 million for stadium sales tax (net of abatements), 80% of the $9.7 million ticket surcharges, and 100% of the $70 million in hotel taxes. So, about $125 million of fiscal revenues for the District will come from those living outside the District. This is almost as much as the original investment by the District.
Question: The deal includes $50 million in tax abatements for DC United. Doesn't this just give DC United more profit?
The Office of the Chief Financial Officer was unsurprisingly opposed to the tax abatement provision and wants to see it voided. The CSL report concludes, however, that the tax abatements are justified because otherwise DC United will not be in a sound position to pay back its $60 million in loans taken out for the $156 million stadium construction (with $96 million coming from DC United equity investment). Given that this transaction is truly a public-private partnership, it only makes sense that DC United should not be in financial distress as a result of spending $156 million to build a stadium for the team, especially in light of the substantial fiscal benefits the District will reap (even including the tax abatement) along with the additional development the stadium site at Buzzard Point will quickly generate in the surrounding area. The CSL report concludes that the OCFO's opposition to the tax abatement is misplaced.
Question: So is it a done deal? What needs to be worked out?
We all know it's not a done deal! But the biggest single issue that is a sticking point seems to be the $11.2 million discrepancy in the value of the Reeves Center property (mainly coming from adding in the value of three years of leaseback payments by the District to Akridge). One way to look at this is that in a $287 million stadium development project, only about 4 percent of the total stadium project value is holding back the deal.
A better way of looking at it, though, is that $11.2 million is all that stands in the way not only of the Buzzard Point stadium (and associated hotel) worth $189 million in fiscal benefits over 30 years ($49 million net benefits). It also stands in the way of the relocation of a new Reeves Center to provide city services and a spur to development in Ward 8. The focus on the $11.2 million also is an impediment to the redevelopment of the old Reeves Center property, which will further enliven the burgeoning U Street corridor and bring the District $106 million in fiscal benefits ($65 million net fiscal benefits) over 30 years. Finally, it stands in the way of the development of the area surrounding the stadium at Buzzard Point for a period of 8-10 years, possibly reducing the net new fiscal benefits for the District from the Buzzard Point area by 30%. The $11.2 million should certainly be a bridgeable gap within the framework of the existing proposed deal when so much is at stake.
Question: Couldn't the District just pay for the stadium site preparation, and leave out the Reeves Center?
This is a question that constantly comes up. The City Administrator indicated that the city considered this possibility but rejected it as unworkable because of current debt cap restrictions on the District. Also, this is not an easy path due to the existing commitments and associated negotiated settlements with Ein, Pepco, Super Salvage, Akridge, and DC United, all of which would have to be revisited. The verdict on this option will have to await the result of behind-closed-door meetings getting underway now.