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Originally published July 14, 2012 at 8:06 PM | Page modified July 16, 2012 at 9:17 AM

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Answering 5 big questions about the Sodo arena proposal

We answer some common questions about investor Chris Hansen's proposal for a $490 million sports arena in Seattle.

Seattle Times staff reporter

Breaking down the arena deal

Rod Mar / Seattle Times, 2008

In February, Chris Hansen — joined by Seattle Mayor Mike McGinn and King County Executive Dow Constantine — announced a proposal to build a $490 million basketball and hockey arena south of downtown.

Supporters cheered, eager to reclaim the Sonics and for the arrival of professional hockey to a state-of-the-art sports and entertainment facility. Opposition has swelled, citing concerns mostly about economic impact on the maritime industry and the use of up to $200 million in public bonds.

Supporters note that the bonds would be repaid from taxes generated by arena events. And they point to taxpayer protections that didn’t exist in the previous Sonics lease — non-relocation clauses for the sports teams and reserve funds to cover revenue shortfalls and capital improvements.

Thursday, the city and county councils will meet together to discuss the proposal and take public comment. They’re expected to vote in August.

1. How is the deal set up?

Under the agreement with Seattle and King County, Chris Hansen and ArenaCo, his investment group, would buy the Sodo property on which the arena will be built, obtain all the necessary permits and secure a new National Basketball Association team.

When the team is secured and the environmental reviews and permits approved, the city would issue its first payment of up to $100 million in public bonds to buy the land. The price would be determined by an independent appraiser.

ArenaCo would pay all arena construction costs and any cost overruns. When the building is complete, the city would issue a second bond, bringing its total investment to $120 million. If a National Hockey League team is found to play at the arena, King County would contribute $80 million to complete the purchase of the building. If no hockey team is secured, the county would pay only $5 million. The city and county would jointly own the arena and lease it back to Hansen for 30 years with an option of another 20.

2. What would we get out of it?

Greg Gilbert / Seattle Times, 1996

The region would get the return of an NBA franchise, the Sonics, and a new, state-of-the-art entertainment venue that could host major concerts and events in addition to professional hockey and basketball.

The state would get an estimated $21 million in tax revenue generated during arena construction.

The city and county also would own an 18,000-seat arena and the city would own the 7 acres it sits on. Hansen’s tentative deal with local governments calls for the city to own the real estate and lease it back to him.

What might those assets be worth in, say, 30 years, when Hansen’s lease expires?

“You’ve got to assume the building is worth zero,” says deal critic Chris Van Dyk, pointing to the Kingdome and other sports facilities that didn’t last that long.

This arena will be different, Hansen counters: The deal requires him and his partners keep it up to league standards, at their expense. It will still have value in three decades, he maintains.

Even if the building does turn into a white elephant, however, the city still would have the dirt — and, while the past doesn’t always predict the future, the land’s value has soared over the past 30 years.

In 1982 the King County Assessor appraised the arena properties Hansen now owns or controls at about $3 million. Now the tax folks value the land at more than $37 million. That suggests it has appreciated more than 8 percent a year — although most of the gain has come since 2007.

Hansen figures he’ll end up paying about $50 million for the properties he’ll later sell to the city. It probably will pay him $75 or $80 million, in part to cover the costs he’s incurred for design, permits and environmental review.

But Sodo property values should continue to rise as downtown expands, Hansen says. If you assume appreciation of 5 percent a year on $50 million, he calculates, the arena land would be worth more than $200 million at the end of the 30-year lease term — even after subtracting the cost of demolishing the arena, if it comes to that.

Are his projections realistic?

“It will very likely be worth more (than now),” appraiser Steve Price, a principal with Terra Property Analytics of Seattle, says of the arena site. “But you’re going to have a lot of forecast error 30 years out.”

Land values in north Sodo took off in recent years as offices and retailers replaced warehouses and factories, he says: The neighborhood may not have another huge bump like that in its future.

“But if you’re going to replicate South Lake Union down there,” Price says, “then maybe it does.”

3. What are the real risks to taxpayers?

Have your say

A public hearing is scheduled before a joint session of the city and county councils at 5:30 p.m. Thursday, July 19, at Seattle City Hall. The council chambers are expected to be packed; people wishing to speak are urged to arrive at 5 p.m. and sign in.

A citizens’ group assembled by the city to study the proposal concluded that while the deal is favorable to the city, taxpayers are responsible for paying off the debt if ArenaCo defaults or goes bankrupt.

King County Budget Director Dwight Dively called that possibility “extremely remote” and notes that no NBA team has gone bankrupt in the past 20 years. But in the case of a financial meltdown (the original owners decide to sell, the new owners have fewer financial resources, the team does poorly) there are a number of taxpayer protections in the memorandum of understanding (MOU).

Team owners would agree to keep them playing at the arena for 30 years. To date, say the city’s legal advisers, no team has broken such an agreement. The Sonics, by comparison, had a lease that was for fewer years than the length of the bonds that paid for the 1995 KeyArena remodel.

ArenaCo would be required to keep a reserve account equal to the yearly debt, to open its books annually to assure its continued profitability and to contribute $2 million a year to a fund to pay for repairs and improvements. That’s designed to avoid the KeyArena experience in which the city had to use general-fund money to make repairs.

The MOU creates a thicket of limited-liability companies that, as their name suggests, protect the assets of the investors. The billion-dollars-plus assets of the arena’s most prominent investor, Microsoft CEO Steve Ballmer, wouldn’t back the city bond.

At this point, it isn’t clear how much Ballmer or Erik and Peter Nordstrom, the only named investors, have contributed to join Hansen’s investment group.

City Councilmember Mike O’Brien said he wants to know how much equity or security the investors have put in and whether the city would have access to that equity in the event of a default.

The MOU envisions that one entity, ParentCo, would back up the obligations of ArenaCo. Supplemental information provided by Hansen shows two parent companies, one for the NBA team and one for the NHL. That’s left some in the city wondering who would be responsible if ArenaCo can’t meet its financial obligations.

The MOU also has been advertised as giving the city and county first position in the event of a default, meaning they would be entitled to collect payment from the arena revenues and assets before other creditors. But what it actually says is that those positions would be negotiated during financing. City Councilmember Tim Burgess says the city’s position must be secured.

There are risks, said Justin Marlowe, University of Washington assistant professor at the Evans School of Public Affairs and an adviser to the Metropolitan King County Council on the arena deal. But he recently concluded, “The MOU is one of the most favorable to the public of any recent public-private partnership.”

4. How would the money be paid back?

The bonds and interest — about $15.4 million annually — would be paid back through two primary revenue streams: taxes generated by activity at the arena and rent paid by ArenaCo.

The largest source of tax money would come from taxes on game and event tickets. Other revenue would come from the sales tax on arena purchases such as concessions and souvenirs, the business and occupation tax on team and arena revenues, and a tax on ArenaCo’s annual lease payments.

ArenaCo would pay $2 million a year in base rent, and would make up any shortfall in the annual debt service on the public bonds not covered by tax money, though Hansen says he’s sure that won’t be necessary.

Bond payment by source

Annual reimbursement amount

The City Budget Office, using conservative attendance and event figures, estimates that ArenaCo would have to add about $5.14 million each year to make the debt payments.

One criticism of the deal is that because ArenaCo wouldn’t pay property taxes, every property owner in Seattle would have to pay an extra $3 to $4 a year.

Bond payment breakdown over time

5. How would Chris Hansen benefit?

Bettina Hansen / Seattle Times, 2012

A common question is why, with wealthy investors on board, does Hansen even need public money to build the arena?

First, Hansen and his investors would have the loan of $200 million in public funds — repaid largely through taxes and rent — and a 30-year lease that they could take to a private lender to help finance arena construction.

The interest rate on a municipal bond would be lower than on a commercial loan, saving Hansen about $6 million in interest the first year, estimates Dwight Dively, King County budget director.

Also, with the city and county owning the facility, the owners wouldn’t pay property taxes.

City Councilmember Richard Conlin has come out against the proposal — in part, he said, because city taxpayers would have to make up the $1 million or so in annual property taxes that a private commercial building owner would have paid.

Other taxes on arena activity, such as sales and B&O, would go to pay off the bonds and interest. That’s $200 million in financing Hansen doesn’t have to repay.

“Without public financing the deal probably wouldn’t pencil out,” Dively said.

Seattle Times reporter Eric Pryne contributed to this report.

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