Do's and Don'ts for the Next Arena Deal by Attorney Joel Nied

By Joel Nied, Guest Columnist

Joel Nied. See Bio.

With assistance from local economist Ian Taylor

As first published by Inside Business March 25, 2013

Now that we lost the Kings to Seattle, let's take a look back at what happened and figure out what we can do better next time.

Here are a few do's and don'ts.

1. Do identify the forces motivating the other party. We were so focused on what we wanted, we didn't look at what the current owners needed: to sell the team. 

Based on news reports, the Maloof siblings have been liquidating their family assets over the past few years. According to some news stories, the Maloofs' wealth in 2003 was made up primarily of four assets: the Kings, a New Mexico beer distributorship that controlled 42 percent of the market, 

Ian Taylor. See more here.

The Palms Hotel and Casino, and Wells Fargo stock. They sold their beer distribution business in an unsuccessful attempt to salvage their investment in The Palms Hotel and Casino. They then sold 98 percent of the casino complex. And the Wells Fargo stock is worth about 41 percent of what it was worth in 2003. Based on that history, it's no surprise that they needed to sell their share of the Kings.

That, of course, is what happened - a group of Seattle investors bought a majority interest in the Kings, sealing the team's move to Seattle.

2. Don't overpay. Clearly we offered too much money. Sure, we had some economic forecasts that posited that the city would make money off the deal, some rosier than others - the BARMAC Inc. study estimated close to $12 billion more in revenue over the life of the stadium than the ODU Economics Forecasting Team. Those forecasts, however, fly in the face of, well, virtually every independent study on the economic impact of sports arenas.

Victor Matheson, an economist at Holy Cross, who has studied the subject for decades, said in the September 2012 edition of The Atlantic, "Take whatever number the sports promoter says, take it and move the decimal one place to the left. Divide it by 10, and that's a pretty good estimate of the actual economic impact."

He is not alone. A 2005 survey by Robert Whaples of economists who are members of the American Economic Association revealed that 58 percent "strongly agreed" and 28 percent "agreed" with the statement, "Local and state governments in the U.S. should eliminate subsidies to professional sports franchises."

Warnings from economists have not stopped virtually every other city with an NBA arena from subsidizing its construction.

The difference, however, is how much Virginia Beach offered. Our deal involved the public paying about 92 percent of the construction costs, not including the cost of the land - by some accounts valued at about $7 million.

That level of public investment exceeded the public investment in over 75 percent of all NBA arena deals.

In other words, we would have been in the top quartile of public investments in NBA arenas. We shouldn't aspire to be in that category.

Want more evidence that we would have overpaid?

The winning bidders, the future owners of the Kings, volunteered to pay $290 million toward the construction of an arena. Comcast offered $35 million in our deal.

3. Don't say a stadium is economic development. This gives opponents an easy way to derail public support.

Promoters declare that a stadium is an economic development tool worthy of public investment. Independent studies, however, confirm it is not.

A 2001 study by Brad Humphreys and Dennis Coates analyzing the net economic impact of professional sports in 37 host cities over a nearly 30-year period showed a negative effect, including an average net loss of 1,924 jobs and a reduction in wages at bars and restaurants of about $162 per worker per year. That loss offsets the nominal increase in hotel wages, about $10.

An April 2008 article in the American Enterprise Institute's online magazine stated that every man, woman and child in a metropolitan area is poorer by $10 as a result of the presence of a major league sports arena.

When promoters call a stadium economic development, they make it a big target for valid criticism.

An NBA team is a lot of things, such as a way to build civic pride and a hugely profitable venture for team owners.

It is not, however, an economic development project.

4. Don't pay for the public investment with a hotel tax. The argument in favor of a hotel tax is that the users of the stadium will pay for it. That argument, however, is flawed.

Everyone who stays in a hotel, whether for an arena-related event or not, will pay a higher room price.

Coates at the University of Maryland points out the obvious: "Imposing new taxes introduces new administrative costs and makes the economy less efficient."

Looking at it from a less theoretical perspective, the hotel tax will make Virginia Beach hotel rooms more expensive year-round, thereby reducing hotel stays from non-arena-event visitors. Reduced hotel stays lead to job losses and other economic damage.

5. Don't focus on the tenant guaranteeing the city's obligations. The deal should be structured so that if the project fails, the team owners will feel the most pain. Or a bank will. Anyone other than the city. Guarantees by shell companies aren't worth much.

6. Do encourage locals to own the team. If you want the local economy to benefit, your best bet is to have team owned locally. That will also reduce the chances of the owners threatening to move the team 10 years after completion of the arena.

Joel Nied is a partner at LeClairRyan. He can be reached at joel.nied@leclairryan.com. 

Ian Taylor teaches economics at Old Dominion University and at Tidewater and Thomas Nelson community colleges. He also owns Carry Norfolk (www.carrynorfolk.com), co-founded OurCareDirect (www.ourcaredirect.com) and Start Academy (www.startacademy.org). 

Taylor can be reached at iantaylor@itseconomics.com.