“What in the world did the city agree to with the new arena?”

Okay, that’s not a specific quote, but among various basketball and even hockey fans in Seattle, it’s not an uncommon sentiment. All the passion and fire from campaigning to get the city to sign off on a new building to lasso NBA and NHL clubs wanes a fair bit when nose-deep in the hundreds of pages of documents that do so.

Confusion abounds around the particulars of the city’s agreement with Oak View Group and Seattle Hockey Partners (“NHL Seattle”). This, unsurprisingly, makes for strained and inconsistent conversation.

It was evident in the recent pro-SoDo arena proposal op-ed by Seattle City Council candidate Ann Davison Sattler, which didn’t appear to have a full understanding of the Seattle Center Arena agreement.

Last year, I was able to detail the deal in broad strokes, but let’s do a bit deeper dive to clear some things up.

ARENA SPECIFICS

The new arena obliterates the interior of the old arena, allowing construction to dig down 15 feet and dig outward to expand the footprint. The new arena will put on its big building pants at a whopping 800,000+ sq. ft., up from 368,000 sq. ft. for the old KeyArena.

The majority of the new building will exist underground, allowing OVG to maintain the historically landmarked roof and three of the existing exterior walls. The south wall will be leveled to make way for a fancy entrance atrium to welcome guests starting with a planned June 2021 opening.

The new haunt will seat 17,363 for the NHL, 18,627 for the NBA, 17,739 for an end-stage concert, and around 19,000 for a center-stage concert. This would rank SCA 27th on the list of NHL arenas and 16th on the list of NBA arenas by capacity at the time it opens. By comparison, KeyArena was the smallest NBA home in the Sonics’ last season at 17,072 and was downright inhospitable for major league hockey with 15,177 seats, a far off-center scoreboard, and obstructed views aplenty.

TEAMS

Seattle made an extraordinary statement in March 2018 on the thirst here for winter sports and NHL hockey, in particular. Shattering expectations and records, a sanctioned season ticket drive to demonstrate interest saw 10,000 ticket deposits made in the first 12 minutes, and 32,000+ total deposits laid down in the first day. The NHL’s previous expansion team, the Vegas Golden Knights, had impressed by garnering 10,000 deposits in 8 weeks. The day in Seattle shook through the sports world like a Beast-quake.

Don’t fret, hoops fans, the NBA is on the menu. As part of the agreement, Seattle Arena Company LLC (“ArenaCo”), the umbrella company for the arena construction and operations, is charged with using “commercially reasonable efforts” to pursue both NHL and NBA clubs. Despite claims and thoughts otherwise, they must pursue an NBA team. Prior to beginning demolition of the existing building earlier this year, OVG gained approval from both leagues on the SCA design.

An NBA ownership group would join ArenaCo as equity partners, becoming equal “owners” of the arena with OVG and SHP. The city owns the building, but ArenaCo will manage and operate. The NHL ownership is also anticipated to have cross-ownership in the NBA club, either as majority or minority owners.

Seattle was, of course, granted expansion for the NHL’s 32nd club back in December. One down, one to go.

The group will also take over the lease for the reigning WNBA champion Seattle Storm from the city.

MUSIC

ArenaCo is anticipating 70-80 concerts and live events annually. These are the lifeblood of any arena, even though the anchor sports team(s) tend to get higher profile. The new arena will allow Seattle to host those 15-20 major touring events it has missed out on each year due to previous insufficient facilities.

Music has been referred to as an “anchor tenant,” leading many to believe this will shut out NBA opportunities. With 200-250 potential use dates planned each year, there is plenty of opportunity to go around. And with single facilities hosting events, in addition to programming both the NBA and NHL, in the biggest markets in the country — New York, Los Angeles, Chicago, Boston, Dallas, Denver, Detroit, Philadelphia, Washington, D.C., and even Toronto in Canada — Seattle would not be reinventing the wheel.

The NBA requires teams to submit at least 50 available dates each year to coordinate that season’s schedule. Tentative scheduling of other events during potential playoff timing is a regular aspect of the business.

OVG has long stated that the sports anchor teams will get priority scheduling. On the SCA website, when discussing the initial “music-first” approach to building the arena, they state, “If we attract teams, we will adjust the music programming to accommodate the Storm, NBA and NHL schedules before booking other events to ensure teams can be competitive.”

FINANCIALS

Alright, enough teasing. Let’s get to the sexy part, money and taxes.

The project is estimated to cost about $930 million. All of the cost, and the risk associated with it, is borne by OVG. The city and its taxpayers bear no responsibility, which is great considering the project when first proposed was around $600 million.

Costs of labor in the booming Seattle construction market, as well as costs of materials due to the oh-so-fun present geopolitical environment, have contributed. The group has also iterated upon and added elements to the arena to improve the overall experience.

Speaking to KOMO News in July 2018, OVG chief executive Tim Leiweke stated,

“A lot of the extra money we’re spending on this building is geared to make sure we have three anchor tenants: the Storm, the NHL, and if the NBA chooses one day, we will not only make it work where they’re equal, but the revenue they can generate from the building will be as if they are in a brand new building that they own without them having to pay for it.”

Oak View Group CEO Tim Leiweke speaking with KOMO News, July 31, 2018

Scoffing at a group willing to drop a cool billion to deliver a top-flight arena may signal a loss of some perspective. And don’t worry, the group has been independently verified as financially capable to deliver the arena and operate it.

City getting paid

So what does the city earn each year through this deal?

A guaranteed annual rent payment of just over $2.8 million. A guaranteed annual baseline tax payment of $2.24 million. Claims to the first $2 million in net parking revenue each from the 5th Avenue N and the Mercer Street parking garages.

To deal with that pesky inflation, all amounts will be escalated annually based on the lesser of 3% or that year’s percentage change in the urban Consumer Price Index for the Seattle-Tacoma-Bremerton area. The amount cannot be de-escalated.

There is a $350,000 annual rent abatement — a discount, if you will — for the first ten years of the lease. It’s not explicitly spelled out what this is for in the documents.

The math

How did they get to those numbers?A financial analysis of the last four operating years of KeyArena (2014-17), which was operating at a profit, to create historical averages for each payment element. OVG has agreed to guarantee that the city does not “go backwards” from the profit it was making.

The averages for the rent include 2 elements:

• combination of the KeyArena net facility revenue and the net parking revenue from the 1st Avenue N parking garage

• the net revenue from Seattle Center sponsorship rights

The averages for the baseline tax payment include 5 elements, all directly attributable to arena operations and related businesses:

• the city’s portion of sales tax revenues related to the arena

• Business & Occupation tax revenues related to the arena

• the city’s portion of Leasehold Excise tax revenues related to the arena

• the annual Admissions tax revenue related to the arena

• combination of the annual commercial parking tax revenue and the city’s portion of the sales tax revenues from the three Seattle Center parking garages

The percentage change of the area CPI is a common and effective means of determining the local rate of inflation. This allows the baseline rent and tax payments to keep pace with the change in dollar value long-term. The average percentage change in Seattle’s CPI from 2000-2018 was 2.41%. By comparison, the national average rate of inflation during that time was 2.14%.

How the city earns more

One of the more common misconceptions of the SCA agreement appears to be the belief that the city stands to make no more from it than rent and little to nothing from associated taxes. While there’s no guarantee the city will make more money, that actually holds no guarantee that ArenaCo will make any more money than its annual obligations to the city. It’s safe to chalk that under the not very likely category.

Think of it as pie. Flavor of your choosing.

Not simply as a metaphor for sharing but as a dessert after a meal. Here, the meal has a full course of the baseline rent and a full course of the baseline tax payments. The treat afterward is a split of excess revenue as each of seven payment thresholds — four of the five ensured tax amounts and the first-served payouts on sponsorship and parking revenues — is met. This is called the “rent adjustment”.

For the first ten years of the lease, the city gets 25% of that excess and ArenaCo gets 75%. After that, the two share a dead-even 50-50 split for the remainder of the lease, including any of the extensions. That’s the potential of 45 years of matched shared dessert dollar for dollar.

Parking

1st Ave N garage: ArenaCo will take over operating the garage from Seattle Center and will lease it as part of the overall arena lease. The baseline rent payment guarantees the city is paid as much as the garage was earning on average. ArenaCo gets the net parking revenue above the rent payout. During arena construction, the group will pay the city rent on the garage.

5th Ave N garage: The city gets dibs on the net parking revenue up to the threshold of $2,009,969 annually, escalated for inflation. The city and ArenaCo split any revenue above that.

Mercer St. garage: Like 5th Ave, the city earns the revenue up to the threshold of $2,010,704 annually, escalated for inflation, and splits any revenue with ArenaCo beyond that.

Sponsorships

During the arena lease, ArenaCo will be the exclusive sponsorship benefits representative for Seattle Center as a whole entity and specifically for the arena. They will not be permitted to sell benefits for any “specific portion, place, facility, segment or feature of the Seattle Center Campus, or any event or activity occurring at the Seattle Center Campus” outside of the arena, but may be consulted and help administer and activate these other sponsorships.

Speaking with Q13 Fox TV’s Bill Wixey back in November 2017, Leiweke explained that their sponsorships (and corporate sales) will escalate with the arrival of an NBA team to offer incentive to the NBA ownership without taking away from the NHL club.

Wixey: It’s basically like an escalator clause that you have in there…?

Leiweke: Exactly right. So we’re building all of that into our deals. We’ve already made that understanding and agreement with everyone including the NBA knows what we’re gonna do […]At the end of the day, we’ve already built all of the contractually-obligated income into every contract we did and all of them go up in order to make sure we have the basketball team as a top quartile within the NBA. That’s the way that’s going to work.

Oak View Group CEO Tim Leiweke speaking with Q13 Fox’s Bill Wixey, November 5, 2017

Arena sponsors: ArenaCo has the right to sell sponsorship benefits to one (1) arena naming rights sponsor, eight (8) arena founding partners, eight (8) arena presenting partners, and eight (8) arena partners. Recently, Symetra and Virginia Mason were announced as two of the founding partner sponsors.

Rent adjustment: ArenaCo guarantees to pay the net sponsorship revenue up to the $781,454 threshold annually, escalated for inflation. If the annual revenue is less than that amount, ArenaCo will pay the difference to the city. If the annual revenue is more, the city and ArenaCo will split the excess. This includes the arena naming rights.

After the first ten years of the lease, if there is a period of three (3) consecutive years with no rent adjustment payments made to the city from sponsorship revenue, ArenaCo must pay the city the threshold amount and then pay the city an additional 50% of the then-current threshold amount out of pocket.

This is a rolling provision. So, say there’s no rent adjustment in years 11, 12, and 13, ArenaCo pays the threshold plus 50% in year 14, but there’s still no rent adjustment in year 14? They have to pay the 50% extra cash in year 15 to cover the run of years 12, 13, and 14, and so on.

Taxes

The city gets first cut of the taxes. Under the agreement’s “Baseline Tax Guaranty,” each of the five tax thresholds must be met each year. ArenaCo agrees to pay the difference to the city if a threshold is not met.

Rent adjustment: As each of the sales tax, B&O tax, leasehold excise tax, and combo of commercial parking tax and parking sales tax thresholds are hit, whichever tax has excess revenue, the city and ArenaCo will split that excess amount.

Admissions tax: Again, city receives first cut of admissions tax revenues up to the annual $1.3 million threshold, escalated for inflation. ArenaCo will pay the difference to the city if the threshold is not met. If it is met and there is excess, ArenaCo will keep 100% of the excess amount.

COMMUNITY AND ADDITIONAL BENEFITS

As with many of these public-private partnership projects, a plethora of additional benefits are provided for the community at large both associated with the arena and beyond it. These focus on youth, arts, sports, music, and culture.

• agreements to foster equity and social justice

  • Community Workforce Agreement / Project Labor Agreement adhering to city’s Priority Hire Program for women, people of color, and those in social and economic distressed areas

  • Labor Harmony Agreements with all relevant labor organizations

  • Women and Minority-Owned Businesses inclusion plan

• a charitable foundation with a minimum $20 million fund established to aid various community organizations around Seattle

  • $10 million earmarked for YouthCare, a group aiding homeless youth

  • 12-member “giving council” will vote on how to provide funds to other organizations and administer

• $2.5 million contributed towards affordable housing

• minimum of $3.5 million to be spent on public art in two phases

  • One phase with art dedicated specifically to the arena

  • One phase with art, music, and cultural programming in public spaces around the arena

• city granted 14 days of arena use each year free of charge

  • up to 6 consecutive days around Labor Day weekend for Bumbershoot

  • up to 8 days for the Seattle/King County free health clinic or other community events

• meeting space provided for the Uptown Alliance and the Uptown Arts & Culture Coalition

  • bi-weekly up to 12 people

  • quarterly up to 50 people

• dedicated positions with ArenaCo and city to coordinate with the communities around Seattle Center

  • full-time ArenaCo community liaison

  • Seattle Center ombudsperson position

• Monthly meeting to discuss construction impacts, and eventually arena operation

  • ArenaCo, city, and community coordination committee established by the development agreement

• addressing affordability and arena access at all income levels

  • various pricing at all seating levels

  • coordinating with tenants on opportunities for reduced pricing at games and events

FURTHER ARENACO RESPONSIBILITIES

In addition to the responsibility of pursuing an NBA team, ArenaCo agrees to use “commercially reasonable efforts” to garner the ‘Seattle SuperSonics’ name for the team, pending NBA approval, of course. The group also has to maintain and operate the arena to the standards of three benchmark NBA/NHL arenas: TD Garden in Boston, United Center in Chicago, and Pepsi Center in Denver.

They were charged with preserving the iconic Paul Thiry roof of the existing building. As part of that, they engaged in the preservation entitlement process at their own cost and gained historical landmark status for the roof from the city in August 2017. They are still pursuing a spot on the National Register of Historic Places. If they make the list, ArenaCo will be eligible for federal historic tax credits for the project. They will also need to have the arena green building certified LEED Gold.

Capital Improvements

As part of the maintenance, the arena group is required to cover all expenses for any repair, restoration, or replacement of any element within the arena due to minor or major damage. That’s your basic wear-and-tear.

Beyond that, they are required to spend a minimum of $1 million per year on capital improvements during the first 10 years of the lease. This doubles to a $2 million minimum per year each year after that. These are investments toward the future of the arena. But that’s not all.

Above those minimum improvements, during the first 20 years of the lease, they are required to make any additional capital expenditures that would be commonly expected in a leasehold mortgage. To then qualify for the first of the two built-in 8-year lease extensions, the arena has to be home to one or both of the NHL and NBA clubs, and they have to spend at least $50 million in capital improvements above the minimums during years 21 to 30 of the lease.

If they want to go for the second lease extension, they’ll need the team(s) and have to spend at least another $50 million in capital improvements above the minimums during years 31 to 47.

Development and construction

ArenaCo reimburses the city on costs associated with the development, execution, and performance of the Memorandum of Understanding entered into in December 2017, and the transaction documents that make up the arena deal agreed to in September 2018, up to $3.5 million. They also pay and/or reimburse the city for all costs associated with the permitting process and the SEPA environmental review process.

The arena group also pays to help relocate tenants and facilities affected by the redevelopment of the arena site. For tenants at the Bressi Garage and the Blue Spruce building, they have paid up to $500,000. To relocate the Seattle Center Skatepark, a campus maintenance facility, and public restrooms, they’ve contributed $1.5 million.

They have also agreed to offer employment to both city workers and employees of contractors previously working at KeyArena who have been displaced by the construction.

Transportation

Long the sticky wicket in the debate over the viability of the Seattle Center site for an arena. With changes in urban planning due to growth, the arena is better located for the future than many will give credit. That said, even in the waning years of the Sonics’ original time in Seattle, it was a challenge to get to the arena let alone find parking for the many who drove. With big changes to mass transit still years away, no one can deny it will be a bit strenuous getting to (and potentially from) the new digs.

There are some compelling ideas being explored and possibly initiated to improve traffic and transportation regarding the arena. This is a feast of discussion unto itself better saved for another day. While it’s unrealistic to expect ArenaCo to solve all traffic in the South Lake Union-Downtown-Belltown-LQA/Uptown areas, they are contributing $100 million+ to address traffic concerns directly related to the arena.

Part of this is a $40 million transportation fund that ArenaCo will pay into annually during the lease. Many have argued the fund is not helpful unless fully paid upfront. The city counters that they can borrow against the fund with bond-backed financing for any traffic improvements knowing that they have a dedicated source for repayment.

The transportation fund is in addition to money ArenaCo will outlay towards traffic and transportation identified as mitigation during the environmental review process.

WRAPPING UP

The Seattle Center Arena project addresses the two main issues raised by an arena replacement project: the need for a new arena in Seattle and what to do with the aging KeyArena.

Analysis during the MOU discussions, and the run-up to the transaction documents to seal the deal, clearly demonstrated that capital improvements needed for KeyArena would’ve destroyed any profit to be further gained from the building.

With this project, the city has gained a private partner who has agreed to take on all costs of development, construction, operation, and maintenance of the new arena. More important, the risk is shifted off the city and away from taxpayers.

The amount the city was making in revenue and taxes from KeyArena is preserved with the opportunity to make more locked in place.

ArenaCo has already delivered an NHL club on the strength of this project, and we are better poised to get our beloved Sonics back than we’ve been in the eleven years of their absence.

Not everyone likes, agrees with, or believes in this arena deal or its appeal to the NBA. It’s fine to be of that opinion. At the very least, hopefully, this helped to clarify the arena agreement to better discuss the differences of opinion going forward.

Download our handy reference guide to play bingo with the talking points in your discussions.