DC United’s Stadium Cost/Benefit Report Presented to City Council

First and foremost, If you are a DC United Fan, or are interested in the club, absolutely check out www.BlackandRedUnited.com. They are a great resource for all things DC United especially when it comes to the developments surrounding their proposed new stadium. Additionally, following them on Twitter (@blackandredU) is a particularly good idea given that they live tweeted the whole hearing from which this article was spawned.  Both their site and twitter account provided very important coverage that contributed to this piece.  

Given all the coverage and attention surrounding the results of elections nationwide, it would have been easy to miss that DC United’s plans for a new stadium had arguably its biggest day yet on Wednesday. Yesterday, the independent cost/benefit analysis done by Conventions Sports & Leisure International “CSL”, Integra Realty Resources “IRR”, and Robert Bobb Group “RBG” of the 2014 “Stadium Act” put forward by Mayor Vincent Gray commissioned by the DC City Council was made available ahead of a scheduled hearing where the contents of the report would be presented and testimony would be heard.

The “Stadium Act” refers to the overall plan to move DC United out of RFK Stadium and into a new soccer-specific stadium. This would involve a number of land transactions by the city and then leasing the land to DC United where they would build the stadium and an “additional ancillary development” that is likely to be a hotel.

Source: CSL International Final Cost/Benefit Analysis Report 2014

Source: CSL International Final Cost/Benefit Analysis Report 2014 (Link at the beginning of the article)

The Akridge, Pepco, Ein Rollingwood, and Super Salvage Parcel’s are all adjacent to each other and the combination of the four with already existing land parcels owned by the city would represent the footprint for DC United’s new stadium.  The transactions taking place would involve the city trading the Franklin D. Reeves Center, a city government building at 14th and U St. NW, for Akridge’s Parcel at Buzzard Point at which point Akridge would lease back the building for 3-years before demolishing it and putting up a “mixed use property”.

Though technically not in the Act itself, it’s understood that the agencies currently housed in the Reeves Center would move to a proposed new center in Anacostia with the intention to bring government services closer to a needed part of the city the same way the Reeves Center did when it opened in 1986.

The Pepco deal involves a vacant piece of city land about the size of one block bounded by 1st St, New Jersey Ave, K, and L streets and would likely be the location of a new substation.  The city would also cover the costs of Pepco’s relocation of specific utility infrastructure from the Buzzard Point Site which currently acts as a substation, generation and distribution facility.

The other two parcels don’t involve any land deals and would represent outright purchases.  In total as far as market value goes, the report asserts that net, the city is being put at a $25,719,605 disadvantage. This comes from a disparity between the market value and the negotiated prices of the Reeves Center, as well as the Pepco, Ein Rollingwood & Super Salvage Parcels to the tune of $30,633,760 and offset by cash from DC United and Akridge.  The disparity for the Pepco deal mainly comes form the agreement to pay the utility relocation costs while the fair market value of the Super Salvage is based on a vacant and environmental issue free parcel.  The super Salvage portion is not vacant and any environmental damage isn’t possible to asses yet.

Buzzard Point Acqusition Breakdown CSL Report

Source: CSL International Final Cost/Benefit Analysis Report 2014 (Link at the beginning of the article)

This report was commissioned to provide the DC City Council with detailed insight and details into the key elements of this proposed deal in order to determine whether it is reasonable for the city to go ahead with it.  It covers five major aspects:

  1. Analysis of Stadium Funding and Lease Terms
  2. Club and Buzzard Point Financial Projections
  3. Analysis of Economic and Fiscal Impacts
  4. Validation of Land Exchange
  5. Risk Assessment

The report totals 406 pages of incredible detail into each of these sections, for which I would need probably separate articles for each one.

That being said there are some very important details in the report that should be highlighted.

Stadium Related

$286.7 million would represent easily the most expensive soccer-specific stadium in MLS history.  Red Bull Arena comes in second at $245 million while Dick’s Sporting Goods Park in Colorado comes in third at 182.5 million in terms of total project cost.  It more than doubles the league average of $132 million. Beyond that, $152.3 million would be the second highest private expenditure on an MLS stadium falling just behind Red Bull Arena’s $160 million.

Despite those fairly high numbers the breakdown as far as public vs private spending on this stadium project actually fits with the league’s historical average. The public to private breakdown would be 45.7 : 54.3 which is only just above the league’s average of 44.6% regarding development costs associated with other MLS stadiums even though $131.1 million of public spending is third most among the 15 new or renovated soccer-specific stadiums.

Lease Related

An interesting aspect of this report is that they did research on every new or renovated soccer-specific stadium in MLS, evidenced above, including ownership and lease aspects.  It’s important to understand this as it plays into whether or not this stadium is a good idea for the city.  So far, there have been 15 new or renovated stadiums and a vast majority, 87% (13/15), are on publicly owned land.  DC United’s stadium is no different, though it completely evens out the numbers as far as who owns the stadium itself.  With Buzzard Point the count would go to 16 total stadiums and the number of team owned stadiums would move to 8/16 where before the split was 47:53 with more new venues owned publicly.

Regarding the lease itself, DC United would be signing a league average 30-year lease whereby they only pay $1 per year.  This is not the league norm.  Only Real Salt Lake’s Rio Tinto Stadium has a similar $1 lease term and Montreal’s lease term is described as “nominal”.  San Jose, one of only two teams in the league to own their stadium and the land it sits upon, pays nothing while Toronto FC who owns neither the land nor the stadium is paid by the city to manage the stadium’s operations while Sporting KC pays $545,000 from 2010-2021 as a repayment for the land purchase.Every other team pays anywhere between $50,000 and $875,000 annually with various small payment wrinkles here and there.

In addition to the $1 per year, DC United would also be paying a $2 per ticket surcharge to the city starting the 11th years of the lease.  This is not entirely unique, as five other teams have similar surcharges either in $1,$2,or $3 surcharge amounts per ticket, with Sporting KC paying $1 per ticket + 1% and Portland paying a flat 7%.  DC United’s $2 surcharge would apply to all events at the stadium excluding community events and actually increases in the 22nd year of the lease according to Consumer Price Index changes.

Tax Related

One of the more contentious issue of this proposed plan other than the values of the land has to do with tax abatement.  Under this plan there would be five different tax abatements given to DC United with differing terms.

Four of the five have the same terms and they relate to operations of the stadium:

  1. Ticket Sales Tax
  2. Food and Beverage Tax
  3. Merchandise Tax
  4. Parking Tax

DC’s ticket sales tax is 5.75% and would be 6th lowest of other new stadiums. The Food and Beverage tax rate is 10% and would be the third highest among the 15 MLS clubs researched.  The Merchandise Tax rate is 5.75% and would be the second lowest while the Parking Tax would be by far the highest at 18%, with the next closest being 14.975% in Montreal followed by 9.875% in Kansas City.

All four have a 100% abatement during the initial five years of the lease, dropping to 50% abatement from year 6 to 10.  In year 11 the abatement ends and the full amount of the taxes are due.

The fifth tax abatement ,and the one that concerns the city the most, is the property tax on the stadium.  The club would own the stadium which means that property taxes would be due.  Six other new/renovated stadiums are subject to property taxes with FC Dallas only being taxed on their parking lot and Colorado only taxed  on their offices in the stadium.  The remaining four that are subject to property taxes do not have any abatements making DC United unique among the group.

The abatement breakdown is as follows: 100% from years 1-5, 75% from years 6-10, 50% from years 11-15, 25% from years 16-20 with full property taxes due during the final 10 years of the initial 30 year lease.

City Council Responses

The City Council hearing whereby the commissioned analysis creators were on a panel to present before the council, started with a few remarks from councilman Jack Evans going so far as to say this:

Source: www.BlackandRedUnited.com  Live Tweet of Hearing (link at beginning of article)

Source: www.BlackandRedUnited.com Live Tweet of Hearing (link at beginning of article)

Following another councilman’s remarks, Principal CSL International representative Jay Lenhardt presented the analysis’ findings explaining team operating profit projections, stadium and financing details, with CSL project manager Ryan Beaupre further explaining cost impact of the length of the lease and the monetary benefits that would come to the district. IRR’s Patrick Kerr continued the presentation discussing the land valuation details and overpayment details as well as potential growth and risk factors with the proposal overall.

Black and Red United’s Donald Wine II summarized the risk discussion well in his piece:

Among the major issues of contention included whether the District would be responsible for any costs that exceed the $150 million that the District agreed to finance in land and horizontal acquisition costs; altering the terms of the land swap deal for the Reeves Center with Akridge; and whether the tax abatements and relaxing of property taxes for the team would be necessary for D.C United and the District to turn a profit.  in all, the panel concluded in the report that while the District would lose money on the overall market value for the lands involved in the deal, there would be an overall $109.4 million benefit to the District over the life of the 30-year lease.

The specific risks are listed in the executive summary at the beginning of the report as well as in the live tweet.

Following the testimony the panel took questions from the council.  The first regarded the overall cost-benefit of the proposal,  to which the panel responded saying that there would be a net fiscal profit for the city even with cost increases and not including anything the hotel might bring.  Regarding the property taxes, the panel responded saying that even with the abatements DC United would still have the highest property taxes of all the new and renovated stadiums and the report goes on to say that the abatements aren’t likely to give the club any sort of profit advantage and that without them they likely wouldn’t be able to service the debt needed for the private funding of the stadium.

Further questions were taken regarding the environmental assessment and the land valuations of the Reeves Center as well as potential repercussions if DC United in any way pulled out of the deal.  There were alot of questions regarding the financial capability of DC United, the need for tax abatements and the land valuations which clearly highlights where the concerns of the DC City Council lie.

There will definitely be further hearings on the proposal with public testimonies but with the potential for 1,683 Full-time equivalent jobs and $1.3 billion in projected Personal Income earnings over the life of the initial 30-year lease combined with the fact that the analysis expected that without the stadium development there wouldn’t be any anticipated development at Buzzard Point for at least 8-10 years, things are looking in United’s favor, for now.

The concerns are very serious for the City Council and it will be interesting to see how Mayor-elect Muriel Bowser chooses to move forward from here.

 

What do you think about the report on the stadium proposal for D.C. United? Let us know in the comments section below, or via Facebook or Twitter.

 

 

 

Reporting on the business side of the world's game.