26 June 2005

The Tax-Free Zone: Where the REAL war begins

Consider, if you will, a baseball team in 2005. While its prospects on the field are bright, its economic future - its home, in particular - is uncertain. However, in less than a year, the landscape will change dramatically, and the team will be able to pick from numerous new homes and locales, with suitors falling all over themselves to attract the team.

Poor attempt to channel the spirit of Rod Serling aside, this is the future that awaits the A's should SB 4 pass. How is this possible? How could a simple piece of legislation impact the A's that much?

To find the roots of the answer, one has to go back to 1986. That's when the Tax Reform Act of 1986 was passed. In it was a provision designed to prevent teams from using tax-exempt bonds to finance stadiums and arenas. The provision called for no more than 10% of the required debt service on such bonds to be paid back using funds from the team or stadium-based sources. Instead of preventing teams from going after stadium deals, the exact opposite happened. Teams felt emboldened to construct deals with cities where the remaining 90% would be paid off using public sources such as sales taxes and tax-increment (TIF). The results were clear: 17 mostly publicly-funded new and renovated ballparks were built between 1986 and 2005. In the mid-90's, legislation was introduced by the now late senator Daniel Patrick Moynihan (D-NY), but it never went anywhere, and Moynihan soon retired from Congress.

Yet the trend now appears to be a reversal of sorts. While the DC Ballpark follows the normal publicly-funded blueprint, the new ballparks being planned or built for the Mets, Yankees, and Cardinals have a much higher private share. The Cards are relying mostly on privately issued, taxable bonds, while the Mets and Yankees will use tax-exempt funds, but they'll pay it off using stadium sources. How is that possible? Don't ask me. Like Field of Schemes' Neil deMause, I am not a bond lawyer. Furthermore, until someone actually sues to challenge such projects regarding their legality, Mets/Yankees-type deals will continue.

That's where SB 4 comes in. SB 4 actually comes close to the point of flagrantly violating the spirit of the Tax Reform Act of 1986. This is because its goal is clearly to create a statewide vessel by which tax-exempt funding can be made available to fund all manner of stadiums, arenas, and other venues. The key is that since all efforts would be initiated by the Authority and not a city, county, or the State of California, there would be no needed for messy, complicated mechanisms like, oh, voting or public hearings. That is an enormous hurdle that would suddenly be removed. It doesn't make it completely smooth sailing, however. There's still an issue of how the bonds would be paid off once they were issued. That's where multiple cities get involved.

Since it's likely that a ballpark built in Oakland, Fremont, Dublin, Sacramento, or San Jose would have the same rough costs due to small differences in land values and stable construction costs, it will be up to each bidding city to sweeten their respective bids to make them the most attractive to the Lewis Wolff and John Fisher. Here's how that could work:

A city/civic group's responsibility would be to package the terms of the debt service. The terms would include a mix of the following:

  • Annual rent payments from the team
  • Percentages of in-stadium revenues (tickets, concessions, advertising/signage, suites)
  • Stadium naming rights
  • Pouring rights (non-alcoholic and alcoholic beverages)
  • Revenue from non-baseball events (club rentals, tours, concerts)
  • Ticket taxes
  • Sales taxes
  • Gross receipts taxes (paid by the public on the backend as businesses raise prices to cover the tax)
  • Usage taxes (utilities, hotel, car rentals)
  • Tax-increment funds (or TIF, based on property tax revenue past a "frozen" assessment level, within a specified area or district)
  • Existing redevelopment funds
  • Reduction of the team's upfront investment

Assuming the market is relatively fluid in Northern California, the way for a bidding city to differentiate itself from the competition would be to make the terms more favorable for the team, by removing or reducing one of the above items from the final list of debt service sources. For instance, a standard practice is for a city to require a flat rent payment per year ($3 million for argument's sake), plus a percentage of ticket revenue above a threshold of tickets sold (5% of every full-price ticket past the 2,000,000 seasonal attendance figure). A city could reduce the required rent or eliminate that extra percentage. It could eliminate rent 10-15 years early, depending on how the well the debt is being serviced. It could give the team more flexible lease end or buyout terms. The catch is that in order to prevent violating federal law, the team's source really can't be more than 10% of debt service. It could become a Safeco Field redux.

But the big kicker comes from the definition of the word "facility." While "facility" has typically been defined as the actual stadium and little else, for SB 4 the definition has been expanded to include just about anything adjacent to or associated with the venue. In addition to the venue, "facility" includes all of the following:

  • Offices, parking lots and garages, access roads, streets, intersections, highway interchanges, pedestrian walkways, tunnels,bridges, transportation facilities, monuments, restaurants, stores, and other facilities providing goods and services to persons attending performances, meetings, contests, gatherings, or events at a facility.

While building a parking lot or garage is expected, some of the other stuff in the bill is virtually uncharted territory. It could include a new or revamped transit hub, a mall or shopping center, office tower(s), or the most tempting scenario knowing Wolff's background, a hotel/conference center. Of course, history shows that mixed-use projects like these aren't always guaranteed successes, and sometimes, they don't even get off the ground. Interestingly enough, Wolff's downtown LA hotel project is being built on land owned by Anschutz Entertainment Group. As mentioned in a previous post, the leading sponsor of SB 4 is none other than AEG.

The problem for bidding cities is balancing the need to find a realistic mix of sources to pay off the debt against the desire to make concessions to teams. Should multiple cities get into a competitive bidding situation for the A's, it could escalate quickly, with each city granting greater concessions with each round of proposals.