09 May 2009

Blueprint for a deal

While I've mentioned the Quakes' stadium deal from time to time, I haven't really gone in depth as to how the deal works. Now's as good a time as any, since the Quakes deal provides some excellent clues into how a San Jose-A's deal might be structured.

66 of the 75 acres were sold to the Quakes for $89 million, a cost of $1.35 million per acre or $31 per square foot. The remaining 9 acres will be sold to VTA for the BART Extension, as there are plans for a train yard there. Within the 66 acres for the Quakes, 13.5 have been set aside for the stadium.

The idea is for the Quakes to build the stadium, funding the construction on its own. Once completed, the Quakes would donate the stadium to San Jose. In doing this, they would avoid paying property taxes on the stadium, which could amount to $500k per year or more. The "donation" could also provide additional tax breaks for ownership, though I'm not clear on what those would be.

San Jose would own the stadium, the Quakes would own the land. Next, they would set up leases with each other which would probably have a counterbalancing or zero net effect. The business arrangement is the opposite of the Giants-San Francisco deal, in which the Giants owned the stadium and the City owned the land. This is important because the Giants currently pay a sizable property tax bill in the neighborhood of $2 million per year (on top of their AT&T Park mortgage and the ground lease with the Port of SF). Don't feel too bad for the Giants, though, all of these expenses translate into a $6 million reduction in their annual revenue sharing payment (it's probably more when other stadium expenses are accounted for).

For the A's, $2 million a year in property taxes is nothing to sneeze at. It would be much higher if they owned the stadium in San Jose, since a ballpark will run $500 million to build, resulting in a $5 million bill. Surely, longtime ballpark proponent and County Assessor Larry Stone would be willing to reassess the ballpark at a lower value, but the A's would still be out a few million a year. The avoidance of property taxes would be an integral part of the deal wherever it is built (SJ, Oakland, Fremont, etc.). Why? Let's say the A's go out into the market for a $300 million loan for the ballpark. Their interest rate is guaranteed to be 1 full point higher than a comparable loan/bond issue for a public entity such as a city or county. That 1% translates to $2.5 million per year, the same amount as the forgone property taxes.

If we were to apply the principles of the Quakes-SJ deal to the A's at Diridon South, it might look like this:
  • San Jose completes acquisition of all Diridon South land for ~$60 million.
  • In the deal, the ballpark land only is sold to the A's for the same amount, $60 million. That translates to $600k in annual property taxes.
  • The A's build the stadium for $500 million, then donate it to the City.
  • A triple net stadium lease is arranged which covers basic operations costs (insurance, utilities, police and traffic management). That could be worth $4-5 million a year and would escalate annually. The A's would also be charged with paying into some sort of capital improvements fund.
  • City leases the land from the A's for the stadium for a nominal amount. This would not completely offset the stadium lease. I'm guessing it'd be around $1 million a year, similar to the Giants-Port of SF arrangement.
  • City applies part of the $60 million towards the PG&E substation relocation and the creation of a park on the fire training site (I hope). The rest of the money goes towards other RDA projects or acquisitions.
  • SVS+E operates stadium on behalf of the A's. The two parties split concessions and parking revenue.
  • The San Jose Arena Authority would provide oversight, as it already does for HP Pavilion, Municipal Stadium, Sharks Ice, and in all likelihood, the new Quakes stadium.
  • (An alternative would have the City simply lease the land to the A's, which could run another $2 million a year instead of the upfront $70 million.)
The net annual outlay for the A's would be $3-5 million, plus the amount paid into the capital improvements fund. These costs would be the same whether the ballpark were publicly or privately owned. In this scenario, the ballpark itself would not be a net revenue generator for the City. However, they could get significant tax increment from the defined TIF zone, and the ballpark would undoubtedly be good for downtown businesses.

Sidebar: A comment in a previous thread asked about the exclusion of the ballpark site from the newly designated TIF zone. I think this is because, as the deal is constructed above, there would be no tax increment to collect. If the land and stadium were City owned they'd be exempt from property taxes. If the land were owned by the A's the stadium would exempt, but the land would also be frozen in its assessment because the improvements to the land, from which tax increment is derived, would all be tied up in the stadium. Either way, there's no point in adding them to the zone when they wouldn't generate significant TIF revenue.


Anonymous said...

wow !! This would be quite the deal if they can pull it off. But you show this is how these deals work in other cities too. Thanks for responding to my comment to that previous post. I had no idea that there would be a way not just to not pay the extra TIF taxes but also not having to pay property taxes at all on M$500 (wish that trick could work for my home too ;-). I am again amazed by your knowledge of stadium construction projects !!

Anonymous said...

ML--while I agree with your financing concept there is one key element that needs to be highlighted to better understand why it doesn't work the same for all city's. There is a $500M capital investment required as well as an additional $60M or so to acquire the land. This investment must be recouped somehow--most likely through development rights somewhere within a city. The value of these development rights vary dramatically from city to city--assuming that the housing market rebounds the value of housing in San Jose is much more lucrative than that of Oakland---not trying to pit one city against the other--just a fact associated with the median price for these two cities.

Tony D. said...

"This investment must be recouped somehow--most likely through the development rights to somewhere within a city."

For Lew Wolff and the A's, those rights could be for Diridon/Arena between the proposed ballpark and HP Pavilion: future high-speed rail train station (with BART), high-density commercial development with office, retail and residential. This development will only be rivaled in the Bay Area by SF's Transbay Terminal project.

Not trying to pit city against city either, but Oakland has nothing that compares to the development potential at Diridon/Arena.

On another note, for those who are fairly new to this site: check out posts from 2006, particularly August 31 (Lew Wolff throws in towel for San Jose). It will give you an idea of how many of us were thinking back then: Bartleby (then Bartleby66), myself (then, and still, Anthony Dominguez) and others. That was the day my eternal optimism for San Jose was born, and my "online guerrilla" campaign for San Jose's freedom/downtown ballpark began. Enjoy!

Anonymous said...

As was explained to Bartleby, San Jose got its second chance because the real estate market collapsed, dooming Pacific Commons; an event that NO ONE could have forseen two years ago.

All Tony's "online guerilla campaign" has done is to piss off Oaklanders and embarass San Jose residents that would love to have a MLB team but know that their city's testosterone level won't be compromised if it doesn't happen.

Marine Layer said...

There's no need to drag Oakland into this. I won't tolerate turning yet another thread into a pissing match.

Georob said...

Well, you didn't need to let that comment in. Now you'll have to let the SJ folks respond just to be fair. However, as long as the A's play in the Coliseum, then Oakland plays a role in any stadium discussion, even if it's subliminal.

Deny it if you want, but "pissing matches" drive a sizeable amount of traffic on this board (as well as many others) It's just the nature of the blogosphere.

Marine Layer said...

Deny it? I live it 24/7, Rob. Thanks for pointing it out, Captain Obvious.

Sometimes one of the motivations for putting up a topic like this is to see what response it elicits. It's refreshingly low on partisanship.