OVG highly incentivized to have both NBA and NHL, per independent analysis

Oak View Group, the private investor looking to renovate the Seattle Center arena, will be highly incentivized to house both NBA and NHL teams at the new facility. This finding from an independent financial analysis of the proposal ordered by the Seattle City Council.

The city council's Select Committee on Civic Arenas is scheduled to meet on Thursday morning to discuss potential amendments to the proposed Memorandum of Understanding between the city and OVG. Ahead of that meeting, city central staff director Kirstan Arestad sent a memo to council on Monday detailing the amendments and the analysis of the proposal.

Hat tip to SCC Insight for the news.

The memo reiterates the project objectives and priorities, and provides a brief history of proposed KeyArena redevelopment, starting with the AECOM report commissioned in 2014 and leading to the MOU negotiations with OVG. It also mentions how the council's voice was represented and included in the negotiations, as well as the advice provided by the City Attorney's Office and outside consultants on the legal, financial, and sports and entertainment particulars of such a proposal.

One of the key objectives and priorities is financial prudence, something that will minimize the city's risk as well as provide OVG with financial gains for the project. The memo highlights OVG's main contributions to the project:

• $600 million project costs plus all cost over runs (construction is estimated at $350 million).
• $3.5 million to reimburse the City for consultant and outside counsel costs related to the execution and performance of the MOU and the Transaction Documents.
• $40 million transportation payment over the 39-year lease term (or $1.026M per year).
• $250,000 for a transportation consultant.
• ($TBD) Baseline rent, amount yet to be determined, by an accounting firm based on the four-year trailing historical annual average of arena-related revenues for years 2014 through 2017.
• $20 million in kind or cash to non-profit organizations (not made directly to City)
• $500,000 for tenant relocation (Pottery Northwest addressed separately)
• All costs related to temporary and permanent relocation of Pottery Northwest
• Hire and pay for a Community Liaison
• 14 rent-free days per year.
• Dedicate 1% construction costs to the 1% for the Arts program.

The independent consultant found that financial terms laid out in the proposal "will largely guarantee the City’s revenue stream under any redevelopment scenario, while incentivizing OVG to add tenants." The proposal includes escalators in the incremental tax revenue sharing that make it significantly beneficial for OVG to add both NHL and NBA teams to maximize the potential.

The analysis identified four most likely redevelopment scenarios where the City's tax revenues are mostly guaranteed. Outside of no redevelopment, the least profitable scenario is having no tenant and relying solely on concert and event admissions.

The two other likely scenarios are an NHL tenant only and NHL & NBA tenants, which the analysis found to be the most profitable.

City of Seattle Central Staff

The city’s revenue stream would include a mix of guaranteed payments (base rent, transportation fund, etc.) and the city’s share of the incremental tax revenues. For the first ten years of the lease, the city gets 25% of the tax revenues. For the remainder of the lease, it’s a 50/50 split.

As noted in the memo, privately-generated revenues are not included in the analysis. Those private revenues, including rent, concessions, merchandise, sponsorships, and more, would be added to OVG’s share of the admissions and tax revenues in their proposed split with both NHL and NBA clubs.

The values in the chart above also don't include the deductions for the operation of the arena, OVG's additional financial contributions laid out in the MOU, and any debt service. As such, the memo points out, OVG is highly incentivized to have both sports in the new arena. They and the city would earn nearly ²⁄₃ more in admissions and tax revenues over the initial term of the lease.

In total, 14 amendments to the draft MOU have been proposed. These include requiring Seattle Center to consult with tenants at the arena regarding naming rights; requiring OVG to start paying rent no later than 6 months after the 24-month construction period; requiring OVG to compensate Pottery Northwest for relocation costs and any lost revenue caused by temporary relocation during construction; increasing the free “Community Days” given to the city from 14 to 24; and restricting any use of the city’s transportation fund to pay for monorail improvements.

The Select Committee on Civic Arenas meets on Thursday, November 16th at 10:30 am to review the draft MOU and proposed amendments. Per Chris Daniels of KING5-TV, committee chair Debora Juarez expects the committee will vote the MOU out and back to the full council for its final consideration and vote on approval on December 4th. They have also set aside time to meet on Monday, November 27th at 10:30 am to discuss amendments, if needed.

You can read the full memo and summary of amendments here.