PAYING FOR RX2

 

The thorniest issue amongst Edmontonians with regards to the new arena remains how it will be funded.

We seem to fall into four groups on the matter:

  1. People who want a new arena and would personally pay via taxes towards it.
  2. People who want a new arena but don’t want to personally pay via taxes.
  3. People who don’t want a new arena and don’t want to personally pay via taxes.
  4. People who want the Mayor personally fixing the pot holes in front of their house at 4 PM on a Tuesday.

We can totally understand the reluctance of some Edmontonians to want to see their hard earned dollars go towards a new arena, particularly if they don’t attend Oilers games, Justin Bieber concerts or anything else at the facility.

But paying the City "paying for a free arena" should not be confused with using the City’s borrowing power to fund the arena at a much lower cost, nor should it be confused with a concept like a community revitilzation levy – or a CRL.

CRLs

Gary Lamphier of the Edmonton Journal wrote an interesting article in the Journal the pointing out holes in the arena development project and nothing the value of a CRL as a means of financing the arena district.

“Although Mayor Stephen Mandel seems determined to wrap up the Seinfeldian arena "debate" — such as it is — in early April and push the project ahead at Mach speed, it’s hard to see why with so many key questions unresolved.

Although the Katz Group has committed $100 million to the arena and a ticket tax might raise another $125 million, the rest of the funding model looks shaky at best. So far, there are no federal dollars, no provincial dollars, and no other private dollars committed to the arena.

That leaves a proposed CRL (Community Revitalization Levy) as the only other potential source of funds. And while the CRL sounds good in theory — i.e., any new taxes generated from new hotel, condo, casino, office or retail projects on the 6.4-hectare redevelopment site would be used to help pay for the arena it’s all just hot air until real projects with real budgets and timelines backed by credible developers come forward."

Firstly, Katz has committed $100 million to the arena and an additional $100 million to the arena district. This is often overlooked in the debate. Keeping the basic facts straight has been one of the many issues that have been needlessly complicated during this entire process.

Secondly. the idea of a CRL is a good way to fund the arena. It prevents the average Edmontonian from having to dig into their jeans to fund the arena through higher taxes.

This would placate the folks who scream “not a penny for this arena shall come from my wallet good Sir!” while at the same time allowing the City to levy a tax on all of the developments in the arena district as a means to generate revenue to service the construction debt.

The other good thing about a CRL? Once the debt to the City has been paid back – with interest like any debt – they are free to use the revenues as they see fit for ever and ever amen. With the amount of development that would go on in the arena district, this sum of money would be considerably more than the vacant lots and parking facilities currently contribute to City coffers.

The City estimates the CRL could cover a $125M investment in the arena. Katz has vowed to invest $100M in the district – aside from the $100M into the arena – which would bring the development to $325M. That would represent a sizeable chunk of the total budget that has been thrown around and doesn’t represent a dollar of new taxes paid by Edmontonians.

One thing we should keep in mind during the final push towards a decision on the arena. No one can borrow money as cheaply as a Government. You think you can roll in to the local money mart and demand a $400 million dollar loan? Think again son.

But Cities have access to money at much lower interest rates than anyone else, which would in turn lower the price of the payments of the arena district significantly. There may be private money floating around out there willing to fit the bill – ol’ Phil Anschutz springs to mind – but we need to consider all of the costs involved in taking that money at higher rates.

You borrow $400 million at 5% interest vs 10% and you have a much cheaper arena when all is said and done that is paid off much faster.

Ever wonder how much RX1 cost to build back in the 1970s? How about $17.3 million dollars  – roughly $77 million dollars in 2011. Looking back 40 odd years you would be hard pressed to find a reason that this wasn’t a slam dunk of an investment that has generated that money back for Edmontonians many, many times over.

The cost of the entire arena in 1970s dollars doesn’t even buy you five consecutive games of Shawn Horcoff hockey in 2011 – if our math is correct.*

Everyone in the know seems to think that a decision on this baby is imminent and can be expected in the next several weeks. Here’s to hoping that creative ways can be found to minimize the impact on tax payers and get the thing built as cheaply as possible.

*It isn’t.

  • 9 Inches Uncut

    I guess it’s alright if Edmonton wants an arena but you’re kidding yourself if you think the citizens of the city will see a return on all the money they pour in.

    In this day and age the profits are strictly for the banksters and the billionaires.

  • Clyde Frog

    This is why there is an entire economics degree at the UofA…

    First off, Katz isn’t demanding an arena being built and stating it will revitalize downtown.

    He has committed 100 million dollars to the area that will not be spent otherwise. Our downtown core is one of the saddest of any city I have visited, outside of the bar scene on Jasper Avenue we have almost no reason to be there after 5 pm.

    So in that respect he is promising to kickstart the revitalization, which should in turn bring in a demonstratable return to that area of the city.

    The issues revolve around where the rest of the revitalization money come from, will they be able to attract outside investment that would not come to Edmonton otherwise, will existing businessess relocate? That is an important distinction because in the second situation you will actually depress the tax base in one area of the city to the CRL area limiting the economic benefit.

    Without an understanding of how the business is supposed to be attacted it is very hard to know how I feel about this as a whole. If they could get other investment agencies to put up bond to demonstrate interest outside of the Katz group I would be much happier.

    The arena itself is being payed for under the idea of subsidization for development. Its an interesting concept that is used more often than you would think, just look at how residential developers commit land to the city on new developments for schools. Obviously if the city were to build a school it can drive the value of property and desirability. Its not the best example for this situation and profit sharing, but it does provide a good example how the city does partner with private enterprise to mutual benefit.

    The question really is how much development should the city expect in return for their portion of the arena financing. City’s that have done their due diligence and ensured their target level of development was guarunteed with bonds have done extremely well, while others that don’t tend to up with large empty fields beside beautiful modern facilities.

    If they set a target based on realistic studies and ensure its met with the appropiate portion of NEW development versus relocated I am happy. If not this will explode in their face within the next 5 years, I guaruntee it.

  • Quicksilver ballet

    Not sure why so many are up in arms over this. The building is going to get built like it or not. The squabbles you’re hearing are the last noises before the shovels hit the ground. If Katz wants to control the profits he should be the largest shareholder so it involves as few taxpayer dollars as possible.

  • Oilers4ever

    Well written Wanye…. Too many people either have their blinders on or their heads up their you know what’s when it comes to the issue and aren’t seeing the big picture. Then there is the ones that say good riddance to the team if they leave because they are too stupid to realize the serious amount of revenue this team generates for the city every year…

    They’ll get it done, they just need to make sure they do it the right way.

  • Quicksilver ballet

    Had this dream about 8 months ago. Daryl built Canadas version of the Jerry Jones dome up here. A 40 thousand seat arena that has a retractable playing surface, like they do at the University of Arizona. Roll the appropriate playing surface in for the upcoming event and then replace/fill with temporary seating (like the first dozen rows now at rexall) to accomodate the diffent size of playing surfaces. I watched the Eskimos win the Grey cup, had lunch and came back and watched the Oilers beat the Flames.

  • Oilers4ever

    And to actually tell people by the way to stop with the Art Gallery comment as it’s ridiculous is a bit ludricous in my mind to tell people that.

    Pretell, how exactly is it different? It’s an art building that was paid for by city taxpayers that they didn’t have a choice on regardless of whether you like art or not. Too bad, so sad, yer paying for it and non-art lovers still had to fit the bill.

    Please do tell me how the situation with the Downtown arena district is any different from someone who is not a sports fan saying they don’t want their tax dollars paying for it?

    It’s the same damn thing, so suck it up and be smart enough to admit… yeah the Art Gallery didn’t have a billion dollar owner on it.. but last I checked most Art Gallery’s are usually a city or province/state type of thing. Most billionaires wouldn’t want to own an Art Gallery… they don’t make cash compared to an entertainment district… Seriously get it together people.

  • Gilmore Tuttle

    @rick

    Agreed, I was thinking more of the surrounding district than the barn itself. If the district grows to the size predicted, then there will be a need for more police in that zone than there is now – assuming all the people from Jasper don’t just move a bit North. This will mean that the budget will have to be found and if all the tax for the district is going to the debt, then it will have to be topped up from somewhere else.

    Thanks for the clarification. I am not a troll or part of speak up edmonton but it seems that anybody that asks a valid question about the proposed or potential financial model is immediately (not by you) called out as somebody stuck in the 70s and obsessed with filling potholes.

    It is funny to watch the Coyote situation. Hockey fans, sports media and the NHL Commissioner are calling the watchdog group neo-conservatives and tea party members. All they have done is point out that the City of Glendale is likely breaking their state’s law in the way they are trying to facilitate the sale of a team. This is something that bond purchasers should know. I would hope the same thing would happen here. The sad part is that the Glendale taxpayers are screwed either way. They will either have an empty building that they are paying for or continue to subsidize the team so they lose the same or more money but over a longer period of time.

    Again – separating the revitalization aspect, the NHL business/revenue stream model seems to be broken and the Coyotes are just one of the problems. Mr. Bettman seems to trying to prevent the first team from moving or going under as that might start the dominos falling.

  • ogorr

    I dont like all the threats being made by Katz, the team, and Bettman. If not building an arena is gonna cost the city the team, so be it! Go ahead move them to Vegas or something. The NHL doesnt care about its fan base so why should we care about them. I wanted the new barn right up until Bettman had his little press conference. As a former Edmontonian who now lives in Halifax maybe my opinion doesn’t matter but tickets to a QMJHL game are cheap, beer and concession prices are much lower, and the hockey’s pretty damn good. I LOVE the Oilers but with how awful the team is and the tone of this arena issue, I dont care what happens anymore.

  • ogorr

    i want to open a restaurant and hotel. i want the city to borrow money (maybe even half of the total start up capital) and then give me that money, free of interest, to open it. i want to keep all the revenue for myself and then pay it back in taxes – taxes that i would pay anyways.

    sounds like a fair deal right? i mean the city IS getting something out of it – a new place to eat and to stay over night.

  • The arena debate is so interesting, in that people will be forced to put a dollar value on how much they like the Oilers. I know that there certainly is a limit for me as a taxpayer as to what I want to spend without any direct return. As a private investor, however, I would be interested in looking at being involved in private financing via seat mortgages or other means – but only because I derive a more direct benefit from that. However, the Oilers have stated that they do not want that type of setup because they are not being gifted free money as they would with government funding.