Friday Jolt: Reuven Carlyle Turns Arena Debate On Its Head

By Josh Feit July 27, 2012

State Rep. Reuven Carlyle says the city and county negotiated the arena deal with one hand tied behind their back.

State Rep. Reuven Carlyle (D-36, Seattle), whose district includes Key Arena and the Port, has a blog post on his personal blog that smashes conventional wisdom about the arena deal today.

The conventional wisdom: A solid deal when it comes to public/private partnerships on stadiums.

Even critics of the deal have been conceding that for a stadium deal, the city and the county have gotten great terms from investor Chris Hansen: He's agreed to make up the difference every year in extra rent on the debt service if tax revenues aren't enough; he's agreed to a $2 million annual capital fund to keep the arena upgraded to changing NBA standards; he's agreed to put in an immediate $15 million; and he's agreed that the team won't leave for 30 years.

That's some solid risk mitigation for a city that was burned by the NBA before on shy tax receipts and a broken lease.

However, Carlyle—who helps raise capital for an early stage tech company and since starting out at McCaw Cellular has gone on to be a senior executive or director at startups such as Xypoint—thinks the city and county have totally missed the point of negotiations, especially when the public is the biggest contributor in Hansen's private project at up to $200 million.

Carlyle argues that the public shouldn't have simply been looking to mitigate risk, it should be looking to benefit.

Here's Carlyle:
In effect, the city and county are so concerned–even frantically consumed– with the real and perceived downside that they are effectively leaving immense, untapped investment and financial value on the table.

In this deal, the public is investing a total dollar amount near, equal or more than any other single funder (I don’t know if this is true because we haven’t seen the financial) and yet we don’t have many of the traditional benefits of preferred investors in a major deal. Examples include: a position on the board of directors, veto rights over business location, interest income or dividends, a portion of equity in the asset that is the brand and business value, a small percentage of revenues from sale of TV, radio and media rights, ability to institute a small surcharge on admissions, the right to place a ‘call’ on investors’ requirement to invest additional resources into the team when losing games and attendance, and other random business ideas.

Our key mistake, it seems, isn’t that we might accept too much risk, but that we’ll fail to realize that the driver of the larger asset is also about a long-term increase in value.

Without equity of some fashion, we’re just living paycheck to paycheck. The money is made in the long-term value proposition of the investment growth of the asset, not in the sunk infrastructure.

Like any sophisticated and major investor in a deal ultimately worth billions, our focus should be on BOTH mitigating for financial risk, downside and failure, AND maximizing value for taxpayers and the community.

But this is, unfortunately, the symbolic representation of why public private partnerships too often don’t go well for the public: We socialize the risk and costs and allow the market to realize the full benefits of the upside without aligning the long-term financial interests of ownership.

There's a bigger point here too. "I don't think as a general rule the public sector is highly astute at negotiating sophisticated financial deals," Carlyle says.

And thus the point of his post, he told me: "We're leaving a lot of value on the table."

Carlyle contends that the private sector goes into negotiations with places like Seattle knowing we value risk mitigation above everything else—"and so we end up socializing the risk at their behest .. we're willing to give them the capital so they can use the proceeds to run the business as they see fit."

He concludes: "We go into negotiations  with one hand tied behind our back because  all we value is risk mitigation."

Mayor McGinn's spokesman Aaron Pickus tells PubliCola: "This is really simple. If you want upside, then you need to be willing to take risk. Nothing revolutionary here. It's just that government isn't well suited to this.  Just look at the Pacific Place Garage.  Our team has done a good job with the arena of protecting taxpayers from risk, something that has been noted by independent finance experts.  And we will benefit over the long term from a return on the hundreds of millions in private investment."

Carlyle's point, of course, was precisely that the city was all about "protecting the taxpayers from risk" at the expense, however, of demanding equity in the deal.

As for the "return of the hundreds of millions in private investments."

Hmmm. It seems to me we're loaning Hansen public money and then he's paying us back with more public money—in taxes and rent on city property. It's a closed loop. And that, I think, was Carlyle's point.

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