Sunday, May 31, 2009

Hockeynomics 201

It was announced last week that the Columbus Blue Jackets have entered negotiations with Nationwide Insurance Company and Franklin County (the county where Columbus is located) to discuss the possible sale of the home ice of the BJ's, Nationwide Arena, to the county. The objective is to obtain a more favorable lease for the Jackets and improve their financial condition. Currently, the Arena is 90% owned by the Nationwide Insurance company and 10% by Dispatch Printing Company, the owner of the Columbus Dispatch newspaper. This ownership arrangement was necessitated when John McConnell was awarded the franchise but Franklin County voters rejected a public/private partnership to construct the arena, and the private companies stepped in to build the facility. Because the arena is privately owned, the BJ's gave up income from naming rights, parking revenue in facilities adjacent to the arena, and 30% of the revenue from luxury suites. The BJ's receive all operating revenue from the arena, but these revenues are not covering operating costs. This economic situation has become problematic for the BJ's as their payroll has risen substantially since their inaugural season, and they are currently operating at a loss. According to Mike Priest, President of the Blue Jackets, this situation has forced the team to look at all options, and he has stated that this is being done to stave off a possible relocation of the hockey club. The proposal would be for Franklin County to issue bonds to pay for the purchase of the arena and pay those bonds off with a dedicated revenue stream derived from increased taxes on beer and cigarettes. If this occurs, then the BJ's could re-negotiate their lease on more favorable terms with the county, ostensibly improving their financial situation.

Critics of public/private partnerships to finance venues for professional sports teams will point to this situation as another example of a failed venture. It is important, however, to look past the headlines in these discussions and try to understand the economic impact that a team and its venue can have on a community. In the case of the Nationwide Arena, construction occurred in a downtown area that was in need of revitalization. According to Columbus Business First, Nationwide Insurance and its investment partners have spent over $750MM to build the arena and redevelop the area around the arena. Currently, there are 17 restaurants, 3 hotels, 200,000 square feet of retail space, 1.3MM square feet of office space, and 350 luxury apartments that have been built in the the Arena District. Reasonably, could anyone think that development would have occurred to the extent it has without the arena or its primary tenant, the BJ's? I don't have sales tax information or revenue numbers for the Arena district, but one would have to believe they are substantial. By way of comparison, according to a 2007 report by MZ Sports prepared for the Nashville Predators, the sales tax generated by all arena events at the Sommet Center was $3,178,638, and the portion of that number generated by the Predators was $2,750,544. Add to that number $875,000 in annual seat taxes. Additionally, the report estimates that fans attending hockey games spend $1.5-3.0MM in local restaurants and bars in the downtown area, representing upwards of $67,500 in additional sales taxes, based on Metro Nashville's 2.25% tax rate. The report estimated that a loss of the Predators from Nashville would result in a net loss of tax revenues of $4,331,000 annually.

Public/private partnerships to finance sports venues represent an opportunity cost for the public entity in the relationship. That opportunity cost is dollars that can be spent on other programs or projects are utilized in the construction of a facility used primarily for a private enterprise. This requires that these types of enterprises receive appropriate scrutiny and that revenue sources to repay the indebtedness be sound. Critics of these ventures often point to the opportunity costs associated with them, but a fair comparison is to look at the total picture of on-going tax revenues, the economic vibrancy that these ventures create, and the quality of life they engender.

I am a hockey fan, and I love the Predators. I am glad they are in Nashville. Critics of the lease arrangements for the Preds would be wise to consider the positive financial impact of the team on our community, and be glad that we are not facing the economic challenges that confront Columbus and its franchise.

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