Build it yourself Mike – why publicly financed arenas are a thing of the past

Mike Babcock should realize we live in a new reality. The head coach of the Detroit Red Wings decided to speak out this week about how the State of Michigan should “jump onside” a new arena project for the Red Wings in downtown Detroit.

Babcock was supported by Illitch Holdings spokewoman Karen Cullen. This is the same Illitch Holdings that took $115 million from the City of Detroit, Wayne County and corporate investors to build Comerica Park. I pat Mr. Illtich on the back for his contribution of $185 million to that project but I ask why he didn’t just found the entirety himself. Mr. Illitch (and wife Marian) has a reported net worth of $2 billion. He is the 212th richest American according to Forbes in 2011.

A new arena does not have to paid for up front. I’m sure Mr. Illitch has favorable banking relationships. Take out a loan, throw 8% interest on it, secure it against some pizzas over 15 years, and voila – the project is financed.

Let’s look at costs where NHL teams play:
– Staples Center (Los Angeles Kings) – $300 million in 1999
– Air Canada Centre (Toronto Maple Leafs ) – $250 million in 1999
– XCel Energy Center (Minnesota Wild) – $130 million in 2000
– Nationwide Arena (Columbus Blue Jackets) – $150 million in 2000

So let’s put some time value of money against these projects and add 20%. Let’s suggest the Red Wings do not need an arena like the Staples Center (also a tri-project for the LA Lakers and Clippers) but instead need a state of the art, best in the NHL arena. So that will exceed the other midwestern new builds in Minnesota and Columbus but remain shy of the Staples Center. Toronto’s figure is probably a reasonable estimate, but even on the high side, let’s suggest $275 million.

The Detroit Tigers just signed Prince Fielder for $214 million over 9 years. Banks are likely to provide loan terms of longer than 9 years when related to a building, and an arena with ongoing cash flows at that. So, a 15 year loan on $275 million or immediate payoff of $214 million? As a baseball fan, I’m happy to have a big bomber sitting in the 4 hole from the left side of the plate, but as a Detroiter, if you made me choose, I’d say take the arena.

The challenge one will say is that I’m cutting across the Illitch empire and co-mingling funds – as if funds have not always been co-mingled between pizzas, concerts (Fox Theatre), parking lots, hot dogs, home runs and hat tricks.

A greater reality here is that co-mingling does not need to exist. The Red Wings are the Yankees of the NHL. They are not threatened to miss the playoffs this year, or any upcoming year. If they can’t find enough to pay the interest on a loan to build an arena someone is not keeping track of the books well enough.

So that’s the argument for why the team can and should be able to afford this. The flip side to this is why the State should not and cannot afford this.

I have the executive budget for the State of Michigan for 2012 and 2013 open in a pdf document. But, I remembered we are talking about Michigan. Count the foreclosures, count the people. Stand on I-75 and watch the cars move families south. Walk the streets of Detroit (if you dare) and look for shops. Find me a grocery store. Go to the suburbs and look at main street. Count the empty windows. I don’t need to quote statistics. It’s a living breathing reality that close to $300 million would be better spent on many, many other things than a new arena.

Coach Babcock, we live in a new reality. You may want to come up from the dreamworld of being in professional sports and realize municipalities, cities and states should not fund arenas (and they never should have). If you want a tax break, ask for it. That doesn’t create a deficit (in and of itself). It’s not the State’s responsibility to build luxury suites that will sit empty – since those in the State have a hard enough time paying the mortgage.