Tuesday, February 20, 2007
New Stadium Financing Will Take A Hail Mary Play
If The Pyramid stands as a symbol of anything these days, it is as a reminder that the promise of innovative ways to pay for public buildings often dies quietly when it comes to the reality of making it happen.
This comes to mind with Memphis Mayor Willie W. Herenton’s continued championing of a new football stadium for Memphis. To pay for this $100-175 million project, he holds out the prospects of paying for it with naming rights, new revenue streams and innovative financing.
That probably sounds familiar, because a variation of it was used to command support for construction of The Pyramid on our waterfront. Upon its opening in 1991, even in the wake of the doomed grand plans for themed attractions in the building, there were exhuberant predictions of new money that would be attracted to “Memphis’ signature symbol for the future.”
While political rhetoric about funding big projects often stretches the limits of credulity, after the collapse of The Pyramid development plans, public officials were upping the ante even more to mitigate public criticism about the shift in financial responsibility from developers to taxpayers.
Of course, the collapse of the private development plans for The Pyramid occurred when partners Sidney Shlenker and John Tigrett parted ways over lavish overspending by the former and deepening concerns about the whole enterprise by the latter.
It came so close, but in the end, it was not to be. If success has many fathers, the failure of The Pyramid left city and county officials standing alone to defend an unloved, abandoned child.
Digressing a bit, the much ballyhooed plans for an inclinator to the summit, a music or Egypt-themed attraction, the Hard Rock restaurant, the multi-media tour, and all the rest might have happened if not for two things. One, Memphis city government thought it saw a way to dump its deficit funding for Mud Island and convinced Mr. Shlenker to take it as part of his doomed Rakapolis theme park, which would have been the ultimate indignity for the always underappreciated river park.
Second, there was the point when Mr. Shlenker finally cobbled together the financing for The Pyramid development, but as he hammered out the extension of yet another extension of a deadline with city and county governments, this time with prospects of success at last, the French bank that had notified the mayor of Memphis that it would provide the financing received an anonymous note that chronicled the perils of loaning Mr. Shlenker the much-needed transfusion of capital. The deal immediately exploded.
Into the brink stepped city and county governments, shell shocked by the turn of events and with none of the promised private money to pay the debt service of the building. In quick order, the governments signed a sweetheart deal for University of Memphis, which invested about $15 million in the building in return for lucrative cuts of the revenues.
One telling statistic: an entire year of University of Memphis basketball produced less revenue for The Pyramid than a single concert sell-out. Perhaps that is a telling indication of the public sector’s inability to drive a hard bargain, but in search of more money and to quieten public disgust, city and county officials raised the potential of naming rights for The Pyramid (Think The FedEx Pyramid) and streams of money from sponsorships and advertising.
When The Pyramid closed 13 years later, there still were no naming rights, and the lack of interest by the corporate community was deafening. More to the point, the majority of the sponsorships and advertisements in the building was sold by the University of Memphis athletic department.
Instead of the new sources of revenue pledged by city and county governments when they took control of The Pyramid, in the end, local taxpayers were left to pay annual operating costs of about $2 million plus the yearly debt service of about $3.3 million.
It’s Just Not Their Thing
If there was one clear lesson from The Pyramid experience, it is that the public sector is ill-equipped and unprepared to close the kinds of deals that result in naming rights and sponsorship agreements. It’s just not in their skill set, and without a profit motive or sense of urgency, there’s rarely much impetus to deliver. After all, there’s always property taxes to fall back on.
The truth about these kinds of facilities is there really aren’t that many sources of income – concessions, parking, advertising, private boxes, rentals, and merchandise. Even with all of these in The Pyramid, when they were totaled up, there was never any revenue left over to put toward the payment of debt service on the building.
Perhaps, a new football stadium wouldn’t have the same kinds of daily costs. After all, it would essentially only operate 8-10 days a year, whereas The Pyramid had more than 100 events a year (even pre-Grizzlies).
Pay To Play
For the sake or argument, presume that the cost of a new stadium is $150 million. Presume that city government keeps the existing revenue sources and increases the per capita revenues from food, parking and merchandise. Presume that the city sells naming rights, and presume that based on similar deals in similar markets, Memphis is able to strike an exceptional deal of $2 million a year. Now, presume that city government is able to develop some unknown sources of revenue (perhaps leasing or selling Fairgrounds land for private development and applying this money to stadium debt service) and these amount to $3 million a year.
If these were to happen, it would be historic, because never in the history of this community has local government been able to negotiate anything like it. But even with these two remarkable, perhaps unrealistic, revenue streams, the annual debt service for the new football stadium would still be short about $5-6 million a year for a couple of decades. Without question, at that point, attention would turn to property taxes to make up the difference.
It’s also worth remembering that the large source of revenues paying off the bonds for FedEx Forum is the sales tax refunds allowed by state law; however, those refunds can only be used to pay for professional sports facilities (Autozone Park also uses these taxes to pay its bonds). In other words, these sales taxes are not available to pay for a new stadium.
The Hard Sell
At a time when the tax base for Memphis is feeling pressure and the number of taxpayers is constricting, it seems like a hard sale to Memphians, who are already picking up a disproportionate share of these kinds of regional facilities and services.
We’ve already stated our reasons for opposing the stadium, and why we think it should be built by the University of Memphis for the University of Memphis. That said, if it is to be built at all, it makes little sense for it to be on the tax bills of city taxpayers. If anything, Mayor Herenton should be mending fences enough with county government in hopes of getting the cost of the new stadium being placed on the largest local tax base.
All of this aside, it’s still hard to imagine that right now, a new stadium would make the list of the top 50 things that city government should be worrying about. While Mayor Herenton stunned the community with this idea back on New Year’s Day, nobody was more stunned by the announcement than his staff which has grimly tried to put some meat on the bony proposal.
All in all, it makes for a monumental challenge for Mayor Herenton if he is to pay for a new stadium with non-property tax revenues. And it’s a challenge that government has talked about a lot in the past but has never been able to solve.
Posted by Smart City Consulting at 4:47 PM