A cursory analysis of the PWC arena study

I finished going through the PWC study in great detail and ended up with more questions than answers. I am going to request additional supporting data as this seems to be missing. The short of my analysis is that the PWC report is fairly well done with one glaring $18 million exception. I have requested but not yet received a standalone copy of the PWC report, but a portion is available in the 11/6/17 Committee of the Whole Packet.

I get a chuckle out of this page. Despite the language this public data, we own it.
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It is frustrating from a city council perspective to clearly see there is a ton of information that has been considered but has not been shared with the council. The CVB presentation to the council lacked substance and I expect the days of this being acceptable practice are numbered.

Observations:

  • The report does a real nice job at painting a realistic picture of what the true net economic activity is as a result of the project. They did a nice job of considering substitution effects (You don’t go to a movie because you do go to a hockey game).
  • The report suggest about $4.6 million in direct economic activity which would appear to be reasonable. It is important to realize that this money is the amount of private spending.
  • The report also sees this stadium as primarily a local amenity and sees most audience coming from here. I find this also to be highly likely.
  • Assuming the public bonding portion was $32 million the capital cost of the arena would be a little under $2.5 million dollars annually.
  • I tried to make some assumptions as to how much $4.6 million in local spending would generate in taxes assuming 70% of that spending was taxable (with 30% being spent on lodging) this would generate only $90 thousand annually in incremental local taxes.
  • The report does not get into annual operating costs. Even if we assume this is a break even (highly unlikely) venture; the net of the project, a $2.4 million annual subsidy appears to be required.
  • There isn’t really anything in there to suggest that we could get $10 million in naming rights so I will be asking for more information on that.
  • There is no line item for Taylor Arena demolition. It could be included elsewhere, but I suspect this will not be an easy or cheap demolition.
  • My biggest issue with the report is that in analyzing the ability to fund $18 million through private equity the report pointed to some pretty ridiculous comparables. See the chart below. We are not LA (or any of these cities) and will not spur on the ancillary development of the Staples Center. Nor would we have the ability to generate profits with where are rental rates are relative to these other markets.
  • If this private contributions are through TIF direction from future projects, those are actually public contributions.
  • So I tried to do a back on the envelop analysis of how much development would be required to allow a private contribution of $18 million, assuming 30% equity a 9% rate of return with a willingness to accept 7%. Basically after I did all of that I just concluded I really needed more information. But the capital investment would have to be on the order of hundreds of millions. I also find this to be unlikely.

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