Taxpayer-Backed Arena Deal Gets New Scrutiny Amid Radical Housing Shortage

CREDIT: AP Photo/Alex Brandon

Ted Leonsis, center, owns three of Washington's professional sports teams.

With the nation’s capital set to spend $50 million in taxpayer money to build another sports facility, one city councilmember is tapping the brakes.

Instead of automatically approving a contract to use public dollars to build a practice arena for the NBA’s Washington Wizards in the city’s most historically neglected corner, Councilmember Elissa Silverman is forcing a formal vote in hopes of ensuring the team’s owner will pay any surprise costs that crop up.

The contract bills the Wizards’ billionaire owner Ted Leonsis just $5 million of the $55 million total. Leonsis, who cracked into the economic elite as an executive with AOL, runs a company called Monumental Sports that owns the Wizards, their sister WNBA franchise the Mystics, the NHL’s Washington Capitals, and the 20,000-seat downtown arena where they all currently play.

The deal pulls $23 million in demolition and construction expenses from the D.C. government directly. The other $27 million will come from Events DC, a government entity charged with marketing and operating the city’s various efforts to draw tourists and trade groups to the District. But it’s all taxpayer money. Events DC gets almost all of its funding from the city’s sales tax system, capturing about a third of hotel tax revenue and ten cents on the dollar of all restaurant and alcohol sales taxes.

Potential cost overruns on the Wizards facility will get dumped onto taxpayers under the deal. Even people who haven’t lived in the capital long are familiar with budget-busting surprises, like the recently opened H Street Streetcar and the city’s baseball stadium. But proponents of the Wizards deal are confident this new contract is no boondoggle, despite the potential for the pricetag to balloon. And it’s the likelihood of overages – and not a wholesale re-evaluation of the decision to build the team a new arena – that led to Silverman’s bill.

“We’re making a significant investment in not only Ward 8 but in the Wizards, and if there are cost overruns they should be paid for by the primary beneficiary of the facility: the Wizards, Ted Leonsis and Monumental Sports,” Silverman said in an interview. “I think we need to be tougher negotiators. And if Monumental is going to walk away from this deal because the threat of cost overruns is so severe, then I think that should give us cause for concern as well.”

A Popular Idea With A Poor Track Record

Investing public dollars to help private sports franchises that are more than capable of paying their own way has long been portrayed as an inherently reasonable, even grown-up thing for cities to do. Nicer buildings mean more fans buying tickets means more people drinking and eating and shopping before the anthem starts and after the horn sounds.

Logical though it seems in a vacuum, reality has time and again disproven that chain-reaction theory of sports arenas as local development engine. Revenues fall miles short of projections and initial job growth doesn’t last, but the debts incurred to build the thing linger. But Events DC president and CEO Greg O’Dell says this project is different – in large part because D.C., not Leonsis, will own the building.

“It makes complete sense for us to be responsible” for any overages, he said in an interview, because the city will own the building and his organization will get to book 60 percent of all events hosted there. “I’m not sure you can point to many investments by a city where they’re going to be directly benefiting from operating the facility.”

But control doesn’t guarantee execution. To make good on O’Dell’s direct revenues argument, his team will have to book shows and events in the 5,000-seat arena during the school months – in competition with numerous other venues closer to the heart of the city that can also hold thousands. And in the summers, when Leonsis’ WNBA team plays out in Ward 8, Monumental will turn new profit out of the resulting booking vacancies at the Verizon Center downtown.

The more fundamental selling point that the new building will lure other investments to Ward 8 is, even for O’Dell, more aspirational than operational. “Hopefully it will serve as a catalyst for other development that will occur there,” he said.

That development rarely materializes – sports economist Victor Matheson says the rule of thumb is an arena project will generate about 10 percent of the economic activity its advocates pledge up front – but is sorely needed in Ward 8. That’s the conversation Silverman wishes the council would have.

“I wish we were discussing how to best leverage $50 million in Ward 8, and what is the best anchor or catalyst for economic development,” she said.

Her office pointed out a number of alternative uses of the same dollar figure: Refurbishing a long-suffering local elementary school, developing a shopping hub like the ones that have anchored both gentrification and revitalization elsewhere, or adding a community center in parts of Ward 8 that are now a 30-minute walk from such amenities.

“I see in the contract where Ted Leonsis is guaranteed a stadium,” Silverman said. “Where in the contract are there guarantees for economic development in Ward 8?”

That line of thought misses the point of Deputy Mayor for Planning and Economic Development Brian Kenner’s job, he told ThinkProgress. There are no guarantees in these projects, but there is dedicated funding specifically for efforts to lure private investment to under-served areas. But Kenner, who moved to D.C. from Iowa in the late 1990s when the city’s Chinatown was “difficult,” is optimistic about the city’s track record.

“There was public money put into the Verizon Center and there were questions back then about why we would wanna commit resources when the benefits aren’t guaranteed, only with the hope that the benefits will accrue?” Kenner said. “There’s no formula that says if you do x here, it’ll be y successful. But I think largely Washington, D.C., has had some success at showing that you can take neighborhoods that were tough and use public investments to really drive development there.”

Those successes have also come with significant displacement, however. Insufficient supply of affordable housing and profit-motivated developers eager to replace rent-subsidized tenants with young professionals who can afford luxury condos have made it hard for the people who stuck out the hard times in D.C.’s downtown to hang on long enough to benefit from the slow process the city hopes to spark again in Ward 8.

A Buck For Stadiums, 50 Cents For Housing

That $50 million taxpayer investment in the facility may look appropriately small next to other investments with a clearer public value, such as the quarter-billion dollars Mayor Bowser intends to spend replacing D.C.’s decrepit central homeless shelter with a number of smaller, distributed, and modernized shelters and supportive housing units.

But building a new arena in the District’s hardest-hit ward is only the latest in a sequence of far costlier public investments in sports facilities. It’s spent at least $700 million on the ballpark where the Washington Nationals play, and less optimistic estimates put the total north of $900 million — far above the pricetag used to sell the deal.

And a deal sealed last year to build a new stadium for Major League Soccer’s D.C. United will add at least another $150 million. That deal drew some praise from those generally critical of public financing for stadiums, on the grounds that the club is picking up the other half of the projected $300 million total cost.

Even that success is shrouded in past failures and future risks. The city nearly traded away valuable public property along the U Street corridor to acquire the soccer stadium parcel because D.C.’s borrowing ability was so drained by the Nats Park project. And the 50/50 cost split for the United stadium comes with a kick-out option for the soccer club, which can walk away if the construction costs it’s shouldering jump by more than 20 percent. The city wouldn’t be obligated to save the project if that happened, but there would be significant political pressure on District leaders to do so.

The best-case scenario, then, is that the District will have spent over a billion dollars on baseball, soccer, and basketball facilities for private companies with billionaire owners in highly profitable leagues in just over a decade.

The District’s signature affordable housing system, the Housing Production Trust Fund, has only gotten about $530 million over that same span, according to Silverman’s office.

Such a two-to-one ratio is probably being generous to the string of Bowser predecessors who authorized the bulk of that stadium spending. Rough estimates indicate the city also spent $82 million for transportation upgrades to service Nats Park, according to Greater Greater Washington.

Beefing up housing investments and stiffening the system of incentives and rules that are meant to encourage mixed-income development could help correct the imbalance, and increase the odds that public dollars for sports facilities create equitable growth rather than pure gentrification.

But if those questions are going to be addressed, it will be separate from the decision to put $50 million into the Ward 8 arena.

“What I’m trying to do is drive close to 400,000 people to this campus in a way they are not today,” Kenner said. “What I hear from the community is, how can we make sure that some of the economic benefits that will accrue from this investment will be distributed equitably? That’s a fantastic question.”

A previous version of this piece stated D.C. traded away public property as part of the D.C. United stadium deal. The city initially proposed such a swap, but ultimately retained the U Street property.