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Interview With The Arch-Enemy Of Stadium Deals: Neil deMause

by on 21 April 2015

After Minnesota United FC released a plan for funding their proposed Minneapolis soccer specific stadium the West Loop, to applause from some and opposition from others, I reached out Neil deMause to get some perspective on this deal compared to others, what it might truly cost, and why some might oppose it. deMause is perhaps the foremost stadium funding skeptic in America. He runs the Field of Schemes blog and has co-authored a book of the same title.

He is, he hastens to say, a fan of beautiful soccer stadiums. But where he takes issue is how stadiums across the country are paid for. He has been covering the stadium debate in Minnesota, and has written two recent contrary posts on the issue here and here.

With soccer an easy target for politicians strenuously attempting to look frugal, Minnesota United must work hard to address concerns and demonstrate the potential value of the plan. Perhaps to win over the final nay-sayers, the plan itself might be revised. Meanwhile, it’s important for fans arguing on the team’s behalf to be informed and take the opposing views seriously. For a proponent of the soccer stadium, like this writer, Neil’s arguments are challenging but vital.

This interview has been lightly edited for comprehension, but no questions or answers are omitted.

 

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Given the details released yesterday, what is your general sense of what is being proposed by Minnesota United FC?

Neil deMause: It seems like Minnesota United is going for the low hanging subsidy fruit. They’ve realized that getting actual tax revenue to be paid over in terms of cash towards construction is not going to happen, and so they’re sniffing around the more popular hidden subsidies that tend to go with stadium deals. They’re trying to get as much money as they could.

On one hand, that’s better than the alternative. It’s certainly better than what the Vikings did. But it can still come to a significant amount of money. The construction sales tax that they want is not a huge amount. The possible property tax exemption would be a good bit larger. We could be talking $40 million dollars worth or more. Which on a building that’s costing $100-120 million to build, is a significant help. If they take the money that in the future they would use to pay property taxes and instead use to pay back stadium loans, then that’s a huge subsidy they’d be getting.

And I’m still not entirely clear on what some of the other stuff means, like the whole issue of limits on future taxes on the stadium. I don’t know if that means ‘we’ll promise not to raise taxes on you’ or if that means ‘we’re promising that your taxes stay where they are now even if you’d normally pay more’ so it’s a little hard to tell.

Again, they’re not proposing a “you have to build the entire thing for us” but that’s not typical for MLS. The model really has been “we’ll build the stadium, you do everything else”. This is “we’ll build the stadium and buy the land, and you do everything else”. So marginally better, but not a new paradigm.

We were hoping you’d walk us through some of the different taxes. Now on that third tax item, Nick Rogers, the team president wrote on Twitter that “It’s something that was contained in the Twins and Vikings deal and all it is is to say that the city, county, and state can’t single out the facility for extra taxes.”

NdM: Okay, yeah, that’s not that bad then. The team doesn’t want to go in saying “here’s what our costs are going to be” and suddenly have the city say “oh hey, great, you’re here we can raise revenue for something else by slapping on a ticket tax, and you can’t do anything about it because you’ve already built your stadium”. That’s not terrible, it’s just a guarantee of not trying to levy more taxes later. That I don’t really consider a subsidy.

The relief from the tax on construction materials, we know that’s common in Minnesota, is that common nationwide?

NdM: Oh yeah. It’s common in the sense that it’s a common special gift to give to developers. It’s obviously something that if you’re just going and building a house, you’re not going to get this off, but it’s the first thing that sports teams or people building a condo development always ask for. They say “well, you wouldn’t be getting any sales tax on construction materials if we didn’t build this, so please chop that off.” It’s complete disingenuous from my perspective, in that anybody could claim that. I could claim that if I were renovating my bathroom. “If I didn’t renovate my bathroom, you wouldn’t get any sales tax, so I should get to go to the hardware store and buy everything without any taxes”.

But on the other hand, it’s not a huge amount of money. Because maybe half the cost of the building is construction material, and the rest is labor and things like that. I think the Star Tribune’s number was $3 million and I think that’s about right.

The property tax is a far bigger issue and it’s common, but by no means ubiquitous.

Before we discuss that, please explain for all of us how you calculated the ‘present value’ of the property tax exemption. You estimated the property tax at $3M a year. [Other sources have estimated around $1.5M to 2M] and extrapolated that to $48 million in present value.

NdM: Basically what you want to do to figure out present value is you’re trying to figure out how much cash you would need to have now to generate that stream of money. So if I were saying to you “Hey, I’ll give you three thousand dollars a year for the next thirty years, then you think okay, how much is that worth to me now? How much do I have to put in now, how much do I have to put in the bank to then take out $3,000 for the next thirty years?”

So it’s basically you’re calculating the present value of those future payments over that thirty year—and you’re assuming that the stadium is going to be there—g and it can vary depending on what interest rate you assume but it comes to somewhere around $48M. It’s kinda like trying to figure out how much you’d pay for your house if all you paid were your mortgage payments.

You’ve already addressed this in pieces, but it’s clear you don’t think there’s merit to the argument that what the government is losing is future, non-existent revenues, and that no money is currently being lost. That this is money that wouldn’t exist unless the deal went forward and that that makes a difference in the accounting.

NdM: You know, I think you could make that argument for [i]anything[/i]. You could make it for income taxes. I could call up the IRS and say “you know, I owe you some money, but if I chose to quit my job, you wouldn’t get any money, so really how about I don’t pay you anything?” I don’t think that would get very far.

Is there a difference between $48 million now and $48 million in lost revenues over the course of thirty years? Is there a difference between the current proposal and if the city gave Minnesota United $48 million in cash in exchange for paying the property tax?

NdM: I think it’s more or less the same. Because if they got $48 million dollars, but they would have to pay property taxes, and so the city would get it back over time.

The argument, what you’re saying is, should the city be willing to forgo taxes on something that wouldn’t happen otherwise. Now the problem is the ‘wouldn’t happen otherwise’. [More on this in future articles – Ed.] That’s kinda called the ‘but-for’. Again, anyone can claim “hey, you wouldn’t get the money otherwise so you might as well not charge it to us” but if you do that enough times you start having problems because nobody is paying property tax. This is exactly what happened in Chicago in the early 90’s where they started handing out these TIF districts, where they would say “we’ll lock in the property tax where it is now, then you can build on top of it, and anything that you would have to pay in property taxes, we’ll collect and give right back to you and you can use it to pay off the development”. You do that once and great, you’ve got a new development. You do it 100 times and suddenly your property tax base looks like Swiss cheese.

Not only that, but then the shrinking number of property owners who are still paying property tax have to foot the bill for the costs of the other people. So it’s not like having something like a soccer stadium is cost free compared to nothing. You’re still going to have to provide stuff like police protection, you’re still going to have traffic… again, every development is going to cost the city, that’s why the city exists, but the reason you pay property tax is so that the city can afford to do that. Now, again, this is very very common, there are very few sports facilities in the US that pay property tax. In Canada that’s not the case, I should say. Most buildings, even if they’re publicly owned, still pay property tax.

It’s just one of those things that over the last 30 years or so that people have realized they can ask for, and because everyone else has it, it’s not going to look like a subsidy. It’s just standard business practice. But it’s only standard business practice because everyone else is doing it. It’s still a cost, even if it’s a cost commonly incurred.

How about the economic benefits that Minnesota United has claimed related to the stadium? 1,900 construction jobs with over $50 million of construction wages, hundreds of service-sector and related jobs, over $2.5 million of state and local sales taxes paid annually.

NdM: The construction benefits are probably correct, but they’re short term, if you build anything anywhere you’ll create construction jobs. The service sector jobs are low paid, and again they’re going to be seasonal. Is that full time equivalent jobs? Or are they only going to work during the MLS season? Even if you’re talking $40 million in tax breaks and you’re getting several hundred jobs out of that, it’s still not a terrific ratio.

Now the $2.5 million of state and local sales taxes, there’s a big problem. They’re probably assuming not just people actually spending at the game, but also people staying at a hotel and eating in a restaurant. There usually tends to be a multiplier and it’s usually overly optimistic. But the bigger problem is that, as every economist who studies this has pointed out, if people are spending money going to a soccer game, they’re not spending money doing something else. If that means that they’re not going to a Twins game, and you’ve just substituted one expenditure for another and not gained anything.

If they’re coming from out of town, if they’re driving in from North Dakota just for the game, then you can say this is sales tax revenue we’re stealing from North Dakota and not cannibalizing it from ourselves. The problem is that it needs to be people driving in for the game—and again, that but-for—who would not be coming in otherwise. So if I’m in Minnesota because I’m visiting friends, and I decide to go to the soccer game, then there might be some additional money that I’m spending otherwise, but you can’t then say that my hotel room is then credited to the soccer team existing because I was going to go there anyway.

This is what economists who actually look at the empirical data have said, they look at Super Bowls, they look at the presence of a team, they look at what happens when the sports leagues go on strike and nobody is spending money on them. They can’t see anything happening in the sales tax data. All the evidence is that people spend the same money on some of the same things. People spend the same money on entertainment overall, regardless of what the entertainment is. And you put in a soccer stadium, and it will shuffle around what people spend their money on. And you’ll get so few new people coming into town that it won’t even register in the data.

My favorite quote from this remains when baseball went on strike in 1994 and the CBC was going around Toronto saying “what do you think, what do you think about the strike?” And they went into a comedy club and they said “this is great! we’ve had all these new people coming into our comedy club because they have nothing to do, we hope hockey goes on strike too!”.

So again, it’s not zero impact, but the best guess I’ve heard is that you should move the decimal point one spot left and you’re probably a bit closer to what the true gains are.

Part of the Minnesota United stadium deal is that they’re building on land that isn’t really at the highest and best use at the moment. And there’s evidence that the plan will go beyond the stadium to invest in the whole area. If this stadium plan is a stadium plan plus apartments and a new food venue, ect. Does this change the calculus for you?

NdM: Not really. I mean, this is very common, you see this going on right now with the [Milwaukee] Bucks arena deal. They’re saying they’re going to build a half billion dollars in other ancillary buildings. The Red Wings were also saying that, and that has a couple problems. The first is that these ballpark village concepts tend to be very slow to develop. The idea is that they’re going to do something else, but that’s the private part of the development and so there’s very little commitment. I was looking at a quote from the early days of the early days of the Nets basketball arena in Brooklyn. And people were criticizing the new housing that was supposed to be built around it, saying “you know that new housing might not open until 2016”. Now at the time that was about ten years away. I walked down by the Barclays Center yesterday, and they have succeeding in building exactly half of one residential building. It’s not going to get done by 2016, it’s probably not going to get done by 2026. So it tends to get built at whatever rate the market will bear.

That’s the other problem. If you have a market for all that other development, why wouldn’t it happen without a stadium? Stadiums and arenas are such terrible anchors for anything. They’re good for saying “hey, this area is under redevelopment” and getting on people’s radar, but nobody is going to open a restaurant just because there’s a soccer stadium that’s going to have maybe 30 events a year, if you’re lucky. It’s dark most of the year, it’s a terrible place to put a business. It’s not like you’re next to a mall or a hospital that brings people there constantly.

Is that partially because a lot of stadiums just tend to be surrounded by a moat of parking or highways?

NdM: It doesn’t matter, they’re black holes! I was talking to a restaurant owner in St. Louis, near the Rams stadium. And he said they close on gamedays! Because all you get is 70,000 people streaming through, and in three hours you get 70,000 people streaming back out again. How is he supposed to serve them? It’s obviously better if you don’t have a sea of parking lots around. But not that much better. New stadiums that are located in downtown neighborhoods, the Barclays Center is located in the middle of hugely developed Brooklyn, Camden Yards got build right down Baltimore, and there’s a couple sports bars around. It’s not like if you build a stadium downtown then all of a sudden you’re going to get Wrigleyville. That exists because it was there for decades and just happened to have a ballpark in the middle of it. But it didn’t grow up because the ballpark was there. So yeah, it’s nice if you’re talking about building something else, but if there’s a market for that, wouldn’t you be able to get something built there regardless?

Take the Brooklyn situation, you could’ve build housing over the entire area and there were people willing to do it. All you needed to do is move the rail lines and people would’ve come scurrying in to build there.

So the question [in Minnesota] is has anybody looked and said, what else can with do with that land, how else can we get that kind of development. Do we need a soccer stadium to do it? Again, that doesn’t necessarily mean you don’t do it. But at least you know what your other options are. Is this the only way to get any development there, or is this someone saying I’ll build a lot more there that they’d do anyway.

Can you think of other stadium projects funded in a similar way to this? All private funding with tax breaks?

NdM: There’s been a whole series of them. [Avaya Stadium in San Jose and Mapfre Stadium in Columbus are the two stadiums purely built with private funds. Source. – Ed.] The one thing that’s uncommon is that they’re willing to pay for the land. That’s what, $30 million dollars, and it’s great that they’re doing that.

But an example of “hey, we’ll build the entire thing except for this other stuff” is Yankee Stadium, where they paid for every last penny of the construction cost, but when you finished adding up the property tax cost and the cost of cleaning up the land and the construction sales tax kickbacks and the parking garage money, it wound up being the most expensive stadium subsidy in the history of the world…on a stadium they absolutely rightly claimed was privately constructed.

Economists at the University of Michigan who have looked into the final costs in the most depth, have said that the average stadium costs an extra 40% in public dollars over what it’s said to cost. The Vikings deal falls into this, it looked bad at first and now it looks even worse.

But again, this soccer stadium deal isn’t one of the worst deals in the world. But I still wouldn’t say it’s a good deal.

But on a scale of stadium deals, this is one of the better ones?

NdM: It’s much better than the average poke in the eye with a sharp stick.

 

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Thanks for Neil for his sharing his time with us! Agree or disagree? Share your augments for and against (politely, please!) in the comments below!

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