"C" is for Arena (That's Good Enough for Me)

Now, I don't claim to be an expert on economic development, let alone a sports and exhibition authority, but this article in the P-G this morning on the new arena raised a couple red flags with me. From the article:

State and local politicians should go beyond Plan B to offer the Penguins something other cities can't -- a share of the profits in the redevelopment of the Mellon Arena site, city Councilman Bill Peduto says...

"This is the perfect opportunity for [Detroit businessman and casino licensee Don] Barden, the Penguins, the city, the county and the state to partner together," he said. "It's a great way to keep the team in Pittsburgh, redevelop the Hill, get Barden more involved in the community, and lessen the impact on taxpayers."...

He said the arrangement would be similar to that negotiated with the Pirates and the Steelers to redevelop land between PNC Park and Heinz Field. Both teams get a piece of revenues from the redevelopment, which is being led by Continental Real Estate Cos.

I've only been grudgingly a supporter of this type of big project/sports venue development and, again, I'm not an expert here, but there are a couple thoughts for you to chew on.

Before anything, if the proposed "Melody Tent Site" development does take place, I would assume that it would take the form of similar large scale redevelopment projects in the City by creating a mixed-income, mixed use development. So, basically you're talking the opportunity for small retail space (perhaps a grocery store!), some small office space, rental apartments affordable to low and middle income families, and for sale houses or condominiums. That's not to say that it couldn't be something totally different, but I think this is a safe City modus operandi to bet on. Financing for the development would probably come from a mixture of state and local funds, Barden's $7.5M/30 yr commitment, private loans and grants, and equity investment.

If I was the Penguins, this would not look like an attractive scenario for a couple of reasons. First, the ROI for this project is long term based on a non-guaranteed stream of income from the development. It seems unlikely that any small office, retail, or rental development would create a profit in the first year or even first yearS. If the Penguins are patient, they could be sitting on a tidy little sum eventually, but not until all the bonds, investors, and creditors are paid off or if there is sufficient cash flow.

That is, of course, unless the Penguins are capitalizing on the actual sale of the land and getting a share of those profits. Now, that's assuming that there are any actual profits to be had, considering that the value of the land to a developer and the developer's willingness to pay will be directly related to the ROI that can be (probably) achieved. So, again, if the development can't afford the sales price of land, it will either (a) not happen or (b) have to subsidized so that it can.

If I was any other group that received funding from the City (especially in areas that are in equally dire need of economic revitalization), I would be royally pissed. Either plan basically shunts already scarce economic development resources away from other areas in order to create an artificial profit for the Penguins. Morever, the $7.5M promised by Barden over 30 years really only works out to about $115 Million, not $225 Million, when you take the discounted value. In that case, the City or the Penguins would have to float a bond to cover those payments, an action that may or may not be possible given the financial concerns of each. If it's the City, floating a bond will restrict its ability to borrow for more critical projects.

Finally, if I was any of the groups in the Hill, I would definitely want a say in what would be going on in my neighborhood. While it is, in my opinion, nearly inevitable that the development would be mixed-income, mixed use, the actual ratio of the mixture is unknown. The desires of the residents may not be compatible with the economic profitability of the project, thereby forcing more public resources into the project.

So I guess what I'm trying to say here is that if I were the Penguins, I wouldn't think that this plan improves the City's bargaining position much. If anything, I would be looking for more up front money, maximizing profit as quickly as possible.

And notice I didn't mention anything about the profitability of the new arena itself.

Tag(s): Economic Development, Pittsburgh Penguins, Mellon Arena