Is Virginia Beach Arena Deal Good or Bad for Taxpayers?

Mayor Will Sessoms announces a $220 million Virginia Beach arena deal

Mayor Will Sessoms announces a $220 million Virginia Beach arena deal at a Chamber of Commerce function. Photo credit: Virginian-Pilot.

Virginia Beach City Council has approved a financing plan to build a $220 million sports and entertainment center near the Oceanfront, reports the Virginian-Pilot.

“Game on,” said Mayor Will Sessoms in announcing the deal. There is “a real possibility now” of hosting part of the NCAA basketball tournament. “Picture March Madness two years from now. Wouldn’t it be amazing to have that happening right across the street at our new Virginia Beach arena?”

I’ll tell you what would be amazing — if Virginia Beach taxpayers don’t take a drubbing.

The deal has gone through multiple iterations over more than a year. More than a year ago, City Council approved a plan submitted by the arena developer, United States Management involving $170 million in loans and $40 million in equity. A second plan would have entailed a $240 million loan. Under the latest plan, approved by City Council, the developer will borrow $150 million and invest $70 million in equity.

The city has committed to a $476 million in incentives over 33 years, as described by the Pilot: 1 percentage point of the city’s lodging tax, construction tax incentives, and tax revenue generated by the arena. Also, the city will shell out $76.5 million in hotel and discretionary taxes for infrastructure in the area.

Sessoms described the agreement as “a very good deal,” and other council members agreed.

Bacon’s bottom line: Maybe it is a good deal, I don’t know. There isn’t enough information in the Pilot article to tell. One positive sign: The developer is putting in $30 million more of its own money and borrowing $20 million less under the final deal than under the original deal. That puts the developer at greater financial risk, as is proper, and provides an extra financial cushion if, surprise, surprise, revenue projections don’t meet forecasts, the developer goes bust and the city has to step in. I hate to sound like Debbie Downer, but it’s been known to happen.

It’s more difficult to assess whether or not the city is giving away the store. We need to know how much tax revenue the Virginia Beach arena is expected to generate directly in property, sales, and hospitality taxes, and how much it is expected to generate indirectly through increased hospitality taxes at Virginia Beach hotels and restaurants. Then we need to match up those numbers year by year against the value of the incentives and give-aways. Presumably, that will yield a positive number, in which the city and its taxpayers gain each year more than they lose.

But, wait, what about the $76 million in taxes spent on infrastructure? Presumably, that will be front-end loaded. The city will have to build the infrastructure (street improvements, sidewalks, utilities, whatever) right away as part of the arena project, not phase it in over 30 years. Here’s how city council persons should be thinking about the deal: In exchange for an up-front investment of $76 million in tax dollars, the city will generate an increased stream of net tax revenue (gross revenues minus cost of incentives) from the project.

If the city’s return on investment is, say, six or seven percent, then taxpayers are getting a decent deal to compensate them for the risk they’re taking on. If the return is close to zero, one wonders why the city is pursuing the project when it could put its resources to work to better effect elsewhere. If the city is actually generating negative net taxes, then the developer took it to the cleaners.

In making the announcement, the mayor did not release any such numbers (at least none that were reported) and offered instead a lot of gassy talk about how great it will be if, maybe, just maybe, the NCAA tournament chooses Virginia Beach as a venue. That makes me suspect that either the numbers look shaky or, worse, Virginia Beach officials don’t even know what kind of return they’re getting. If I were a city taxpayer, I’d be demanding answers.