June 23, 2013 8:00 AM, Crain’s Detroit
$650M Wings complex plan linked to taxes from GM, others
General Motors Co. and other downtown corporations will be the chief funders via their property taxes of the public portion of the $650 million Detroit Red Wings arena and entertainment district under a plan announced last week.
Detroit’s Downtown Development Authority intends to use $284.5 million in property taxes captured within its 615-acre downtown district to pay off bonds issued by the state to build the 18,000-seat arena at Woodward Avenue and I-75.
GM has the largest taxable value within that district, and it and other corporations, along with small- and medium-sized property owners, will foot some of the arena’s bill through property taxes.
The remainder of the arena costs, or $365.5 million, will be picked up by Olympia Development of Michigan, the property development arm of Mike and Marian Ilitch’s $2 billion Detroit business empire that includes the Red Wings, Detroit Tigers and Little Caesars pizza chain.
The Michigan Strategic Fund will issue 30-year bonds to cover the public portion of the arena’s construction costs.
The fund, which can sell low-interest bonds for projects, is an autonomous board within the quasi-public Michigan Economic Development Corp. and was created in 1984 to promote economic development. It has financed projects via bonds and owns others.
A nonbinding memorandum of understanding involving the DDA, Olympia and Wayne County that outlines the project and its financing was approved in a unanimous voice vote by the DDA board last week.
The memorandum outlines a framework of the project, but absent are key details yet to be worked out, such as a timeline, bond schedule and more. The DDA will own the arena.
Approvals still are needed from the DDA, Detroit City Council, Wayne County Commission, Michigan Strategic Fund, Detroit Economic Growth Corp. and Olympia’s board.
Backers explained the bond repayment sources as:
• Approximately $12.8 million annually (not to exceed $15 million) from a special DDA tax capture.
• Approximately $2.15 million in average annual payments made by the DDA from other annual property tax collection.
• $11.5 million annually from Olympia.
Critics have blasted the arena deal as unnecessary subsidies for a billionaire pro sports team owner in a city on the precipice of municipal bankruptcy.
Detroit’s state-appointed emergency manager, Kevyn Orr, has said the city’s long-term debt is as much as $20 billion, and he’s halted all debt service payments on city liabilities not secured by dedicated revenue sources.
Moody’s Investors Service, one of the three major debt rating services, has all Detroit bonds below investment grade.
Backers say the project will create new tax revenue for the city and jobs.
They also explained to Crain’s that the special tax capture has been in place for more than two decades and legally cannot be used for any purpose other than economic development.
In December, the state Legislature authorized the DDA to use a specific property tax capture to pay off a “catalyst development project” of $300 million or more — with the hockey arena in mind.
The origin of that capture is thus: The DDA said it issued tax increment bonds in 1989 (and refunded them in 1996) to create a pool of money that would be used to fund downtown projects, including construction of the Millender Center, Riverfront Towers, One Detroit Center and 150 West Jefferson.
The DDA, under state law, was permitted to tap into a school millage, believed to be primarily for the Detroit Public Schools, to capture property taxes in the DDA district and use the money to pay off the bonds used for those projects.
The money captured from the school tax was reimbursed to the schools by the state, the DDA said.
The largest single taxpayer in the DDA district is GM, which represents about 22 percent of the taxable value within the DDA district, according to information published by Fitch Ratings in November.
That means the automaker’s property taxes will fuel the public portion of the bond repayment for the hockey arena.
GM declined to comment, and DDA spokesman Robert Rossbach said he did not have details available Friday afternoon about the tax capture breakdown by company or taxpayer.
According to Fitch, 10 companies account for more than 50 percent of the taxable property value downtown. The ratings agency didn’t identify the other nine, but it appears DTE Energy and Greektown Casino-Hotel are other major landholders in the district.
In addition to the arena, an additional $200 million is proposed to be spent on ancillary development, such as residential, retail and office space around the event center, according to the agreement for the project. The arena will be home to the hockey team but also will be able to host basketball, concerts and other events.
That money will be paid by the Ilitches or private developers they contract for the project. The DDA will credit Olympia up to $62 million if it spends the $200 million five years after the arena opens, the agreement states.
Olympia Development will operate the arena under a 35-year concession management agreement with the DDA. There will be 12 five-year renewal options.
Using property tax captures to finance sports facilities isn’t unusual, said Andrew Zimbalist, a noted sports economist at Smith College and author of several sports finance books.
“What’s different here is that Detroit doesn’t have the ability to issue bonds, and the state is doing that,” he said.
Zimbalist also said he’s surprised at the public-private ratio of the project costs.
“It seems like they could have leaned on Ilitch a little bit more here. He’s done pretty well with that franchise and he’s got deep pockets,” he said.
The DDA and Olympia chose to use the Michigan Strategic Fund to issue the bonds for the public portion of the project but were not required to do so. The DDA can issue bonds.
“The state of Michigan authorized the extension of the property tax capture, which is the majority of the public funding, so it made sense for MSF to be the issuing entity,” the DDA said in a statement Friday.
The state was even more vague when asked why the Strategic Fund is the bond issuer.
“Subject to board review and approval, MSF is viewed by the parties as the preferred bond issuer for legal and economic reasons,” said Kathy Fagan, communication specialist at the MEDC, via email Friday afternoon.
What those “legal and economic reasons” are were not disclosed by anyone involved in the deal.
John Axe, founder of Grosse Pointe Farms-based Axe & Ecklund PC, which specializes in municipal bond work, said the MSF was likely chosen because Wall Street is wary of anything coming out of Detroit right now.
“For the time being, Detroit would be a difficult name to have on any financial obligation. If they’ve got the city’s name on them, that’s enough to hurt you,” Axe said. “No entity with Detroit’s name on it is going to be chosen to sell bonds for quite a while.”
Using the Strategic Fund as a pass-through could eliminate some worry, he said, although the bond rating agencies and bond buyers will be primarily interested in the ability of the DDA and Olympia to generate revenue to pay the debt.
“You’re going to get a rating on the bonds if you’re going to sell them. What they’re going to look at is how the bonds are going to get paid,” Axe said.
DEGC President and CEO George Jackson said he hoped the approvals could be in place by the end of the year. Actual construction of the arena would take 24-30 months, so 2016 or 2017 are the likeliest years that the Red Wings would begin play at the new arena.
The quasi-public, nonprofit DEGC is the city’s umbrella economic development agency providing staff, financing and incentives for the various authorities, including the DDA, that do specific tasks, such as neighborhood, commercial and industrial redevelopment along with investment.
Olympia has said little publicly about the project. No arena design schematics have been made public, and it’s unknown whether the Ilitches have decided on what they want the building to look like.
In May 2012, the Red Wings’ ownership selected Dallas-based HKS Inc. as the arena architect, according to Sports Business Journal. The team and firm declined to confirm or deny the report. HKS will design the venue with the Cambridge, Mass.-based architectural firm NBBJ, the sports industry trade magazine said.