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Subsidizing Sports Stadia: Detroit's Tradition Continues

Detroit, Michigan is issuing $450 million in tax-exempt private activity bonds to pay for the construction of a new sports arena. While private investors purchase the bonds, the risks are assumed for future gains. This presentation explores how Tax Increment Finance (TIF) works and discusses the costs, benefits, and implications of stadium development deals for distressed cities like Detroit.

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Subsidizing Sports Stadia: Detroit's Tradition Continues

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  1. Public Finance PresentationBy: T.J. Auer Detroit/Michigan continues local government tradition of subsidizing sports stadia

  2. Michigan Not Detroit? Michigan is issuing “$450 million in 30-year tax-exempt private activity bonds to pay for construction of the arena itself.” 58% of repayment - Downtown Development Authority - $261.5 million 42% of repayment - Olympia Entertainment - $188.4 million http://www.crainsdetroit.com/article/20131213/NEWS/131219910/state-would-demolish-joe-louis-under-plan-for-new-hockey-arena http://www.freep.com/article/20140129/NEWS01/301290158/Red-Wings-arena-Detroit-land Bonds are sold by the state to raise funds, funds not actually issued by state or city. So, who is paying for the stadium? Private investors purchase the bonds, assume risk for future gain. Since private interests purchase bonds many claim these types of arrangements are distinct from public subsidy….

  3. How TIF Works • Expanded Tax Increment Finance Area • Theory – the new stadium development will increase business activity and raise surrounding property values • Practice – Revenue Bonds issued (different from general obligation bond) • A portion (increment) of the resulting property tax is used to repay bond + interest T Stadium Site TIF Area

  4. Taxpayers Pay Risk Free Slope would equal Mill Rate Bond Repayment Tax Revenue Actually Revenue Usable Revenue Property Values

  5. Site Assembly • Olympia Development (division of Ilitch owned Olympia Entertainment) spent $50 million purchasing land for approximately half the development site • Detroit expected to transfer land for other half of the development • Detroit Downtown Development Authority will be the property’s owner – is this quasi-public body tax exempt? • Ownership is an important component of this deal • Current question in media regarding taxes for Joe Louis Arena Detroit loses potential revenue from land sales & possibly future tax revenue

  6. Benefits to the City • Expected 400 more jobs than Joe Louis Arena • Construction and demolishing jobs • $200 million dollar spin off development would not be owned by DDA • Potential increases in property value in and beyond TIF area • Commitment to a Neighbourhood Advisory Committee – influence/power not yet set Costs • Land being assembled for the development site • Demolition costs of Joe Louis Arena – cost to state • future demolition or repurposes of new arena – Red Wings lease is 35 years • Property tax from stadium and property tax increases that go towards bond repayment • Maintenance and Repair – DDA and Olympia share

  7. Why Do Cities Make Stadium Development Deals? “We are recruiting and retaining talent, andit’s important that we have a competitive facility in order to compete in the National Hockey League,We need your support on this project to keep our team competitive.” – Ken Holland Red Wings GM • Artificial Scarcity – There are more large cities than teams • the supply of teams is regulated by the leagues • the geographic distribution is controlled by the league Is this a good deal for Detroit? Is it a better or worse deal for Detroit given its current distressed state?

  8. Sources • http://www.freep.com/article/20140129/NEWS01/301290158/Red-Wings-arena-Detroit-land • http://www.crainsdetroit.com/article/20131213/NEWS/131219910/state-would-demolish-joe-louis-under-plan-for-new-hockey-arena

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