Thumbs up if you’re still worth $2.7 billion

Flashback to two weeks ago. NHL training camp was just getting underway. The Patriots were favorites to win the Super Bowl. The Tigers were even further away from Spring Training and the Lions had still been well into their offseason, leaving me searching for something to write about.

I did some reading on the Red Wings’ proposed new stadium, realized some issues with the original plans, and wrote about how the arena doesn’t make all that much sense for the city. Well it just got worse.

Crain’s Detroit has obtained some emails and done some first-rate reporting on the plans for the new arena, and it certainly appears like Detroit is going to spend much more public money than originally intended.

(I would recommend reading the article. We can break it down together.)

Now, there is a very real possibility that the state of Michigan will own the arena instead of the person who stands to gain the most from the arena, Mr. Mike Ilitch.

Discussions have the state’s Michigan Strategic Fund owning the arena in a “similar way” it owns the state office building in Detroit. Right, because a building that exists for to pump money into a private entity operates in a “similar way” as a building that houses a portion of the state’s infrastructure.

Remember two weeks ago when we discussed Ilitch getting reduced tax rates on the building because he’s a part of the NHL? Well, that apparently isn’t enough. If the state owns the arena, Ilitch obviously doesn’t, and all of the sudden somebody doesn’t have to pay property taxes, journalist Neil deMause told Crain’s.

Recent NHL arenas have been built for as much as $300 million and as low as $133 million. Let’s play it safe. Let’s assume if Ilitch was to keep ownership of the building, he would get enough tax breaks so that the taxable value of his arena was just $50 million. Using this handy little application provided by the state of Michigan, we can get a rough estimate that he would be paying about $4.3 million in property taxes.

If the state owns it, I’m sure the Red Wings would get a similar deal that they got for Joe Louis Arena, where they simply pay rent.  This Detroit News article says the Red Wings are paying $450,000 a year to stay in Joe Louis. In the Crain’s article it says they’re paying $25,000 a month, which comes out to $300,000 a year.

Let’s play it safe again. Let’s assume Ilitch pays a cool $1 million in rent per year for the new arena. That still oh, about $3.3 million that the city is voluntarily saving Ilitch — and costing themselves — on a facility that Crain’s estimates will generate an extra $5 million to $8 million in revenue for Ilitch — and not the city — anyway.

What’s in it for the city? Well they get to lose a lot of money. Let’s review a quote from the Crain’s article. Consultant Patrick Anderson:

“The idea that an economic development authority could own a sports facility and run it in an attempt to generate a profit is not one that has a long track record of success,” he said. “Historically, they’ve been very poor investments as operating entities. They tend not to be income producers for whoever owns them.”

But it’s coming with an arts and entertainment district, right? And Ilitch still has to foot the bill for construction costs, right? As of right now, yes, but even those plans have changed to make the city more involved. The $12.8 million per year for a mysterious amount of years that is being taken from Detroit Public Schools is still being contributed, and Crain’s says an extra $2 million from the “quasi-public” Detroit Economic Growth Corp. and $2 million from Wayne County is also being requested.

Plus, should the Michigan Strategic Fund get involved and own the stadium, it can issue “private activity bonds” to help with the construction. Essentially Ilitch would get tax-exempt loans from the city with a low interest to help with the construction of this stadium.

Let’s recap what happens if this plan for the state to take over Detroit’s most famous unnamed arena goes through.

Ilitch gets:  $3.3 million (probably more) in savings due to paying rent instead of property taxes, an extra $4 million on top of the $12.8 million for an undisclosed amount of years from the city, reduced construction costs, and a stadium that should make him at least $5 million more than he does now.

Detroit gets: Less money from property taxes, an arena it’s probably going to lose money off of, and some slight revenue from the low-interest “private activity bonds” issued.

Deal or No Deal?

To be clear, this isn’t Ilitch hoodwinking the city. He’s just a smart business man. The same kind of creativity goes on with just about every other arena in just about every other city. On the rare occasion a city pushes back (Seattle), there are plenty of others willing to accommodate them (Oklahoma City).

Ilitch has been good to the city. He wants to see it thrive. He has good intentions. But at a certain point, we’ve got to realize the madness of forcing a new arena to be funded by a city that can’t afford it and to be owned by a state that doesn’t need it.

Why not Detroit?

To  borrow from the Crain’s piece for the 150th time, let’s find the best way for the fans (and Ilitch) — not the taxpayers — to pay the majority of the costs.