New NHL arenas in Calgary and Ottawa better not cross-check taxpayers

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By GlenHodgson

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In Calgary and Ottawa, interest in new NHL arenas for each city’s downtown area is resurgent after previous projects failed to start. Modern downtown arenas would have obvious draws for owners and fans in both cities. If the projects go ahead, however, it is certain that taxpayers will be asked for financial support. Should you? And if so, on what terms?

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The primary purpose of each new building is to help the franchise’s private owners make more money by selling more tickets, luxury boxes, refreshments, and advertising, including naming rights. Ideally, buildings would be completely privately financed and, thanks to strong demand, operated profitably, often used for concerts and other events in addition to professional sports. NHL arenas in Montréal, Toronto and Vancouver have been built largely with private funding, showing that it can be done in large markets. The New York Islanders’ new $1 billion arena is the latest example of private funding, with a business model that includes up to a hundred concerts and commercial events per year in addition to NHL games.

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But in smaller markets, both the number of days the building is likely to generate revenue and the financial capacity and risk appetite of the private sector are more limited. City and provincial governments will therefore face requests from franchise owners, usually supported by fans, to provide some form of financial support for new buildings.

New plants usually benefit the local economy. The local component of most construction projects is relatively high and often accounts for more than 80 percent of the total costs of the project. Construction can boost local employment, especially when labor markets are weak – which, of course, they are currently not. On the other hand, any multiplier effect is limited by “leakage” of imports used for construction and interest costs on borrowed money. And for multiplier purposes any Building is enough: Arenas are nothing special.

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Professional sports facilities also have some characteristics of “public goods” as they benefit society as a whole, not just owners, athletes and fans. A new arena could raise a community’s profile as a place for private capital investment. It could also encourage local entrepreneurs to start new ventures or attract additional tourists – people who really wouldn’t come without the sports franchise. (People attending a game for other reasons during a visit don’t count: if it weren’t for the team, they’d probably be spending money on restaurants or other local attractions.)

Each case has its own characteristics. In Calgary, an arena funding deal that fell through last year between the city and the Flames appears to have been resurrected. In Ottawa, the National Capital Commission recently signaled its willingness to make land available in LeBreton Flats, where the Canadian War Museum and some residential towers have already been built, and a light rail system and public library are the latest development projects.

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If taxpayers end up supporting new arenas, they should share the benefits and not just the risk – which has been the traditional “socialism for capitalists” way of doing these things. Edmonton’s stunning new NHL arena was funded through public-private risk-sharing, using projected revenues from an expanded property tax base, ticket surcharges, lease fees and other arena-related revenue streams. Public-private collaboration is also being used in Ottawa to rejuvenate the city’s soccer stadium and junior hockey arena while developing adjacent commercial and residential properties. The city borrowed the funds for construction and will be repaid from several predefined revenue streams, such as ticket fees and an expanded property tax base. The private partner provides construction services and builds up equity in the associated commercial and residential real estate.

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The Flames and the City of Calgary confirmed in October that negotiations for a new arena would resume. A risk-sharing financial partnership that minimizes the burden on interest payers would be the best way forward. The current provincial government has shown interest in the project – an election is imminent – but it should do what Ed Stelmach’s government did and not provide core funding for an NHL arena in Alberta.

In Ottawa, the Senators are up for sale following the death of owner Eugene Melnyk, leaving movement in a new arena awaiting a new ownership group. The city should clarify that any new arena will be largely funded by the private sector, based on a strong commercial model for the facility and surrounding area.

The bottom line? If public money is needed to get either project across the finish line, it should only be made available if both risks exist and Benefits are shared between the private and public sectors and the specific revenue streams that will repay government funds are clearly identified.

Glen Hodgson is a Senior Fellow at the CD Howe Institute and co-author of the 2014 book Power Play: The Business Administration of Professional Sports.