At some point in the near future, the Orlando City Council will likely approve an agreement to build the Orlando Magic a new arena. City leaders and Magic officials will tell us how terrific this "downtown events center" — a phrase that has replaced "arena" in city parlance — will be for our urban core. They'll tell us this is a fair deal, comparable to the subsidies similarly sized cities have given their basketball teams. They'll tell us the Magic will pay $500,000 more per year than the team pays to play at the Amway Arena.
They'll tell us that it's more than a home court for a basketball team: The events center will host events from gymnastics to minor-league hockey, arena football to college basketball tournaments. The Rolling Stones might even hobble in for a show.
They'll tell us that it's more than a home court for a basketball team: The events center will host events from gymnastics to minor-league hockey, arena football to college basketball tournaments. The Rolling Stones might even hobble in for a show.
They'll tell us this is a vital part of a new, vibrant downtown, the first part of Mayor Buddy Dyer's $1 billion-plus renovation. (The performing arts center and Citrus Bowl are on deck.) This is something we have to do, they'll say, to keep pace with other emerging cities.
They'll tell us the new events center will cost $480 million and downplay the fact that almost 90 percent of that will come from taxpayers, both tourists and locals. They'll hype the Magic's $50 million contribution, and thank the team for being so supportive of the community. They'll tell us the building will open in September 2010, and unless we meet that deadline, they'll tell us the Magic "have no way to be economically viable," as city-paid consultant Carl Hirsh said Jan. 11.
They'll tell us — not directly, but the message will be strongly implied — that if we don't build this arena, the Magic will leave Orlando. And since the city is desperate for that not to happen, commissioners will vote for the agreement.
The next day, the Orlando Sentinel's editorial board will cheer. Should any commissioner voice an objection, the Sentinel will label that person an obstructionist or perhaps question their dedication to the rebirth of downtown Orlando.
All of this can be virtually guaranteed, as if it had been scripted. Which, in a sense, it has. The major players long ago decided that the Magic will be getting a new arena; public input is a formality. You don't have a say. You never did.
Because this is a plan designed and built for the vested interests that will reap the most profit from it, you may be wondering: Did the city get the best possible deal it could? Did the mayor and city council work hard to negotiate in the best interests of the citizens of Central Florida?
The short answer to both questions is: no. From the beginning Orlando negotiated with the Magic from a position of weakness, instead of strength. The team knew the city would give them whatever they wanted, as long as their contribution wasn't embarrassingly pitiful.
The Magic said, "Jump." The city asked, "How high?"
The deal
The price of the arena is $480 million. The building will cost $380 million, and the land it sits on and infrastructure needed to support it will cost $100 million, money that Orlando will generate from bonds taken against the city's general fund and earned from the redevelopment of the Centroplex into a proposed "creative village".
That leaves $380 million to cover; tourist taxes pay for about $300 million of that, including the $100 million in tourist-tax bonds the Magic has promised to guarantee. The rest comes from a combination of interest earnings, sales-tax rebates and the Orlando Magic.
City documents peg the Magic's contribution at $62 million, but that number is inflated. The team is actually paying $50 million; the rest is rent paid upfront instead of over the life of the agreement. Instead of paying $1 million a year in rent for 25 years, the team pays $12 million at the start, so essentially years 13 through 25 are rent-free.
The Magic have agreed to pick up any cost overruns. If the arena ends up costing $400 million, rather $380 million, the Magic pay the $20 million difference. The team has also agreed to commit $100 million worth of bonds to back up a portion of the tourist-tax money, a safeguard should the tourism money not come through as expected.
The city will collect $2.75 million per year from the team for naming rights, advertising, luxury-box sales, etc., an increase of $500,000 over what they collect now. But that figure assumes full rent payments of $1 million per year for 25 years, or $25 million over the life of the agreement. As noted, the Magic have negotiated a break in their rent, which will total only $12 million for 25 years; subtract the $1 million per year in rent the team has prepaid, and the actual annual payment is $1.75 million. The city will take in all revenue from non-Magic events, and expects to make $2.5 million a year.
Add those together, and you get $4.25 million. But that money won't go to paying off the city or county's debt. Instead, it pays for operating the arena. The city may collect more from the Magic than it does now, but maintaining the new arena will cost more than the current one. The city's goal is that the arena break even. It's not a moneymaker; except, that is, for Rich DeVos.
Orlando couldn't agree to the deal fast enough; Dyer originally had it on the consent agenda for Jan. 11, meaning it would have been voted on without discussion. Perhaps realizing that would be a public-relations disaster, Dyer then wanted to move the decision to a public hearing the same day. That plan was only scrapped because Orange County Mayor Rich Crotty had some problems with it.
Despite the city's substantial contributions to the deal, there will be no referendum, no chance for the public to have a voice on whether or not they'd like to spend $100 million on an arena or on something else. "It can be used for other things," says commissioner Phil Diamond, an accountant by trade who seems to be the council's lone dissenter. For instance, "More cops on the street, buying park land."
Diamond raised that issue Jan. 11, but Dyer ignored it. The deal is already set in stone, at least from the city's end.
Orange County, however, has some problems with the fine print; specifically, "perceived inconsistencies" between how the deal was pitched in September and the actual signed agreement in December.
For instance, the city and the Magic said the team would pay $50 million up front. The county assumed that meant cash; the city didn't, believing it would be fine if the Magic submitted a letter of credit and put the money in an interest- bearing escrow account. Guess who gets the interest?
Another point of dispute: The Magic guaranteed that it would take out $100 million worth of bonds in case tourist taxes didn't grow enough to cover all of the debt. But the Magic had something else in mind, saying they want to supply bond buyers instead of buying the bonds themselves. That sounds like a small distinction, but it puts the county at greater financial risk, which in turn increases the interest rate the county must pay. Over time, that could equal $37 million.
The Magic also offered to cover any cost overruns. But the city was all set to allow the team to undertake "such value engineering as may be necessary to cause the `$380 million` not to be exceeded." In other words, the Magic had authority to cut as many corners as necessary to make sure the arena's price tag didn't go up.
"We believe … that such ‘value engineering' may result in the removal of non—basketball-related improvements prior to any reduction in basketball-related improvements," county staffers wrote in a Jan. 12 memo.
A look around
City officials are convinced they are getting a good deal. And they want to convince you of the same thing. They think the Magic's $50 million contribution — a little over 10 percent of the construction cost — is more generous than teams in similar markets, and they say the city is getting a better deal because it, not the team, will operate the arena. They point to Indianapolis, San Antonio, Memphis, Tenn., and Charlotte, N.C., as examples.
There are problems with their comparisons, however.
Charlotte and Memphis, for example, both built arenas in hopes of landing an NBA franchise. In San Antonio, the Spurs paid a greater percentage of the cost than the Magic proposes to; in Indianapolis, private funds paid for most of that team's arena.
In San Antonio, voters passed a referendum in 1999 to build the $186 million AT&T Center, primarily through a temporary tourist tax. The Spurs chipped in $28.5 million, about 15 percent.
In Indianapolis, the Pacers brought $57 million to the table toward a total price tag of $183 million, or about 31 percent. A total of 60 percent of the arena was paid for with private funding.
Look beyond the comparisons used by Orlando and you'll note that the $375 million Staples Center in Los Angeles, which opened in 1999, was entirely privately funded. In Dallas, public money paid for half of the $420 million American Airlines Arena, while the basketball and hockey teams that would use the arena paid the other half.
Orlando officials say you can't compare those markets to us, because their media markets are much bigger. But what about comparing public/private percentages for other projects on Dyer's priority list? Even the nonprofit Orlando Performing Arts Center has pledged more private money toward its facility — $75 million — than the Magic is willing to pay.
Then there's the option of getting tough with basketball teams, drawing a line in the sand when it comes to spending public money to support private businesses. Sacramento, like Orlando, has an NBA team as its only professional franchise. Given a chance to voice their opinion at the polls, voters there rejected building the Kings a new arena with public money. Now there's a plan to build an arena with private dollars.
In November, Seattle voters approved a law banning city dollars from going to sports teams, which means the Seattle Supersonics will likely leave when the team's contract expires in 2010.
Losing proposition?
So if other teams in other cities can pay more to build arenas, or can rally more private support to get it done, why can't the Magic do the same? After all, Magic owner DeVos pays his players more in annual salaries ($61 million this year) than he is offering to contribute to a new arena.
According to the Magic themselves, the reason is they can't afford it; they're losing $20 million a year (that's up from the $10 million they claimed to be losing six years ago), due to being forced to play at the Amway Arena. That line has been parroted by both city officials and the Orlando Sentinel.
And it sounds like a lot of money. Unfortunately, there's no way to confirm it. The Magic have never offered any proof that what they say about their finances is true. Not to the media, and not to the city.
"They don't have to give us that information," says city spokeswoman Heather Allebaugh. The city, essentially, is taking the Magic's declaration on faith.
Even the city's own hired contract negotiator, Hirsh, says he doesn't know much about the Magic's finances; he hasn't seen the books, he said at a Jan. 11 city council meeting.
People who know the business of sports say that owners do not lose money on their teams.
"In general, sports teams are notoriously bad record keepers," says Victor Matheson, an assistant professor of economics at the College of the Holy Cross in Massachusetts. "The reported losses are far higher than what people would say the losses really are."
Matheson is suspicious of the Magic's claimed $20 million annual deficit. "They plead poverty so they … get subsidies from cities."
"The numbers dictate what you want them to say," says Dan Migala, who runs The Migala Report, a newsletter aimed at sports-related businesses. Migala believes sports teams are important to an area, and he's hardly an arena opponent. Nonetheless, he says, "The numbers are used as a public-bargaining chip."
Even if you assume that the Magic does lose money — and that's not an entirely unreasonable assumption, notes Matheson, given the team's losing ways — that doesn't mean being the owner of an NBA franchise is a losing proposition. As Charlotte Bobcats owner Bob Johnson once told USA Today, "No one has ever lost money on an NBA franchise, and I don't think anybody ever will. There … will always be a greater fool out there looking to buy."
How do you make money, then?
"You make it back when you sell it," says Larry Degaris, an economist at Sponsorship Research and Strategy.
A new arena would be a very good economic generator for DeVos. It would include luxury suites and other premium seating that could run as much as $100,000 for a season ticket. Sell 100 of those, and DeVos would have made up half the purported annual deficit. The new arena would also allow the team to raise other ticket prices. As Degaris notes, the average season ticket in the NBA costs about $3,000.
The new arena would make the team more profitable, and that makes it worth a lot more money, should DeVos decide to sell. If the lion's share of a huge boost in the team's profitability can be paid for with public dollars, what does DeVos have to lose?
Nothing. And the Magic have said as much themselves. As then—Magic VP (and longtime Dyer friend) Cari Coats told this newspaper in 2001, when the team was pushing for an arena, "If we're using the revenue to build the building, then we're not getting the revenue, and we're right back where we started, and why do we have a new building?" (At the time, DeVos was only willing to pony up $10.5 million of his own money toward a new arena.)
But why stop at the Magic? Why isn't every company looking to public funding to make itself more profitable?
"There's an obvious comparison," Matheson says. "What kind of handout is Disney looking for? Are they asking Orlando to build the next Space Mountain? They have every bit `as big` a claim `as the Magic`. Basketball teams are not good economic generators."
We deserve better
A new arena isn't necessarily a bad idea. The problem is the city let the Magic control the debate. "The Magic have done a fine job of framing the negotiations," Diamond says, "`and` setting the parameters."
The reality is this: Orlando is the 19th largest media market in the country, and it's growing rapidly; in 25 years, it will be the 17th largest. Every city above us has pro teams, as do several cities below us. For a professional sports team, this is a good place to be. Despite all their talk of commitment to the community, the Magic is a business. They would be long gone if they weren't making money here, or didn't have the potential, at least, to do so.
The Magic will use the arena at least 41 times a year for the next 25 years, and more if they make the playoffs. The team's upfront contribution, Diamond has calculated, amounts to about $5 per seat per game. The rest of your ticket price is pure profit.
The only reason the city is building a new arena is that the Magic demanded it. Yet all they are willing to contribute is 10 percent. Someone should have called foul.
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