Breakdown: Safeco Field, a $180 Million Proposal and Seattle’s Lodging Tax

This story originally ran on SCC Insight.

The King County Council is considering a proposal to allocate about $180 million of hotel and lodging tax revenues toward capital expenditures on Safeco Field. This is enraging community members who think that the money should be spent on affordable housing instead and certainly shouldnt be spent on supporting a private, for-profit organization like the Seattle Mariners.

The financial arrangements of the ballpark, the Mariners, and the hotel and lodging tax are rather convoluted. Lets pick this apart to understand where all the money is going.

The current consortium of owners bought the Mariners in 1992, while the team was still playing in the Kingdome. The new owners negotiated with the State of Washington and King County for the construction of Safeco Field, and a 20-year lease from when it opened in 1999 through the end of 2018.

Safeco Field, which is publicly owned, cost $517 million to construct; the Mariners paid for $145 million of that, including $100 million in cost overruns. The rest was paid for with public funds. The county established the Washington Baseball Public Facilities District as an ownership and financing vehicle for the ballpark, the adjacent garage, and the land they sit on. The PFD and King County issued bonds to pay for the land acquisition and construction, using its taxing authority to raise revenues to pay debt service. The construction-financing bonds have all been paid off, and most of the taxes used to pay it have been retired except for a 5 percent admissions tax on events at the ballpark and a 10 percent parking tax that are used to help pay for ongoing ballpark repair and capital improvements.

Under the terms of the existing lease agreement, the Mariners are paying annual rent to the PFD of just over $1 million. They also have a profit-sharing agreement with the PFD, but that is a structured as a share of the cumulative profit of the Mariners since 1996. The team lost $200 million from 1996 to 1999 while it was still playing in the Kingdome, and using the formula dictated by the profit-sharing agreement, they have yet to get out of the red though they have whittled the cumulative loss down to about $26.5 million.

The Seattle Mariners is a private, for-profit corporation, so its finances are not public. However, the PFD does get to privately audit them to ensure compliance with their financial arrangements. The numbers for 2017 arent out yet, but in 2016 the team lost $7.3 million (again, using the special formula in the profit-sharing agreement, which excludes depreciation, but includes player signing bonuses and capital expenditures).

It may surprise you to hear that the Mariners arent insanely profitable. In fact, they claim that they have never made any financial distributions to their owners. Its a tougher business than it sounds: attendance is at a 15-year low, player salaries are high, and fans have high expectations for amenities at ballparks and for the ballparks themselves. Of course, just because the owners havent received any income from the team doesnt mean they havent gained financially; the franchises value has grown dramatically in 26 years, from $100 million in 1992 to around $1.2 billion in 2016 (as measured by the value of a fractional ownership that changed hands that year). If and when owners sell their share, they stand to make some good money.

Under the current lease agreement, the Mariners are responsible for all costs associated with operations, repairs, minor and major maintenance, and upgrades of Safeco Field, except for unanticipated capital expenses such as sudden failure of equipment that was expected to have a much longer operating life. Those do, in fact, happen, and the PFD has provided a small amount of funding for that, but the bulk of the cost has fallen on the Ms. The lease requires that Safeco Field be maintained as a first class facility, in the top third of MLB ballparks. And the Mariners have done a good job of maintaining it; it ranks highly among comparable ballparks, and the latest inspection report says that the ballpark is in good shape. The PFDs records also shows that $103 million of capital improvements (in 2015 dollars) were made between 1999 and 2016.

In May of this year, the Mariners and the PFD announced that they had agreed upon a term sheet for a 25-year lease extension. Among the terms:

• – Rent is $1.5 million for 2019, with annual CPI adjustments.
• – It switches from profit sharing to revenue sharing. 1.5 percent of the Mariners first $100 million of revenue subject to the admissions tax goes to the PFD, and 2 percent of revenues above $100 million, with no minimum and no cap. All of the PFDs revenue-share receipts go towards capital expenditures.
• – The Mariners must continue to maintain the ballpark to the same first-class standard, measured against the top one-third of ballparks.
• – The Mariners are responsible for 100 percent of operations, capital maintenance, repairs, re-equipping, and necessary improvements as detailed in the PFDs capital needs assessment.
• – There is a joint Capital Expenditure Fund that is used to pay for capital improvements to the ballpark, and both the PFD and the Mariners pay into it. This fund exists as a form of escrow account, ensuring the PFD that the funds required to meet the Mariners responsibilities are secured. The PFD contributes admissions taxes, parking taxes, $250,000 a year from the Mariners rent payments, its annual revenue share, and any lodging taxes from King County into the fund. The Mariners contribute $3,250,000 per year directly for the first five years (and more indirectly through the PFD from their revenue share and rent payments). After the first five years, the PFD and the Mariners will compare the projected fund balance with projected expenses, and adjust the clubs contribution so that the fund will be at 110% of projected expenses. Regardless of what the fund balance is, the Mariners are required to complete all necessary capital improvements to meet the standard and if doing so exhausts the capital expenditure fund, then the team must pay the rest of the costs itself.

The Capital Needs Assessment that the PFD and the Mariners commissioned found that there are $297 million of necessary capital investments required through 2036 in order to meet the required standard (with more in the remaining five years of the lease, but the needs assessment is only a 20-year study). Thats about $16.5 million per year.

Any upgrades (as distinguished from necessary improvements) to the facility above and beyond the necessary ones are the responsibility of the Mariners to fund, with the exception that if the team has fully met its responsibilities toward the necessary improvements and there are excess funds in the Capital Expenditure Fund, the PFD must entertain the idea of at least partially funding upgrades that are in the spirit of keeping the park first class and in the top third of ballparks. Upgrades might include:

• – Maintaining or improving upon the patron experience;
• – Expanding or maintaining revenue streams;
• – Attracting new demographic groups to the facility;
• – Maintaining Safeco Fields competitive position with the market.

And that brings us full-circle, back to the King County lodging tax. The issue in front of the King County Council is how to allocate the revenues from the 2 percent lodging tax starting in 2021 when the CenturyLink Field bonds are paid off. Under state law authorizing the lodging tax, at least 37 percent must go to cultural organizations, at least 37.5 percent to affordable workforce housing near transit stations or to youth homeless programs, and the remainder (up to 25 percent) shall be spent on tourism-related efforts. King County Executive Dow Constantine has proposed 37.5 percent to 4Culture, 37.5 percent to Transit-oriented Development (TOD)projects, 15 percent to capital improvements for Safeco Field, 1 percent for capital improvements to the Showare Center in Kent, and the remainder generally allocated to promoting tourism and attracting tourists to King County.

Heres how that breaks out in 2021-2022, when the lodging tax is expected to produce revenues of about $55.57 million:

• $20.8 million for transit-oriented development projects;
• $20.8 million for 4Culture;
• $8.3 million to Safeco Field;
• $417,000 to the Showare Center;
• $5,140,000 generally allocated to promoting tourism.

The $8.3 million will cover about half the average annual spend on necessary capital expenses for Safeco Field. In total, under the term sheet the funds devoted to necessary capital expenditures include:

$8,335,000 lodging tax
$4,500,000 admissions tax (based on 2017 PFD financials)
$500,000 parking tax (based on 2017 PFD financials)
$250,000 PFD contribution from Mariners rent payment
$3,250,000 Mariners required annual direct contribution
$16,835,000 Total

That meets the $16.5 million average annual planned spend under the Needs Assessment, and doesnt even include the contribution from the new revenue-share agreement. Without visibility into the Mariners finances, its difficult to estimate how much money the revenue-share represents, but a quick back-of-the-envelope calculation says that if the Mariners average 30,000 tickets across their 80 home games, with an average ticket price of $30, thats just over $1 million coming to the PFD in revenue-share per year. Factoring that in, theres roughly $1.3 million of cushion in the funds proposed for capital expenses. On the flip side, without the lodging tax the funding is about $7 million per year short of what is required.

So where does that leave us? Some thoughts:

– Its clear why the Mariners are asking for the lodging tax: without it the math simply doesnt pencil out on the capital expenditures. Including the Mariners direct contribution, the rent contribution, and the revenue-share contribution, the team will be funding about $4.5 million per year; without the lodging tax that would need to be $11.5 million.

– We need to be very clear that the Mariners are not asking King County to pay for all of the Safeco Field capital expenditures; the team is definitely on the hook for a substantial portion under the teams of their new lease. Also, only 15 percent of the lodging tax revenues would be going to Safeco Field under the proposal, while 37.5 percent over $20 million per year would be going to affordable housing in transit-oriented development projects.

– That said, theres room to trim down how much of the lodging tax revenues go to Safeco Field, given that capital expenditures seem to be amply funded when you add up all the sources. You could reallocate a million over to TOD projects, plus some of the $5.1 million generally allocated to tourism.

– If King County says no, the Mariners have indicated that they would probably exercise their option for a five-year extension on their existing lease. Even if the county says yes when the vote comes up in the County Council at the end of August, the Mariners and the PFD would probably need an extension, because it would be challenging to subsequently get the full contract done before the end of the year when the lease expires.

– There are open questions as to whether public investment in stadiums is a good idea, and there are smart people making plausible cases either way. There are equally good questions to be pondered as to whether the county should be spending money on a sports stadium when faced with a housing a homelessness crisis. I wont takes sides on that, though I will point out that the county owns Safeco Field and all of the capital improvements that have been made to it, regardless of who paid for them; if the Mariners walk away from their lease, they take none of that with them.

The question of whether to pour lodging tax revenues into Safeco Field in the face of other urgent funding needs is more a question of how to best preserve and maintain a 10-acre campus currently worth $519 million that the County owns, and less a question of whether doing so is using public funds to support a private company or whether that is justified. Whether taxpayers should have funded Safeco Field in the first place is water under the bridge; they did, and they own it now. There is certainly a moral argument to be made that relieving the human suffering happening on our streets must be the first priority for public funds, and equally an argument that public funds need to support a diverse set of investments that make King County a great place to live and work: streets, parks, sewers, water and electrical infrastructure, police and fire departments, transit, human services, community centers, libraries… and perhaps arenas and stadiums.

The King County Council will continue to debate the topic before taking a vote in late August.