Oak View Group’s KeyArena MOU Passes Through Committee

This article originally ran on SCC Insight.

This morning the Councils Committee on Civic Arenas met to discuss the proposed MOU with Oak View Group for renovating Key Arena, and in the end the moved it a big step forward.

Six of the nine Council members were present (Sawant, Harris-Talley and OBrien were absent). After a lengthy public comment session in which community members mostly voiced their support for the MOU, the Council heard a report from their staff and consultants on the project.

This meeting differed a bit from the usual council process of deliberating and passing legislation, since the topic of discussion is an agreement that is being negotiated with an outside party. The council members cant simply amend the agreement as they see fit; instead, they can offer a set of topics that they would like further negotiation on and recommend that the citys negotiating team bring those topics to OVG in the spirit that it would increase the likelihood that the council will ratify the MOU.

But first, the financial review. Largely it laid out the same story I summarized earlier this week on the potential revenue scenarios and how the benefit the city and OVG. There were a few interesting clarifications today though:

• – Council member Johnson pointed out that this morning the House of Representatives passed a tax reform bill that would eliminate the historic building preservation tax credit. OVG was counting on that for a portion of the $600 million funding for construction. But OVG has been tracking the issue and is lobbying in D.C. to try to get the tax credit reinstated. If they fail however, they feel confident in their ability to secure other private financing to replace it.
• – The MOU gives full naming rights to the renovated arena to OVG, who can sell that for an estimated $5 million per year and not share the revenues with the city. According to the Councils consultants, this arrangement is not unusual for a deal like this where OVG is providing all the funds for the project; if the city were providing partial funding, the revenues would likely be split.
• – Its important to understand that if the agreement falls through and the parties walk away from the deal, the city would continue to have its current revenue stream from Key Arena in the short term. But since the city hasnt been doing major maintenance on Key Arena and has no sustained funding source to do so, that revenue would dwindle over time as the building falls into disrepair. Left to its own devices, the city will either lose its arena revenues or end up plowing it (and possibly more) back into the building. However, under the terms of the MOU, OVG assumes all responsibility for major maintenance and capital improvements of the arena for the length of the contract (at least 39 years). The city gets a guaranteed revenue stream, it has essentially no expenses related to upkeep of the arena, and it has ownership of a state-of-the-art, well maintained arena on its asset ledger. That last part is interesting, and Council member Johnson inquired as to whether having such a valuable asset pays hidden dividends to the city by improving its overall financial standing (e.g. its assets-to-debt ratio, which might affect its credit rating). City staff are working on an answer to that.
• – In the scenarios where an NHL and/or NBA team becomes a tenant, OVGs revenues shoot up. But OVG will need to split those revenues with the tenant teams as a term of the hosting agreement. SO in practice, it isnt as directly profitable to OVG as it looks on paper.

The Council brought in a list of thirteen amendments to the MOU that they wanted to discuss (listed at the end of this presentation) but by the time they had discussed the list they had narrowed it down to seven that they wanted the citys negotiating team to take back to OVG:

• – A technical amendment just to clean up some language;
• – Requiring OVG to brand the facility as an iconic arena;
• – Requiring OVG to program activities that actively involves the surrounding neighborhoods; both the city and OVG will dedicate staff to collaborative programming and involvement with community organizations;
• – Currently the MOU requires OVG to start paying rent when the renovated arena begins operations, which is anticipated to be 24 months after the project begins. An amendment would require that if construction runs behind schedule, OVG must begin to pay rent beginning no later than the 30th month even if construction is not complete unless the city is the cause of the delay.
• – OVG has made a substantial commitment to contributions to YouthCare and other local charitable organizations, with the YouthCare commitment spread out over 20 years. An amendment would apply the same 20-year spread to the other charitable contributions, and it would require that at least half of the contributions be in cash (vs. in-kind donations).
• – An amendment would set an explicit expectation that OVG would coordinate its booking schedule with Seattle Center arts and cultural organizations, including the Pacific Northwest Ballet and the Seattle Opera. The Seattle Center already manages such coordination activities, but Council members felt it is important to set the expectation explicitly in the MOU that OVG would participate.
• – The MOU currently says that OVG will pay for relocation costs for Pottery Northwest to move out of the construction zone and back into the same space afterwards, but it isnt clear on exactly what is included in relocation costs, leaving open questions as to whether it includes higher rent at its temporary location, or lost revenues because of the move. An amendment would add a schedule and plan for Pottery Northwests relocation, as well as a definition for relocation costs so that expectations are clear.

The committee voted to recommend approval of the MOU by the full Council, contingent upon these six issues being addressed to their satisfaction. What that means in practice is that the citys negotiation team will attempt to close on all of these issues with OVG by November 27th, resulting in an updated, final MOU (and a piece of legislation calling for the Council to ratify it) by December 1, in time for the full Council to review and approve it on Monday, December 4.

Side note: by December 4th, Council member Harris-Talley will have stepped down and Teresa Mosqueda will be sworn in, so Mosqueda will get to vote to approve the MOU.

Once the MOU is done, other work begins. The city expects to have a draft Mobility Plan in February, a draft Environmental Impact Statement on the arena renovation project in March, and a final EIS in August. The permitting process for the arena will also move forward in parallel, and hopefully complete in time for demolition to begin next October.