Is Virginia Beach Arena Deal Good or Bad for Taxpayers?

Mayor Will Sessoms announces a $220 million Virginia Beach arena deal
Mayor Will Sessoms announces a $220 million Virginia Beach arena deal at a Chamber of Commerce function. Photo credit: Virginian-Pilot.

Virginia Beach City Council has approved a financing plan to build a $220 million sports and entertainment center near the Oceanfront, reports the Virginian-Pilot.

“Game on,” said Mayor Will Sessoms in announcing the deal. There is “a real possibility now” of hosting part of the NCAA basketball tournament. “Picture March Madness two years from now. Wouldn’t it be amazing to have that happening right across the street at our new Virginia Beach arena?”

I’ll tell you what would be amazing — if Virginia Beach taxpayers don’t take a drubbing.

The deal has gone through multiple iterations over more than a year. More than a year ago, City Council approved a plan submitted by the arena developer, United States Management involving $170 million in loans and $40 million in equity. A second plan would have entailed a $240 million loan. Under the latest plan, approved by City Council, the developer will borrow $150 million and invest $70 million in equity.

The city has committed to a $476 million in incentives over 33 years, as described by the Pilot: 1 percentage point of the city’s lodging tax, construction tax incentives, and tax revenue generated by the arena. Also, the city will shell out $76.5 million in hotel and discretionary taxes for infrastructure in the area.

Sessoms described the agreement as “a very good deal,” and other council members agreed.

Bacon’s bottom line: Maybe it is a good deal, I don’t know. There isn’t enough information in the Pilot article to tell. One positive sign: The developer is putting in $30 million more of its own money and borrowing $20 million less under the final deal than under the original deal. That puts the developer at greater financial risk, as is proper, and provides an extra financial cushion if, surprise, surprise, revenue projections don’t meet forecasts, the developer goes bust and the city has to step in. I hate to sound like Debbie Downer, but it’s been known to happen.

It’s more difficult to assess whether or not the city is giving away the store. We need to know how much tax revenue the Virginia Beach arena is expected to generate directly in property, sales, and hospitality taxes, and how much it is expected to generate indirectly through increased hospitality taxes at Virginia Beach hotels and restaurants. Then we need to match up those numbers year by year against the value of the incentives and give-aways. Presumably, that will yield a positive number, in which the city and its taxpayers gain each year more than they lose.

But, wait, what about the $76 million in taxes spent on infrastructure? Presumably, that will be front-end loaded. The city will have to build the infrastructure (street improvements, sidewalks, utilities, whatever) right away as part of the arena project, not phase it in over 30 years. Here’s how city council persons should be thinking about the deal: In exchange for an up-front investment of $76 million in tax dollars, the city will generate an increased stream of net tax revenue (gross revenues minus cost of incentives) from the project.

If the city’s return on investment is, say, six or seven percent, then taxpayers are getting a decent deal to compensate them for the risk they’re taking on. If the return is close to zero, one wonders why the city is pursuing the project when it could put its resources to work to better effect elsewhere. If the city is actually generating negative net taxes, then the developer took it to the cleaners.

In making the announcement, the mayor did not release any such numbers (at least none that were reported) and offered instead a lot of gassy talk about how great it will be if, maybe, just maybe, the NCAA tournament chooses Virginia Beach as a venue. That makes me suspect that either the numbers look shaky or, worse, Virginia Beach officials don’t even know what kind of return they’re getting. If I were a city taxpayer, I’d be demanding answers.

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9 responses to “Is Virginia Beach Arena Deal Good or Bad for Taxpayers?”

  1. Great walk-through of how one could evaluate the deal, if the relevant information was available.

  2. ijustwantedtoknow Avatar

    1 thing is for certain– 76 million for infrastructure work is coming out of the taxpayers pockets
    that other– 470,000$ is money that will never go into the taxpayers benefit
    that a 1/2 billion dollars in costs to the people of the city
    is it worth it?– how long,– if ever–will it take the people to re coop that money?
    then again, personally,– it’s in the wrong place with parking being a problem, and traffic will only get worse for everyone including the people who live around that area.
    they have voiced their opposition many times to deaf ears.

  3. Good deal? The only times you see deals like this is when it is good for the politicians to get re elected and the businessmen to make money and slough off the risk to taxpayers.

  4. Bob Matthias Avatar
    Bob Matthias

    The infrastructure improvements have been planned for many years. They are being paid for with tourism related taxes. Hotel and meals taxes including an industry supported increase of the ” bed ” tax from 1 to 2 dollars a night. Not general fund dollars.

  5. ijustwantedtoknow Avatar

    it still isn’t worth 500,000$ of taxpayers money
    it will not generate any money for the city– only developers will see any money for years & years — what will we get?– a few low paying jobs.– lots of traffic problems– lots of parking problems– a lot of unhappy people that live close to it.
    if it was such a great deal, the city would NOT have to give them all of that money.
    tourism related taxes?– you are talking about taxes that the entire city should be benefiting from, not just the developers that love getting their investments back.– more in their pockets.
    maybe some people should reread their deal and understand how sweet it is for them.

    1. TooManyTaxes Avatar

      There needs to be some substantial contribution from nearby landowners who see a significant increases in the value of their property for development due to taxpayer funding of improvements. Developers and builders should make their profits from the construction of desirable buildings and subsequent sales or rentals.

  6. Doodad63 Avatar

    The Virgininian-Pilot had a fairly succinct list of those taxes and how much they would generate per year. They top out at $14.6 million. Click below to see.

    1. Doodad63, Thanks for linking to the Virginian-Pilot piece. These are exactly the kinds of questions that reporters should be asking. The fact that the feasibility study is made available to the public only in redacted form is most worrisome. The developers may consider some of the projections proprietary, but if they’re asking for public money, they need to be transparent.

      Almost every feasibility study for projects like this err on the side of optimism. Elected officials are not likely to scrutinize the underlying assumptions because they revel in the publicity but probably won’t be around if the project doesn’t live up to its promises.

  7. ijustwantedtoknow Avatar

    only in a perfect world– in the world we live in the property taxes will force them to sell before they can make any profits at all

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