This post is part of a series on the NOB/Navy Hill downtown development plan.
I’ve been looking at various parts of the city of Richmond’s downtown development plans. I have finally reached to the centerpiece of the deal – and, in some ways, the deal’s “original sin.” This is, of course, the plan to build an entirely new arena in place of the aging Richmond Coliseum.
The head of the Navy Hill development group, Dominion CEO Tom Farrell, has been dreaming of a new coliseum at least since 2011. That year, his company joined three other locally-based corporations in commissioning a study that called for a new arena to be built near the current site, but it went nowhere.
Apparently he never gave up. And when news arose in mid-2017 that his Navy Hill development group was going to try to redevelop downtown, it was clear that a new coliseum was going to be a big part of their plans. And so it was not much of a surprise when the city’s call for proposals demanded “Richmond Coliseum Replacement” with a new 17,500-seat arena. Apparently no other options – renovation, a smaller arena, a different site – were considered.
There are lots of conspiratorial rumblings around the city, especially on social media, about Farrell’s role in this development, and what he stands to gain. That’s understandable, as Dominion is probably the most powerful corporate player in Virginia; the company is currently embroiled in an unpopular attempt to build a natural gas pipeline through parts of the state.
But I think there’s a simpler explanation than any financial gain for Farrell and his company. By all accounts, Farrell is a big booster of the city of Richmond. The capital is a great city, with terrific neighborhoods and a much bigger cultural footprint than its small size might suggest. Why shouldn’t this great city have a great arena to match, the largest in the state?
Maybe because we simply can’t afford it?
Despite complaints about it being run-down, the Coliseum is not doing badly in terms of business. As the Richmond Free Press noted, the consultants the Mayor commissioned to study the development plan found that the Richmond arena is the busiest in the state. A regular ranking of arena sales suggested the Coliseum (along with other Richmond facilities) was on the rise in the last year.
Still, the building seems to have been operating at a significant loss for at least half a decade. Along with the debt for the last round of renovations, the Coliseum costs Richmond taxpayers around $1.5M a year just to keep in business. That’s money that would be better spent elsewhere.
But would a new arena be any better of a deal for the city? According to the Hunden consultant report, a new arena would be built at a cost of $220M, and should produce something like $12M a year in revenue. That doesn’t sound too bad, right? At least we’d cover interest payments.
Well, hold on. You may have heard me say before that the numbers we’ve been hearing about this development deal aren’t what they seem. (Like here, here, and here.) The same thing goes for these arena development plans, namely:
As far as I can tell, the $12M per year cited in the Hunden report is GROSS revenues, before expenses. It is not clear how much profit the arena would actually rake in, or how much of that profit would be claimed by the management company who runs the arena. (Currently, the city owns the Coliseum, but its day-to-day operations are handled by SMG.) So the actual return to the city is certain to be much less.
Hunden seems to be making some wildly optimistic assumptions even to reach that $12M/year number. As Justin Griffin notes over at nocoliseum.com, the Hunden report seems to be based on the idea that the number of concerts will triple. (Justin also likes to point out that developers seem to be obsessed with the claim that the new arena will bring Beyoncé to Richmond, although she never plays arenas this small.)
I suspect that Hunden is dramatically underestimating the costs of arena construction. The new coliseum would be considerably larger than the current one, with Hunden and other boosters making some noise about possibly hosting a hockey team. Each arena project is different, but recent trends in arenas of this size involve costs way higher than Hunden’s $220M number. For just one example, an 18,000-seat arena in Minnesota was built for a cost of anywhere from $170M to $230M – and that was almost two decades ago.
So call me skeptical about the arena somehow generating enough money to pay for itself. This fundamental financial problem is the reason why the city had to draw such expansive lines for the dedicated tax district, basically pulling tax revenue from everything in downtown. Since the arena generates so little revenue by itself, you need more and more taxes from other parts of the downtown to pay for it.
So then how can the Mayor and developers say this project is such a good deal? This is where they bring up arguments about billions of dollars in “economic impact.” They claim that a new arena will bring people, and investment dollars, to downtown. People will come from miles around to attend shows, but also shop, stay at hotels, and even live downtown.
As I’ve noted in earlier posts, economists are extremely skeptical about these effects actually materializing. A 1997 study and accompanying book from two Brookings economists point out the underlying truth: spending at arenas typically acts as a SUBSTITUTE for spending in other parts of the economy. While they focus on sports facilities exclusively, the authors’ general argument applies to a Richmond arena as well. Building a new arena, the authors note,
has an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues.
Journalist Neil deMause comes to similar conclusions at his essential website, Field of Schemes; deMause has story after story after story of stadium and arena construction deals ending up costing taxpayers way more than they thought. As these reports show, there is a simple conclusion from decades of economic evidence about public funding for arena and stadium projects: they are not worth the cost.
The Mayor seems to have a lot of aspirations for this project. In a November press release, he touted its “potential to generate significant revenues that we can use to build a world-class educational system, to improve housing opportunities for all our residents, and to invest in art and cultural projects that tell our full and complete history.” These are admirable goals. But in what universe is a brand new Richmond Coliseum the best way, or even a good way, to achieve them?
With all these problems, why demand a new coliseum? As best as I can tell, it’s because Tom Farrell wants it. Is his desire worth hundreds of millions of dollars of taxpayer money? We'll soon find out.
Next up: I’ll be taking a blog-break for the holidays. In the new year, I’ll take a look at the deal’s financial structures, including the TIF district and the “non-recourse” bonds. Until then, happy happy!