Is There a Better Way to Build a Stadium?

MILWAUKEE—It has become widely accepted that publicly-financed sports stadiums are a bad deal for cities.Yet in Milwaukee, located in a state that recently cut $250 million from its higher-education system, the state has agreed to to pitch in $250 million for a new arena for the Milwaukee Bucks basketball team. The new building, to be built just a few feet from the current arena—the BMO Bradley Center—will break ground in late June. There are plenty of examples to suggest that this might be a bad idea. Take the example of St. Louis, some 400 miles to the south of here. In 1995, the city, county, and state spent $258 million to build a stadium hoping to attract a football team, eventually luring the Rams from Los Angeles. It didn’t come cheap: Stadium maintenance—which was written into the contract—was expensive, to the tune of $6 million a year. That’s far more than the city was making from games. Now, the Rams are headed back to Los Angeles, and St. Louis is stuck with $144 million in debt and ongoing maintenance costs, according to Reuters.

What’s different in the case of Milwaukee? Either a whole lot, or nothing, depending on who you ask.

On the one hand, it’s mind-blowing that Wisconsin’s Governor Scott Walker, who has centered his political career on  cutting government spending, has willingly agreed to use taxpayer money for  a sports arena for a team owned by billionaires.“The return on investment is 3 to 1 on this, so we think this is a good, solid move as a good steward of the taxpayers’ money here in Wisconsin,” Walker said when he signed the legislation authorizing the funding.

Observers—even those who usually agree with his fiscal policy—aren’t so sure.“There is a fairly big deal of hypocrisy going on particularly in Milwaukee Bucks case, given the fact that this is a large expenditure of public money, on behalf of a governor who says you should keep government out of everything,” Victor Matheson, an economics professor at College of the Holy Cross, told me.

There’s also the fact that these ventures rarely end well. Studies have found multiple reasons public investment in stadiums and arenas is a bad idea. For example, while it’s true that the construction of arenas creates jobs (a huge talking point for supporters of these endeavors)  those jobs are usually temporary construction positions or seasonal, low-paid positions working in concessions or cleaning the restrooms. “If there were tons of money to be made in arenas, people would build them,” says Matthew Parlow, a professor at Marquette University School of Law in Milwaukee, who also studies sports arenas. But arenas rarely reap returns on an investment. No one can afford to build them except governments, who can issue bonds, and then lease the arenas back to the teams, Parlow said. The Bucks, will pay about $1 million a year to lease the new arena in Milwaukee.

Public financing for stadiums came about as Congress tried to limit deals that allowed private entities to profit from tax-exempt bonds, according to Parlow. Before 1986, local governments could issue tax-exempt bonds, and businesses would pocket the savings they made from striking up deals with the government. The 1986 Tax Reform Act sought to rectify that. It said that no more than 10 percent of the revenue generated by a project built with public money could be repaid with revenues from that project. So a team couldn’t use more than 10 percent of revenues from concessions or tickets to pay for stadiums. But a loophole allowed for public revenue, such as sales tax, lottery proceeds, or other taxes to be used to pay for the stadiums. Increasingly, teams asked the public to pay up to 90 percent of stadium costs, since they could only use profits from the deal to pay for 10 percent.

But it’s possible that the Bucks, and other teams, have learned something from the public antipathy towards public financing of arenas. The team isn’t just using public funds to build an arena for itself; it is also pledging to build a seven-story parking structure alongside the arena with mixed-use retail on the ground floor and an apartment complex on the eastern side. It has hired a design team for a block of entertainment, retail, and commercial spaces, and hopes to begin building that area next year, according to spokesman Jake Suski. The team is also the master developer for the entire 27-acre development, which may someday include bars, restaurants, a public plaza, and eventually office space, multifamily housing, and a hotel. The Bucks created two new LLCs, Head of the Herd LLC and Deer District LLC to handle much of the development.

The Milwaukee deal is bigger than just an arena, it’s part of a trend in which sports teams, cognizant that public sentiment is largely against public financing, get into the business of economic development. Of course, the city often sweetens the deal by throwing in incentives for them to develop real estate, but the teams are stepping up to the plate. “You’ve got to become a catalyst,” team president Peter Feigin told me*. “We’ve got to really put the foundation in the ground and look to transform the city.”

Feigin talked to me about “connective tissue” in cities and how the arena may bring together different neighborhoods, about how a stadium can be more than just for sports (he wants to see festivals and pep rallies and viewing parties). He said if a team drives development, it has much more control in helping a neighborhood thrive. This, economists say, is a different attitude than team owners used to have about the neighborhoods surrounding their team homes. Before, Matheson told me, teams had no incentive for local restaurants, bars and stores to succeed. They wanted fans to spend money inside the arena, and hoped people would skip neighborhood restaurants and bars in favor of arena food. But give local owners some control over development, he said, and they may actually want to create an entertainment district and build commercial establishments where they can make more money.

One of the first examples of a deal struck with the goal of economic development outside the arena is the Staples Center in Los Angeles, according to Parlow. The city of Los Angeles wanted to revitalize the South Park neighborhood, where 25 percent of the land was parking lots and 25 percent was vacant. The area was struggling while the city put money into other areas of downtown, building new concert venues and incentivizing development in areas closer to the central part of downtown. But AEG, which owned the Lakers and the Kings, saw that it could tap into the city’s development plans by expanding on them. In addition to the arena, it built a hotel, a movie theater, an ice skating rink, a plaza, and kept expanding. The Staples Center and surrounding area is now a thriving commercial district even when the arena isn’t in use. The city and the developer, then, entered into a plan to revitalize the neighborhood, rather than just working together to build an arena. That led to more profit for the developer, and higher tax revenues for the city.

Other deals have included similar economic development partnerships between the city and sports teams. In Brooklyn, for instance, one of the owners of the Nets is also a majority investor in the Atlantic Yards project, which includes the Barclays Center arena and commercial and residential buildings. In Massachusetts, the New England Patriots build a stadium surrounded by parking lots until the team’s owners, the Krafts, decided they wanted to use the real estate as more than just parking lots. There’s now a large outdoor mall and entertainment district surrounding the Patriots’ stadium. And the owner of the Rams, Stan Kroenke, is working with developer Stockbridge to build a stadium and an entertainment center in the Inglewood area of Los Angeles—and he’s not asking for any public financing at all.

“The old model of a walled fortress stadium surrounded by a moat of parking lots, and having that be publicly subsidized, was always crazy,” Matheson said. “You have a much better chance of these things turning out better for the city as a whole if there is a grander redevelopment scheme.”

But all of this isn’t quite proof that the new arena will be a good deal for Milwaukee.

For one thing, the team is not required by any agreement with the city or county to build more than the arena, a practice facility and a parking lot. If the economy goes sour and downtown Milwaukee looks like a bad investment, the team and its subsidiary development companies don’t have any obligations to build the rest of the entertainment district.

And the city hasn’t yet put forth economic development plans of its own to expand on the team’s development. With multiple headaches over approving development on those parcels, they’re still sitting vacant, and thus far, then, the city is ceding development plans to the Bucks and their local real estate partners. The nearby land is owned by different entities, including the city, county, and state, Parlow said, making broad-based development difficult. “I remain a skeptic,” he told me.

This article is part of a week-long series of articles about the business of sports. Joe Pinsker on the future of corporate sponsorship is here.

* This article originally spelled Peter Feigin's name as Fagin. We regret the error.