Story from Crain’s Detroit Business and written by Bill Shea. Click here for Crains article. Photo by Olympia Development of Michigan.
It will cost nearly $863 million to build the Little Caesars Arena project, which is the latest estimate from the state after $40 million in taxpayer-financed funding was approved Tuesday to cover the Detroit Pistons relocating to the venue.
The revised deal also includes increased public subsidies for the Ilitch family’s The District Detroit commercial development around the arena.
The new cost estimate made public Tuesday by the Michigan Strategic Fund, which unanimously approved the changes to the 2013 financing deal for the arena, includes $34.5 million in new bonds (and $4.85 million in closing costs and interest) that will be used to pay for changes to the downtown Detroit venue that will allow the NBA team to play there when the building opens in September at I-75 and Woodward. A deal was worked out in November by the owner of the building’s primary tenant, the Detroit Red Wings, to have the Pistons leave the Palace of Auburn Hills for Little Caesars Arena.
The nearly $40 million in Pistons-related arena costs, which had been previously disclosed, is atop $250 million in tax-exempt bonds previously issued by the Detroit Downtown Development Authority — which ultimately owns the arena — to finance some of the construction. The Michigan Strategic Fund issued the original bonds used to finance the DDA bonds under a deal approved in 2012 by the state Legislature.
Tuesday’s deal brings the total up-front public cost of the arena, so far, to $324.1 million. The new $863 million cost replaced the last working estimate of $732 million, which included $635 million in hard costs and $97.3 million in soft costs (such as engineering and architectural services).
Ground was broken on the arena in September 2014.
Olympia Development of Michigan, the real estate arm of the Ilitch family’s business holdings, has financed the majority of the arena’s cost at $538.8 million. The total $863 million includes the arena bowl itself along with an adjacent parking garage and commercial buildings flanking the venue along Woodward Avenue and Henry Street.
The building’s original cost had been predicted at $450 million, but that’s gone up as Olympia has tweaked and expanded the arena, which is the anchor of the wider Ilitch-led The District Detroit mixed-use redevelopment of 50 downtown blocks. Olympia — owned by the Ilitch family that has made billions from its Little Caesar pizza chain and other businesses — is responsible for any costs beyond the original $250 million in DDA bonds — except for the Pistons-related bonds approved Tuesday. That money will pay for NBA-quality locker rooms and other work required to make the arena appropriate for an NBA team.
The deal approved Tuesday also ups the public money that will be given to Olympia to cover ancillary development to $74 million from the original $62 million. As part of the 2013 agreement with the state and DDA, Olympia gets $62 million from taxes captured in the DDA district around the arena if the company caused at least $200 million in non-arena private construction to occur, such as Olympia or outside investors building apartments, restaurants, officers, etc. That taxpayer reimbursement has been increased now by $12 million.
Olympia has stated that its District Detroit project already has $2.2 billion in total investment, meaning it has reached the threshold to qualify for the DDA-backed subsidy, which will be paid after the public bonds are paid off. The bond maturity date was extended to 2050-51 as part of the contract approved Tuesday.
By the time all of the arena bonds are paid off, borrowing costs and interest will have pushed the arena’s price tag to beyond $1 billion.
The public bonds will be paid off by the tax capture mechanism, and the Olympia bonds and private financing will be paid via revenue created by the arena, such as games and concerts. Olympia, under the financing deal, keeps all revenue generated by the arena — a departure from its current deal with the city for Joe Louis Arena, where Olympia in the past has paid rent and surrendered revenue in the form of ticket charges and other fees.
Under the financing deal for the new arena, downtown companies will foot much of the property tax bill used to pay off the public bonds, including Quicken Loans Inc., General Motors Co., Olympia Entertainment and real estate firms such as Southfield-based Redico LLC.
How the tax capture works
How the property taxes paid on downtown buildings and land end up paying off the arena debt is a complicated process.
The DDA, which owns the 20,000-seat arena, since 1978 has captured property taxes in defined zones of more than a square mile in the city’s central business district for the purpose of using the money to fuel economic development within those zones. Legally, the money can’t be diverted to schools or public services such as police and fire protection.
The tax capture arrangement is Byzantine: For starters, the DDA doesn’t capture every cent of property taxes. Instead, it captures taxes paid on the increase in property values in the district after a baseline year for each parcel of land. The thinking is that new development increases the value of everything around it, so the value of the increase in taxes is what’s captured.
For example, if a property in the DDA TIF district has a $1,000 tax bill in the baseline year, what’s collected is only the amount that the tax increases by the next year — ostensibly because a new development has boosted values nearby. So if the property’s value is $1,100 in year two, the DDA captures that $100 difference. The rest goes to the taxing entity.
Each property owner pays property taxes to several taxing authorities, much like a homeowner.
The original arena deal approved by the state allows the DDA to capture three property levies — state education tax, Wayne County Regional Educational Service Agency and Detroit Public Schools — as revenue sources for paying off the arena bonds. Money collected from those three taxes can be spent by the DDA only within a 40-block zone around the arena site, known as the Catalyst Development Project Area.
Five other tax entities — city of Detroit, Detroit library, Wayne County, Wayne County Community College District and Huron Clinton Metroparks taxes — are collected in the DDA’s wider TIF district known as Development Area 1, but all but $2 million of those taxes are for use on any DDA project, such as paying down past bonds and loans not tied to the arena.
One caveat: Under the 2012 arena legislation, about $2 million collected in total from those five taxes will be used to pay off the public bonds.
The Pistons announced in February they will build a separate team headquarters, training and rehab facility for $65 million. That project is being privately financed by the team.
Apart from a few leaked details, terms of the deal between the Pistons, owned by private equity billionaire Tom Gores, and Olympia to bring the team downtown have not been disclosed. Both sides say it’s a private deal.