An Uncertain Proposal: Arena Economics

Photo courtesy Rubin Communications Group

VIRGINIA BEACH, Va. (WAVY) - By Wednesday, developers must show city officials that financing for the Virginia Beach arena project has been secured.

If not, the project will be scrapped.

A spokesperson for United States Management, the developer behind the project, told 10 On Your Side he is confident the company will be able to deliver a loan commitment letter by the deadline.

That would be the culmination of years of work to bring an arena to the city, an idea that most council members and the mayor are excited about.

Council approves second extension to secure funding for arena

"I want it really badly," said Mayor Will Sessoms. "I think that it's something that our city and region are starving for."

Bringing big artists, tournaments and crowds of tourists to Virginia Beach seems like an obvious win for the city, especially considering the project will rely heavily on private financing.

However, 10 On Your Side's investigation into the economics behind arenas revealed that the proposal is more risky than it seems.

"We don't have much evidence that stadiums and arenas bring good economic development to host cities," said Dr. Victor Matheson, a professor at College of the Holy Cross who specializes in sports economics. "If it's entirely privately funded, no economist would have any problem with it."

USM must secure financing comprised of $40 million in equity and $170 million in loans.

Developers and city officials often tout that the Virginia Beach project will be privately funded, but that is not accurate.

The city will lease land valued at $6.1 million to the developer at no cost plus pay $76.5 million for infrastructure improvements, which will come from a fund specifically earmarked for investment in tourism.

By 2052, USM will reap $438 million in taxes generated by the arena and a portion of the hotel tax.

Economists like Matheson and Dr. James Koch of Old Dominion University argue money spent at the arena isn't necessarily new cash flowing into the city.

Instead, residents may simply be spending money they would have spent elsewhere in the city, and those taxes would not necessarily be routed straight back to private industry.

The mayor pushed back at that argument, arguing the arena will create new revenue because it would bring events to the city during the more sluggish winter months.

Although Koch has written extensively about the prospect of an arena in Virginia Beach, he has not taken a firm stance on whether or not it will be successful.

"You can put me down here as a skeptic," he said. "I would say 90 percent of all the arena deals in the United States have been disappointing in that the projections aren't met, and the experience is disappointing."

A feasibility study conducted in 2016 contains the sort of information that could help Koch or any other economist determine the viability of an arena in Virginia Beach.

By law, however, the consultants who authored the study were allowed to redact nearly all of the useful data it contains, including operating revenues, expenses and projected attendance.

A separate study commissioned by the city is available to the public, but contains fewer specific projections.

"I don't have any argument against [the arena]. I just would simply like to see the numbers that would justify the public investment," Koch said. "It might be a good idea, it might not, but at this point, I can't really tell."

Sessoms has seen the full report, and said it indicates the arena would be profitable.

"We don't want the arena to be anything but a success," Sessoms said. "But this is not just the City of Virginia Beach doing its analysis and getting behind this. There's going to be a bank that I assure you does a lot of due diligence before they put out a large loan."

Sessoms and other city officials have reassured taxpayers that no general fund dollars will be used for the arena, but when pressed by 10 On Your Side, he stopped short of guaranteeing that.

"I've learned long ago that I can't guarantee anything. But I will tell you that it is my strong belief and it is the way this development has been planned that the city of Virginia Beach is not liable for one bit of debt service on that arena."

USM's loan commitment letter is due to city officials by 5 p.m. Wednesday.

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