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The Stadium Conversation We Should Be Having

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The announcement of the Inglewood Stadium project in January derailed the opportunity San Diego has been waiting for to get a new stadium built. Let's go to fantasy land for a moment and discuss what could and/or should be.

JMI Realty's proposed stadium in downtown San Diego
JMI Realty's proposed stadium in downtown San Diego

When the Citizen's Stadium Advisory Group (CSAG) was given their assignment, it was initially done with the thought that they would have until September 2015 to produce their report, with almost another full year's worth of public debate before a vote in November 2016.

The announcement of the Inglewood stadium project in January, with a projected start date in December blew that timeline out of the water. In response, the Chargers (and Raiders) accelerated their project in Carson, announcing it in February, and having a projected start date in Fall of 2016.

As a result, CSAG's project was accelerated to May. Given CSAG's timeframe, the Final Report they put in place was very solid.

However, let's go to fantasy land for a few minutes and see what we could be doing ...

The Downtown Option

This is JMI Reality's proposed joint stadium / convention center, which would be located east of Petco Park. The actual site comprises Tailgate Park, as well as the current MTS Bus Yard.

For the last few years, this proposal was considered a non-starter. Until last summer, the plan was for a contiguous expansion of the SDCC. Then two events occurred which have all but killed the contiguous expansion plan:

  1. The financing scheme for the contiguous expansion was ruled unconstitutional in August 2014.
  2. The city allowed an option on land required for the expansion to pass last May.

As it turns out, Convention Center Chairman Stephen Cushman, who was vehemently criticized by Chargers' Special Counsel Mark Fabiani back in January, is waiting for the results of a study on whether additional "off-site" convention space would satisfy the needs for additional convention space.

So, if this is an option the Chargers want, and an option for San Diego to kill 2 birds with 1 stone, why aren't we doing it yet?

Very simply, this option will probably cost about $1.8 billion to complete.

Financing a Stadium Downtown

There are two options by which San Diego could attempt to fund a project of this magnitude.

Here's a rough breakdown of the cost, based on JMI Realty's own construction estimates, along with CSAG's estimates for land purchases and relocation of the MTS Bus Yard:

JMI Proposal ($ in millions)
Table 1
Facility 1,420.33
Contingency 119.67
Relocate Bus Yard 150.00
Land Purchase 100.00
Total 1,790.00

Option 1 - No tax option.

This means the City (and possibly County) of San Diego has to identify existing funding sources to help cover the public share of the cost. With that option in mind, let's take a look at how that might work:

Downtown Site (no taxes) ($ in millions [over 30 years])
Table 2
Revenue Source Chargers / SDSU Public Total
Team Contribution 240 400 700
Personal Seat Licenses 60 60 120
Additional Funding 0 25 25
Property Sale (Q & SA)1 0 705 705
NFL G4 Stadium Loan2 200 0 200
SDCC Naming Rights3 0 7 7
SDSU Rent 21 0 21
Chargers Rent 225 0 225
Totals 606 1,197 1,803
  1. The land sales total includes the Qualcomm (135 acres) and Sports Arena (100 acres) sites, using the $3 million figure quoted in the CSAG Final Report.
  2. I have estimated that the Chargers will be directly paying back $81 million of the G4 Loan Amount. Based on repaying $50 million at 8% interest.
  3. The SDCC naming rights deal is based on the deal reached for the Cleveland Convention Center ($350K/year for 20 years).

As you can see, the "no tax increase" option involves the sale of both the Qualcomm and Sports Arena sites (for at least $3 million per acre). That might be tricky, because of the 30' high limit for coastal height development west of Interstate 5, as well as questions about whether the water company would get the proceeds from their share of the Qualcomm site (h/t: Scott Lewis at Voice of San Diego).

Now, including the PSL split and additional funding suggested by the CSAG report (CSAG suggested $50 million in Additional Funding sources), and then $7 million in naming rights for the San Diego Convention Center. At this point (provided $705 million can be generated from land sales), at least $400 million in public contributions is still required.

Should this remaining $400 million come completely from the County? Split between the City and County? What is the revenue source?

Further, one should consider the "opportunity cost." This $1.1 billion (land sale plus public money) cannot be used for any other purpose. Also, this model relies on consistent use of the additional convention space in order to generate enough revenue for annual maintenance and facility upgrades.

Option 2 - Raising the TOT

For the moment, let's ignore that this option currently requires 2/3rds of voters to vote "yes" to pass.

I also admit that I've supported pursuing the "no tax increase" option, because of the 2/3rds vote requirement. Maybe I was wrong about that. Anyway...

I suggest the tax to be raised is the Transient Occupancy Tax (TOT). This tax is applied to persons staying in hotels, motels, vacation rentals, and RV parks and campgrounds.

By and large, this tax will be paid by people who ARE NOT RESIDENTS OF SAN DIEGO, CITY OR COUNTY.

The current TOT is set at 10.5%. 5.5% goes to the General Fund, 4% goes to Tourism Promotion, 1% goes to the City Council, to use at their discretion. The total amount generated by TOT in FY 2015 came in at $176.3 million. FY 2016 is projected to see a total amount of $191.4 million generated.

I propose we raise the TOT from 10.5% to 14%. The additional 3.5% would be dedicated exclusively to a new "Sports & Convention Fund", dedicated to construction and maintenance of Sports and Convention facilities.

Based on the FY 2015 numbers, this increase could be expected to generate $1.76 billion over 30 years. That number goes up to $1.91 billion over 30 years if you use the FY 2016 numbers.

Here's how the numbers look using the tax model:

Downtown Site - Taxes ($ in millions [over 30 years])
Table 3
Revenue Source Chargers / SDSU Public Total
Team Contribution 200 0 250
TOT 3.5% over 30 years1 0 1,250 1,250
Personal Seat Licenses 50 0 50
Additional Funding 0 25 25
NFL G4 Stadium Loan2 200 0 200
SDCC Naming Rights3 0 7 7
SDSU Rent 21 0 21
Chargers Rent 200 0 200
Totals 531 1,282 1,813
  1. I capped the public contribution from taxes at $1.25 billion. You'll see why below.
  2. I have estimated that the Chargers will be directly paying back $81 million of the G4 Loan Amount. Based on repaying $50 million at 8% interest.
  3. The SDCC naming rights deal is based on the deal reached for the Cleveland Convention Center ($350K/year for 20 years).

First, the tax model eliminates the land sale elements of the deal. The city could sell off the Qualcomm and (maybe) the Sports Arena sites to generate money for other projects, such as schools, emergency services, infrastructure, etc.

Second, this model eliminates the need for the City and County to come up with an additional $400 million worth of existing assets.

Third, this model allows the Chargers to engage in what I'd call "targeted" PSL purchases (i.e. club seats and luxury boxes), meaning many seats in a new stadium will not require PSL purchases from fans.

Fourth, this deal requires a smaller upfront contribution from the Chargers.

Fifth, notice the remaining $513 - $663 million in projected tax revenue? That revenue could be used to:

  • Add a retractable roof, allowing the facility to host events such as the NCAA Final Four.
  • Finance a later expansion of the Convention Center.
  • Pay off the Qualcomm Stadium debt.
  • Help finance a new arena to replace the Sports Arena
  • Cover maintenance and upgrades for the new stadium and existing convention center.
  • Provide future revenues which could be used to finance a new facility 30-40 years down the road - in other words, we wouldn't have to worry about where to find the money when this issue comes up again.

It goes without saying this financing method would work just as well for a stadium located in Mission Valley, if that's your preference.

I submit the only reason we aren't considering this option is because of the 2/3rds vote requirement. I'd also submit this option makes so much sense, that maybe we should consider it even with the 2/3rds vote requirement.

In Closing

In a perfect world, the Chargers and San Diego would be pursuing the downtown stadium option. This option kills 2 birds (new stadium, added convention space) with 1 stone.

Further, if voters approved an increase in the TOT, this increase could be used to create a "Stadium and Convention" fund, which would provide a mechanism to fund these projects for the foreseeable future.

Better yet, raising the TOT doesn't directly impact residents of the City or County of San Diego. Best of all, raising the TOT allows the City and County to preserve existing assets for other uses.

Author's Note: The post was in part inspired by Scott Kaplan, Billy Ray Smith, and Scott Lewis, who had a knockout podcast discussing stadium issues. Thanks to the three of them hosting a tremendous conversation.

Tomorrow - Why can't the Chargers and San Diego make this deal?