Once in a while it’s good when a parade gets a little rain. I think that is the case with the opening of Rogers Place. It is useful to take stock of the situation with a little more objectivity than the giddy hype of the City of Edmonton and the Katz Group. Rogers Place is beautiful, no doubt. But its beauty is a product of deal whose consequences will impact our community for decades. From our present vantage point it looks like a good deal for Edmonton and an absolutely fantastic deal for the Katz Group. It is merely good for Edmonton because the City will bear the substantial risks of the deal and almost all of the negative consequences. It is great deal for the Katz Group because almost all the upside benefits of the new arena will flow in their direction.
Full disclosure, I am a rabid Oilers fan and have a couple of season tickets in the upper level of the new building. But the sentimental part of me is more apt to ask Cathy Kiss for a last tour of the Coliseum than to call Tim Shipton and ask for a look behind the scenes at the new place. In the grand scheme of historical importance, the Coliseum will always be the place where Wayne Gretzky played. Rogers Place may end up being historically significant for those of us that study business dealings between governments and private business. At a time when almost all new sports facilities are being built privately, it may end up as the last significant project funded by government. I think it will end up as an example of how not to build an arena and why public money should not subsidize the palaces of private business.
I place no blame for this bad deal on Daryl Katz. He has become very wealthy by maximizing his investments by taking advantage of business opportunities. It is simply good business to risk other peoples money when the benefits come to you. When he bought the Edmonton Oilers he had two primary businesses; retail drug stores and sports. There was no way on earth he could have gone to any government and asked them to fund the capital cost of expanding his network of drug stores. However, he figured he might get a government to fund the capital cost of infrastructure for his sports team. Conservative governments at the provincial and federal level turned him down cold. Funny thing, governments made up of business people want nothing to do with this stuff. The folks at City Hall were a different story. Katz saw the opportunity and he made the best of it. Daryl Katz did not become a multi-billionaire by accident.
The Katz group strategy was brilliant. On the one hand they had the threat of the Oilers leaving town. That had already worked a generation ago to get the Coliseum renovated. Katz also saw a stagnant downtown and promised the Arena District as a carrot to both fund his new rink and get the Edmonton City Council drooling over pictures of shiny new buildings mere metres away from their offices in City Hall. The politicians were finally convinced that a Community Revitalization Levy (the “CRL”) would provide the political cover to justify hundreds of millions of tax dollars flowing to a piece of infrastructure for a private business.
The CRL is a shell game. The idea that one type of property tax is somehow different than another type of property tax is silly. The CRL is part of the tax base and, more concerning, it becomes part of the tax base dedicated to things that are not part of the core business of the city. The politicians will tell us that all these new buildings mean new taxes and a net gain. They may be right. However, that ignores the real possibility of the downtown being overbuilt. That would diminish the value of all the office buildings downtown and erode the tax base. That risk falls on the City. Katz mitigated his risk by ironically getting the City of Edmonton as one of the main tenants in one of the buildings. As long as his buildings are full of tenants the value of the buildings is not a concern. In fact, if their value goes down, he pays less in property taxes and his bottom line is better. If downtown were a roulette table, Katz covered red and black and the City covered black only. With the price of oil under $50 and a clueless NDP provincial government managing the provincial economy, maybe the City should have covered red.
Katz does own the risk that the people of Edmonton may choose not to want to watch Connor McDavid play in the best arena in the NHL. His previous big business risk was betting that an aging population would still want Tylenol and Viagra. It is too bad his businesses are not publicly traded. I would buy stock.
As I write this City Council is debating the future of Northlands. The completely foreseeable result of the City’s deal with the Katz Group is that Northlands has no future. Northlands core revenue stream was money from their concert business and that has been given to the Katz Group. Northlands now is merely a holder of assets and debt and that those assets and debt residually belong to the City. This is where the City shot themselves in the foot by failing to anticipate the consequences of the arena deal to Northlands. Whether City Council wants to use more of the tax base for Northlands’ plans may show the extent to which they love using public money to buy risk. My advice is to buy tickets to the Kenny Rogers concert at the Coliseum because he knows when to fold ‘em. It looks like the City will have eat their loan on the Expo Centre to the tune of $48 million. It will be an expensive lesson. Throwing more money at Northlands without a revenue stream to pay it back would be stupid. Note to Mayor Iveson; a letter from Hockey Canada is not a business plan.
In a perfect world, businesses risk capital for profit and cities use taxes to build public infrastructure. Edmonton is not part of a perfect world. Not close.
Deals are often about risk allocation relative to the proportionate share of investment. The Katz Group invested comparatively little in the arena, minimized risk and maximized their profit potential. City Council bought themselves significant risk and overpaid in doing so. Things might be fine. Or not. It is certain that big chunks of the tax base are now no longer available for the core business of the City of Edmonton. The City owns the risk and the downside consequences. You and I, we paid for it.