How Your Property Taxes Will Pay for the New Arena

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Seattle property owners will actually fund about $15 million of the City’s proposed $120 million investment in the proposed basketball/hockey arena to be developed south of Safeco Field, even though publicity for the project has suggested that repayment of this investment will come entirely from revenues associated with the arena, not taxpayers, and, further, that this investment will be risk-free for taxpayers.  As the Council is finally given the information that will allow us to make a reasoned judgment on the viability of this proposal, details are beginning to emerge about the actual agreement, and some of those details do not quite live up to the hype.

The agreement between Mr. Hansen and the governmental participants is complex, with lots of moving parts and highly specific arrangements.  One of those details transfers some of the funding responsibility to Seattle property owners.  It’s an arcane arrangement specifically tailored to the unique way in which property taxes are assessed in Washington.  It’s also a challenge to explain, but here’s the basic story.

Unlike almost every other state, in Washington local governments do not actually set a property tax rate.  Instead, cities levy a total dollar amount of taxes to be collected, and the County Assessor translates that into a rate that will collect that much money.  The amount of money to be collected can only increase by 1% per year without voter approval, which means that property taxes are generally pretty stable, with only small increases or decreases as property values fluctuate with the economy.

There is one exception:  new development.  This is assessed at the same rate as other property, and then is added to the base for the following year.  In practice, this means that actual property tax collections increase by 2% or 3% each year, rather than the 1% allowed, but since the additional amounts are paid by the owners of the new development, this does not increase the tax bill for the rest of the property owners beyond 1%, so normally new development and this extra revenue collection does not affect your property taxes.

But the arena deal is structured so that it will.  Here’s how:

  • Hansen’s company will build the new arena as a private development, so when it is completed, the approximate $400 million value of the new building (the value of the land underneath the building is not included in this) will be added to the tax rolls, leading to about $1 million in additional property tax revenues to the City the first year that the new facility is in operation.
  • But then the agreement provides that the City will take possession of the arena after a year or so.  Once the City becomes the owner, no property taxes will be assessed on the arena, because public property is exempt from property taxes.
  • The catch is that since the arena was on the tax rolls for a year, its value gets rolled into the next year’s property tax base.  So the $1 million or so in taxes that the arena would have owed each year from then on gets paid by every other taxpayer.  The $1 million per year will be used to pay off $15 million of the City’s funding for the arena, but even after the loan is paid off, taxpayers will pay this much more per year — forever.
  • If the arena remained private property, the taxes paid by the arena would go to the City’s general fund to support police, fire, human services, and other City programs.

Is this an accident, a mere quirk of the deal?  No, the City’s financial analysts explained to me that it is deliberately structured in this way to allow the City to sell about $15 million of the bonds with the very secure backing of a guaranteed property tax revenue stream.  And then to ensure that these property taxes are not paid by the team owners.

It’s a small amount – no more than a few dollars per year for even the owners of the most valuable property.  But it disturbs me, and it emphasizes how important it is to look this ‘gift horse’ in the mouth, and thoroughly check all of the provisions of the agreement before signing off on it.

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