Taxpayer tab on FC Cincinnati real estate needs: $213 million

Posted at 5:00 AM, Jun 10, 2019
and last updated 2019-06-11 13:08:00-04

CINCINNATI — The stadium is on track to open in 2021.

But the taxpayer tab could run for decades.

An I-Team analysis of contracts between FC Cincinnati and its various public partners shows the Major League Soccer club’s real estate projects could cost taxpayers more than $200 million in their first 20 years of operation. This includes borrowing costs of more than $80 million and property tax exemptions worth more than $100 million.

It’s still a better deal for taxpayers than local governments struck with MLS teams in Nashville and Columbus. And it’s light years ahead of the lopsided agreements that built Paul Brown Stadium and Great American Ball Park. But it’s far less favorable than the terms first sketched out in November 2017, when city and county leaders first pledged their help in securing an MLS franchise for Cincinnati.

That 2017 agreement called for a private investment of more than $200 million from the team and public investments of $51 million for garages, road improvements and other infrastructure. Several subsequent contracts with three local governments, two port authorities and one school district added meat to those bare-bone promises, adding to the equation more land, more parking spaces, a Milford practice facility and at least 4,000 more seats.

FC Cincinnati President Jeff Berding has no doubt the deal is good for taxpayers.

FC Cincinnati President Jeff Berding

“We are making an enormous investment when you take the stadium, the privately funded stadium, and obviously the land on top of that,” he said. “We have the franchise fee of $150 million. We’re building a $30 million training facility in Milford. So, there’s no question its $430 million maybe approaching $450 million private investment to bring a third major league franchise to this region.”

But a longtime critic of local stadium subsidies disagrees.

“If we gave FC Cincinnati the same as another company with 125 employees and a similar payroll would have gotten, I’m fine with that. But anything beyond that is a proven waste of tax dollars,” said Jeff Capell, a Blue Ash city councilman and co-founder of the watchdog group No More Stadium Taxes. “We’ve got decades of economic research that shows stadiums do not create net new jobs, tax revenues or economic growth. So, it’s not the kind of thing you want to subsidize.”

The analysis took several weeks to complete and required assumptions that are fully explained in the story and charts that follow.

But here’s the bottom line:

We estimate FC Cincinnati’s stadium and practice facility will cost the team $402 million over 20 years and taxpayers $213 million over the same period.

The I-Team reviewed the following documents for this analysis:

Using these public records, the I-Team attempted to put a price tag on every contract clause that called for the team or the taxpayer to spend money. We included borrowing costs when the contracts specified that bonds would be used to pay for improvements. We also included a 20-year estimate on the cost of exemptions, or taxes that won’t be paid because port authorities own the team’s real estate. We used a 20-year time frame because that’s the length of the only public debt issued so far in Milford. Hamilton County is contemplating a similar term for its parking debt.

We did not include the team’s $150 million franchise fee for joining Major League Soccer because it’s neither required nor mentioned in any of the above documents. And we didn’t include funding sources named in the documents that the team says it’s no longer pursuing.

Here’s how we arrived at those numbers:

Step one: Borrowing costs

Hamilton County hasn’t decided how it will honor its public commitments to provide 1,000 parking spaces for FC Cincinnati’s West End stadium, but it does appear likely to involve some bond debt.

A December report by county consultant Walker Parking estimated it will cost $34.4 million over 20 years to build and finance two garages; one near Findlay Market, the other on Liberty Street just north of the stadium site.

Walker’s analysis assumed the team would keep all parking revenue on game days, while the county would benefit from privately developed hotel, retail and office space attached to the Liberty garage. Walker projected the two garages would generate more than $13 million in combined revenue in their first five years, enough to cover operating expenses but not debt service of $1.7 million per year.

“This is not a final plan,” said Hamilton County Administrator Jeff Aluotto. “Discussions between the team and county continue with other alternatives currently being assessed.”

Aluotto said the team wants more spaces close to the stadium, while the county is looking to maximize the impact of the garages on surrounding development. That should improve the financial performance of the garages and make it less likely to cover the cost of borrowing.

The city of Milford is borrowing $3.5 million to cover the cost of purchasing land for FC Cincinnati’s training facility. Minutes from a July 24, 2018, council meeting show the city expects 20 years of bond payments totaling $5.3 million.

The city of Cincinnati is also likely to finance up to $25 million in funding commitments for road improvements, a 750-car garage and other stadium infrastructure. Its 2018 funding and development agreement says it will borrow up to $17 million in bonds backed by hotel-tax revenue and up to $8 million backed by revenue from the “District 4 TIF,” a special taxing district established in 2014.

The I-Team used a municipal bond calculator to estimate Cincinnati’s borrowing costs, assuming its debt would be paid off in 20 years with an interest rate of 4.25 percent, the same rate Walker Parking used in its Hamilton County analysis. Based on these assumptions, Cincinnati’s total borrowing cost is $40.8 million. That’s $15.8 million more than it would cost to pay for its stadium obligations without borrowing.

The public partners aren’t the only ones turning to lenders, but FC Cincinnati’s borrowing costs are tougher to estimate.

That’s because no one is exactly sure what combination of bond debt, bank loans and cash the team will use to pay for construction expenses. In addition, its bond deals with port authorities in Hamilton and Clermont counties are more than a little complicated: They allow the team to buy the bonds once issued, effectively making the team its own lender.

The structure offers flexibility: The bonds can be resold to raise money or reduce borrowing costs.

The Clermont County Port Authority authorized up to $30 million in bonds with a 4 percent interest rate and the team has purchased nearly $6 million of that debt, said Frank Woodside, a bond counsel for the port. Based on those terms, a 20-year bond issue would cost the team $49.6 million.

Hamilton County’s port authority has authorized up to $250 million in bonds at 7 percent interest. About $450,000 have been issued to date, said Todd Castellini, director of public finance at The Port in Hamilton County. He expects U.S. Bank to eventually purchase the team’s bonds as part of a mortgage agreement, but he isn’t sure how much the team will ultimately borrow.

“I think they’re still trying to figure out how they want to structure it,” said

Berding declined to provide details on the team’s borrowing plans for the West End stadium. But the city’s funding and development agreement includes a chart that estimates the team will contribute $90.3 million in owner equity toward the stadium and borrow the rest to cover estimated stadium costs of $217.7 million. So, the I-Team assumed the team will borrow $127.7 million at 7 percent interest for 20 years at a total cost of $215.1 million.

Berding objected to the use of debt service in the I-Team’s estimate for stadium costs, arguing that no one would tell you their mortgage payments if you ask them what their home is worth. But Capell argues city and county debt obligations represent tax dollars that can’t be spent on other needs in the future.

“It’s a legitimate cost. It counts,” Capell said. “Because whether you’re paying principal or you’re paying interest, that’s still a dollar out of the taxpayer’s pocket.”

Step two: Exemptions

Dollars that never make their way into the taxpayer’s pocket are the biggest numbers benefiting the team in our analysis: Exemptions flow from the ownership structure of the stadium and practice facility, which allows the team to avoid taxes on real estate and construction materials.

Ohio law says port authorities are exempt from taxes, but that exemption doesn’t apply to people using the property “under a written lease with a remaining term longer than one year.” So, port authorities in Hamilton and Clermont counties each signed lease agreements with 360-day terms, renewable annually. That means the team won’t pay taxes as long as the lease stays in tact.

“It’s incredibly unusual,” said Laura Brunner, president and CEO of the Port in Hamilton County. “Generally, when a private party is investing that sum of money into real estate they want to make sure they get it back. Certainly, our expectation is that we will renew (but) we have no commitment to do so.”

Brunner said the deal is worth doing because of the impact it will have on surrounding properties, stimulating new development, increasing the city’s overall tax base - and eventually generating tax revenue on the stadium site itself.

In an email response to WCPO’s questions about the lease, the team’s attorney Brock Denton declined to estimate a value for the property tax exemption on the West End stadium.

“It depends on the assessed value from time to time of the property, which is outside the team’s control,” wrote Denton, a partner at Keating Muething & Klekamp law firm Downtown. “That said, the value of the exemption is akin to other real property exemptions (like a 75 percent Commercial CRA or a rebate TIF) in effect in Cincinnati because there is a 25 percent compensation arrangement to the School District.”

FC Cincinnati signed a separate deal with Cincinnati Public Schools in which it agrees to payments in lieu of taxes equal to 25 percent of what the team would have paid if no exemption were in place. The contract calls for a lump sum payment of $9.3 million, which is the present value of 10 years of school taxes based on a stadium with a market value of $175 million. If Hamilton County’s Auditor ultimately sets a higher value for the stadium, the team would have to pay more. If it’s less, the district will offset the team’s future payments so they don’t exceed 25 percent of all exempted taxes.

The I-Team used the auditor’s online calculator, which estimates total property taxes based on different market values. Based on the school district’s $175 million amount, the West End stadium would pay $5.9 million in annual property taxes. Seventy-five percent of that total is $4.4 million a year, or $88.9 million over 20 years.

Brunner said it’s important to remember that exemptions are based on real estate value that only exists because the team is investing in a new stadium.

“We can’t just keep harping on taxes being abated when there wasn’t any tax otherwise,” she said. “And that’s why these tools exist. It is to motivate investment that wouldn’t otherwise happen, recognizing that we’re playing the long game here and that there will be taxes paid in the future.”

But Capell said it’s a way around public opposition to direct subsidies for sports teams.

“When you listen to team owners and stadium backers, one of the first things they always say is, ‘Think of all the taxes that it’ll generate.’ But then the very first thing they do is exempt them from paying taxes,” Capell said. “Communities should be getting millions of dollars a year in property taxes from these stadiums and they end up getting nothing because the politicians will just wipe out their tax obligations as a different way of providing taxpayer support to their teams.”

The Clermont County Port Authority has the same lease structure as Hamilton County’s Port, but the two leases differ on the potential for annual renewals. Clermont’s deal can only be renewed for 20 years. The West End stadium could renew its lease annually until 2070.

Clermont County’s exemption would be worth $577,830 for FC Cincinnati annually, based on a $20 million valuation for the Milford practice facility. About $385,000 of that is money that would be paid to the Milford Exempted School District, according to the port authority’s term sheet with the team. FC Cincinnati signed a separate agreement with the Milford district that calls for the team to pay the district $50,000 for each year the exemption is in place.

"Regardless as to what the site is valued at, the district does not (currently) receive any property taxes on the property,” said Milford’s Treasurer Brian Rabe. “Prior to the site being purchased by the port authority, the district was receiving around $38,000 in real estate taxes on the property. FC Cincinnati agreed to pay the district $50,000 to offset the loss in property taxes. FC Cincinnati was not obligated to make any such payments to the district.”

In addition to property-tax savings, FC Cincinnati will also avoid sales taxes on construction materials in Milford and the West End. The Clermont County Port Authority said the team will save $1 million, based on its estimate that the team will spend $15 million on materials. Berding said he didn’t know how much the team will spend on construction materials in the West End. Denton’s email response: “This is the same exemption the Port gives to many other projects and it ultimately is unknowable until after completion because of the nature of Ohio sales tax law (e.g. sourcing of materials, total material cost, etc.)”

A December 2018 cost estimate contained in bond documents from the Port says the team will spend $185.7 million on direct construction costs. Brunner said about half of all construction-cost estimates are typically labor expenses. So, the I-Team estimated the project would require $92.8 million in construction materials. Applying that total to Hamilton County’s 7.2 percent sales tax brings you to $6.7 million in sales-tax savings.

Step three: Everything else
Some of the public contributions outlined in contracts with the team are easy to quantify.

These include Cincinnati’s pledge of an $8.9 million “cash grant” to the team, as outlined in Section H of its funding and development agreement. That contract also says the state “has committed” $4 million to the project from the state capital budget and the parties anticipate $4 million more. But Ohio lawmakers approved a $15 million capital contribution for the Columbus Crew in December. So, FC Cincinnati will ask for more.

“For the last 25-30 years the state’s tried to treat similar projects in different cities consistently,” Berding said. “But to be fair, the commitment we have from the state right now is $4 million.”

Based on those facts, the I-Team included $8 million as its estimate for state capital contributions, citing the amounts listed in the city contract.

Other major line items in the I-Team’s cost estimate come from two side agreements involving the city: A Community Benefits Agreement for West End improvements and a purchase agreement for city-owned land.

The CBA, which calls for payments of at least $16.1 million over 30 years from the team, was part of the city’s 2018 funding and development agreement. It mandates a $10 million payment to Cincinnati Public Schools for the cost of replacing Stargel Stadium and $100,000 per year each to fund youth soccer programs and “community building activities” in the West End.

The 35-page agreement has a variety of requirements that don’t specify a cost, including a hiring program for stadium construction job and inclusion goals of 25 percent for minority-owned contractors and 30 percent for small-business contractors building the stadium. It also called for FC Cincinnati to partner with the Port and a nonprofit, Seven Hills Neighborhood Houses, to promote the development of affordable housing in the West End.

A February 2019 term sheet on the sale of a parking lot behind the District One police station calls for FC Cincinnati to guarantee the city at least $550,000 a year in parking and ticket-tax revenue and lease the 600-space Town Center garage on game days for $3.7 million over 20 years.

In return, the city accepted a $1 payment for land valued at $1.6 million and agreed to pay at least $40 per space for 115 parking spaces to be used 24-7 by police officers in various garages controlled by FC Cincinnati. The city also agreed to reimburse the team up to $750,000 to build and finance a new surface parking lot along Ezzard Charles Drive.

Based on our analysis, the deal was worth $9.6 million for the city and $3.5 million for the team.

Finally, a contract clause in Milford says the team could be reimbursed up to $1.5 million for its purchase of land that will be part of its training facility. The agreement says the reimbursements would come solely from the 1 percent increase in Clermont County’s hotel tax but only if collections for a given year exceed the amount required for debt service on Milford’s $3.5 million bond issue. Its proceeds were also used to acquire land.

There were lots of contract clauses we left out of this analysis that could ultimately benefit the team, but there isn’t enough known about how or whether FC Cincinnati actually plans to use them.

For example, the city contract says “the parties currently anticipate seeking” a 30-year property tax exemption on “private improvements exclusive of the stadium.” But no other details are provided on the tax-increment financing exemption and Berding won’t reveal much about plans to privately develop land around the stadium.

Hamilton County records show the team has acquired several parcels in three blocks north of the stadium site. Berding confirmed the team is buying a cluster of properties owned by the Midtown Congregation of Jehovahs Witnesses, which is next to the stadium's northwest corner. And city records show the team has a first right of refusal on District One headquarters, just south of the stadium, if Cincinnati Police ever decide to vacate the property.

Documents submitted to the Cincinnati Planning Commission show the team is contemplating up to 150,000 square feet of future development at the corner of Wade Street and Central Parkway, which abuts the stadium's northeast corner. The mix of uses could include office, hotel, retail or apartments, according to the stadium development plan. But the club has yet to announce any development partnerships to make that happen.

Berding said there is no plan to capitalize on the stadium with ancillary development beyond what's depicted in planning records.

“Obviously, we’re keeping a close eye on what development may occur in the future around the stadium,” Berding said. “We don’t have any specific plans today in terms of what that could look like. We’re very focused on our stadium.”

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