Monumental Changes
How should we think about the proposed sports and entertainment complex in Potomac Yard?
One of the surprising things about the proposed Potomac Yard sports and entertainment complex is the large number of people who were surprised by its mid-December announcement.
Alexandrians should brace for a 2024 public engagement tidal wave from the project’s prime movers: the city, the state, Wizards and Capitals owner Monumental Sports & Entertainment (MSE), and real estate firm and property owner JBG Smith.
Before its 1990’s redevelopment as a retail center, Potomac Yard, with 136 miles of track, was the largest freight car interchange rail yard on the East Coast. City Manager James Parajon, describing the proposed project at the December 16, 2023 City Council meeting, called Potomac Yard’s intense redevelopment inevitable and long-planned.
At the Del Ray Citizens Association’s (DRCA) December 13, 2023 meeting, Mayor Justin Wilson described the sports and entertainment complex positively, calling it “an incredible proposal.” He also said, “There are a lot of bad stadium deals around the country.” The complete meeting can be seen
Parajon and Alexandria Economic Development Partnership (AEDP) President and CEO Stephanie Landrum’s verbal and slide presentation to the City Council about the project is viewable at AEDP’s MonumentalALX website
What follows are ways to think about this complex project and what it may mean for Alexandria, including things to keep in mind for the public engagement phase.
An important caveat: the facts, particularly those relating to transportation infrastructure costs, may change significantly before city approvals and the planned 2025 groundbreaking. Wilson told the DRCA, “The traffic and the transportation is probably the biggest unknown here. We have a lot of work to do with the community.”
What Does the City Give?
Money. Slide 11 of the December 16 presentation describes, “a total city contribution of $106 million”— $50 million for a 2,500-space underground parking garage and $56 million for a 6,000-seat performance venue to be owned by the city and MSE. The performance venue will be located on land leased from the Virginia Sports and Entertainment Authority (VSEA) which will be established by the General Assembly.
The FAQs on AEDP’s MonumentalALX website identify the source of the city’s contribution:
The contribution will be funded through Alexandria’s capital reserves, and profits from the performing arts venue will be split between MSE and Alexandria’s general fund. Those profits will be Alexandria’s to spend. They are not included in the bond repayment structure.
Credit Support. Contingent on city and state approvals, VSEA will issue $1.05 billion in Project Revenue Bonds (to be repaid by arena-related revenues and new, incremental tax revenues) and $416 million in Lease Revenue Bonds (to be repaid by MSE’s lease payments.) VSEA will have no capacity to generate revenue, so the repayment sources for its bond issues must be the revenues generated by the sports and entertainment complex that will flow to the city and state.
According to a video released by the city’s Department of Finance and viewable on the MonumentalALX website, the city’s financial advisory firm, Davenport & Co, envisions that Alexandria will provide three types of credit support for the project:
1. Pledge of Site-Specific Revenues. The city and the state will jointly pledge revenues generated at the Potomac Yard project to pay the VSEA-issued Project Revenue Bonds.
2. Contingent Moral Obligation Pledge for Project Revenue Bonds. The city and the state will make a contingent moral obligation pledge to ensure payment of the Project Revenue Bonds. Moody’s Investor Service, a rating agency for public debt, describes a moral obligation pledge as:
An example of a moral obligation structure would be where a city or county promises to consider supporting a contingent obligation, under certain circumstances, by appropriating funds for the replenishment of a debt service reserve. A moral obligation pledge is neither a guarantee to pay debt service nor a promise to replenish a debt service reserve nor a legally enforceable obligation to pay. Rather, it is a declaration that the city or county intends to support the debt and will consider making appropriations and providing funding under certain circumstances.
The city and the state will share the $700 million contingent moral obligation equally; the remainder of the $1.05 billion in Project Revenue Bonds will be secured by the pledged incremental revenues.
3. Credit Enhancements for Lease Revenue Bonds. The city and state will also provide credit enhancements to ensure repayment of the $416 million in Lease Revenue Bonds. The city’s share of this obligation is $208 million. The state will provide credit enhancement on the remaining 50% of the bonds, or $208 million.
The credit support from the city and the state facilitates VSEA’s bond issuances at the lowest possible interest rates. In effect, the city and state are lending VSEA the strength of their credit ratings to lower the cost of capital for the Potomac Yard project.
Davenport & Co. representatives project that the 2:1 ratio of Potomac Yard-generated revenues to debt service makes it unlikely that the city and the state will be called on to fulfill the contingent moral obligation (city share: $350 million) on the Project Revenue Bonds. Similarly, MSE’s credit on the Lease Revenue Bonds, in addition to oversight by the NBA and NHL, provides the city and state assurance that their credit enhancement (city share: $208 million) will not be called on.
Services. The city will be obliged to provide the full range of municipal services—police, fire, sewers, etc. for the new development in Potomac Yard.
Possible Additional Transportation Infrastructure Costs. Transportation infrastructure expenses, and the city’s share of these costs, is a “to be determined” item for now. Transportation planning for the project is complicated by the already significant transportation needs, including airport access, in the Route 1 corridor.
Slide 15 of the Parajon and Landrum presentation states:
The project funding includes $110 million in on-site infrastructure including site development and roadway, signal, and intersection improvements funded through the bonds.
VDOT, Alexandria DOT, MSE, JBG SMITH, and transportation consultants continue to refine a detailed analysis of the National Landing corridor needs, with input from residents, regional partners, and the business community to ensure a safe, reliable, and successful Entertainment District.
“Clearly, there [will] have to be improvements to the Metro station,” Wilson told the DRCA, “Secondly, there [will] have to be intersection and roadway improvements on Route 1 as well as other adjacent intersections to ensure that the volume of cars that does come into this site is able to get in there and not create problems for the neighborhoods and Route 1.”
Things to keep in mind:
Is a $106 million reduction in the city’s capital reserves to invest in the performance venue a prudent financial decision?
Will the city’s contribution be limited to $106 million, or will it increase because of additional transportation infrastructure costs or for other reasons?
Should the city assume a $558 million contingent payment obligation to ensure payment of the Project Revenue Bonds and the Lease Revenue Bonds?
Will the transportation analysis provide reasonable assurance that the project can be built without epic traffic gridlock in the Route 1 corridor and nearby roadways?
What does the City Get?
Slide 12 of the presentation to the Council describes the anticipated benefits as:
Things to keep in mind:
Will the methodology for the projections of public benefits, and the assumptions underlying the projections, be fully described to the public?
Will these studies indicate the extent of losses elsewhere, including the value of tax subsidies for bond financing?
Anti-Professional Sports Facility Subsidy Economic Theory and Potomac Yard
Extensive economic research dating back to the late 1990’s concludes that public subsidies for professional sports facilities are not money well spent. Most economists conclude that the projected public benefits are almost always overstated and that the opportunity cost—the value of what is given up—is often omitted from the projections. Economists also say that in beggar-thy-neighbor competition among jurisdictions—here Alexandria’s gain is the District of Columbia’s loss—much of the benefit goes to the sports franchises and their owners.
An economist would factor in the District of Columbia’s losses, including declines in property values even if there is a net gain to Alexandria, subsidies for tax-exempt bonds that reduce government revenue, and the cost of people stuck in denser traffic.
The use of tax revenues generated by the project to pay off the arena bonds issued is also a subsidy—MSE offloads the construction cost of the arena on the public while continuing to enjoy the appreciation in the values of its assets, the Wizards and Capitals franchises.
The Federal Reserve Bank of St. Louis published a succinct article summarizing the research on public subsidies for professional sports teams. It can be seen
City officials anticipate these arguments. “You may have heard that arenas, things like that, do not pay for themselves,” Parajon said on December 16, “This project is not one piece, it is not a standalone stadium, it is not a standalone ballpark, it is a combination of a series of development projects meshed together. You look at that from that perspective and I think you will find that some of those studies won’t be relevant.”
Things to keep in mind:
Will the evidence provided by the project’s advocates persuasively overcome the consensus of economists that public subsidies for professional sports facilities are a poor use of public money?
How Should We See the City’s Decision to Invest in the Potomac Yard Project?
Potomac Yard, like every investment decision, involves a balance of risk and reward.
The city’s investment has two potential forms of economic return. The first is the anticipated tax revenues, jobs and other benefits from the hoped-for catalytic effects of the sports and entertainment complex.
The second investment opportunity is the potential return from the 6,000-seat performance venue to be operated by MSE and the city. A way to frame this opportunity: In any other context, would Alexandria pay $106 million to build, co-own, and manage (or hire a manager for) a performance hall about the size of the DC Wharf’s The Anthem: (57,000 square feet; holds 6,000 people; cost of $60 million) with underground parking on land the city will not own?
The non-gameday usage of the arena, and the number of performance venue bookings, are also major investment considerations. AEDP hired HR&A Advisors in June 2023 “to conduct an impact analysis assessing both the economic and fiscal impacts of the planned development at Potomac Yard.” HR&A’s impact analysis is viewable at the MonumentalALX website and contains this critical assumption:
The information provided in this memo is based on proprietary Monumental Sports & Entertainment (“Monumental”, “MSE”) operations information shared by AEDP on October 31, 2023 that reflects 221 arena events and 115 performing arts venue events held annually.
MSE’s booking levels for the performance venue—projected at 115 events per year—will directly affect the city’s return on its $106 million investment. MSE’s estimate of 221 arena events annually includes the 81 regular season Wizards and Capitals home games.
The number of non-gameday arena events, and revenue-generating events in the performance venue, relates directly to the time required for Potomac Yard-generated revenues to meet the payment obligations on the $1.05 billion in Project Revenue bonds.
Things to keep in mind:
Should the city co-own with MSE and manage (or hire the management of) a 6,000-person performance venue on land owned by VSEA?
Are MSE’s projected event booking levels at the arena and the performance venue reasonable?
Will there be enough revenue-generating events in the performance venue, and in the arena on non-gamedays, to make the project economically viable? Said another way, will the planned sports and entertainment complex be big enough to generate sufficient revenues to make it a success?
What Do Other Mixed-use Pro Sports Facility-Anchored Developments Show?
The Potomac Yard project closely resembles The Battery Atlanta, the suburban development anchored by Truist Park, the home of the Atlanta Braves. The Battery Atlanta includes a performance venue and offers useful reference points for Potomac Yard.
The Battery Atlanta describes its non-gameday attractions this way:
Conveniently located at the intersection of I-75 and I-285 in the bustling Cumberland area, The Battery Atlanta™ offers an unprecedented entertainment experience 365 days a year, not just on gamedays. The 2-million-square-foot mixed-use destination features some of Atlanta’s most acclaimed chefs and a diverse blend of culinary options to please foodies and families alike. In addition, visitors can sip cocktails from some of the area’s renowned mixologists, shop for the hottest new styles at unique retailers, bowl a few games or ride a mechanical bull. The Battery Atlanta® is also home to the Coca-Cola Roxy™, where music lovers will find a 4,000-seat venue for all genres of live music.
Urbanize Atlanta reported on the financial performance of The Battery Atlanta in May 2023:
Six years after the first pitch at what was then SunTrust Park, [Cobb County finance director] Volckmann’s findings indicate The Battery Atlanta complex finally emerged in 2022 as a net positive for Cobb County taxpayers. That means the mixed-use district generated more property tax revenue than the portion Cobb taxpayers are on the hook for to cover this year’s debt service, the county reports.
The Battery Atlanta’s six-year climb to a positive cash flow for taxpayers suggests that the Potomac Yard project may require years to reach the same point.
Things to keep in mind:
The Potomac Yard complex may ultimately generate the 30,000 jobs and $12 billion in economic impact described in the December 16, 2023 City Council presentation, but when will these and other benefits to Alexandria materialize?
Will the Public Engagement Process be Fully Transparent?
On December 15, 2023, The Washington Post reported:
To build the $2.2 billion project, Virginia would need to create a sports and entertainment authority that would issue two bond offerings and would need to contribute an additional $300 million from existing city and state funds, according to a 37-page study produced by investment bank JPMorgan for the state, a copy of which was obtained by The Washington Post.
A Post reporter told me that the paper has declined to release the JP Morgan study. Virginia Governor Glenn Youngkin’s office also declined to release the report.
Things to keep in mind:
Will the public ever see the JP Morgan study commissioned by the Virginia state government?
Will there be a study that balances out all the gains and losses, not just in Alexandria. For example, if Alexandria gains 30,000 new jobs, how many of those represent jobs lost elsewhere?
Does the Project Change the Overall Vision for Potomac Yard in a Positive Way?
Virginia Tech’s Innovation Campus at Potomac Yard is planned to include the 300,000-square foot building currently under construction and two additional buildings of about 150,00 square feet each. Virginia Tech describes the Innovation Campus this way:
Located adjacent to the nation’s capital in Alexandria, Virginia, the Innovation Campus will unite industry, government, and academia in dynamic project-based learning and research to shape the way emerging technologies influence society, driving a new era for the greater Washington D.C. metro area’s tech ecosystem.
The sports and entertainment complex in Potomac Yard is an undeniable pivot from “driving a new era for the greater Washington, D.C. metro area’s tech ecosystem.”
“Synergies” and “catalyst” are fashionable words in real estate development, but the benefits of productive engagement involving the Innovation Campus and the sports and entertainment complex remain to be identified.
Things to keep in mind:
What is the probability that the proposed sports and entertainment complex and the Virginia Tech Innovation Campus will form meaningful and productive relationships?
What is the probability that MSE will use, or is using, the Potomac Yard project to extract additional concessions from the District of Columbia?
What is the probability that the jurisdictions in the National Capital region will cooperate to avoid beggar-thy-neighbor competition among each other by paying subsidies to businesses naturally attracted to the region anyway?
Mark: Well writing and thought provoking Q's. Your legal training shines thru. As I read Justin's and perhaps other city officials they frame the Q a little differently. Do home/condo owners shoulder the heaving lifting for the cities social programs or do we " diversify " the tax base and bring in this project? I read three different places where a "school site" is referenced...I do not see any reference in the drawings. Given all that's planned on those 22 acres it must be a micro site. Again thought provoking article. H