How much will the new downtown arena really benefit Sacramento's economy?

If you’ve drive through downtown Sacramento lately, it’s impossible to miss the area’s signature construction project, a downtown arena to host the Sacramento Kings, called the Golden 1 Center and set to open in 2016. This ambitious $507 million arena build is already changing the look of Sacramento’s skyline, but will it have the same impact on the economic horizon? It’s hard not to welcome the arena to a city that desperately needs it on several levels – a new home for the Kings that ensures they won’t bolt to Seattle or Las Vegas, a chance to revitalize a shabby and underutilized downtown, and a chance to shed a reputation as a second city, despite being the capital.

But past all of the banner waving and encouraging rhetoric, what are the cold, hard, facts that display how the Kings new arena will affect the local economy?

Of course we can analyze the financials, but a better way to predict the economic impact of the new arena is to look at how similar arena projects across the nation have flourished – or floundered. .

First, the prognosis through rose colored glasses; despite a Sacramento city $258 million subsidy left on the books, Mayor Kevin Johnson and the Kings predict the new downtown arena – will spark the local economy to the tune of a $11.5 billion windfall, revitalizing the downtown and bringing renewed prosperity to the city’s business climate and citizens.

Critics of the arena deal, however, point to the imbalanced and somewhat ambiguous financials of this particular deal, as well as numerous studies that reveal that sports arenas help communities far less than thought. In fact, they say writing a blank check for the arena like that can even jeopardize the city’s budget and actually set the region back in the long run.

So who is right?

Only time will tell, but here are some key points to consider:

The city isn’t shy about citing an $11.5 billion economic impact, but it’s important to note that those numbers project over 35 years.

The fine print on the arena studies reveals that approximately 50% of that projected economic benefits is expected to come from bars, hotels, shops, real estate values, taxis, tourism, convention business, and other commercial development. Together, all of these are called “ancillary developments” and aren’t guaranteed.

Critics of the arena deal – not necessarily the arena – point to the uncertainty of those ancillary developments, as the term sheet approved by the City Council only guarantees the Kings will spend $189 million on the arena – not a cent to develop the rest of the Downtown Plaza or surrounding neighborhoods.

The city’s financing plan is largely based on borrowing against future parking garage revenue below the arena.

The huge bill pushed to the city’s side of the table after dinner will include $19 million a year in principal and interest payments. However, City Treasurer Russ Fehr predicts that the city will receive $2.7 million in new tax revenue once the project is completed –a meager return on investment that would have any first year economics student shaking their heads.

Numerous studies have analyzed the economic impact of new sports arenas and stadiums on their surrounding communities, including arenas in Atlanta, Boston, Brooklyn, Chicago, Denver, Indianapolis, and Cleveland, Milwaukee, San Francisco, and Oklahoma City.

Here is the short version of what they found: stadiums can and often do benefit the cities they’re built in, but so much depends on context.

For instance, NFL football stadiums, with only 8 regular season home games per year, offer the least economic returns for cities.

However, a well-placed baseball stadium in a downtown or industrial area in need of revitalization can provide a “major” benefit, probably the most of any sport. With 81 home games and 40,000+-seat attendance, baseball stadium builds provide the greatest immediate economic benefit.

However, basketball arenas sometimes provide the best combined returns, as there are at least 41 home games played in cold weather months when people usually otherwise stay indoors and don’t spend as much. Most importantly, the facility can be used for other venues like concerts, shows, events, and hockey and other sports.

Studies show that for a basketball arena to be a cash cow to the community, annual attendance needs to be at full capacity. The Kings only attracted 680, 049 people to their home games last year, one of the lowest in the NBA, although that could be a symptom of a bad arena and a bad team, not an indicator of a potential attendance cap. But the new Golden 1 Center is going to be one of the NBA's smallest arenas, with a capacity of 17,317 seats and only 30 luxury suites.

The Brookings Institution and Heartland Institute both back up research that shows that new pro sports facilities have “little impact or even a negative impact on net personal income of residents in the surrounding area.”

That’s because most of jobs created are minimum or low-wage jobs, the increase in real estate values prices many average people out of the rental and housing market, and dollars spent on sports games takes away from other events.  In fact, some research found that per capita income in cities with new arenas actually dropped by about $2,430.

Huge gains are expected for already-wealthy restaurateurs (Randy Paragary), hotel, commercial, and real estate developers – not the average Sacramentan.

Notable sports economist Roger Noll at Stanford University, thinks that a city the size of Sacramento can expect only $10 million to $15 million a year in new revenue from the arena.

Other comprehensive studies, such as the one conducted by Geoffrey Propheter of George Washington University and published in The Journal of Urban Affairs, indicates a half empty, half full glass when it comes to the question, “Do basketball arenas act as catalysts for economic development?”

According to Propheter, “The results suggest that basketball arenas do not add economic value on their own but instead are highly dependent on the local economic, social, and cultural context where they are located.”

Within that open door of “context” is where hopes for the King’s arena can enter.

Considering that Sacramento is the capital of California yet still just a big town compared to metropolitan areas like San Francisco, San Jose, Los Angeles, and San Diego, the city is sorely in need of a thriving professional sports franchise, a revitalized downtown, and a signature project to rally around.

The arena is expected to be a shot in the arm for the struggling hotel industry in Sacramento, which declined to an all-time low of 50% vacancies six years ago, but already on the uptick to a normalized average of 62%. Already, several luxury and big-money hotel projects are underway, and analysts predict a 6% increase over the next few years as the arena is built.

Along with a huge boost to hotel business comes unlimited potential to Sacramento’s convention and conference business and increased revenues for the region’s Sacramento International Airport, which is already planning expansion and a beautiful new hotel complex.

One independent study found that the Sacramento arena will attract 1.6 million new visitors a year to downtown, spending $230 million parking, eating, drinking, shopping, and yes – watching Kings games.

But more than just the arena, Mayor Kevin Johnson is most excited about the four-block, one-billion-dollar real estate development that will bring restaurants, new offices, hotels, and family entertainment downtown, bolstering his city.

"We’re in a new era called Sacramento 3.0,” says Johnson. “Where we do things differently and where we control our own destiny. It’s bigger than basketball. We’re revitalizing our downtown. It’s about civic pride."

So what’s the answer to the burning question, “Will the arena really benefit the economy of Sacramento?”

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