When accounting for interest and other expenditures relating to the project, the final cost of Little Caesars Arena could be close to $1 billion.
The future home of the Detroit Red Wings is essentially a two-part development. There is the arena itself and then The District Detroit, which is a mixed-use development consisting of about 50 blocks. Previous cost estimates on the arena alone have come out to $627.5 million, but those have not included the interest on 30-year bonds–$250 in million Series A bonds issued by the Downtown Development Authority (DDA), plus $200 million in Series B bonds–and other project costs.
The variable interest rate Series A bonds, which are to be covered by tax revenues from the arena and surrounding area, are expected to generate $231 million in interest, while the Series B bonds will come with an additional $132.5 million in interest that is to be paid by Olympia Development of Michigan. Those factors, combined with another $177 million spent by Olympia Entertainment, mean that Little Caesars Arena‘s final price tag could rise to $991 million by 2045.
Merrill Lynch will resell the Series A bonds to the public in mid-2018 (after the arena is open and revenue is being generated), according to the bond authorization approved by the state in September 2014. That means the interest rate, and the final arena cost, could change. The initial interest rate on the Series A bonds was 4.125 percent, according to online records of the sale.
Market concerns about the Detroit bankruptcy are why the public bonds are short-term variable-rate bonds rather than a long-term fixed rate, according to the DDA.
Wall Street bankers Siebert Brandford Shank & Co. LLC, hired as the financial adviser to the DDA and the state for the deal, recommended the variable rates. So did Olympia’s adviser, New York City-based First Southwest Co., an investment bank specializing in public finance for major infrastructure projects including sports arenas, according to the DDA.
The Series A bonds are tax-exempt because they will be repaid from a special incremental finance property tax capture (mostly from large corporations and various Ilitch-owned entities) in a portion of the DDA’s taxing district that was expanded to include the arena project footprint. The state Legislature in 2013 approved the tax capture use for the arena project.
The DDA executed an interest rate swap on the Series B bonds when they were sold, using New York City-based Mohanty Gargiulo LLC as a swap adviser as required under Dodd-Frank, the 2010 Wall Street reform act. Interest rate swaps are a complex financing gamble often used as a money-saving hedge. However, when they backfire, the results can be calamitous: The city of Detroit’s bankruptcy filing was, in part, because of interest rate swaps in the mid-2000s that turned sour for the city.
As the project has progressed, Olympia has added and financially covered a few additions to the arena, including gondola-style seating and an outdoor plaza with a videoboard. Little Caesars Arena is set to open for the 2017-2018 NHL season.
Image courtesy Olympia Entertainment.