How winning KeyArena deal turned into a loser

It was supposed to be a no-lose deal.

In 1995, the Sonics and city completed a $75.7 million renovation of the Seattle Coliseum they said would turn a profit for both sides for many years to come.

In an unusual arrangement, the city sold bonds to build what is now KeyArena in exchange for a cut of basketball-game revenue that would pay off the debt. The public wouldn't have to contribute a dime of tax money. At least that's how it was supposed to work.

Almost 10 years later, the city and the professional basketball team want to tear up their partnership. The city has lost nearly $3 million on the arena over the past four years, dragging down the finances of the entire Seattle Center. Sonics executives claim losses of $41 million and say the team can't make money this season even if every game is sold out.

The Sonics and Seattle Mayor Greg Nickels have been lobbying state lawmakers to bail them out of the $60 million debt remaining from the 1995 arena project. They've also proposed a $205 million expansion that would nearly double the size of the arena. So far, legislators have recoiled from those requests. But team executives warn that they can't keep losing money and have hinted they might have to sell the team if taxpayers don't pick up the tab.

How did the Sonics-city arrangement, once so praised by city leaders, turn out so bad?

City records and interviews with key participants reveal that the deal was risky from the start. Despite warnings by city analysts, it assumed that the Sonics would pack in big crowds, sell expensive luxury suites and generate ever-increasing flows of cash.

But KeyArena had barely opened when the political and economic assumptions on which it was built changed dramatically. Before long, the Kingdome was demolished and replaced with two stadiums built with taxpayer subsidies that made the city's pact with the Sonics look downright stingy.

In what he acknowledges is a bit of revisionist history, Sonics Vice President Terry McLaughlin now describes the 1995 KeyArena project as merely "Phase 1" of the old Coliseum's renovation.

"We didn't really do a full arena deal 10 years ago. We did what the revenues that could be generated off this building could build. What we want to do now is complete that, what we think of as Phase 2 of the building," he said.

ROD MAR / THE SEATTLE TIMES Among the renovations the Sonics envision for KeyArena (photographed last week during a Seattle Thunderbirds hockey game) are wider concourses, which they believe would increase concessions revenue as fans would have more room to roam — and more options.

What's clear in the up-and-down history of KeyArena is that the Sonics are done with the notion — so lauded a decade ago — that a professional-sports franchise can play ball in Seattle without a substantial taxpayer subsidy.

Warnings ignored

By the early 1990s there wasn't much question something had to be done about the aging Seattle Coliseum. The only question — one that seems quaint today — was whether local politicians would dare dip into taxpayer money to pay for a new arena.

Built for the 1962 World's Fair, the Coliseum was among the smallest venues in the National Basketball Association. Even worse, the roof leaked. In 1986, a game against the Phoenix Suns was called off early in the second quarter because of water dripping on the court — the NBA's first rainout.

Faced with a league edict to get out of the Coliseum, team owner Barry Ackerley proposed a 20,000-seat, privately funded arena south of the Kingdome. That plan fell through in part because the team couldn't guarantee sales of 70 luxury suites.

Seattle Center Director Virginia Anderson persuaded the team to take a second look at the Coliseum. The city drew up plans to transform the building into a basketball showplace.

A key assumption was that the new building would pay for itself. The city would issue 20-year bonds to pay for it. In return, the Sonics would sign a 15-year lease and split game proceeds with the city — including luxury-suite revenue and naming rights.

"We are convinced it will not just work, but it will provide a new, state-of-the-art home for the SuperSonics over the long term," then-Sonics president Bob Whitsitt told the City Council on March 31, 1993.

Nevertheless, some warned that the city was gambling on some of the priciest seats in the house. An April 23, 1993, report by City Council analysts Diane Clausen and Martha Lester said the city was "undertaking significant financial risk by going forward with this project." While the city had received a guaranteed percentage of all ticket sales in the Coliseum, the new KeyArena deal gave the city only a cut of expensive corporate luxury suites and "club" seats. If those didn't sell, taxpayers would be on the hook to pay for the $7 million-a-year construction debt.

Anderson, though, reassured council members in a May 3, 1993, memo that the new arena would generate "more than sufficient" cash to cover the debt payments for the 15 years of the Sonics lease.

After raising brief objections, the council voted to OK the deal. But some fretted the city was setting itself up for future losses.

"There was a huge risk," former Councilwoman Jane Noland, who voted against the proposal, said in a recent interview. "The deal was based on a best-case scenario rather than an average scenario. It was a steamroller, and nobody wanted to think about a bad case, much less the worse case."

But former Councilwoman Sue Donaldson said it was the best option available at the time. The difficulties facing KeyArena now, she said, are the result of "challenges nobody foresaw."

The landscape changes

At first, the KeyArena deal looked smart.

"The day that building opened was a beautiful day. The Sonics strengthened their bottom line on Day 1," Bill Ackerley, former president Ackerley Communications, which owned the team, said in a recent interview.

The team immediately boosted its revenue by $5 million a year above what it had made in the Coliseum, according to city estimates. And the city easily earned enough money to pay the construction debt, plus turn a $5 million profit over the first two years of operation.

It helped that the team was among basketball's elite. During the 1995-96 season, the Sonics went 64-18 and reached the NBA Finals.

However, at the other end of town the Mariners and Seahawks were plotting the demise of the Kingdome and demanding hefty public subsidies for new stadiums.

By 1997, after years of acrimonious debate, public money had been approved for stadiums for both the professional baseball and football teams. The new homes of the Mariners and Seahawks cost $947 million, with the public tapped for $636 million. Unlike the basketball club, the Mariners and Seahawks did not have to share game revenue with taxpayers. The new stadiums also more than doubled the number of luxury suites in town competing for corporate buyers, directly threatening KeyArena's bottom line.

Sonics executives were astounded by the taxpayer largess and wondered whether they should have held out for a better deal.

"Did we have days as an organization where we felt kind of stupid? Yes," Ackerley recalled.

The Sonics might have lived silently with that jealousy, but larger forces began to sap KeyArena's finances.

In 1998, NBA owners locked out players in a labor dispute. The Sonics canceled 16 home games; the city lost $300,000 in rent and refunded $2.7 million to placate luxury-suite customers. KeyArena was in the red for the first time.

By 2001, with the economy failing, Safeco Field open and the new Seahawks Stadium under construction, sales of suites and expensive club seats at KeyArena faltered. City revenue from the arena, which peaked at $13.7 million in 1999, began to fall, coming in at $10.2 million last year. Counting this year's projected loss, the city has lost money on the KeyArena in more years than it has turned a profit.

By the time the Ackerley family sold the team in 2001 for a reported $200 million, the Sonics, too, were losing money.

Revenue flat, expenses up

Into the growing mess walked The Basketball Club of Seattle, a new ownership group of 58 investors led by Starbucks Chairman Howard Schultz. Despite the Sonics' mounting problems, the owners were optimistic.

"We thought we could [turn a profit]. The projections were based on our revenue going up, but it's been flat," said Sonics President Wally Walker, who released limited financial information to The Seattle Times.

The team says it has lost more than $41 million since the new owners arrived and expects to lose $17.8 million this year. A "cash call" was recently issued to the team's investors, forcing them to pony up a reported $17 million to cover losses.

A major problem, Walker said, is that the owners overestimated the amount of money the team would receive from the NBA, principally from a new national television contract. The TV deal has brought in $6 million to $10 million a year less than anticipated, he said.

Meanwhile, the luxury suites and club seats — which were supposed to make KeyArena profitable for the city — turned into a liability. Just 23 of the arena's 53 suites are leased this year, and the team gave up entirely on the pricey "club-seat" concept in 2002, converting them to regular seats.

The Sonics' difficulties on the court have also made them less attractive to ticket buyers. The Sonics have won just one playoff game since the new owners took over. Things are looking up this season, with the team recently clinching the Northwest Division title. A ticket-price increase of 6.6 percent has already been announced for next season.

The team's expenses also have climbed. The Sonics' player payroll has more than doubled since 1995 — to $54 million this year — but remains below the league average of nearly $60 million.

The Sonics say they would be closer to profitability if they had a better lease with the city. Most NBA clubs get to keep money from luxury suites and concessions, while the Sonics have steered to the city at least $10 million a year in KeyArena revenues, including $800,000 a year in rent.

The Sonics, with the support of Mayor Greg Nickels, have been pressing state lawmakers to extend taxes used to pay for Safeco and Qwest fields. The Sonics hope those taxes could be redirected to pay off the $60 million in debt from the 1995 KeyArena expansion.

If that happened, the team would no longer have to share revenue with the city, immediately boosting the team's bottom line. The city would turn management of KeyArena over to the Sonics, allowing the team to keep all the revenue but assume all the risks. Nickels said such an arrangement would benefit the city.

"If you take KeyArena out of the equation, the rest of the Seattle Center is OK, it's doing fine. KeyArena financially is the 800-pound gorilla," he said.

As a King County councilman, Nickels helped push through the Safeco Field deal. He said the city and region have an interest in the success of local professional-sports teams.

"It isn't about being a fan, it's about how you have a community that has these exciting attractions that bring tourists to spend money, provide jobs in the community and provide economic opportunity," he said.

With the mayor's blessing, the city has lobbied hard for a KeyArena bailout — spending $186,000 for consultants to draw up arena-expansion sketches and hiring former Boeing lobbyist Rob Makin under a $60,000 contract to prod legislators.

But the efforts have fallen flat in Olympia, where Democratic majority leaders in the House and Senate have said their caucuses have little desire to bail out the Sonics. Even at Seattle City Hall, not everyone agrees with Nickels' pro-Sonics push.

"I don't feel we have an obligation to help the Sonics become a more-profitable corporation. We have an obligation to make sure our arena has a tenant," said City Councilman Nick Licata.

Licata said he thought the Sonics arena deal had been a good model, but it was sabotaged by subsequent stadium deals.

"By funding the other two stadiums, we were in fact digging the grave for the Sonics," said Licata, pointing to the glut of luxury boxes competing for corporate customers.

But the Sonics and mayor say even if lawmakers turn them down for now, the financial problems will not go away. They'll be back next year, asking again.

"We wouldn't be saying 'me too' if we had a deal that worked for ourselves and our landlord, the city," Walker said.

Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com

Bob Young: 206-464-2174 or byoung@seattletimes.com