Tempe voters to decide on $2.1B Coyotes development after city OKs project plan

Tempe City Council members voted on Tuesday to send the $2.1 billion Arizona Coyotes deal to local voters in May.
Sam Kmack
Arizona Republic

Corrections & Clarifications: The amount of private debt the Arizona Coyotes will take on was incorrect in an earlier version of the article.

Tempe voters will decide the fate of the Arizona Coyotes' $2.1 billion development deal during a May 16 special election.

The Tempe City Council on Tuesday unanimously called for the election after accepting the team's development plan and listening to dozens of public speakers, the vast majority of whom were in favor of the deal and the council’s decision to send it to the ballot.

NHL Commissioner Gary Bettman was among those attending, along with Coyotes owner Alex Meruelo and the team’s CEO Xavier Gutierrez.

The final iteration of the Coyote's proposal would involve building nearly 2,000 apartments, an NHL arena and an entertainment district on 46 acres of Tempe-owned land west of Town Lake. The property has been used as a landfill and currently houses a municipal operations yard.

Coyotes lawyer Nick Wood said the team is the only entity that could "ever make this (proposal) work." The team has promised to create nearly 7,000 new jobs, generate billions in economic impact and create roughly $200 million in new tax revenue for the city over the next 30 years ― all while using zero existing public dollars.

But uncertainty about the team's financial strength and its tumultuous tenure in Glendale have raised questions about whether the proposal is too good to be true. It's become one of Tempe's most divisive deals in recent history, facing pushback on everything from the team's requested tax breaks ― which total about $100 million in city taxes alone ― to the site's location under noisy flight paths in and out of Phoenix Sky Harbor International Airport.

It was that cocktail of controversy that spurred the city's decision to put the deal on the ballot as local citizen groups were poised to launch a petition that could have sent the project to voters anyway.

"The main reason was because there were many groups who were talking about the notion of referring this to the ballot for a referendum," Tempe Mayor Corey Woods said.

Citizen-led referendums have delayed similar projects in Tempe and have even landed the city in court when officials decided against sending those deals to voters.

Woods said he believes giving residents the final say will lessen the likelihood that any of those outside challenges could throw a wrench in the deal, describing the public's decision during the May election as "ironclad."

Now, the responsibility of weighing the pros and cons of the deal sits squarely with residents. Their decision on the project's future is far from a trivial one, with more at stake than NHL hockey or increasing entertainment options in the city.

A "no" vote could cause Tempe to lose out on a great deal that would turn a "contaminated" landfill into a cash-generating behemoth. The city needs money to fund efforts ranging from homeless initiatives to law enforcement to water conservation.

But it could also be a disaster for Tempe if the team's promises don't come true, if the Coyotes fail to pay off the more than $200 million in borrowed cash needed for startup costs, or if the team runs short of money to see the project through.

Tempe City Councilmember Doreen Garlid highlighted the importance of the proposed Coyotes project site in June, when the City Council voted to officially enter negotiations with the team.

That scenario would mean the city loses control of its "last bulk" of empty land and never sees the money it might have otherwise generated had voters chosen to walk away from the Coyotes deal.

“This is the last bulk of land that the city of Tempe owns. We are a landlocked city,” Councilmember Doreen Garlid said about the proposal in June. “Is this the right fit? Is this exactly 100% what we want there? Because we can't go back. Once we have made this decision to sell this last bulk of land that we have left … that's it.”

How the deal would work

The Coyotes project plan is a unique one as far as arena deals are concerned because the developer isn't asking for any existing public cash, just a piece of the newly created tax revenue to cover some of the startup costs.

Tempe will receive a combined $60 million for the land purchase and construction permitting fees off the bat. After that, the team will take on at least $209 million in private debt to cover things such as land cleanup, which will have to be paid back over the next 30 years.

The actual amount of money that must be paid back will probably be somewhere around $480 million because of interest. The team's ability to repay that will depend heavily on how many customers it can attract once the project is finished because up to half of the debt will be repaid using new taxes generated on-site.

That's one of the only publicly funded pieces of the project, but the site doesn't currently produce any revenue, so the team isn't taking up cash that the city would otherwise have. The Coyotes organization will cover the rest of the bond repayment and the remaining $1.9 billion in construction costs.

“I’ve never had a client who’s willing to put up this much money and make these kinds of commitments,” said Wood, the Coyotes attorney.

In exchange for footing most of the bill, the Coyotes are asking for a 30-year property tax break for the hockey-oriented parts of the project and an eight-year break for the other components of the development. In all, it will save the team about $100 million in city-specific taxes, according to Tempe estimates.

Tempe isn't currently collecting any property taxes on that land, however, so it doesn't necessarily represent a financial loss for residents. City staffers also expect to generate $100 million in new tax collections within 15 years of the project opening its doors.

On top of that, the city anticipates that the development will generate $14 billion in economic impact over the next three decades.

“I think if you look at the project, it’s pretty incredible,” former Tempe Mayor Neil Giuliano said about the deal last summer. “Quite honestly, you’re not going to find another project that’s going to come forward with that kind of capacity to impact the future economic well-being of the city.”

Opportunity cost remains biggest risk

Tempe officials and staffers are adamant that the city will not have to dole out any off-site tax money to cover extra costs under the proposed deal.

The team is responsible for at least half of the debt repayment regardless of whether the project fails to generate enough revenue to pay it back, for example, and there are a number of "backstops" included to prevent it from defaulting on the payments.

One option is to levy an extra "surcharge" fee at the on-site business to make up the difference. The other would involve putting a lien on every property within the district, which would essentially create an extra property tax fee that would be used to close the debt payment gap.

"If for whatever reason this doesn't generate what we think it will, the backstops make sure that everything is recouped at the end of the day," Mayor Woods said. "This structure allows that to be the case."

Those steps make it unlikely the Coyotes will simply default on their debt payments, which would mean the property passes to banks or other investors who buy up the bonds.

The real question is whether the Coyotes can cover the rest of the project cost. If the team falls short, the city could be stuck with a massive piece of half-developed land that provides few of the economic benefits the team has promised. And the franchise's financial wherewithal has long been a matter of concern for those involved in the deal.

A city memo released in June gave the team's plan a failing 40% score for "financial strength/ability."

Another report by business analytics company Dun & Bradstreet found that the Coyotes were a "high" financial risk, and suggested the team was only worthy of a $5,000 credit line ― an amount that would be more appropriate for a young adult with a credit card than an NHL franchise.

And late last year, the Coyotes franchise was penalized for being late on a $1.3 million sales tax payment to the state, which the team attributed to possible human error. 

Coyotes representatives contest the validity of those financial scores and insist the organization is capable of seeing the project through.