District of Columbia: Status of the Sports Arena
Released: 1997-11-14T00:00:00

Letter

Background

The District of Columbia government, acting through the Mayor, the District’s Redevelopment Land Agency (RLA), and the District of Columbia Arena, L.P. (DCALP)—a limited partnership formed by the owner of the Washington Wizards and the Washington Capitals—agreed that DCALP would build a sports arena (estimated to cost about $175 million) and that the District would be responsible for financing certain predevelopment costs.

The District agreed to be responsible for the following predevelopment costs: acquiring land, including the purchase of property not then owned by the connecting the Gallery Place Metrorail station to the sports arena; relocating District employees from two buildings on the site to other demolishing buildings, remediating soil, relocating utilities, and securing all regulatory approvals necessary for construction of the sports arena.

The Omnibus Budget Support Act of 1994 (Arena Tax Act), as amended, provides for a Public Safety Fee (Arena Tax) to be levied on businesses located in the District based upon the annual gross receipts of such businesses. The Arena Tax is due on or before June 15 of each year. The Arena Tax Act provides that if on or before December 1 of each year, the Mayor estimates that the Arena Tax revenue is less than $9 million, the Mayor is required to raise the Arena Tax rates to provide for an estimated revenue of not greater than $9 million. The Arena Tax Act also authorized RLA to pledge the Arena Tax as security to repay loans to finance predevelopment activities. The Arena Tax was first levied in fiscal year 1995 and mostly used to fund predevelopment activities. In subsequent years, the Arena Tax was used to pay principal and interest (debt service) on the bonds as required by the bond resolution.

To initially finance the predevelopment costs of the sports arena, $2.5 million was advanced by the District’s Sports Commission. The funds were provided with the understanding that they would be repaid from the proceeds of a loan the District would secure. In August 1995, the District received a $53 million loan commitment (line of credit) from a consortium of banks. In January 1996, RLA issued about $60 million in revenue bonds backed by the Arena Tax and paid off the $36.6 million portion of the line of credit used.

The funds originally available to pay the arena’s predevelopment costs and to establish a debt service reserve totaled $66.6 million. These funds consisted of (1) $57.4 million in net bond proceeds (after financing costs) from the sale of RLA Revenue Bonds in January 1996 and (2) about $9.1 million in 1995 tax collections from the dedicated Arena Tax. Of the $66.6 million then available, $11 million was placed in two reserves. A mandatory $5 million capital reserve, which was required by the bond resolution, was established to pay for any insufficiency in the project fund. A reserve of about $6 million was established for debt service.

Objectives, Scope, and Methodology

Our objectives were to determine the status of the sports arena project’s (1) predevelopment costs, (2) revenue collections, and (3) construction status.

To determine the status of expenditures for predevelopment activities for the sports arena, we interviewed District officials on the Arena Task Force, the District’s Sports Commission and Corporation Counsel, the Office of the D.C. Treasurer, and the Office of Tax and Revenue. We also met with trustees for the bonds and lockbox (into which dedicated taxes are deposited). In addition, we discussed the construction progress of the arena and Metrorail connection with officials from DCALP and the Washington Metropolitan Area Transit Authority (WMATA).

We statistically selected a sample of expenditures for review. Our sample was drawn from payments made from the funds provided by the District’s Sports Commission, the loan from the consortium of banks, the 1995 Arena Tax collections, and the net proceeds from the sale of the bonds. The sample was comprised of 56 expenditure items, which, at the time of our audit, represented 92 percent of the total funds spent. We reviewed each sampled expenditure item to determine whether it was made within the terms of the contract or invoice amounts, it had been approved for payment by a District official, and the funds had actually been disbursed.

We did not audit the reported taxes collected and deposited for the sports arena project. Therefore, we did not determine if the District government accurately identified the universe of taxpayers or reported all dedicated taxes for this project. However, we reviewed the lockbox procedures that were established to collect the dedicated taxes, and we also reviewed monthly statements provided by the lockbox trustee to determine the amount of taxes collected and placed in escrow. In addition, we reviewed the District’s lead underwriter’s assumptions pertaining to the early redemption of the term bonds. Our review was built on previous work,and we conducted our review from February 1997 through October 1997 in accordance with generally accepted government auditing standards.

Predevelopment Project Costs

Since our last report, predevelopment cost estimates have increased from $55.8 million to about $58.5 million, or by a net amount of $2.7 million (4.8 percent). The District’s predevelopment activities consist of four major categories: (1) acquiring land, (2) demolishing two buildings, remediating soil, relocating utilities, and using consultants to secure regulatory approvals, (3) relocating District employees, and (4) constructing the Metrorail connection. The District has completed almost all of its predevelopment activities and has spent $56.7 million, or about 97 percent, of the estimated total expenditures. Table 1 shows the District’s total predevelopment activities financed for the sports arena project.

Land Acquisition

As shown in table 1, land acquisition has represented over half of total predevelopment costs and remains the only known potential risk to the District’s predevelopment budget for the arena project. While the District acquired two pieces of property for the sports arena site, the price of one piece of property has not yet been determined. The District had two appraisals performed on the land in question. The first appraisal reflects a value of $5.25 million, and the second appraisal a value of $6.56 million. The owner has an appraisal showing a value of $10.6 million, and the owner’s last requested price was $8.6 million. The District invoked its powers of eminent domain to secure title to the property and deposited $5.25 million with the D.C. Superior Court, which is $3.35 million less than the owner’s last requested price. According to the District’s project manager, a trial to determine the value of the land is scheduled for December 1, 1997.

Metrorail Connection

The Metrorail connection to the sports arena is almost complete. According to WMATA officials, the Metro station will be ready for an unofficial opening on November 15, 1997. During the period between the unofficial opening and the official opening on December 2, 1997, WMATA will be finalizing its work, such as installing permanent lights and handrails at the Metrorail station. In addition, according to WMATA officials, the work on the Metrorail connection is currently within the budget of $19 million, of which the District has contributed $3 million. WMATA officials do not foresee any additional needs that would require additional funding by the District.

Soil Remediation and Related Activities

As shown in table 1, expenditures for building demolition, soil remediation, and relocation of utilities have increased from the projected $9.6 million reported in our December 1996 report to about $15 million, an increase of $5.4 million, or about 56 percent. The significant increase in expenditures in this category is primarily a result of a negotiated settlement related to delays in construction activities due to extended time frames for soil remediation efforts. The actual cost for soil remediation ($3.5 million) has not increased since our last report.

The majority of the increase in spending ($4 million) was paid to DCALP—the developer. DCALP, on behalf of its subcontractors, had claimed losses arising from construction delays. According to DCALP, subcontractors had to pay additional premium labor rates to get back on schedule, and additional materials were also required. DCALP claimed that under the terms of the ground lease, the District was responsible for these costs. As part of its settlement, the District has obtained a legal agreement, intended to preclude the developer from prevailing in any further claims for losses arising from soil remediation efforts. In our last report, we had mentioned that the District’s Deputy Corporation Counsel stated that the District would take legal action against the alleged source of the contaminants if it does not receive compensation. However, as of October 21, 1997, the District had not determined the amount or presented a claim to the alleged source of the contaminants.

The $4 million was paid out of the project fund following a transfer of that amount from the Mandatory Capital Reserve Fund. The Mandatory Capital Reserve Fund was initially established with $5 million, as required by the bond resolution, to cover any insufficiency in the project fund. The Mandatory Capital Reserve Fund currently has a balance of about $1 million. The bond resolution requires that any funds in excess of $1 million in the Mandatory Capital Reserve Fund as of September 1, 1997, that are not required to be used to finance any portion of the project be transferred to the Redemption Fund and be used to redeem term bonds on November 1, 1997. In addition, any balance remaining in the Mandatory Capital Reserve Fund on September 1, 1998, should be transferred to the Redemption Fund and be used to redeem bonds on November 1, 1998.

In addition, the District requested and RLA modified the original bond resolution in August 1997 to maintain funding in the project fund to be used for predevelopment expenses after September 1, 1997.

All activities associated with soil remediation efforts have not been fully completed. The District’s project manager for the sports arena has recently included in the expenditure estimates an additional $700,000 for the removal of concrete structures below the surface and remediation of the soil, if necessary, on a parcel of land transferred to WMATA. The District believes that it has budgeted sufficient funds to remove the concrete structures. The District stated that based on preliminary work, the soil is not contaminated. The project manager of the sports arena fund stated that the District is hiring a contractor to perform further examination of this parcel of land.

Relocation of District Employees

The activities related to the relocation of District employees are almost complete. As shown in table 1, as of October 7, 1997, total expenditures for these activities is expected to be about $4 million, which is $804,000 less than what was estimated about a year ago. According to the project manager of the sports arena fund, leasehold improvements relating to installing computer workstations will soon be completed and will cost $338,000 less than the amount anticipated. In addition, spending on the telecommunication equipment move will cost $252,000 less than originally anticipated since it was determined that the cost was not solely associated with the employees affected by the move but with work that was performed on other District buildings.

Sources of Revenues for Predevelopment Costs

Table 2 shows total receipts of about $61.9 million available as of September 30, 1997, to fund predevelopment costs. Through that date, the District had earned about $1.3 million in interest from the bond proceeds. However, we have excluded $371,000 in funds that we believe the sports arena project fund should not have received from the District’s General Fund for sports arena predevelopment costs. In our last report, we stated that all of the leasehold improvement costs associated with the relocated employees should have been paid from the District’s sports arena project fund rather than from the District’s appropriated funds because this activity was an allowable cost for the sports arena project. We had informed the District’s Chief Financial Officer of this matter, and he had agreed to recoup the money from the sports arena project fund. However, as of October 7, 1997, the funds had not yet been returned to the District’s General Fund. The project manager of the arena project fund contends that this amount should be borne by the District since it was not factored into the original predevelopment activities budget. We disagree. These costs were precipitated by the relocation action to allow arena construction and, accordingly, were an allowable cost of the sports arena project.

Dedicated Tax Revenue Collections and Other Revenues

As of September 30, 1997, collections for the 1997 Arena Tax had totaled about $9 million and were sufficient to meet 1997 principal and interest payments (about $5.9 million annually) on the bonds issued to finance the predevelopment expenses. The District forecasts Arena Tax collections of $9 million for each year that the bonds are outstanding. For 1995 and 1996, the trustees for the lockbox collected Arena Tax revenues of about $9.3 million and $9.6 million, respectively. Based on an analysis performed by the District’s lead underwriter for the Sports Arena Special Tax Revenue Bonds, if future Arena Tax collections remain in the $9 million range, and if revenues from the ground lease of the arena and the $6 million in the debt service reserve, including interest earnings, are used, the bonds could be paid off in 2002, well before the 2010 maturity date of the longest term bonds.

The approximately $9 million in dedicated tax revenues collected as of September 30, 1997, compares favorably with 1995 and 1996 collections; therefore, it is likely that collections will also exceed $9 million in 1997. As was done in previous years, taxpayers were instructed to send their payments to a lockbox under the control of bank trustees. We verified that these funds were transferred to the trustee for the bonds and placed in accounts for principal and interest payments.

The combined total of $18.6 million in dedicated tax revenues collected for 1996 and 1997 is being used to pay principal and interest on the sports arena bonds. The District’s Sports Arena Special Tax Revenue Bonds are comprised of about $15.4 million in serial bonds, which have stated maturity dates from 1996 to 2000, and $44.5 million of term bonds with stated maturity dates from 2001 to 2010. As of November 30, 1996, the District had paid principal and interest of $5.8 million on its serial bonds. The bond resolution requires that any additional tax collected over the amount needed to pay debt service on bonds be placed in a super sinker fund and be used to redeem term bonds earlier than their due dates.The serial bonds cannot be redeemed earlier than their stated maturity dates.

According to the bond trustees, on May 1, 1997, about $2.5 million of term bonds had been redeemed, and interest of about $1.6 million had been paid. Of the $18.6 million collected in dedicated tax revenues as of September 30, 1997, the District has used about $9.9 million for debt service, leaving about $8.7 million in the debt service fund. In addition, according to the bond trustee, as of September 30, 1997, the District had approximately $6.5 million, including about $500,000 in interest earnings, in the debt service reserve fund.

The District will soon begin to generate additional revenue from the lease of the sports arena land, which will also be used to pay debt service on the bonds. Pursuant to the terms of a ground lease dated December 29, 1995, the District and the RLA have agreed to lease to DCALP, the land upon which the arena is constructed for 30 years with the option to extend the lease for two 10-year periods. DCALP will make annual payments in quarterly installments to RLA, upon issuance of a certificate of occupancy. Based on the terms of the ground lease, for the next 6 years, the District will receive $300,000 annually and is expected to receive a total of about $24 million for the 30-year lease period.

The District’s lead underwriter on the Sports Arena Special Tax Revenue Bonds has performed an analysis that shows that if future collections of dedicated tax revenues remain about the same as past collections, and if revenues from the ground lease of the arena and from the debt service reserve fund were used, the bonds could be paid off in the year 2002, 8 years before the last scheduled maturity date. In addition, the analysis revealed that the District would save about $15.6 million in interest costs from early redemption of the term bonds at their par value.

Construction Status

According to the Chief Operating Officer of DCALP, the arena is scheduled for an unofficial opening on November 15, 1997 and the majority of the work will be completed at that time. The arena is expected to be completed and available for its intended use on December 2, 1997, about 3 months later than the originally scheduled date of September 1, 1997.

District’s Comments and Our Evaluation

We requested comments on a draft of this letter from the Mayor of the District of Columbia. The Mayor provided us with comments that are reprinted in appendix I. With regard to the District presenting a claim to the alleged source of the contaminants, the Mayor stated that the Office of the Corporation Counsel is in the process of determining how to proceed with legal action.

We are sending copies of this report to the Ranking Minority Member of your Subcommittee and to the the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations and their subcommittees on the District of Columbia and the Subcommittee on Oversight of Government Management, Restructuring and the District of Columbia, Senate Committee on Governmental Affairs. Major contributors to this report are listed in appendix II. If you or your staff need further information, please contact me at (202) 512-4476.

Comments From the District of Columbia

The following is GAO’s comment on the letter from the Mayor of the District of Columbia dated November 7, 1997.

GAO Comment

1. The Mayor’s assumption is correct. Table 1 contains both budget obligation and expenditure amounts.

Major Contributors to This Report

Accounting and Information Management Division, Washington, D.C.

Office of General Counsel

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