#YEGArena Tales: Santa Katz and the gift of debt

The mystery surrounding Stephen Mandel's trip to New York is over and the word is in; Daryl Katz and Stephen Mandel have a new deal for the city. For those who haven't been following Edmonton's newest attempt to catch the dangling carrot of becoming a "big city", prior to this meeting two main sticking points about the arena existed:

1. A non-compete clause with Northlands
2. $100million in funding outstanding

Post New York it seems they managed to "sort out" the non-compete clause. Katz has withdrawn this request and has instead replaced it with a public-private marketing campaign for the city of Edmonton (I *think* it's about the city, although it sounds more like a campaign about visiting Edmonton's new arena). Considering the ridiculousness of such a request of the city in the first place I don't exactly see this as "productive" since the $100million (arguably the most important sticking point) is still outstanding.

What else has changed? Well it appears the city will now be putting up 100% of the cost up front, with a 30-year "rent-to-own" style lease of 5.5million / year for the $100million Katz was supposed to contribute. Of course Mandel says the city would "ensure" that the $100million is paid, but with the city's *amazing* negotiation skills how confident can anyone really be on that point?

The live chat was again filled with the pro-arena Nike addicts, chanting their "Just do it" slogan. Seriously guys, you watch too much TV. Last weekend while visiting with my parents we all watched the game. I found it shocking how many Money Mart and other payday loan commercials I saw. Thinking about it though, is it really so shocking? Here you have a group of people whose argument for hastily spending a large portion of taxpayer dollars while taking on considerable risk is "Just do it", Money Mart must be getting rich.

So it would appear that Santa Katz this year brings us the gift of debt. Of course we can be completely confident this loan (give away?) will be paid. We can be confident of this because their reasoning for needing public money in the first place is that the industry would go bankrupt otherwise. As we all know, taxpayer dollars are magical and never go bankrupt. So yes, the new twist of logic is "We can't go to a bank and get a loan, we'll loose money. We can however go to the city and get a loan and pay that back 100%".



No investor could realistically take Santa Katz seriously, and that is probably why he doesn't have any.

My solution to the Edmonton arena debate | #yegarena

Ugh, this arena debate just isn't going away. Now it appears the city wants to preemptively buy the land for 25million (on top of the arena's tag price, and infrastructure costs). Some of the ignorant comments in the live chat such as "Like Nike, Just Do It!" shows the severely irrational mentality behind justifying this frivolous expense.

So I'm going to propose a plan that should make everyone happy. It will transfer the risk to those invested in the arena. It will provide returns in as secure a sense as the free market can provide. It will leave the city free to spend it's money on the many high-grade infrastructure upgrades that will be needed should funding be raised. Finally it will give Edmontonian's (or other Albertans, probably open to other investors too) who want to build up, have input, and support the arena a direct way to do this.

Now before I explain this plan, I am in no way vouching for the success of the project itself. Even if this approach were taken, I would not be investing my own money expecting a return. Like any investment this one would be folly to the market's mood and if you read my other posts on this blog my long term outlook for the current global economic system is clear. However that aside, let's see how we can solve everyone's issues here.

First, the main arguments for and against (as I understand them):

• Katz should be using the free market if he is certain about the return on investment.
• Maintenance alone is not worth 100% of return on investment.
• The questionable non-compete clause.
• We are in a deficit and the arena is a luxury item.
• The meetings are too secretive.
• Infrastructure upgrading

• It's believed the arena will contribute to revitalizing downtown.
• The costs to renovate/modernize Rexall are also high.
• The Oilers might leave without an upgraded facility.
• The facility would probably get heavy use by non-hockey events.
• There are high hopes that an arena will springboard an expansion in commercial service in the area.
• It's a 1 time opportunity for the city.
• If not an arena, then what?
• And finally, Katz says he loves Edmonton.

 So how do we solve all of these issues and make everyone happy? We need to both please those for and against the arena, this is a large investment and those not confident in it should not be obligated to fund it. So the solution? We need a competitive bond process. Ownership of this arena needs to be on the open market. We've had partial open ownership of the Oilers before. So let me break this down for you.

Right now it's estimated that the cost is $450 million broken down:

• $100 from Katz Group.
• $125 directly from city.
• $125 loan from the city, which will be paid back with a utility fee in the future.
• $100 is remaining without a source.

What I would propose is to drop everything except the utility fee. The utility fee would remain but not to repay a loan from the city, instead it would go towards dividend payouts. Once the shares were put on the open market, Katz could *buy* his $100million worth of ownership (or however much he deemed fit) and the rest would be put up for bids. As time went on, this would give the Katz Group opportunity to buy back all of the shares for complete ownership and would minimize their risk.

Under this model, I also would not be *AS* opposed to city investment in the arena as there would be a direct return and we'd be able to cash out and have another player buy the shares. This would also give the hockey players themselves a chance to invest in the stadium they play in, giving them direct input. Other investors, and hockey fans would get direct input by holding shares.

So lets see, this solves the issue of Katz circumventing the free market system in hopes of placing himself in a monopoly. If he wants a non-compete clause with Northlands that is his business, but it's not the city's business to give him an edge over an already established business and then demand a monopoly. It solves the issue that the city is getting very little in return as like any other investor it could get as much a return as anyone else depending on free market risk. It places all risk and reward directly on the shoulders of those with direct interest in the success of a luxury item. I personally do not believe with the current credit crisis that an arena will increase growth, so why should I personally be on the hook with all risk and no reward? This mitigates that for me, and also leaves those who think that like Nike "Just Do It" to cover the cost. They might then make financial decisions off information instead of propaganda slogans.

Under this proposal all meetings would need to be 100% transparent to convince investors it's a viable opportunity. Good bye shadowy city counsel meetings, it should be 100% public and this system would ensure that.

When it comes to infrastructure upgrading, the city would have a lot more resources in terms of state of the art infrastructure without an already large commitment to the facility itself, and any commitment like I said would provide direct returns thus topping up the infrastructure fund if the city chooses to put it there.

Since everything on the pro-side is theoretical or fan-based, I don't see why it doesn't meet the needs. It certainly would show Edmontonians how much Katz loves us and the city by giving us direct input. It would give the expected commercial services the chance to have a direct investment in the facility as well.

That's my idea, I'll be refining it as I think about it more, but I think this model pretty well solves all of the major issues and controversies regarding the arena and should make everyone happy, or at least get their happiness out of city council’s hands as they are supposed to work for all people and any deal brokered by the city isn't going to work for everyone.

I am still refining this solution, so please comment with your constructive criticism. Additional factors I should consider, whatever...

Edmonton Arena pt2: The world class city myth

* UPDATED * My solution to the Arena Debate.

Ok, wtf. I write 5 articles and my 2nd and probably worst one gets the most hits? no comments? what gives?

Seriously I wrote that while having an overdose of anger, and its not very well done. So let me try this again. I *really* want to make the case here. I am not just some arena hating guy but that I strongly believe we are being convinced of something that is not economically feasible and is at the moment a ridiculous use of our resources. The previous article was really just a blend of half-assed points that really need some background to really make any sense.

You'll notice much of what I am writing on this blog is about energy and economics, particularly oil. Indeed my argument against the Katz Arena is centered around oil, or more specifically what has come to be know as the representation of oil world-wide, the U.S. dollar.

To understand why the state of their dollar matters to us Canadians and particularly to Albertans is that that is what they give us, for what we give them. We give them oil, they give us digital paper and say "this is worth something". Think about it, therefore what are Canadian dollars? Denominations of the American dollar. This is why staying near or below parity is very important for our government, preferably for the Americans they would want below parity.

Still with me? I promise this relates to the Arena, we'll be getting to that soon. Alright, so we've covered oil and the fact that oil is represented by the American dollar. Now, why does oil give the American dollar value? Well because up until recently it was the sole currency oil could be traded in, it is energy. How do we use it? In everything! In every stage of production! Oil is the engine for modern day consumption, it's not just any commodity it is the base of everything we have today.The American dollar is based of the future capacity to pay debts. If countries didn't accept American dollars, then they wouldn't have any value. They are not intrinsically valuable. It is a promise to pay. (Previously redeemable in gold). So what does Alberta get for it's oil? USD.

So how do we get materials to build say.. an Arena? Well we *pay* for the energy; both human and mechanical that is used in the process of getting them. This is where a term called "peak oil" becomes relevant, and which I am not going into here. There are many resources on the internet about peak oil, I suggest checking it out for yourself. I will say this though, Peak Oil is not Oil depletion. Anyone who implies this doesn't know what they are talking about.

Ok, almost to the arena now. You should see now why the USD collapsing is going to play a big role in the coming years. Think about all of these USD Quantative Easing, they are simply pressing buttons on a computer, making "cash", and then giving this "cash" to middle eastern countries for oil. So the U.S. presses a button, prints 1 trillion, and in return they get oil and also the work required to get that oil which likewise costs oil to provide the industry enough energy to get more oil. The same thing goes with derivative energy by the way, so don't think that there is an easy fix to this issue. Soon the CDN government will need to choose whether they go down over the cliff edge devaluation of the USD to maintain the huge trade relations or to revalue the CDN currency effectively cutting off the U.S. trade capability as it would be too expensive for them which likewise would affect our economy substantially as we saw with the brief interruption they had to their economy in 2008 which caused many Canadian auto shops to close, hundreds of thousands lost jobs.

So in either case we can expect a huge economic impact, there is no recovery, the recovery is a bubble, the final bubble you could say (pt2). A bubble of the USD itself, the international currency. There has been no recovery because you can't eat digital paper, or drive with it, it doesn't make buildings or develop new technology. With the manufacturing base in the U.S. gone, they are literally giving the world nothing in turn for everything, how long do you think that will last for?

When it comes to the arena, construction prices will skyrocket along with the price of oil, as the more the U.S. devalues their dollar, the more USD OPEC will ask for oil. (noticed anything expensive lately?) They are in a competition with China and India, China which by the way made the first ever deal for oil with Russia that is not in USD recently.

Daryl Katz did not become a businessman overnight. To own 1800 drug stores proves he obviously has a good grasp on the economy. How much do you want to bet that if someone like me sees this coming, not to mention many others then he probably does too. So why is it he would rather put his big money into a public relations campaign (public relations is propaganda) which I'm sure isn't cheap, instead of just putting it into the arena he wants to help "give" Edmonton?

This is not the great depression, economic growth in the future under today's terms of what an economy means isn't going to work no matter how many fiat dollars they print. Namely GDP which is just a fancy way of saying it is based on debt. This is because energy is now expensive, and will remain expensive as long as we require yearly increases in energy consumption to fuel GDP growth. More cars, more factories, Quantity not Quality.


Now. I want to get into this first class city crap. You want to know why Edmonton is not a "first class" city? I'll show you why:

From top left to bottom right:

• Sports Bar, Home away from home.
• The Strat, Classy.
• More classy places
• Used Cars
• Gravel parking lot

This is the intersection at 103st and 82ave. The FIRST main intersection showing what Edmonton has to offer to anyone coming into the city from the airport, the reputable center of our culture. The above lists what they see first. I highly doubt this would fly in a real world class city, you know like the ones Katz Group points to as successful?

We aren't a world class city, and a downtown arena won't change that. Katz Group is playing on your wants for such a dream town, they are playing on your fears of loosing the Oilers. Edmonton has a long way to come in a lot of areas before an arena is going to make or break this city. Its a wasted investment. As I advocated in my previous article, let's spend millions of dollars in thousands of places. We could start by putting something useful in the prime real estate that is the gravel parking lot.

That all I got to say on this subject, thanks for reading. Please read my first article on the arena if you haven't already or continue on about Canada's economy in general.

Edmonton Arena Reasoning Awry

* UPDATED * My solution to the Arena Debate.

Ok Edmonton; I've got a beef with the Katz Group. I think they are trying to put one over on us; to distribute risk (that lets all be honest here is quite high) amongst Edmontonians.

nhl.com

Of course I am talking about the beloved Arena: that will revitalize downtown, kick start the economy, upgrade our standard of living, and be paid off in a relatively short time by a bunch of side businesses who haven't stepped forward yet through the taxes that could be levied on future establishments.

Yup, similar to the Alberta Government's theory that oil booms are some sort of universal constant law; the City of Edmonton and the Katz group also seem to be of a similar mystical belief that "if you build it, they will come" in any and all cases.

Edmonton has had a pretty large list in recent history of big investment ventures with little payoff, all in some quest to become a "first class" city which isn't really new. We've made big investments in events like the Edmonton Indy. We were willing to put large bids towards events such as Expo 2017. Yet even though we have held multiple of these world-class events we are not as of yet a "first class" city it would now seem without a new arena for the Oilers.

At the forefront of the drive for a higher standard of living and improved economy for their fellow Edmontonians through the thoughtful service of a new arena is the Katz Group, which according to their site:

The Katz Group is one of Canada's leading drug store operators with over 1,800 drug stores across the country. 

This drive primarily is being done through a propaganda campaign which for the most part seems to offer little information in the "how" department. I call it propaganda because the argument being presented to Edmontonians is being framed for you with the possible outcomes limited to:

• Build an arena and revitalize downtown.
• Do not build an arena and do not revitalize downtown.

The arena is a dreamland, but also likely an expensive economic nightmare based on this rendering.

edmontonjournal.com

Naturally the domain name they chose is "revitalizedowntown.ca". Working to establish an assumed association that the revitalization is an absolute certainty and will surely happen, only the arena itself is debatable not the assumed effects. Their version of the effects this arena will have is that basically, the Arena itself will be so glorious, amazing, and kick ass that business far and wide will flock to have their business near the arena, that people will have the money to pay what are surely to be ridiculous costs to use the arena and surrounding business, that more tourists will come to use it even though its primary months of use for hockey will be when its cold or even colder (-40C).

With the way things are going predicting long term budgets are likely to be pretty much impossible with the Wall Street Journal predicting an end to the USD which up until now has reigned as the international currency and more importantly has been the only currency you can trade for oil. Contrary to sports arena economic experts I have the belief we are nowhere close to being economically positioned to afford a project on this scale.

I have a question for the Katz Group since they ignore me in their Facebook group. If you can own 1600 different drug store locations, and you actually believe this investment is a 100% guarantee -- why not take out a loan? Isn't that what capitalism is all about? If I wanted to get my business a larger office because I needed it and it would surely pay itself off then that would be a no-brainer. I wouldn't then go to the city for my loan, I would go to the bank like everyone else is supposed to. So what is with the insistence Mr. Katz? Could it be this investment is not nearly as sound as you would prefer us all to believe? Could it be you know the construction costs will over-shoot due to current world economic circumstances? Could it be you want the new arena right now before the cost of living goes so high no one will be able to afford the ridiculous cost of tickets to one of the events hosted there? Might it be that world food prices are soaring which is sure to affect us sooner or later?

Edmonton, I plead with you that the logic behind the arena is flawed. There is no extra consumer money right now to fuel the needed amounts of consumption that will be required to pay this thing off. The Katz Group is trying to sell you on the idea to distribute their investment risk on to the people of Edmonton. If we really want to revitalize downtown, how about a park? More street venders? More culture and arts? Why don't we try spending millions of dollars in thousands of places around Edmonton, instead of in one single place? one single investment? I'm all for becoming this elusive "first class" city but my excitement for that prospect does not cloud my judgment on the fact this arena is probably one of the stupidest ideas Edmonton has had in a long time. We already have an arena, and a stadium -- both of which are the center of their particular bad neighborhood. Sports centers do not revitalize anything in Edmonton, and in the end how much should this revitalization really be costing?

Besides problems like this haven't you ever been downtown at rush hour, Daryl? Our downtown can not handle the sorts of traffic this arena would generate even if your theory is correct. Why don't you prove you have faith in the project by going ahead with it on the Oiler's dime and if you can demonstrate a personal faith with personal risk in such a project then I'm all behind Edmonton getting behind it too.

* Edmonton Arena Part 2 *