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Wednesday, July 27, 2005

And so it begins...

It was bound to happen, but a few landowners are suing the city of Arlington on the grounds that using eminent domain to seize land for the Cowboys stadium is against the state constitution. The state of Texas is somewhat tough on eminent domain issues, but lawsuits were filed when the city built the Rangers a new stadium and the suits were thrown out.

Essentially, the land owners will argue that the project is basically a private enterprise and therefore it violates the constitution which prohibits taking land from Person A and giving it to Person B for private development (essentiall what Kelo v. New London was all about). However, in both stadium endeavors the city owns the stadium and will rent/lease it back to the team.

Hence the avoidance of private transfer. While the city will own the stadium, the city voluntarily ceeded all rights to the revenues generated within and outside the stadium. The city ostensibly gets a small cut of the parking fees and sales tax on tickets but that is paltry compared to what the Cowboys revenue will be when they move to the new stadium.

Owner vs. residual claimant. Usually these are one in the same, at least in the minds of most people, however in this case they are clearly different. The Cowboys ownership will retain revenues from luxury suites, in-stadium advertising, majority of ticket, parking, concession revenues, the vast majority of outside-stadium advertising, the team will share only up to $500,000 of naming rights revenue, and the team controls all non-NFL event booking and keeps all revenue generated from those events.

Where exactly is the benefit to owning the stadium, at least to the city? It has never been my argument that Arlington is a bad place to build a stadium, indeed given its geographic location, Arlington is an ideal place to build a stadium (except for the Texas 360-I 30 interchange, which will be changed). However, it always seemed excessive to a) volunteer to shoulder the entire burden of paying off the public (and likely most of the private) debt incurred to build the stadium when Arlington is only one city in a city of cities and b) to give all the revenues away and be satisfied with the "crumbs" generated by sales tax and additional spending 8 days a year.

The litigants claim that the Cowboys should be negotiating with them about land prices, not the city. After all, the Cowboys do not have the threat of eminent domain but the city does. This shifts the power of negotiation to the city/team and away from the private land owner. The Coase Theorem suggests that in the absence of transaction costs the last holdout could negotiate for the entire rents generated by the project. However, no homeowner is asking for $60 million or more, which might be a deal breaker if the Cowboys were negotiating. As far as I can tell homeowners are asking for a few hundred thousand dollars. Do I want to pay for it? No, but then I am sympathetic with their claim that they are negotiating with the wrong party - at least in the spirit of the law if not in the letter of the law.

I predict that the case will fail, especially in light of Kelo and precedent here in Arlington. I laud them, however, for their attempt to throw light on who actually stands to gain the most in the stadium deal and who is using the power of government for their own benefit. Whether Person B owns the property or not seems, in the case of these massive non-public good type projects, to be immaterial. The residual claimant or the majority residual claimant of the revenues/rents generated by the project should be the one who negotiates and pays for the land on which the project will be built. If the city keeps a sizable portion of the revenues generated, then I have little problem with the city negotiating for the land. However, if a third party stands to gain the most, then perhaps the third party should do the negotiating.

In my opinion, this was the disaster the Kelo allowed to prevail. Kelo essentially said a "reasonably well thought out plan of economic development" and a positive probability that jobs and taxes would be created was enough to justify eminent domain, even if the project is handed over to a third party. This is the ultimate shame of the decision. The market has been replaced with the government, which economists generally consider to be less than efficient (even if not as expedient).

My two cents - good luck.

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