Before the arena's opening, the Capitals and the Wizards (then known as the Washington Bullets) played at USAir Arena in the Washington suburb of Landover, Maryland. The teams experienced subpar attendance because the location was inconvenient for both Washington and Baltimore residents, and their arena, though only 20 years old, was not up to the standards of other NBA and NHL venues. In December 1993, Abe Pollin, the owner of both teams, began studying options to move the teams to a new arena to be built with public financing, with possible locations including Baltimore, downtown Washington, and Laurel, Maryland.

A group of Washington business leaders brokered a deal between Pollin and the District government to build an arena at the Gallery Place site, with the District paying for the $150-million project. The D.C. Council approved a special tax on businesses to finance the deal. However, a competing proposal soon emerged, when Robert Johnson, head of Black Entertainment Television, offered to build the arena with mostly private financing. With the arena deal facing criticism amid the District's budget crisis, Pollin eventually agreed to privately fund the construction of the building, which ultimately came to $200 million. The District would pay for other costs, including purchasing the portion of the land it did not already own, preparing the site, and expanding the Metro station; these eventually amounted to $79 million. The District leased the land to Pollin at a below-market rate of $300,000 per year.

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