From 1957 to 1978, the Pistons competed in Detroit's Olympia Stadium, Memorial Building, and Cobo Arena. In 1978, owner Bill Davidson elected not to share the new Joe Louis Arena with the Detroit Red Wings, and instead chose to relocate the team to the Pontiac Silverdome, a venue constructed for football, where they remained for the next decade. While the Silverdome could accommodate massive crowds, it offered substandard sight lines for basketball viewing. In late 1985, a group led by Davidson decided to build a new arena in Auburn Hills. Groundbreaking for the arena took place in June 1986. Using entirely private funding, The Palace cost a relatively low price of $90 million. The Davidson family held a controlling interest in the arena until Tom Gores bought it as part of his purchase of the Pistons in 2011.

Then-Pistons owner Bill Davidson and two developers privately financed the $90 million construction of The Palace, and did not require public funds.

The Palace was built with 180 luxury suites, considered an exorbitant number when it opened. However, it consistently managed to lease virtually all of them. In December 2005, the Palace added five underground luxury suites, each containing 450 square feet (42 m2) of space and renting for $450,000 per year. Eight more luxury suites, also located below arena level, were opened in February 2006. They range in size from 800 to 1,200 square feet (74 to 111 m2) and rent for $350,000 annually. The architectural design of the Palace, including its multiple tiers of luxury suites, has been used as the basis for many other arenas in North America since its construction.

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