WWE has their own spin on history, and what a spin this has been over the years. Originally, WrestleMania 7 was to be held in the Los Angeles Memorial Coliseum, a venue capable of holding 100,000 fans when seating was added to field level. The NFL's Rams and Raiders struggled to sell out the venue at the time, and WWE was having its problems too.
To hear WWE tell it, Sgt. Slaughter was receiving death threats from pro-Americana marks for his kayfabed allegiance to Iraq, and thus they had to move the show to a safer indoor venue. Slaughter may have been fielding threats, but the real reason for the move is that WWE had barely sold 16,000 seats for WrestleMania 7 by February 1991.
Rather than perform in front of a mostly-empty stadium, the show was moved to the Los Angeles Sports Arena, home of one-third of WrestleMania 2.