OF 12 Stadium Financing/Operating Models
And Projected Revenue Yields
by Peter J. Jessen August 2001
Summary of 12 Stadium Financing/Operating Models
The ideal would be to use no new taxes. This is totally possible with the models listed here. Given the nature of the development, certainly public funds will be needed for local infrastructure like roads and sewers, etc., as for any development. In other words, some investment is needed in order preserve the taxes that would not be available if the teams were not here.
There are many subsidies, federal and state and local. Many are not visible. These others are not visible as they make their millions and contribute to the tax revenues, whereas the teams and players are very visible, for the latter is what splashes on the news and across the headlines, not the other entities. It is unfair to subsidize so many others and then single out the teams for nothing, especially when they can build stadiums within the current tax law and by adding a very small tax on sources other than income and property taxes of the average tax payer.
And when one looks at how the tax payers of Bloomington are investing $63-$100 million in the new Mall of America expansion (which the NHL NorthStars wanted to do when this was their property but were denied), as one example, the $100-150 million needed for a new stadium, especially if it is financed and not funded by the state, doesnt seem to be very much. And when you "mix and match" parts of each model, including suggestions received from others, you can still end up with a result of no new taxes, regardless of model.
A key consideration is revenue stream assignments. Teams need the stadium revenue streams to be competitive. Therefore, having all of the stadium revenue streams pay off financing bonds is not acceptable to the teams (understandably, from their standpoint), although it should still be placed on the table as a point in the negotiations. HOWEVER, if the state were to work with the teams to generate the kind of mixed used commercial development noted in Models #2 and #4, there would be non-stadium revenue that could be used. And to be clear, for there to be true negotiations, everything has to be on the table, with the resolution starting from there. And if the 40 revenue means in 26 categories are used, there will be plenty for both stadium construction and on-going maintenance as well as team operations.
The twelve models, with comment and 3rd party verification, are as follows:
1. The private investment model of New Ballpark, Inc. (led by the heads of Wells Fargo and US Bank) and C-17 for the Twins.
3rd party verification: championed and verified by the heads of Wells Fargo and US Bank.
2. An earlier commercial real estate multi-use stadium complex proposal made to the Twins Ben Hurst, which would not require any new taxes.
3rd party verification: worked out in commercial real estate deals across the state and country, of which mixed use shopping centers/office space and housing (condos, apartments, free standing homes) are the most obvious and the Mall of America is the most famous.
3. An earlier commercial real estate multi-use stadium complex proposal, which would not require any new taxes, made by Norm Green, regarding the NorthStars NHL team at their Met Arena, but Minneapolis denied him.
3rd party verification: He took it to Texas. The Met Arena area is now Mall of America Phase II.
4. The private-public Vikings model combines NFL and Vikings moneys ($150 million), stadium related taxing using existing laws ($200 million), leaving a gap of $150 million, which could be completely closed by a half cent hotel/motel tax levy.
3rd party verification: already worked out by the Vikings, with only the small half-cent hotel/motel tax to be put in place to make the final financing a reality. When proposed in 2001, the legislature was opposed.
5. The Generic multi-use facility/site model, with its claim of not needing any new taxes.
3rd party verification: this model has been shown to (1) a guy in the stadium building business who says every team should follow it, (2) to a venture capital guy who says it will work, theoretically, and (3) to a former Big 8 guy (he went on his own before they became Big 5), who also says it is sound on the dollar side, with the only major difficulty he finds being the one he says exists for all large projects: getting the disparate groups needed to make it happen to work together. This, of course, is the call for "a public discussion" in which a "family meeting" can provide the setting to resolve this comes into play, and where the conflict resolution models of Appendix L of this model comes into play. These macro and micro models/mechanisms will enable that discussion and resolution to take place.
Finally, the former Big 8 guys estimates $5 million to put the whole package together (physical model, plans, blue prints, agreements with the various jurisdictions, etc., etc., etc.) and $50 million from the owner to oversee putting together the bricks and mortar. Interestingly enough, that is the exact amount figured for the owners revenue contribution line of the financing outline.
6. The university funding models of Appendix A of Model #5.
3rd party verification: universities: the information and individually identified universities who have already done so, as listed in Appendix A of Model 5, can provide the specifics once they are contacted. But they have obtained the funding, ranging from total state funding to totally private funding, to combinations in between. In other words, private citizens can make it happen for university stadiums over which these citizens will have no control, surely private citizens can make it happen for professional stadiums they will control.
7. The 40 ways to generate revenue in 26 revenue categories, which are part of Model #5 above, but which could be used by any of them.
3rd party verification: 40 ways in 26 categories to generate revenues, which is introduced in Model #4: fits any model.
8. The private funding model proposed to the Vikings by Lyle Berman.
3rd party verification: Berman provided the pro formas.
9. The private funding model to finance a new stadium being used by Steve Young and Brent Jones, with backing from Silicon Valley, as they search for a team to buy.
3rd party verification: contact Steve Young and/or Brent Jones.
10. The public-private model of the new Houston Texans
3rd party verification: Houston and the new owner combined to lay $1 billion on the dollar to build a new stadium, operate the new team, and compensate the other owners for letting in an expansion team.
11. The combination of a casino with a stadium, either (a) on a reservation near the Twin Cities or (b) a state owned one from which the profits go to pay for the stadium, etc.
3rd party verification: the Casino folks, state and tribe, can provide the information for this one. It is also part of a proposal made in 2002.
12. A hybrid mix and match creatively developed from parts of the above.
3rd party verification: see above, Models 1-11.
For the purposes of this report: no pro formas accompanied any of these models as they are presented here. They exist with the originators of each, who can be asked to provide them for the legislature (except #5, although similar ones can be obtained by Models #1-4, 8-9). Also, as leagues will work with legislators and teams in working out pro formas, they too need to be contacted. As the NFL would be putting up a sizeable amount, they have and would provide pro formas as they have them, which the new team can use.
The key to pro formas, however, is to pay attention to their assumptions and how they are verified, for that tells how traditional or leading edge they are, what "what-if" analyses they provide, what all is covered in their projected vs. real example cash flows, including both sunk costs and opportunity costs, as well as fixed and variable costs, depreciation, taxes, and profits that can be kept or diverted when combining a stadium with a multi-use commercial development, etc., and so forth and so on, by accounting category. Obviously, it is more than important, it is mandatory to use industry standards in developing such pro formas. HOWEVER, note that as most such stadiums are not of the mixed-use variety, it will require using pro formas from the mixed-use commercial development industry as well as the professional sports industry. Note also that the pro forma mix needs also to be added to for Model #5, as it goes beyond both commercial development and professional sports to creating its own unique "sports-entertainment-commercial development" model.
From a business standpoint, teams need to be able to generate revenues to survive, as any business. There is resentment in those ideologically moved to resent, but it is unwarranted. TV stars of successful shows that draw lots of viewers make far more money than athletes. When David Sarnoff, founder of RCA and NBC was asked why he paid millions to Johnny Carson, he said it was because people wont tune in to watch Sarnoff. They tuned in to watch Johnny. He was responsible for bringing in and keeping the fans and their advertising revenue and network brand name loyalty. Carsons "Tonight" show was NBCs most successful show ever, accounting for 17% of the networks profit. In other words, he earned that money. The same is true of the teams who have sellouts and high TV ratings. They are not overpaid in terms of what they cause to be generated for the business as a whole, and all of the other businesses that benefit from the teams being there, including all of the major media outlets (newspapers, radio stations, Television stations), not to mention the tax collector.
And with the coming demographics of population growth (which will make the baby boomers seem like a small blip on the screen), there will also be plenty of growth, including both those born and moving where the team will play to assure a continuous increase in revenues. The Sporting News online article on Pete Rozelle, on December 20, 1999, says this about the NFL: "by far the most influential and most watched sport in all of the United States .[a] ratings-gobbling, argument-provoking, dollar-generating, thoroughly entertaining and amazingly dominant conglomerate ."
OTHER FINANCING MECHANISMS TO ADD TO ANY OF THE ABOVE
A Word About Lease Bonds
Backed by State Income Tax On Players (local AND out of state players)
The key here is not the lease bonds but he taxes on players, both local and on other teams when they play the local team. This fits the financing not funding approach. It makes sense to use these taxes to back lease bonds with the state income tax collected on local and other teams players salaries".
Two examples: Oregon has agreed to use these taxes to back $150 million in bonds agreed if it is able to obtain a MLB team for Portland. California alone will collect $94 million in 2001, just from out of state athletes. This should make it even easier as it provides a common ground for those who are understandably queasy about either a total private funding or a total public funding. It creates an even better private-public partnership, to enable keeping the teams in a fashion that is economically beneficial to all. It makes an even better private-public partnership than it was before. And who will argue with taxing out-of-state players? No one. They will cheer. Local players pay there. Why not their players paying here?
And who can argue against applying these taxes to back revenue bonds if, without them, the teams are lost either to contraction or relocation and all of that revenue is lost anyway? Neither the fans that love their teams nor the businesses that benefit from their being there, nor the tax collectors anticipating that revenue, nor the angry voters that would result if they were "lost", nor the angry populace as a wholes pride factor. This would also preclude the need of the state to dictate things like where the money goes, such as the proposal for the naming rights money to go to the state which the teams understandably resist, nor to dictate ticket prices, etc. (although true negotiations put everything on the table and work from there to get to what is acceptable to those parties involved in the negotiations). With the approaches outlined here, its pure win-win all the way around.
A Word About Owner Principal
To Generate Interest Revenue to Pay At Least Half the Payments for the Bonds
To see the chart, click here http://www.startribune.com/stories/462/2120622.html
The chart shows how the investors (bond payers) buy $330 million in taxable revenue bonds from the state, earning 6.5%. The State channels the $330 million to the host city which builds the stadium. The team (with or without help from the league and other private investors) provides a "gift" of $165 million to the state. The bonds are paid off from the interest earned on the principle of the $165 million and plus the $165 million.
The interest paid would be $11.5 million yearly for 30 years earned on
the $165 million gift. An additional $10 million would be paid by the
team and host city for 30 years. With voter approval, the host ciy can
impose new local taxes to pay its share.
12 Salary Categories For Compensation
Whether or not such lease bonds and revenue bonds as above are used, the Generic Model also lists 12 salary categories are used for compensation. The original pool for the 12 part salary set up would come from the up front as well as yearly revenue yields.
The 12 salary categories are
(1) Signing bonus
(2) Salary cap
(3) Golden handcuffs (stay for minimum amount of years to vest in team retirement plan),
(4) Golden parachutes (1-2 year "severance pay" if receive play ending injury, any time, or are "cut" after four years)
(5) Participation in profit pool (with each player being a "partner")
(6) Player stock option pool, with the players getting options which will be worth significantly more later on
(7) ESOPs (employee stock ownership plan of Louis Kelso)
(8) Retirement plans
(9) Personal affairs assistance and/or management
(10) Tangible and intangible "perks" related to special events for players and/or families (spouse and/or kids), internal recruitment (continuous "recruitment" of players team wants to keep)
(11) Internal Recruitment (continuing "recruitment" activities carried out during the year)
(12) Newsletter reporting regarding investments, opportunities, and other issues related to post-playing years.
Summary of Projected Revenue Yields
1. $50 million -- one time, by the owner/ownership group (but might not have to
depending upon yield of #5 below)
2. $25-50 million -- one time, by the public for infrastructure (i.e., state costs: land and site prep, streets and sewers, etc. Amount to be determined by final design. Amount is capped at $50 million. Team covers all costs above $50 million.
3. $100-200 million -- bonds backed by ticket and parking revenues over time.
4. $450-850 million -- up front, by investors (the DreamWorks model raised $2 billion). Could also be tailored to include public investment participation to share the wealth with others (fans, community), in order to take the sting off the notion that teams are wealthy and therefore unfair recipients of the money earned. Note also: There are numerous investment funds set up that are trolling in the Far East with big funds to buy up companies that tanked during their downturn; their turn-a-rounds, generate enormous returns on their investments, requiring them to find investments like well conceived stadium complexes to soften their tax burden.
5. $150 million -- amount of bonds to be backed by a half or one cent tax on tourists (hotel/motel tax). Amount depends on the jurisdiction and the negotiated profit sharing amount. This amount might not be part of the mix as sentiments shift from tax maximizing to tax cutting.
$725 million to 1.250 billion up frontSample Projection of Yearly Revenue Yields
1. $75-100 million -- yearly from taxes on players, local and
on other teams playing
locally. California alone will collect $94 million in 2001. Oregon has agreed to use these player taxes to back $150 million in bonds agreed if it is able to obtain a MLB team for Portland. This allows the state to use these to make payments on the money borrowed.
2. $25-50 million -- yearly from "anchors" & others
in non-stadium part of complex.
Amount to be determined by extent of development and final negotiations with anchors. NOTE they will finance the construction of their part of the complex
3. $25-50 million -- yearly from casinos and/or other state gambling revenue
4. $100-200 million from the team Web portals Internet IPO to generate revenues for construction and/or on-going operations (the airlines have made more profit from their Internet reservation IPOs than they have from running their airlines).
5. $25-50 million -- from interest of monies waiting to be spent. Amount depends on formulas used for receipt and expensing of items 1-7
$225 million 450 million/yearly revenues