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Home Pete Toms When Stadium Financing and the Recession Collide

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Pete Toms Article Archive
Written by Pete Toms   
Tuesday, 20 January 2009 10:06

A Biz of Baseball OriginalThe following is a continuing series of articles by Business of Sports Network staff member Pete Toms on stadium financing. For more see Part I and Part II of this series.

Last month, CNBC Sports Business Reporter Darren Rovell offered up this prediction for 2009. “Can't call out which one it will be but stadium financing isn't going to be available for a while. Timetables on stadiums like the ones for the Nets, A's and Marlins will be thrown out of whack by at least a year. And one of the stadiums that is fully designed on paper will never make it to reality.” Frozen credit, the mostly dormant stadium naming rights market, difficulties in launching stadium centred “mixed use” developments and a political backlash against public funding of stadia for professional sports combine to make Mr. Rovell’s prediction believable.  Going forward, will the federal government’s new “ New Deal”, along with deflating construction costs, provide a boost to stadium construction? 

Biz of Baseball reported in March that the collapse of the auction rate bond market was having an inflationary impact on borrowing for stadium construction. Up until then, the ARS market was a primary source of stadium financing for state and local governments.  In November, the WSJ raised the question of stadium financing with sports investment banker Sal Galatioto, President of GSP;

WSJ: Is it safe to say the stadium building era is over for the foreseeable future?

Mr. Galatioto: It would be very difficult to finance a new building right now. There would be all sorts of issues with the banks and the bond market....

Sports Business Journal recently posed a similar question to Mitchell Ziets, President, CEO,MZ Sports.

SBJ: Where are you seeing the most pressure on sports facilities from the current economy and where do you see the arena/stadium construction market going from here?

Mr. Ziets: ... Lenders have significantly retrenched — in terms of availability of capital, cost of capital, covenants and collateral requirements — making project financing a much more difficult proposition. The market feels a bit like it did in the late 1980s and early 1990s, when the stadium project financing market was in its infancy — lack of liquidity, onerous terms, limited financial solutions, and the absence of bond insurers to bring ‘AAA’ buyers to the table.

Mixed use / ballpark village / entertainment district / developments have been effective in subsidizing  stadium construction but the economic crisis has stalled, scrapped or scaled back such plans in Arlington, St. Louis, San Francisco and Fremont.  A’s owner Lewis Wolff announced in November 2006 that he had agreed to purchase 143 acres in Fremont from Cisco Systems for mixed used development , with a new ballpark the centrepiece.  Mr. Wolff’s immediate plans are now for a ballpark only and he is considering alternate sites.  The San Jose Mercury News reported last month on Mr. Wolff’s purported interest in building a stadium at the “Warm Springs” site.

Owner Lew Wolff confirmed reports of the team's interest Wednesday, a decision spurred by two factors: a difficult economy that has tabled, for now, plans to also build a housing and retail "village" in the ballpark's currently proposed site....

Wolff had planned to use proceeds from those new homes and shops to fund stadium construction. But with that project on hold and the economy collapsing, questions are growing about how Wolff would finance a $400 million ballpark, especially without a public investment.

Future tax revenues generated from these developments are often funnelled back into the stadium construction in what is known as “tax increment financing”, or TIF.  Neil deMause wrote recently that  the “Warm Springs” site would not currently qualify for such public financing.  “...the Warm Springs site is not in a redevelopment zone and so would not be eligible for tax-increment financing (kicking back new tax revenues to help pay for construction costs)...   

Stadium naming rights are an important source of revenue for professional sports teams and are particularly lucrative for franchises launching new facilities.  While the selling of naming rights continues ( i.e. Target finalizing a deal with the Twins in September ), the demand for these sponsorships is currently diminished.  ( See Washington Nationals ) From an October AP report:

After a decade's worth of booming growth in naming rights deals, the stock market's dramatic slide has changed the landscape dramatically.

[...]

When the Astros bought their ballpark's good name back from Enron, owner Drayton McLane said there were seven companies with Houston ties that had expressed interest in the naming rights. These days, they might be lucky to get two or three.

[...]

Those that are looking for deals in the short-term might find they don't bring in as much as they might have a year or even six months ago.

"The value of naming rights have been taking off for the last 10 years at a pretty steady upward trajectory," Zimbalist said. "But everything goes in cycles. I think this is going to be a downturn that is likely to be significant." (Note: Andrew Zimbalist is a sports economist)

The distressed economy has not only impacted on the number of, and ability of, corporations to acquire naming rights, but has changed consumers perceptions of these deals.  Corporations are more sensitive to potential public reaction when considering attaching their brand to a sports facility.  The flashpoint was the November public bailout of Citigroup, which brought with it much negative reaction to their $400 million naming rights deal ( concluded in 2006 ) for the Mets new ballpark ( opening this spring ).  Terry Lefton wrote in SBJ of the backlash; “Fearing the same kind of flak, we’re told Bank of America’s plan is to never announce its non-title sponsorship with the Yankees’ new $1.3 billion home.”  Outrage that taxpayer dollars were being given to the wealthy Mets owners was widespread amongst media, bloggers, politicians and the public.  In a Biz of Baseball editorial, Maury Brown wrote:

...two New York City Council members believe that with the bailout, the name on the Mets new stadium should be reconsidered. Staten Island Republicans Vincent Ignizio and James Oddo say the ballpark's name should be changed to Citi/Taxpayer Field.

To add to the political fodder, Rep. Elijah Cummings (D-Md.) said, in a statement Monday, "This type of spending is indefensible and unacceptable to Citigroup's new partner and largest investor: the American taxpayer."

Darren Rovell wrote:

As far as the Mets are concerned, good for them. No other company, in this environment, would give them $20 million a year. I don't even think they could get $12 million at this point, to be frank. As far as Citi is concerned, it's definitely going to be uncomfortable.

Whether it's rational or not, they're going to hear people asking how many employees they could have had back for that $20 million annual investment. The right question to ask, and I don't know the answer to this is, what's a better investment for the company, the people you could have working for those dollars or the naming rights to the stadium?

The political backlash against public funding of stadiums for professional sports was not limited to the Citigroup naming rights sponsorship.  Kurt Badenhausen of Forbes predicted that in 2009;

Any sports team still seeking significant public funding for a new stadium or arena can forget about it. The money is gone, as cities and states are forced to tighten their belts. Politicians are not about to stick their necks out and push through a tax increase to build a venue that benefits a billionaire sports team owner.

If Mr. Badenhausen (and many share his opinion) is correct it will be a dramatic reversal in government behaviour compared to the past few decades. From “Public Dollars, Private Stadiums”: 

There has been an explosion in new stadium construction since the 1990s, and several things make this current boom very different from any other period in history. First, the breadth of new construction across the country and the amount of public contribution is unprecedented. In the decade since the opening of Baltimore's Oriole Park at Camden Yards in the early 1990s, fourteen new baseball stadiums have been built and an additional three are under construction. When the three stadiums currently under construction are completed, seventeen of the thirty major league baseball teams will be playing in stadiums built since 1992. ( Note, the book was published in 2003 ).....This is an unprecedented wave of stadium building, and one analyst has estimated that approximately $10 billion of public money has gone to all new sports stadiums since the mid-1980s (Keating 1999).

Since the publication of “Public Dollars, Private Stadiums”, overall, governments have been funding smaller percentages of stadium construction.  There remain exceptions however.  Tim Lemke recently reported that the final cost to Washington D.C. for constructing Nationals Park is $693 million. 

The political backlash against “public dollars for private stadiums” reached new heights ( and lows )  over public contributions/financing of the new Yankee Stadium.  In July the House Committee on Government Reform, Subcommittee on Domestic Policy, led by chairman Dennis Kucinich, began investigating the financing of the new Yankee Stadium.  The hearing continued into the fall, questioning if the public financing mechanism – PILOTS – served the public interest and if the value of the real estate where the stadium is being constructed was intentionally inflated by NYC officials to aid the financing.  Sports Economist Dennis Coates explained how PILOTS work;

PILOTS are a way by which state and local governments, or quasi-governmental agencies like the New York City Industrial Development Authority, borrow money which is used to finance essentially privately owned development projects which are "owned" by the public agency. Interest costs are about 25% lower this way than if the private company had borrowed directly. (PILOTS sprung up in response to restrictions on the use of state and local government debt for essentially private purposes, of which stadiums and arenas were a prime example. NY Senator Moynihan was instrumental in getting such legislation through Congress.) The new development does not pay property taxes, for instance, because the public agency owns the property. To offset the loss in taxes, the user of the facility makes payments in lieu of taxes, which are used by the agency to pay the principal and interest on the borrowing.

Media and public scrutiny leading up to a January 16 vote of the aforementioned IDA to approve an additional $430 million in bonds ( $259 million of that tax exempt ), on top of $940-million in tax-exempt bonds and $25-million in taxable bonds previously granted, was intense and emotional. (The Mets received lesser amounts of the same bonds but were largely ignored at the hearings and in the press)  The bonds were approved but not without an ugly confrontation at a January 14 IDA hearing when state Assemblyman Richard Brodsky challenged both Yankees President Randy Levine and IDA Chairman Seth Pinsky to a "civil, in-your-face fist fight"

The combination of job losses and declining tax revenues in NYC, the publishing of emails which revealed the mayors office had vigorously lobbied the Yankees for a luxury suite at the new stadium, the Yankees free agent spending spree and record ticket prices at the new stadium made public financing/funding of the stadium a hot political issue.  ( The mayors office eventually forfeited the luxury suite )  City Comptroller William Thompson was very public in his criticism of mayor Bloomberg’s role in the financing/funding of the stadium.  Mr. Thompons’ critics ( the mayor’s office and the Yankees ) pointed out that Mr. Thompson had voted in 2006 to issue approximately 1$ billion in bonds for the stadium and that his opposition to the latest round of financing might stem from his expected run for mayor of NYC this year. 

The unprecedented attention brought to the issue of “public dollars for private stadiums” in the political and media battle over the new Yankee Stadium might be remembered as the tipping point in this debate.  Is public financing/ funding of stadiums for billionaire owners and millionaire players now too politically contentious to risk?  ( There is much debate as to whether the new Yankee Stadium is publicly built or publicly financed )

Ironically, as professional sports in the US is negatively impacted by the floundering economy, public money for stadium development could flow from the federal government.  President Obama’s new “New Deal” is expected to include spending of $92 billion on infrastructure.  Will some of that investment flow to new sports stadiums (or renovate existing)?  Don Muret wrote in SBJ last week: “Sports projects still seeking public assistance are now trying to use the recession to their advantage, promoting their plans as a way to generate much-needed jobs.”  And in December the U.S. Conference of Mayors presented a list of 11,391 “ready to go” infrastructure projects which included a helping of “sports pork”.  Mr. Muret also reports that the “stagnant economy” has lowered construction costs ( steel, copper, aluminum and oil dropping in price ) and that; It's a great time to build if you have equity in hand.

Finally, I predicted here last month that difficulty in financing stadium construction could result in an increase in the usage of PSLs.  Ready, Cubs fans?  (HT Shysterball)


Pete Toms is a staff member of the Business of Sports Network. He can be contacted at \n This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

 
 
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