Billionaire Kroenke borrowing billion dollars to build L.A. stadium, because why not?

Everybody who’s been talking about how Rams owner Stan Kroenke was in the best position to build an L.A. football stadium because he had the most money, you can shut up now:

Rams owner Stan Kroenke is planning to borrow about $1 billion from JP Morgan Chase & Co. to help fund the proposed Inglewood stadium, which could cost nearly $3 billion.

That’s right: Kroenke is getting a big piece of his stadium construction budget by going to a bank, same way as Dean Spanos and Mark Davis would have in Carson. Not because he doesn’t have cash — he’s worth $7.5 billion, though some of that may be locked up in his cherished vintage typewriter collection or something — but because when interest rates are this low, you’d be crazy to use your own money when you can use a bank’s.

For the rest of the construction cost, Kroenke can use $200 million in NFL G-4 money, and whatever he gets from the sale of naming rights and PSL sales once he’s allowed to sell those next January (or once the San Diego Chargers agree to move in with the Rams, whichever comes first), and whatever he gets from either Spanos or Davis if they agree to move in with him, and the remainder will have to come from out of his bank account. Most of the construction bills won’t come due for a while, so he can cross that bridge when he comes to it — in the meantime, he has $1 billion to play with.

In related news, Fivethirtyeight has a good explainer on why moving to L.A. isn’t as lucrative for NFL teams as for teams in other sports. It’d be nice if they tried to figure out how an estimated $500 million increase in team value (per economist Victor Matheson) is supposed to come close to paying off a $3 billion stadium plus relocation fee cost, but I tried to do it and couldn’t make head or tail of it, and Nate Silver isn’t that much smarter than me, right? (Hi, Nate!)


30 comments on “Billionaire Kroenke borrowing billion dollars to build L.A. stadium, because why not?

  1. One other thing for you to bring up on your next article on this: Peter King (yeah I know, not the most reputable source, but still) has said that the belief many had on the vote was true, and that the vote being switched from normal hand raising to secret ballot is why we ended up seeing the sudden flip from “the majority support Carson” to “the majority support Inglewood”. The owners widely preferred the Inglewood move, but too many had given their word to the Chargers and Raiders, and knew they were about to be held accountable if a normal vote occurred. The flip to a secret vote made it where they could vote for what they actually preferred without fear of the vote suddenly turning into a battle royal (though I admit, that would have been the single greatest news story in history).
    Anyway, heres the link for it:
    http://mmqb.si.com/mmqb/2016/01/19/los-angeles-rams-nfl-ownership-meeting

  2. Maybe there is some tax shelter associated with this that we don’t know about because its not a tax loophole any of us have access to. Like how Balmer gets to amortize most of his Clippers purchase price.

  3. Maybe I’m older than I think. I can remember back to a time when the entire league wasn’t worth $3B. I’m being entirely serious. I’m a Northern California guy, and started being a fan probably in high school in the mid 1970s.

    This is just insane. Since they can never really make back that $3B, this means the taxpayers will end up subsidizing the sport. I think that’s crazy. I know concussions can cause horrible symptoms; maybe a few owners are suffering long-term effects of concussions?

  4. “Since they can never really make back that $3B, this means the taxpayers will end up subsidizing the sport.”

    That’s not necessarily true. Even billionaire capitalists do sometimes lose money.

  5. Aqib,

    “Gets to” amortize his purchase price? How on earth is being forced to amortize a reward?

    Neil,

    As usual these days, 538 is clueless. (Keep pluggin’ away at Trump, fellas!)

    If we are to believe Forbes’ numbers, then local NFL revenue ranged from $59M (Raiders) to $394M (Cowboys) per year. And even if we consider the Cowboys an outlier, a fair look says that a big market NFL team gets ~$200M/year extra in local revenue.

    In the NBA we don’t know the exact national revenue splits, but judging by what we know of total team revenues it appears to be around $90M/year. If it is $90M/yr, then the range is $52M to $210M. And if we take out the Cowboys-like outliers (Lakers & Knicks), then the top end is more like ~$125M/year.

    Add all of this up, and what you see is that a big NFL market gives a team ~4x local revenue while a big NBA market gives a team ~2.5x local revenue. Plus, NBA revenue is so much smaller that the dollar difference is $200M compared to $75M.

    This myth that local NFL revenues mean less than other sports’ local revenues is so out of date that I expect economics professors and mainstream media folks to cite it. But, et tú, Neil?

  6. On that Forbes list, I noticed that the Kings have about a $4M annual net operating income. So it amazes me that they’re valued at $975M. If I was a smart investor, I think I’d stay away from investing in that team.

    So, no, instead they get a $252M (officially) subsidy, that we’re pretty sure is more like a $350M subsidy. Amazing. ROI of nearly zero is cause to invest $1.5B. So, remind me again, how do they make enough to make an annual $16.5M bond payment?

  7. Ben, you’re looking at operating income (i.e., profit), not gross revenue. So a big NFL market is really <2x local revenue, not 4x.

    It is odd that a top NFL team can bring in $200m extra in annual revenue while only being worth an extra $1.5b, though — those numbers don't quite make sense. I'll see if I can get Ozanian to walk me through it.

  8. One thing is for certain. No room for Spanos in LA:

    http://www.latimes.com/sports/nfl/la-sp-chargers-plaschke-20160120-column.html

  9. I haven’t lived in California for a while, and haven’t followed the “development” part very closely–but it is remarkable how quickly this thing has moved to approval…which may well largely be due to the stadium attached to it.

    It doesn’t make up the whole difference, but cutting through the red tape like Kroenke has may be worth whatever McMansion stadium he puts up there.

  10. Well Neil, you must have some idea. You often are providing numbers that reflect not only present value, but payments over time for various teams/projects.

  11. Ben – what I mean is that he can use the purchase price as a write off against his other income on his taxes. I don’t remember the exact rule but he Balmer is going to get a good chunk of his costs of buying the Clippers back.

  12. Do banks have a stadium loan calculator like they do for cars? Kroenke just typed in “a billion dollars” and he got the interest rate he wanted in less than a minute.

  13. There’s some public money, but not a huge amount, as these things go:

    http://www.fieldofschemes.com/2015/01/14/8348/secrets-of-the-inglewood-stadium-plan-revealed-except-for-how-much-subsidy-is-worth-thats-still-hazy/

  14. The Federal Reserve publishes a survey of business lending. For loans over $10M the rate averaged 1.63% in the most current release (Nov 15). I would hope the bank would see this as more of risk than an average business loan but I do not know. Anyway, the size of the loan would tend to push the interest way down so a billion would push things way down.

    http://www.federalreserve.gov/releases/e2/current/

  15. Floormaster – typical business loans aren’t for 30 years as this one will most likely be.

    According to Forbes this move makes the value of the team jump from $1.45 billion to $2.9 billion. I have no idea how that justifies a $1.86 billion stadium. #math

  16. Yeah, length makes the interest rate go up. I should have noted that as well but the link has all the information (even though this is a pretty special case)–just ignore my commentary!

  17. Neil,

    I was talking about revenue, not income. I subtracted $226M from every team’s total revs b/c that’s the national distribution. What’s left is the local revenues.

  18. Aqib,

    If I buy a new Trapper Keeper for work, I get to deduct the entire cost of the Trapper Keeper from this year’s income. If I am forced to amortize the Trapper Keeper, then I only am allowed to deduct part of the Trapper Keeper cost this year and I have to wait until future years to deduct the rest of the Trapper Keeper’s cost. I would lose out if I were forced to amortize because lowering my taxes this year is worth more than lowering my taxes in future years.

  19. The fact that Kroenke borrowed $1Bn (or up to $1Bn, depending on how you want to look at it…) doesn’t really matter at all here.

    As a business owner, it matters not one whit whether you have the capital to do something in cash or whether you borrow it (so long as your are able to borrow). If you use your own money (which few do), you’ll pay yourself interest anyway… because providing that funding to the business is a service and service always costs. Hey, you’re not a charity….

    Now, if you have that $1Bn in cash under your bed and can put it to work elsewhere and earn 7.5% while borrowing the $1Bn you need/want for the stadium and paying interest of 2% or less, well… the math is not that hard, right?

    If you don’t have that easy 7.5% return available elsewhere, then you lend your own money to your own project and charge it 7.5% plus fees (or more, if some group of idiot politicians have agreed to cover financing costs for you). You can even create your own financing company to do so if you require the thin veneer of plausibility as cover…

  20. When you have $7.5 Billion, you have to spend your money on something. Some purchase incredible yachts, others massive homes. Kroenke spent his on a really cool football stadium. This is not a profit play (although that may happen after many years) this is a chance to be a huge fish in LA with all the glory, glitz, parties, stars, etc. that come with that role as opposed to being a huge fish in Saint Louis and whatever comes with that. If I had more money than I would ever need, I would spend the money to go for LA even if it did cost me a few bucks.

  21. Except Kroenke isn’t the kind of guy who seems to go for glitz — the adjective usually used to describe him is “reclusive.”

    The only thing I can think is it’s similar to Bruce Ratner in Brooklyn: Kroenke really wants to have a big shiny thing he can point to and say, “I did that.”

  22. I agree that this move doesn’t fit what the general public normally considers as being “kroenkish”… but we don’t actually know what his long term intent is.

    It could be a vanity play, or maybe he just loves the So Cal sun (though he needn’t move his football team at a cost of $3Bn to enjoy better weather). Perhaps I’m giving him too much credit (part of the hangover for laughing at Jerry Jones when he paid $200m for the Cowboys nearly 30 years ago????), but I still wonder if within the next decade we won’t all be saying

    “doh! Of course!”

    As you say, though, I can’t for the life of me figure out what the mystery move is or how he’ll make this (stadium) development profitable. The rest of it makes sense. The stadium, not so much.

  23. Ben,

    Because of the salary cap, local revenues don’t make a big difference on what players a team can hire. However, it does appear that local revenues are useful at sort of ancillary costs that are important to a football team these days–hiring coaches, making fancy buildings to attract free agents, and lots of the usual hangers-on like alternative medicine gurus. So I agree that there is an importance that might be understated.

    It does also seem that some of the more creative owners are leveraging their ownership of a team (scarce asset) into things that have more of an annual cash flow–like trading modest stadium construction costs for much more valuable development rights or development permissions. Some teams are going to have trouble keeping up with that, no matter how much their city gives away.

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