Speaking of paying for sports venues without massive public subsidies, my latest article for Slate takes a deeper look at the finances of Chris Hansen’s proposed Seattle arena — but not at whether the city would make or lose money on the deal, which I’ve already beaten to death pretty effectively here, I think. Rather, here the question is twofold: How realistic is it for Hansen to think his new arena will generate enough money to pay for both its construction debt and a return on investment for his new NBA team, and what does this mean for the possibility of sports facilities ever being worth building without taxpayer subsidies?
Cutting to the chase:
Stanford economist Roger Noll pegs the operating profits of a typical arena at somewhere between $20 and $30 million a year. That could be enough—barely—to pay off $400 million or so in arena debt. But then Hansen and his as-yet-unnamed investors will still need to put down a huge amount of money to purchase an NBA franchise to play there. If every penny of revenue is going to pay off construction debts, that will leave nothing to offer his moneymen as return on their investment. “The gross revenues of an NBA team in Seattle could not possibly be sufficient,” says Noll, to cover the costs of both building an arena and buying a team.
“He’s taking a lot of stuff under his side of the equation,” agrees John Christison, a Seattle venue management consultant who previously ran Seattle’s convention center and the Orlando Arena. “The question is can he sustain it, and is he being realistic about what [kind of profit] he can turn with that arena given the marketplace right now?”
The marketplace for arenas is not as profitable as it used to be. When it comes to raking in revenues, a basketball/hockey facility has one advantage over baseball and football stadiums: It can be used for bushels of non-sports events, ranging from concerts to circuses to Disney on Ice. “As a rule of thumb, you need around 200 revenue-producing events a year in an arena to start looking at covering your costs—and that doesn’t include your debt service operations,” Christison says.
But according to Christison, such events aren’t nearly as lucrative as they once were. “Ten years ago, if you’d asked any arena manager in the country, even if they had a franchise housed in their building, they’d say that concerts are the bread and butter,” he says. But today, with a fragmented music industry that’s producing fewer acts that can draw arena-sized crowds and competition from an increasing number of both arenas and casinos, “the concert market has become incredibly difficult,” he says. “Nobody’s making much money except maybe the artists.”
It goes on, but basically the upshot is: If Hansen thinks he can build his own arena and make a profit on it, more power to him, but both sports economists and arena managers say that history is against him. None of which necessarily makes this a worse deal for Seattle — since Hansen won’t build unless he can buy a team at an affordable price, and he’d be signing a non-relocation agreement, the worst-case scenario for the city would seem to be some sort of Phoenix Coyotes-style bankruptcy and bailout. But as far as Hansen’s vision being a working model for building half-billion-dollar sports venues of the future without soaking taxpayers, the jury is still way, way out.
The gambit seems to be that A) Seattle has no real arena competition, and B) the concert biz had the bubble burst like everything else, but it’ll turn around in 5-10 years.
To me all of this just emphasizes the importance of local governments funding stadiums. At some point (or maybe now) private investors are gonna realize what a money loser stadiums are. Localities will be faced with either holding on to unsatisfying stadiums or coughing up a little cash to keep the locals happy and make the city look first class. Hopefully all of this anti-government funding mania dies out soon enough so that we don’t have to suffer through too much of the former.
Yes, what suffering a citizenry might endure from an unsatisfying stadium. Glendale and Cincinnati may be going broke, but there are worse things. At least their stadia are satisfying.
Hansen has made it clear that Arena Co will not likely make a profit on the arena. The profit is expected to come from media deals. That needs to be considered. I do feel particularly bad for Kent’s Showare Center who are struggling to find enough acts already. The music venue scene is a bit saturated but there does seem to be a higher demand here. However a new arena would bring in much larger acts that are often going to the Tacoma Dome right now.
Even breaking even on the arena is likely to require the neo-Sonics to share a fair chunk of their revenues. It’s going to take one hell of a cable deal to make up for that.
And before anyone says it: Yes, cable revenue is way up in sports. But it’s way up *everywhere*, which means that teams are more lucrative in Sacramento or Kansas City or wherever just as they are in Seattle. (Not quite “just as,” since Seattle is a bigger market, but close.) So the increased lucre from cable is going to be rolled into whatever purchase price Hansen has to pay, which reduces any TV windfall.
Neil, do you know where Rodger Noll’s data comes from? He is obviously an expert in the field but I haven’t seen any recent studies he has published. I’ve been reading Sports, Jobs and Taxes but most of the material in there is rather old and I just wonder about the new stadium economics.
One thing reading that book is that the owner can create several businesses that can profit from the stadium. i.e. a catering company or cleaning company that might have exclusive rights to the stadium etc. That is why labor disputes are so contentious is because the players don’t trust the numbers. It doesn’t seem right that owners should be able to hide revenue/profits this way but it is consistent with lots of businesses so they should not be required to play differently.
I might be a little naïve here but I think Hansen can probably manage financial risk better than most owners. If it was just Hansen, I think the city should be concerned about the ownerships financial solvency, which local press picked up on before the announcement of Ballmer and the Nordstroms being part of the ownership group. Of course once they were announced people immediately jumped to the conclusion that they should just finance it out of their own pockets.By contrast, the Phoenix ownership group was never that financially strong and their business model was built largely on developing the surrounding area. (Oh and someone should be keeping a keen eye on the New Jersey Devils ownership team and stadium financing. That seems like a mess that I am only starting to investigate.)
The other factor is the appreciation of the franchise(s). When I bought my house, I did expect some level of long term appreciation in value to make up for the interest cost. I am sure the ownership group has that built in their modeling…but I can’t help to think that eventually the value of Sports franchises can’t continue at this break neck speed.
-sorry…that was long.
I know Noll keeps up with current events because I’ve talked to him about other stadium/arena deals (he did a pretty solid analysis of the 49ers deal, for one). He didn’t cite any specific recent examples, though.
After I’d filed this story, Geoffrey Propheter (of NBA arena study fame) did note that the Oakland-Alameda Coliseum Authority is one of the few stadium authorities that makes available its internal financial data, and those buildings (Oakland Coliseum and Oracle Arena) don’t do more than cover their operating expenses. I haven’t had a chance to dig into that data yet, but if anyone else wants to, be my guest.
There are definitely ways to hide sports revenues, but that doesn’t change the fact that the new revenues generated by new arenas seldom cover their costs. Seldom isn’t never, and Hansen may have hit upon the perfect combination of a decent media market and low interest rates and an undervalued team (if he can get, say, the Kings at a discount without the sellers noticing how much the team would be worth to him). It’s a question I’d love to ask him, if he’d return my emails.
Thanks Neil. I trust Rogers opinion and just intrigued at the new stadium economics in general so was hoping to get some info (I’m an accountant by education…not trade). I have a friend that was the controller of one of the more popular Concessionaires for a specific NFL stadium and he shared some info on the pieces of the pie everyone takes on concessions…some of them being companies set up by the owners. My point was that they might not care to make money on the Arena if they can make it on the auxiliaries….that assumes they are doing this to make money in the first place.
Good tip on the Oakland –Alameda Coliseum Authority, although hardly one of the new stadiums/arenas. If I am not mistaken, Oracle is the second oldest arena behind MSG and the Coliseum is well, the Coliseum. I grew up in Oakland and spent many summers at the Coliseum and generally think of that is a shining example of old school stadiums and arenas.
JB, Actually it’s the oldest arena operating in the NBA. It’s 2 years older than MSG. And it’s in a terrible remote location to boot. So not the best example.
Neil: “It’s a question I’d love to ask him (Hansen), if he’d return my emails.”
I guess he got the quote he needed from you and doesn’t want to be questioned by someone who knows which questions to ask about sports arenas. (posted two links to Hansen’s website but went to moderation)
www.sonicsarena.com/news/arena-deal-quotes
“…what does this mean for the possibility of sports facilities ever being worth building without taxpayer subsidies?”
If building your own facility was a mandatory part of owning a sports team (as it is with most other businesses), the other major cost associated with the business (i.e. salaries) would adjust to make it all happen. MLB, NFL, NBA wouldn’t disappear just because subsidies disappeared. Players would average $0.8x million/year instead of $x million/year. It’s not like their talents give them other options.
Well, or teams would learn to make do in their ancient 20-year-old buildings. It’s not that sports isn’t profitable, it’s that new stadiums and arenas aren’t (with few exceptions) without subsidies.
“…it’s that new stadiums and arenas aren’t (with few exceptions) without subsidies.”
But that’s just a case of looking at them the wrong way. If I own a car dealership, I don’t worry about the profitability of my showroom. The building is an expense required for the business – and I look at the profits of the business as a whole. If you have no choice but to build a stadium or arena for your team with the income generated by your team(s), you will. What changes is the amount left over for salaries and/or owner’s profit.
If you owned a car dealership, and a new building would cost more to build than it would make you in new revenue, would you still build it?
They could always raise prices until people sto showing up…
Remote? Oracle/Pick Your Name Of The Week Coliseum is on an Interstate freeway (with plenty of parking) and a BART station within walking distance. Just because it isn’t downtown or in a more desirable location doesn’t mean it is remote.
The King County arena “expert panel” for the proposed arena said that Hansen’s ArenaCo business model was probably not sustainable without public funds. Hansen would also be exempt from Seattle taxes.
Hansen’s proposal needs free public money. Hansen’s business model would not survive without public money. That is a parasite.
It is no symbiosis, Hansen would be Seattle tax exempt, Seattle gets no share of any of the business activities at the proposed arena. The King County “expert panel” said there would be little, or no, economic benefit from the proposed arena. Any ancillary revenue to Seattle would be minimal.
Hansen’s proposal is for a parasitic arena, with parasite tenants. Seattle pays, Seattle exempts taxes, Hansen takes. A parasite.
It does not make sense to publicly fund Hansen’s proposal. A business that must suck the blood of public money, or die, is no business for the public to be involved. Given the results of the Propheter study, and that ArenaCo can only survive with public funds, it is stupid for Seattle to get involved financially with Hansen’s proposal.
“If you owned a car dealership, and a new building would cost more to build than it would make you in new revenue, would you still build it?”
Maybe, maybe not. Sometimes you have to build just to maintain your current level of revenues.
Major league sports businesses are a little different because of the enormous revenues involved and the extremely high salaries. But if paying for your building is an accepted cost of doing business, there’s plenty of room in other costs so that the business can still be profitable. The car dealership might lose employees to other job opportunities if salaries have to decrease by 20%, that’s not true in sports – they’d have to drop 90% or more before other opportunities became competitive.
Of course, the problem is that somewhere along the line the idea that you should build your own facility lost out to the lure of extortion, so building your own probably puts you at a competitive disadvantage. But if I’m not a fan of your team, that’s not my problem. $billions have already been thrown at an industry that doesn’t need taxpayer help, your competitive disadvantage doesn’t convince me that we should throw $billions more your way.
I would like to say that there will be a day where Arenas and Stadiums are all privately funded but I don’t know how like Keith mentions, how do we create a level playing field. For every SF or Seattle, there will be a Minneapolis or Santa Clara.
Then I look at other industries and see subsidies for Farmers, Boeing and the Seattle Times and wonder what makes those different. Boeing isn’t much different than an Arena…other than Boeing never attempted to pay the money back. So if we eliminate all sports arenas subsidies, it would also seem we should eliminate all subsidies for for-profit companies. (I know…out of scope for the mission of this website)
JB, if we counted all the local taxes paid by farmers, Boeing, and the Seattle Times as repayment then we may well be “paid back” for those subsidies as much as Hansen’s ArenaCo does.
Most economists are against tax subsidies but politicians still use them as a way to point to some sort of concrete job creation example they can use. Trying to calculate where you’ve created jobs is kind of nuts.
I am not sure what point you are trying to make but my post was way off topic and probably didn’t make sense either. If anyone wants to read up on big subsidy outside Arenas/Stadiums here is an excellent post on the estimated 3.2 billion over 20 years for Boeing: /goodjobsfirst.org/corporate-subsidy-watch/boeing (Thanks to Neil for posting this many months ago.)
Neil
I appreciate the work you do but I’m confused. The end of this entry suggests that investors and developers can’t go at this alone and thus need and can justify the assistance of the tax payers at a reasonable rate.
OTOH, that contradicts the purpose of this site. Are you saying that you agree with the economist and that some tax subsidies are legit or are you suggesting that regions without a current team in a given league should just give up the pursuit of said team since taxing the public for the facilities is wrong and unethical and at the same time, it’s a financial hardship for the investor so the whole pursuit should just be scrapped?
@JB and Dan
The outer structure of Oracle is old but the inside got completely gutted and renovated so that makes it different from other buildings that undergo minor renovations every 5 or 10 years.
By completely scrapping the entire gut of the arena, Oracle basically became a brand new arena in 1997.
“The end of this entry suggests that investors and developers can’t go at this alone and thus need and can justify the assistance of the tax payers at a reasonable rate.”
“Can’t go at this alone,” yes, mostly. But it doesn’t follow that this means that taxpayers should be spending money on these things, either. There’s no law that says every city should build a new arena every 20 years.
The dirty little secret of sports facilities is that they’re not getting built because they make money, or because they generate economic activity, or because fans like them better, or whatever. They’re getting built because if you’re a sports owner and ask for $300 million in cash just because, you get laughed at, but if you ask for $300 million to help build a stadium, you get taken seriously. In the vast majority of cases, they’re loss leaders for subsidies.
In the end, publicly funded stadiums are not really an economic issue but a public policy one. Could they be built privately? It doesn’t matter. If a locale wants one bad enough, then the politicians will decide to do build one.
The problem for me is two-fold. First, there’s the obvious issue of trying to make things look like there’s no cost to taxpayers when in reality there is. And second there’s the issue that you end up with time inconsistent policies, a la Kydland and Prescott. Claiming you won’t bail out a sports franchise today is not a credible threat when if it happens tomorrow.
@Dan,
I wouldn’t agree that the Oakland Alameda stadium/arena complex is in a “terrible” location. It’s situated right on the freeway; when I’m passing it while driving to Berkley on a Sunday afternoon, I can see the grandstands well enough to gauge the Raider’s attendance that day.
Also, I used to attend many A’s games in the ’80s. It was great being able to use BART from Fremont and being dropped off at the Coliseum stop.
With all due respect to santa clara jay I would consider the Oakland location to be terrible in context of the modern arena locations (Staples, AT&T, Petco etc). In spite of being located right off the freeway, it is still a pain to get in and out of the gigantic moat of a parking lot & the neighborhood is one of the sketchiest in Oakland. The Bart is convenient but the neighborhood pretty much forces you to leave as soon as the game is over so you can travel in mass.
Right or wrong, most new arenas and stadiums have tons of commerce outside the stadiums which creates a entire experience of going to the game. I.e. what PacBell…er AT&T park has outside their park. That area was rundown and vacant before the Giants moved in there and now it is filed with Bars, tech companies and hotels. Oakland really has no chance of creating that experience in that location.
The idea of arenas as “loss leaders” is interesting, and seems to be true. Section 19 of the Seattle proposal MOU says that Seattle must work with Hansen to gain him tax avoidance at all other levels (the MOU already gives Hansen tax exemption) of government, including Washington State, and the Federal Government.
Then, the site of the Seattle proposed arena is in an area designated for EB-5 visas. EB-5 visas allow foreign citizens to purchase United States residency permits/work permits by investing in a project within a designated EB-5 area. Hansen could make a bundle getting residency permits for wealthy foreigners. Hansen’s Valiant Capital has Brazilian partners.
jhande, the lobbyist working for Hansen also reps the same group that is building the North Tower development in the centurylink parking lot. You know, that other EB-5 project going on down there. Nice that she can combine her efforts like that.
Chef Joe, Yeah, a supposed 490 million dollar arena, a californicated “entertainment district” nearby, not to mention the 300-500 million dollars for an NBA team, leaves many opportunities for EB-5 visa desirees with 500,000 dollars.
That is the thing; the individuals proposing this arena have more than enough money to finance this themselves. It would be easier for them to finance it themselves, and they would be in full control of the facility if they financed it themselves. The Dodger package deal seems to indicate that team/venue package deals create extra value, if the motive is to make profit.
That is what has bothered me from the start. There would seem that there would have to be a reason for the demands for public involvement with the arena beyond simply getting Seattle funds.
Neil deMause mentions that the proposed arena financing may be a loss leader for other subsidy. These other subsidies need to be brought to light. The other subsidies need to be on the table in MOU negotiations, and proposal assessments.
Just the obvious Section 19 further subsidy is an example. How much tax avoidance would Seattle involvement in Hansen’s proposal, and Seattle actively working to gain Hansen the maximum tax avoidance, end up being? Where are the projections on that?
This is a section in the MOU and there are no figures, and no mention of a Seattle cut of the Hansen tax avoidance. Then the PILOT program, and other hedgey types of subsidy. All undiscussed, all off the table. It seems as if Seattle is being played.
jhande, the other subsidies that haven’t been calculated/shown in the light is any tax exemptions/bond payments from the related entertainment district properties (the MOU makes it sound like they could be considered related to the ArenaCo development) and parking taxes. Both of those are things we know Hansen plans but were not in the city’s early budget estimates. Hansen said he didn’t think he’d need to pay any imputed additional rent and the council has asked for those projections, but they’ve not been made public if the council has received them. Granted, that could just mean the bonds get paid off early but being able to recruit business partners with low rent due to finding all their tax payments helping the arena bottom line could be a really good inducement to create a shopping mall.
But, yes, after nearly a year of having Hirsch, professional arena negotiator, on the city’s payroll they should have some calculations of all the taxes being voided by this MOU or strategies.