LA NFL Stadium Financing Works – If You Run The Numbers

Say, the NFL and AEG can build a stadium in Los Angeles, or what we call LA.

On March 4th, the LA NFL Stadium economics were slammed as not be ‘able to work’ by an NFL source according to Yahoo! Sports Analyst Jason Cole. When I saw that headline, the first thought was “how could that be when you start with a $600 million naming rights agreement?”

Correction update: a $700 million naming rights agreement?

The second thought was that I’d have to make a spreadsheet and test that idea myself.

Now what gives me the right to think I could do that? Well, I’ve done it hundreds of times before. When I was the Economic Advisor to Oakland Mayor Elihu Harris from 1995 to 1999, I used my urban planning, urban economics and finance training, as well as an expertise in something called ‘System Dynamics,’ to constantly analyze every proposal and fiscal plan that came to my attention. One of those plans was concerning the proposed sale of the Oakland Athletics in 1997; to help a potential buyer make a decision I created a small, elegant SD model. I used that to make fiscal forecasts of the A’s organization, and loved it so much, I saved it for a rainy day. That day came when I left the City of Oakland in 2001, after trying to bring The 2005 Super Bowl to Oakland. I used that model as the basis for something called The Oakland Baseball Simworld, and my first company, Sports Business Simulations.

So with that experience – really, enough to write a book – I feel I’m better qualified than most to weigh in on the LA stadium fiscal issue. Let me cut to the chase, and work my way down from there: the stadium cost template I formed was such that over a 30-year bond period, the stadium realized a net profit of $236 million.

That $236 million left over came from

Total Stadium Revenue All Sources: $3.645 billion
Total Revenue For Stadium Construction $2.159 billion
Total Stadium Construction Cost: $1.8 billion
Total Stadium Operating Cost: $123 million
Total Net Profit: $236 million

Now, how did I come to those numbers.

First, Total Stadium Revenue of $3.645 billion over a 30 year period comes from this:

1) Naming Rights of $700 million (Farmers Field), $90 million in sponsorships (based on that for Cowboys Stadium)
2) $200 million from what would be called (and this is my idea based on my knowledge of California law) a “Mello Roos Community Facility District” bond issue
3) $76 million from the NFL G3 Loan Program, $20 million from the rental of meeting room and convention space (that’s a pure hypothesis)
4) Total Suite Revenue of $186 million, which is based on 300 suites at $310,000 each, twice over 30 NFL seasons (a 15-year remarketing) and of which 50 percent is used for stadium construction.
5) Total Ticket Revenue of $1.8 billion, which is based on 100,000 seats, at an average of $55 per game, over a 10-game season (2 pre-season home games, 8 home games), over 30 seasons,
6) Total Seat Option Revenue of $500 million for 50,000 seats at an average annual price of $5,000 per option, and twice over 30 NFL seasons – in other words, a 15-year life then a remarketing effort for the next 15-years.
7) Total Concession Revenue of $240 million, which is based on 100,000 seats times $8 per seat over 10 games for 30 seasons.

As a note, only 20 percent of the Total Ticket Revenue goes to the stadium cost, or $60 million, the rest, or $138 million over 30 years, goes to the team and that’s after the NFL Visiting Team Revenue portion of $102 million is given.

Second, we have to subtract the following revenue shares and team shares over 30 years:

1) Concession revenue to team of $120 million,
2) Ticket Revenue To NFL of $612 million,
3) Seat Option Revenue To NFL of $0 because we’re asking for a waiver here for const costs.
4) Ticket Revenue To Team of $828 million.

That leaves $360 million in ticket revenue for the stadium, and $120 million in concession revenue for the stadium.

The stadium bond issue is $1.363.64 billion, and that’s based on a bond issue of $1.2 billion over 30 years, at a 7 percent interest rate and with standard bond costs (I used a widely available online municipal bond issue calculator to determine this). We will use $500 million of the Total Seat Option Revenue to service the debt from that bond issue over the 30 year period. And we will combine that with 30 percent of the expected luxury suite revenue, or $93 million, and use $360 million from Ticket Revenue for Stadium, and then use $540 million of the $700 million naming rights agreement which gives us $1.4 billion for the bond debt service. (We don’t have to share suite revenue with the NFL.)

Part Of That Excess Revenue Could Be Used For Franchise Fee

The one sticking point that’s not been addressed in this round of coverage of getting an NFL team into Los Angeles is the one that caused LA to lose out in the first go at this in the 21st Century, in 2003: the NFL Franchise Fee.

In 2003, the NFL collected a cool $700 million in four annual installments to allow Robert McNair to buy the Houston Franchise for that city. What eventually became the Houston Texans could have been a team in LA if Creative Artists Agency Co-Founder Michael Ovitz’ $550 million bid stood up.

But Mr. McNair wanted to send a bid message that the league would gasp over, and gasp it did. Then-NFL Commissioner Paul Tagliabue gave Ovtiz a last chance, but after a reported three-hour, tearful meeting, he was unable to do so. Houston beat LA.

This time the LA NFL Stadium Financing is such that $700 million of the expected total of $3.645 billion in revenue from all sources, but specifically suite revenue, could be structured into a bond, and then that bond issue used to pay the Franchise Fee. But that would, at bet, meet the record, not break it – it would hamper the stadium financing structure I have presented, given the stadium construction cost of $1.8 billion.

Hopefully, NFL owners aren’t interested in causing AEG to break Bob McNair’s record. That could be done, but such greed actually works against the financial well-being of the team. Moreover, if it stops the NFL from being in LA, the league’s ability to be in the largest media market in America, and the World, is harmed, so it loses too.

Back To The Numbers: Total Stadium Operating Cost

Finally, we have to subtract Total Stadium Operating Cost of $123 million over 30 years, and that’s based on an annual utility cost of $2.6 million plus $1.5 million in staff and admin costs annually over a 30 year period.

For that Total Stadium Operating Cost, I again turned to Cowboys Stadium’s annual utility cost of $2.4 million, but then added $200,000 to that, and then the $1.5 million staff cost annually was a hypothesis that may very well be far over the real annual staff costs for the stadium. Then, again as a reminder, you have to take that total of $4.1 million annually and multiply that times 30 years.

So that leaves us with this over 30 years:

Total Stadium Revenue All Sources: $3.645 billion
Total Revenue For Stadium Construction $2.159 billion
Total Stadium Construction Cost: $1.8 billion
Total Stadium Operating Cost: $123 million
Total Net Profit: $236 million

Seat Option Revenue Just Used For Construction, NFL Share

The Seat Option Revenue was noted at $500 million, and none was shared with the NFL.

As a note, I hope this part of the process shows how important Seat Options are in the total revenue for stadium construction (The NY Giants experience underscores this). Personally, I hate Seat Options, and deliberately limited the total seats used for it to just 40,000 and then held the average cost at $3,200. In fact, I started with an average of a $5,000 Seat Option Price, and then saw the extra revenue from that, factored in such considerations as LA underemployment, and down-listed the price to $3,200 average – that produced a total revenue from that source that was less than needed to build the stadium via the lease revenue bond. So, the $5,000 price point was used.

But the bottom line is the LA Stadium Economics do work. A profit can be realized and this proves it.

Why, then, would some source from the NFL say that the economics don’t work? The answers I come to aren’t good, but I can’t escape them.

The NFL source may have told Jason Cole that as a way to set about a process that would lead to getting more public money. Note that in my analysis, only $200 million of public money was involved in stadium financing, and that was the Mello-Roos District.

A Mello-Roos District is a special zone that can be created by the LA City Council and the property owners around the football stadium, where they agree to tax themselves. Since that area of Downtown LA will realize a huge retail revenue jump from 100,000 people coming down there ten times a year, a $200 million, 30 year bond issue from that expenditure is not only reasonable, its conservative.

I think the NFL wants a larger public money cushion, but now, given the Atlanta Falcons New Stadium fiscal agreement, it has a huge problem.

Atlanta Falcons Owner Arthur Blank has committed $800 million of the $1 billion stadium cost, with Atlanta and Fulton County on the hook for $200 million. That is far less public money than the NFL wanted, and it points the way toward the negotiating template for the LA Stadium.

Also note that my stadium is much larger that what’s proposed for LA. The LA Stadium’s proposed to cost $1.5 billion, and is at 76,000 in planned stadium capacity. Personally, I feel that’s too small for that area and for LA; a 100,000 seat stadium offers the chance for a larger potential revenue throw-off.

(And, for those who say “you forgot merchandise revenue,” I did not – that’s money generated by the team which has zero to do with the stadium. I did not include what I call “team generated revenues” that do not rely on the existence of the stadium. You can buy team jerseys, books, etc., online.)

In closing, I will post the spreadsheet online within a day or so, once I’ve cleaned it up for presentation – it looks more like a worksheet, which it was, than a presentation document, which is what you would want to see.

I also want to make this point:

Sports bloggers and journalists should learn to do their own analysis and estimates so they are not only not easily swayed by “experts,” but also know what kind of questions to ask. In today’s hyper-specialized environment, journalists can’t get away with just ‘going to a source,’ they have to sweat the details themselves.

One problem I’ve seen in a lot of stadium financing spreadsheets online, is the authors don’t explain what the revenues are for the stadium over a 30-year period, and they don’t show the period of years that each revenue estimate applies to. That was even the case for the Dallas Cowboys / Vanderbilt Study – I had to read it again and again and then crunch some numbers to see if what I was looking at was for one year, or multiple years. Once I determined the estimates were for one year, I realized the true revenue-producing potential of the Cowboys Stadium was not shown. It’s tremendous, and the guy who wrote that Jerry Jones is ‘taking a bath’ on the stadium just didn’t run the numbers to test that idea.

Most folks don’t – they just believe what others tell them. That’s bad.

You have to keep in mind that ‘NFL sources’ don’t leak information because they’ve got nothing better to do, they do it to achieve an objective. In this LA case, that objective is extra public money. From my analysis, the LA deal could survive a $200 million Mello-Roos Bond, rather than a $100 million, but given the extra Seat Option revenue, why bother?

Stay tuned.

For feedback, follow me on Twitter: @Zennie62

The LA NFL Financial Spreadsheet:

LA NFL Stadium Financial Spreadsheet