Inner Circle Sports
Dissecting the financial anatomy of billion-dollar sports facility deals reveals new ways of tapping municipal finance while reducing risk through public-private partnerships and ancillary revenue streams.
“If you’re looking at a $2 billion capital cost, it’s generally outside the reach of governments to invest that kind of money into a building,” said David Abrams, an investment banker with Inner Circle Sports.
“The need for capital from a variety of sources is much greater and the revenue streams are more diverse. Ticket prices are no longer just general admission and some premium product.”
Reams of academic research lay out financial reasons why cities and municipalities should not issue new credits to fund sports facilities. Despite the evidence, five NFL stadiums are currently being built or renovated with public entities kicking into the funding stream.
Major League Baseball’s Miami Marlins and Washington Nationals both play in bond-financed stadiums. The Maryland Stadium Authority is tapping the market to upgrade Orioles Park at Camden Yards and the Pimlico Race Track.
As the projects become more complex, a look behind the curtain shows financing that was once covered by bonds is now being supplemented by private equity firms and funds flowing through holding companies sometimes referred to as “hold-cos,” “stadium-cos,” and “arena-cos.”
“More often than not, the stadium is involved in other types of events outside the main tenant,” said Abrams. ”This is a way of insulating the team from the business relationships of the stadium. It’s a way for the stadium to borrow without directly implicating the team itself.”
The holding companies issue debt that’s rated using criteria that’s custom fit to the entity.
“First we’re looking at the league economics and the strength of its business model,” said Ben Munguia, senior analyst for Fitch Ratings. ”We view the NFL as stronger because of its hard salary cap, revenue sharing policies, and it has responsible debt policies.”
Most of Fitch’s sports-related ratings are private but the Queens Ballpark Company LLC which is tied to the New York Mets is public. As of
According to Fitch, “The rating reflects Major League Baseball’s solid league economics and the historical franchise strength of the New York Mets.”
In July Fitch affirmed a BBB+ rating and stable outlook for the New York City Industrial Development Agency, the holding company that runs Yankee Stadium across town.
Per Fitch, “The strength of the Yankees as a premier franchise within the MLB, and the historically robust demand for premium seating driven by the deep New York City economy, have resulted in a history of strong fan support through previous economic downturns.”
Amenities that include premium seating options helps separate the old way of financing and building sports facilities from what’s happening now. Club level and luxury box seating is often sold on a contract basis providing an ensured revenue stream.
“Arenas and stadiums are getting creative with different renovations to make use of all excess space with more opportunities for some sort of premium experience,” said Munguia. “Whether it’s better food and beverage options, club level seating, or just access to various parts of the building that General Admission would not have.”
Instead of totally bond-financed concrete monoliths that serve one tenant surrounded by a sea of surface parking lots, stadiums and arenas have turned into anchor stores in entertainment districts surrounded by bars, restaurants, hotels, and housing.
“You can’t just build a stadium these days without also having additional real estate or multi-use development around it,” said Mungia.
Revenue streams into the holding companies include sales tax dollars coming from the surrounding businesses. Tax Increment Financing is often deployed as a funding funnel along with other ancillary revenue streams.
“You’ve got naming rights, multiple other sponsorship agreements and potentially multiple tenants,” said Abrams. “A naming rights deal from modern NFL stadium might be $20 to $30 million annually.
The rivers of revenue help service debt incurred during construction or renovations. Once the facility is built or improved, the property tax ringing up on a 40,000-seat baseball stadium or an 80,000-seat football stadium can be onerous for a team owner or a holding company.
Current trends show municipalities taking ownership of buildings and charging rent to the teams who play there. “All things being equal local government would prefer to have it on the tax rolls,” said Abrams. ”Real estate tax exemption is just one way the local community can support the investment in a sports facility.”
“If the owner of the facility is the government, it will likely be exempt from real estate taxes, so that allows the stadium-co to build a little bit bigger or a bit more enhanced project. It also allows the government to shift things like operating expenses, capital expense, insurance, the operating cost of that building and the future repair and replacement off to the private sector.”
Straight bond financing for the facilities is giving way to public-private partnerships that include urban planning and real estate development.
“The trade-off here is to create the catalyst to grow taxable real estate investment in the surrounding area. This is the paradigm shift we have seen in the past 10-15 years,” said Abrams.
In August the NFL owners voted to allow vetted private equity firms buying 10% of individual teams. The select group of investors including Blackstone, Sixth Street, and the Carlyle Group.
The NFL also issues its own debt, ringing up $1.27 billion in new credits in 2023 with the notes backed by television revenue. The league caps the amount of debt an individual team can incur and runs its own stadium financing fund, now known as the G-5 program.
G-5 was preceded by earlier versions and permits teams to borrow up to $300 million for construction or renovation projects if the capital stack includes matching funds from the owner or money provided by public finance.
“When you add an investor class into any business, you’re allowing greater demand for investment with a limited supply of teams,” said Abrams. “It’s not mom and pop businesses anymore, and it’s good for the league. It creates liquidity, and it creates increased valuations of those of those franchises.”
Fitch’s latest outlook report for the Global Sports sector reflects improving prospects. Per their report, “Fitch expects a more favorable market environment for the sector, strongly supported by increased competition for live sports content, which significantly raises media rights contract values.”
“Fitch also projects strong demand for live sports and entertainment at both the corporate and individual levels, leading to higher revenues for the leagues and facilities.”
“The main credit drivers of the U.S. sports sector are contractually obligated income streams such as premium seating, naming rights and sponsorships, and media rights.”
Cautionary tales about municipalities and taxpayers getting stiffed on bond deals include Giants Stadium in New Jersey that was plowed under while still owing $110 million in 2010. The Kingdome in Seattle was razed in 2000 with $80 million in arrears.
Professional sports teams continue to change cities, billionaire team owners angle for tax deferments and help from municipal finance while fan expectations for the game day experience elevates. New stadiums now come standard with legal requirements designed to prevent teams from relocating before their homes are paid off.
“The underlying stadium agreements are incredibly enforceable,” said Abrams. “The non-relocation agreement is the thing that binds the team to the building and allows the building to generate revenues. It gives credence to the stadium-co or the arena-co to be able to borrow. If it wasn’t enforceable, that would be a real problem.”