Wednesday, September 16, 2009

A good deal gone bad? 

A Minneapolis developer signed an agreement a few years back to build and operate the Sears Centre Arena in Hoffman Estates, Ill., a suburb of Chicago. The city provided "about $55 million in bonds" to finance the project. Here are some of the facts, as reported in the Minneapolis Business Journal:
Under the development agreement, MadKatStep was required to repay the bonds and interest at a rate of about $3.9 million a year over a period of 26 years. Ryan, which built the arena and holds a majority stake in MadKatStep, guaranteed the first four years and has made all of the necessary payments...

Hoffman Estates officials said the sides remain far apart. MadKatStep wants the city to take on about $7 million in loan obligations and operating debt, in addition to the roughly $89 million in bond payments remaining over the next 22 years, they said...

Since opening in October 2006, Sears Centre has fallen short of financial projections and failed to turn a profit. It had an operating loss of $512,635 in 2008.

The arena hosted 84 events last year, including eight concerts. A 2005 feasibility study projected the facility would host 140 events a year, about 20 of which would be concerts.

The venue has two small anchor tenants: the Continental Indoor Football League’s Chicago Slaughter and the Lingerie Football League’s Chicago Bliss. It used to be home to minor league hockey, indoor lacrosse and indoor soccer, but those teams have since folded.
That's a pretty big operating loss. The arena's construction costs are sunk, so someone might be able to make a go of it when the economy gets better. The report notes that city is negotiating with AEG and others to take over operations of the arena, but how far they can wiggle off the financial hook remains to be seen.

An interesting project for an undergrad or masters student might be to look into the financing agreements that were put in place in 2005, prior to the opening of the arena, and the politics of how this was sold to the community.

Here's another piece from last month, which suggests the tendency to overstate when selling public projects was at work:
[A]n official from the firm brought in to operate the arena on an interim basis after MadKatStep leaves says the Ryan Companies inflated the 11,000-seat venue's moneymaking potential when it convinced the village to give it a $55 million construction loan.

"I think they were caught up in the (potential) success of the arena," said Joseph Briglia, vice president for International Facilities Group.

But Smith noted the projections from 2005 were based on two reports, one commissioned by Ryan and the other by the village.

He acknowledged those studies "were wrong."

A feasibility called for the Sears Centre to book 140 dates per year. But it's averaged less than 100 annually.
40% off, eh? If I were a taxpayer in Hoffman Estates, I might be asking questions of my elected officials.** The stories in the press suggest that they're putting the blame on the developer, but it takes two parties to sign an agreement.

**Update: some did, from the outset (see here, near the end).

Thanks to James Blakey for the link!

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Monday, November 17, 2008

Weekend Wrapup 

Quite a weekend in sports economics...

Pittsburgh, San Diego, and Vegas

There was an interesting finish in the game between the Chargers and the Steelers. On the last play of the game, Steelers defensive back Troy Polamalu appeared to return a fumble for a touchdown that would have given the Steelers an 18-10 victory. However, the referees later ruled that an illegal forward pass occurred prior to the touchdown, resulting in a final score of 11-10. This was reportedly the first 11-10 final score in NFL history, an odd outcome since 10 is a common score and 11 can be generated a number of ways (3FG+Safety, the outcome in this game, TD+2 Point Conversion+FG, and the unlikely FG+4 safeties). The interesting angle on the game is that the Steelers were a 4 or 4.5 point favorite in the game. If Polamalu's TD counts, the Steelers cover; after the reversal, bets on the Chargers paid off. According to the betting volume data available on Sports Insights, 70% of the straight bets against the spread were on the Steelers, the home favorite, so the reversal put a lot of money into the pockets of Vegas sports books and bookies.

Mark Cuban and the SEC

Dallas Mavericks owner, and wanna be Cubs owner Mark Cuban has been charged with insider trading. According to reports, Cuban owned 6.3% of the shares in search engine Mamma.com in 2004, making him the largest individual stockholder. The SEC claims that Cuban dumped his 600,000 shares prior to a public offering of additional shares that he had inside knowledge of, thus avoiding $750,000 in losses.

In March of this year, Cuban's estimated net worth was $2.3 billion, which begs the question of why he was willing to break the law to avoid a piddly $750k loss. Recall that Martha Stewart did five months in a federal correctional facility for insider trading a few years ago. I wonder if Cuban will also wind up in the slammer?

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Tuesday, November 11, 2008

Trouble in Dallas? 

No, this post is not about PacMan. Looks like the credit market problems are starting to affect stadium construction projects. According to an article in the Sports Business Journal, the Cowboys are trying to borrow $350 million by December 1st to cover -- wait for it -- cost overruns in construction of their new stadium. The loan includes refinancing of a $126 million loan obtained last year plus money for those pesky cost overruns. The original cost estimate in 2004 was $650 million, to be financed with $76 million from the NFL, $350 million in public support, and the rest from the 'Boys. The cost overruns kicked in, and the Cowboys made the unfortunate choice of borrowing in the auction rate securities (ARS) market which melted down last February. That hiccup resulted in automatic interest rate increases that, in turn, led to the 'Boys recent attempt to raise new capital.

It's unclear if the Cowboys will be able to raise that kind of dough in the current credit market conditions. I wonder if they qualify for some of the Federal bailout money? Stay tuned.

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Sunday, March 02, 2008

The Rate of Return on Sports Franchises 

Over on Newmark's Door, economist Craig Newmark discusses a recent New York Times article by Joe Nocera about why bad team owners want to own professional sports teams. Both the Nocera article and Newmark's comments make for interesting reading. The argument comes down to this: Nocera claims that even bad owners of lousy teams make big money from capital gains when they sell the team; Newmark points out that the rate of return in Nocera's example (prototypical bad owner Donald T. Sterling bought the LA Clippers for $13.5 million in 1981 and the franchise is now worth about $300 million according to the most recent Forbes estimates) are not that great in the context of the stock market.

I want to add a couple of points to this debate:
  1. They both mention operating losses claimed by pro sports teams. These must be taken with a grain of salt, if not treated as complete fabrications. It has been more than ten years since Paul Beeston's famous quote: "Anyone who quotes profits of a baseball club is missing the point. Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss and I could get every national accounting firm to agree with me." Both of them should know better than to pay any attention to claims of operating losses, until hard evidence proves otherwise.
  2. They both argue about the Forbes franchise value estimates that come out every year. These estimates are consistently lower than the actual sales prices of franchises.
Several of us here at the Sports Economist have published recent papers on sports franchise values. Rod Fort's 2006 paper in the International Journal of Sport Finance and Phil Miller's 2007 paper in the Journal of Sports Economics jump immediately to mind. Both these papers focus on MLB, and the Miller paper uses the Forbes franchise estimates. For what it's worth, Mike Mondello and I have a new paper coming out in the next International Journal of Sport Finance that analyzes franchise sale prices over the past 38 years. We find that the rate of return on the average sports franchise, adjusted for changes in quality, was about 16% over the period 1969-2006. That is well above the 10.56% rate of return on the S&P 500 with dividend reinvestment over that period that the Political Calculations web tool spits out. So on average, all sports team owners were making a hefty rate of return on their investments.

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Friday, February 29, 2008

Watch Out, NHL! 

An article in today's New York Times claims that the top professional hockey league in Russia, the Superliga, plans to challenge the supremacy of the NHL as the world's top professional hockey league. How? The article is short on financial details (but does manage to work in some tidbits about supermodel Carol Alt, wife of current Superliga and former NHL star Alexei Yashin) but it seems to involve some economic alchemy that involves Russian energy giant Gazprom and $100+ a barrel crude oil.

According to the CIA World Factbook, PPP adjusted GDP per capita in Russia was $14,600 in 2007. I have trouble believing that a country with income per capita that low can generate sufficient revenues from fans to support NHL-level salaries, no matter how expensive crude oil gets.

(HT to Brian Soebbing)

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Tuesday, May 22, 2007

Not a great investment 

I'm speaking of Wolverhampton Wanderers, a football club that was in the old first division when I first set foot in England in 1973. I've kept track of them off and on ever since. A good friend - a former Clemson soccer player and Econ alumnus - comes from Wolverhampton, which makes their recent lack of success somehow more rueful for me. But back to the point - the investment. Here's the condensed story of Sir Jack Hayward, former owner of Wolverhampton Wanderers.
Hayward, 83, who used to crawl under the turnstiles at Molineux to watch the team as a boy, bought the club 17 years ago for £2.1 m from Gallagher Estates, and spent around £50m in the first 10 years in unsuccessful attempts to take Wolves back to the old First Division, and latterly the Premiership.

Four years ago he retired as chairman, handing over to elder son Rick, and taking the title of life president, which he will retain. He promised he would stand aside if the right person came along, and a number of potential suitors showed interest, including Milan Mandaric, before he took over at Leicester, and a consortium led by Graeme Souness. All were rejected until yesterday's news from Wolves that Hayward had taken the "unprecedented step of 'gifting' the shares" to Carden Leisure Ltd, who are controlled by Morgan.
I haven't seen the books of Wolves, but an English soccer club, particularly when operated by a benefactor such as Sir Jack, is a break even business at best. And so, after (at least) £52m of investment since 1984, Sir Jack is turning the club over to a fellow named Morgan, from Liverpool. For £10. Football can be a cruel game.

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