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Transcript of Stadium Bonds


Wealth Management Research

5 April 2012

Municipal BondsBatter Up: Public Sector Support for Professional Sports Facilities As a new major league baseball season commences, we turn our attention to an often-overlooked part of the municipal bond market the use of municipal bonds to build and renovate professional sports venues. Proponents of tax-exempt financing for new venues often cite the economic development potential of a new arena or stadium. Opponents argue that tax-exempt financing for sports facilities represents a misallocation of scarce capital. We explore the arguments from both sides and provide an abbreviated summary of an array of municipal bonds associated with these transactions.Thomas McLoughlin, analyst, 212 713 3914 Joseph Krist, analyst, 212 713 3959 David Wang, associate, 212 713 9295

If people don't want to come out to the ball park, nobody's gonna stop 'em. Yogi Berra Introduction Professional sports have experienced dynamic growth over the past two decades. States and local governments have responded by competing vigorously for the bragging rights associated with the location of a professional sports franchise in their jurisdiction. Franchises often leverage their privileged position as a source of civic pride by extracting concessions from states and local governments reluctant to risk their departure for greener pastures. In an effort to convince professional sports franchises to remain in a particular city - or to encourage their relocation states and local governments often have relied on the sale of tax-exempt bonds to finance the construction of new arenas and stadiums. The Internal Revenue Code permits public agencies to issue the bonds on a tax-exempt basis under certain conditions. Not surprisingly, tax-exempt municipal bonds represent the least expensive source of capital available to most team owners and are the preferred method of financing stadium construction.

Contents Introduction Economic impact Investor perspective The search for value: selecting credits from among a crowded field Looking downfield: the next wave Individual credit summaries

Page 1 2 4 6 8 11

This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures that begin on page 34.

Municipal Bonds

Sixty years ago, most of the professional sports facilities in the United States were privately owned. Patrons would queue up for admission to an arena or stadium and their entrance fees constituted a significant part of the revenue generated by the team owner. For example, every team in the National Hockey League (NHL) and in Major League Baseballs (MLB) National League occupied a facility that was still privately owned and operated in 1950.1 MLBs American League had just 12% of its stadiums in public ownership at that time. However, the National Football League (NFL) was something of an outlier with 46% of the teams already renting their stadiums from public authorities. The introduction of televised broadcasts, complemented by advertising and licensing fees, diversified the income statements of sports franchises and allowed them to generate a national following. Meanwhile, broader demographic shifts were underway. Americas suburban migration and population shift to the south and west created a competitive challenge for older cities in the Northeast and Midwest. Competition among cities to attract or to retain a professional team provided the franchise owners with the leverage necessary to transfer ownership of the facility (and the associated property tax liability) to the public sector. Franchise owners who understood the changing dynamics of their business encouraged the transition from private ownership of spectator facilities to the public treasury in subsequent decades. The resulting flurry of new stadium construction dramatically increased the revenue available to team owners by allowing them to lease luxury suites and offer more seating options. By 1991, according to researchers at the University of Maryland, three-quarters of the arenas and stadiums were owned by the cities and counties in which they were located. The trend accelerated in the last 20 years. Many of the stadiums built after the Second World War were abandoned in favor of more modern facilities. By the end of 2012, 125 of the 140 teams in the five largest professional leagues (NFL, MLB, NBA, NHL, and MLS) will play in stadiums constructed or significantly refurbished since 1990.2 The net effect is a cycle of construction and abandonment in which the life cycle of a major sports facility is roughly 30 years. Economic impact The economic impact of professional sports on local economies has been debated for years. Proponents of publicWealth Management Research 5 April 2012 2

If we began to subsidize baseball teams, all sorts of business enterprises would demand the same things. Our feeling is that professional ball clubs class as private enterprise. They have to carry their own weight. We will not be blackjacked.NYC Mayor Robert Wagner in 1957 Recounted in Stickball in San Francisco by Agostini, Quigley, and Smolensky. The Dodgers and Giants departed to California.

Municipal Bonds

subsidies have argued that a new stadium or arena offers tangible benefits by creating employment opportunities for construction workers and permanent jobs upon completion of the new facility. In their view, new stadiums promote civic pride, raise property values, and stimulate the creation of new retail establishments to accommodate an increase in tourism. Urban redevelopment projects adjacent to Oriole Park at Camden Yard (Baltimore) and Jacobs Field (Cleveland) are cited frequently as evidence of the ancillary benefits generated by the construction of new sports venues near central business districts. Unfortunately, independent academic research studies consistently conclude that new stadiums and arenas have no measurable effect on the level of real income or employment in the metropolitan areas in which they are located.3 Feasibility studies for professional sports facilities often fail to account for the substitution effect. Individuals generally maintain a consistent level of entertainment spending so money spent on sporting events typically comes at the expense of cash spent in restaurants, on travel, and at movie theaters. These same studies also fail to accurately assess the degree to which sports crowd out other types of economic activity. The physical infrastructure of a city, whether its a private hotel or a public airport, cannot abruptly increase capacity. As a consequence, sports fans tend to displace other visitors. As a case in point, Robert Baade and Victor Matheson at the College of the Holy Cross have examined the number of visitors to Beijing during the Summer Olympics of 2008. Tourist arrivals for the month of August did not fluctuate year-over-year and the number of visitors to Beijing actually declined on an annual basis. Similar results can be found for Olympic Games held in the US and for such sporting events as the Super Bowl.4 There appears to be no increase in retail sales, hotel occupancy rates, or passenger enplanements in cities that hosted Super Bowls and Olympic Games, at least in the decade prior to 2003. 5 Critics also highlight the misallocation of scarce public resources as a fatal flaw in the arguments supporting public subsidies. Capital expenditures associated with a new arena and sports stadium are directed towards a relatively narrow group of individuals (the franchise ownership and the sports spectators). Moreover, the resulting infrastructure is not easily convertible for other uses and plainly does not provide the

Of the 30 arenas that host NHL teams, only three older facilities Joe Louis Arena in Detroit, Madison Square Garden in Manhattan, and Nassau Veterans Coliseum on Long Island have not sold naming rights to businesses.- Glen Hodgson and Mario Lefebvre Conference Board of Canada August 2011

Construction costs alone for major league professional sports facilities have totalled in excess of USD30 bn in nominal terms over the past two decades with over half the cost being paid by the public.- Robert Baade and Victor Matheson College of the Holy Cross January 2011

Wealth Management Research 5 April 2012


Municipal Bonds

same broad societal benefits associated with an airport, highway, or public utility improvement.Bid for the Dodgers Shatters Record

The use of public subsidies to underwrite the cost of construction for a new stadium or arena was a contributing factor in the rapid increase in the valuation of sports franchises. The fees paid by ownership groups to obtain a new franchise when Major League Baseball expanded in 1997 was 37% higher than the fees paid by new owners five years earlier. The increased valuations of National Basketball Association (NBA) franchises were even more dramatic. Based upon fees paid by the owners of new expansion teams in 1989 and again in 1995, NBA franchise values increased by roughly 47% every year.6 This type of growth is difficult to sustain without greater leverage (see sidebar at right). An uncertain economy, labor strife, and volatility in the financial markets all have taken a toll on some ownership groups in each of the major sports. The leverage employed to meet the asking price for a new sports franchise has undermined the financial stability of some ownership groups. Major League Baseball, the National Basketball Association, and the National Hockey League currently operate franchises directly in place of ownership groups that are facing insolvency.7 Ironically, these situations may prompt another round of team relocations and another cycle of public sector bidding for professional sports. I