Posted July 30, 2014
Author: Lance Sabo | Part 1 of 6
As citizens of both Western New York region and New York State we are faced with prospect of building a new stadium for the Buffalo Bills. With the passing of Ralph Wilson Jr. and the ongoing matter settling of his estate, it may be some time before ownership is transferred to a new individual or group. Until that officially happens and the new owner(s) publicly state where their preferred location would be, we can only speculate about its future location and the many other variables that would associated with it.
Before we get too caught up on the unknown, we should take a moment to examine some facts related to the construction of new stadiums or the complete remediation of existing stadiums, by doing so we can gain some insight into the NFL’s standard business practices.
Stadium Financing: Public, Private and G4
- Public funding is provided by State, County and City governments; and it is classified as a funds, property transfers, or tax abatements that come at the expense of taxpayers. Typically, Cities and Counties supply more public funding than States normally do. Most stadium funding is derived from the issuing of municipal bonds, which are repaid over time by revenue that is derived from a specific fee or tax. Listed below are some of various mechanisms that state and local governments have used to raise public funding for stadium construction.
• City Sales Tax
• County Sales Tax
• Lodging Tax
• Excise Tax (Alcohol, Tobacco, Gasoline, etc.)
• Car Rental Tax
• Food & Beverage Tax
• Property Tax /TIF
• Income Tax
• Utility Tax
• Lottery & Gaming Funds
• Ticket Admission Tax
• Parking Tax
• Land Contributions
• Public Parking Revenue
• Other State/City/County Contributions
• General Contribution
• Sale of Publicly Held Property
• Sales Tax Rebates
• Income Tax Rebate
• Interest-Free Loans
• Capital Fund Allocation
*Note: the various taxes and fees that have been defined as “public” because they are assessed unilaterally/indiscriminately and do not specifically target stadium patrons only.
- Private funding is simply money that are not (initially) derived from public tax revenues. The term “initially” was included in the statement because some of the private loan/bond obligations that are commonly associated with stadium construction are guaranteed by state or local governments in the event of default. Private funding can come in many forms, such as ownership monetary contributions; ownership secured loans; the NFL’s G-4 loan program; stadium seat licenses; and municipal bonds that are backed by taxes or fees that are directed toward actual stadium patrons, usually related to parking & concessions sales.
- Specifics concerning the NFL’s G-4 loan program:
- G4 loans are only available for public-private stadium projects and require league approval.
- The stadium project must not involve any relocation of or change that affects the club’s “home territory.”
- Teams can barrow up to $200 million for new stadium construction and up to $250 million for stadium renovation.
- Projects must cost at least $400 million, and the team is required to make a “private contribution” of at least $200 million toward the project to be eligible for the top loan amount.
- The team can take up to 15 years repay the loan from revenues related to premium seating. They can also use incremental regular ticket revenue, defined as the difference between ticket sales in the new stadium and average sales in the last three years of the old one.
*Both Minnesota and Atlanta have recently been approved for the full loan amount of $200 million for the construction of their new stadiums; the estimated costs of each stadium are $975 million and $1 billion.
Current Stadium Facts & Trends:
- Of the last 21 stadium projects, all but one received some form of public funding for construction with the exception of Met Life Stadium currently the home the NY Giants and NY Jets. On average public funding covered 58.5% of the construction costs associated with the remaining 20 projects.
The above figure is a sure indication that the majority of the new stadium’s construction costs will come from public funding. That said, cities and counties with larger populations would have an advantage over those with smaller populations because of their ability to distribute the costs among a larger base, which would lessen the financial impact felt by each individual, thus making the total expense more palatable for all. In our case Erie County which has a population of 919k, would have clear advantage over Niagara County’s 216k and Genesee County’s 60k. If the prospective county contributed $400 million towards the stadiums construction by extension each of that counties citizen’s share an equal portion of the total debt; in Erie that figure would equate to $435 per person, Niagara $1852 per person, and Genesee $6667 per person.
- Of the stadiums currently occupied by an NFL team(s), 100% are owned by either their respective team(s), or a local municipality. It is obvious that the NFL prefers stadiums that are built with a combination of team and public funding. Why wouldn’t they? When, the team usually pays an average of 41.5% of the construction costs, little or no property taxes, a minimal amount or none of the long-term facility maintenance costs, and it gets keep all of the concession and parking revenues associated with game days.
NFL teams have obviously come to the conclusion that they would not be able to receive terms as generous if they were to lease a stadium that was built by an independent/third party because the stadium owners would naturally be burdened with a larger portion of the stadiums construction costs, its day to day operating expenses, and its long-term maintenance expenses, and would need a larger portion of game day revenues to cover its debt obligations.
There are two reasons why the owners of independently built stadium would incur more debt a) they would be ineligible for NFL’s 4-G loan program and would have to secure other financing in its place; and b) state and local governments (aka tax payers) would not be willing to subsidize a majority of the stadium’s construction/operation/maintenance costs or provide generous tax abatements without a direct contractual agreement with the team.
- Of the 7 new stadium projects that are currently under construction or have completed since 2004, 5 will be “Domed,” and only 2 will be “Open Air.” This 2 ½ to 1 ratio would indicate that the NFL currently favors domes over open air stadiums. In contrast, during the years of 1993 to 2003, approximately 4 open air stadiums were built for every single domed stadium.
The average cost of the 14 modern era open air stadiums projects was $620 million, while the average cost of the 9 modern era domed stadium projects was $794 million; both figures have been adjusted for inflation and represent present day values.
On the surface the increased expenditure of 174 million dollars for domed stadium seems pretty significant, but if one were to consider that a domed venue would have the ability to host several more events throughout year, and then multiply that additional income times the stadiums expected 30 to 40 year service life of the venue, one would conclude that the expected return would justify the additional expense.
Misconceptions & Consequences:
Much has been made about the National Football League being legally recognized as a 501(c) non-profit organization. The NFL is officially identified as a trade organization that collectively represents all the individual teams in business transactions that concern intellectual property/media rights, labor agreements, and administration of G-4 stadium loan program. In addition to high profile responsibilities the league office also handles various other mundane tasks; such as game schedules, the hiring & training of game officials, etc.
The misconception that the NFL by virtue of this status pays no taxes is simply not true. All monies that are redistributed to each team and the salaries of all of its employees are subject to taxation. This would include the $29 million annual salary that was paid to its commissioner Roger Goodell in 2013; because no portion of his compensation is derived from company stock transfers or dividend earnings, he is guaranteed to pay a greater portion of his salary in taxes than the typical CEO of a Fortune 500 Company.
Recently many law makers have started to question the NFL’s ability to blackout games from local television audiences when ticket sales fail to reach the stadium’s maximum capacity, when a majority of stadium construction costs are/or have been subsidized by local tax payers. These lawmakers often posture their position by threatening to pass legislation that would eliminate the “non-profit” status of the league. While most perceive that this action would eliminate NFL’s legal tax shelter and force them to pay their fair share; in truth, the loss of this status would merely cost the NFL its ability to collectively negotiate business contracts and force these responsibilities and their related operational costs upon each individual team.
Ultimately, the consequences of such legislation would have opposite effect of what law makers had hoped to accomplish. Instead of increasing the public’s ability to watch local games on television, the NFL would lose the ability to negotiate collectively with the major broadcast networks. The NFL would have to resort to putting national games on the cable/satellite subscription based NFL Network and each team would then have to negotiate their own contract with a regional broadcasting station, thus reducing the total number games that would be available to free broadcast audiences. The reduction of televised games would have a cyclical effect on many aspects of a team’s business model. For example a reduction in viewership would generate less revenue for each team, which would cause teams to increase ticket prices in an attempt to make up for the lost revenue, which would further reduce the public’s accessibility to their team. An additional side effect of reducing the NFL revenue steam/ profitability is that the league and teams would have less to contribute to stadium construction, which means that the public would have fund a larger portion of the costs. In short, be careful what you wish for because the consequences may not to be what you had hoped.
see introduction to this six part series
Lance Sabo is currently a master’s student at Buffalo State College and will complete his master’s degree in economics and finance in the fall of 2014. Serves in the Air Force Reserves at the Niagara Falls Airbase and has been a Federal Civil Servant for 20 years. Contact Lance Sabo | twitter Lance_Sabo | Generic dome image: Gates of Ale