The debt is too damn high

LA Times baseball writer Bill Shaikin reported today that as many as nine teams throughout MLB may be in violation of the league’s debt rules. Those teams are (reason for debt in parentheses):

  • LA Dodgers (McCourt divorce)
  • NY Mets (new stadium, Madoff scandal)
  • Chicago Cubs (recent sale)
  • Texas (recent sale, high assumed debt)
  • Washington (new stadium highly leveraged team purchase)
  • Florida (new stadium)
  • Detroit (extremely high payroll compared to revenue)
  • Baltimore (new regional sports network startup costs)

If the A’s build a ballpark somewhere they’ll join these teams. The A’s current debt load is reasonably low according to Forbes’ figures. It will surely rise when it comes time to finance a venue, though I would expect additional partners to be brought in to help soften the blow. At the end of last season I wrote about what the debt rule’s effects on the A’s are now and into the future. Then the post was about payroll. Now it’s about debt service on a new ballpark.

30-year financing of a $450 million ballpark at 6% will cost $27 million per year. For the sake of this discussion, let’s assume there are some cost overruns assumed by the A’s, plus additional soft costs and insurance, bringing debt service to a round $30 million per year. That’s 25x the lease payment they’re making this season, so the revenue streams they’re getting from a new ballpark better be worth it. Lew Wolff has maintained for some time that seat licenses aren’t part of the equation, so no upfront payments are included.

At the same time, it’s no fun having a new ballpark if all you’re going to do is pay a mortgage. Stadium revenue needs to be well above and beyond the debt service amount to make it worthwhile. The Giants and Cardinals have proved it’s possible to make it work, but the amount the A’s will have to shoulder will be unprecedented for a team that’s not in one of the big three markets. To understand the team’s challenge, I’ve broken down how the $30 million can be addressed using multiple revenue sources.

The table above assumes attendance 30,000+ per game, with a complete sellout of premium seating options. In-stadium sponsorships also play a big role, one-third of the debt. Having improved amenities such as rental facilities, a large video board, and ribbon boards will make a huge difference. That makes revenue from every attendee above the 30,000 mark pure gravy. The Giants have operated in this manner since their ballpark opened.

Pretty pie chart

It all seems hunky dory when the fans are filling the place. What happens when they don’t? Let’s look at a scenario in which the A’s only pull in 22,500 per game, or 1.8 million per season.

Lower demand of 25% all around affects all sales, regular and premium. It also puts the team at risk of coming up short, which may force them to cut costs such as payroll.

A drop of $5 million per year is nothing compared to what the Mets and Dodgers are experiencing. However it has broad effects for the A’s because it limits their flexibility. Less money is available upfront for payroll, and they may have to pull from non-stadium sources (TV/Radio) to make ends meet. At the end of the season, they may even find themselves back on revenue sharing welfare (ex.: Pittsburgh). They’ll still have the benefit of the stadium expenses writeoff to help ease the pain, but it’s not a situation anyone wants to be in long term.

Bud Selig and the owners have to be keenly aware of the risk, which may be a legitimate reason why they’re moving so slothlike regarding the A’s. For Oakland, where corporate support isn’t the strongest and attendance has historically been weak, they’ll be looking to keep the A’s from being a bad leverage case like the Dodgers. For San Jose, the question of territorial rights may effectively push the true cost of the ballpark up, though it’s not known how much. Neither is an easy issue to address. Most previous ballparks had huge public financing components to take care of debt service with only a nominal lease payment required of the team tenant. The Giants continue to claim that revenue the South Bay is absolutely necessary to guarantee payments at AT&T Park. Despite the large debt the A’s could accrue, the potential for an extra $30-50 million or more per year after debt service makes it worthwhile, compared to languishing at the Coliseum with no real hope for significant revenue. I’d like to see a $90 million payroll at some point, even if I have to pay more out of pocket to make it happen.

14 thoughts on “The debt is too damn high

  1. For the record, the following isn’t my idea, Lew Wolff said it himself.
    Mr. Wolff did state that “private equity” would play a part in ballpark financing, so perhaps the loan won’t be for $450 million. Maybe its somewhere in the $300 million range.
    Schott/Hoffman were willing to put $100 million of their own money towards an A’s ballpark; is it hard to imagine Wolff/Fisher doing the same?
    On another note, Wolff himself has stated that he has the financing I’m order for Cisco Field. Do we really think at this point MLB is going to “force” the A’s to stay in Oaklamd/Alameda Co. just because of the whiny, greedy SF Giants?
    Yes, the private financing model may be a challenge debt-wise in San Jose, but in Oakland?….

  2. Washington’s reason for non-compliance with the debt rules can’t be the new stadium. Nationals Park is 100% publicly financed (although the Nats have kicked in $10-20 million here and there for a few upgrades, and they do pay rent to the District of Columbia). More likely the debt relates to the Lerner family’s purchase of the franchise in 2006 and subsequent cratering of the commercial real estate market which is their primary business.
    .
    That said, the Nats do not operate as if they were crippled with debt, as the Jason Werth contract illustrates, so it’s surprising to see them on this list at all.

  3. I was thinking the same thign that Simon just wrote. DC took it in the shorts ot bring the Nationals to town and keep them there… Hard to imagine how they are on the list, even mroe frustrating to see them ont he list and signing stupid contracts like the Werth deal… The Tigers are run a bit like Haas used to run the A’s…
    .
    Blue Ribbon Panel on Competitive Balance II, coming to a major sports league near you in 2017.

    • @jeffrey/simon94022 – Not sure why that was left in there. Ted Lerner’s purchase of the team was highly leveraged. That’s the reason.

      @tony d. – It doesn’t matter where or in how many parts the financing comes from, it still adds up to around $30 million. As for Lew’s equity comment, it’s hard to speculate what that means. If it means the equivalent of some serious out-of-pocket upfront cash I’ll be very surprised.

      • @jeffrey/simon94022 – Not sure why that was left in there. Ted Lerner’s purchase of the team was highly leveraged. That’s the reason.@tony d. – It doesn’t matter where or in how many parts the financing comes from, it still adds up to around $30 million. As for Lew’s equity comment, it’s hard to speculate what that means. If it means the equivalent of some serious out-of-pocket upfront cash I’ll be very surprised.

        So hypothetically, if Wolff/Fisher put in $100 million of their own cash into the ballpark ala Schott/Hoffman, would it still add up to around $30 million annually? Not saying this will/would be the case; just asking. Nice post by the way.

  4. Why is that, ML? Isn’t there a point at which ownership can save money in the long run by putting cash into the stadium up front rather than servicing debt over time? Or is it the opportunity cost that makes that unlikely?

    • @Dude – You just answered your own question. Opportunity cost. The only way I could see it happening is if they received upfront payments such as naming rights all at once.

  5. And, by the way, excellent reference to the “Rent is Too Damn High” Party

  6. I really enjoy the detailed analysis on this blog. It really brings to light the fact that building new stadiums/ballparks/arenas is no small feat – big money, big politics, creative financing, lots of hurdles.

    Due to the way the economy is, and the fact that governments everywhere are in the red, I don’t see as many new facilities being built as there had been over the last 10-15 years. Those were halcyon days for new ballparks. It’s just harder nowadays. I see fewer, and more scaled back facilities being built.

    I even see old facilities getting more renovations. Sadly that’s not a viable option for the Coliseum, with mt davis and sharing with the Raiders and all. Prior to the Raiders coming back and construction of Mt Davis, the Coliseum could have been modified and renovated into quite a nice baseball facility (heck, it was already pretty decent for the times, before Mt Davis).

  7. @ML- The naming rights $$ will be given upfront and here is why.

    That contract with Cisco is as good as gold to bank. The reason is Cisco is such a solvent company they will be around for the 30 years and if they got bought out then that new parent company would assume the contract….I.E. SBC buying Pac Bell and then ATT buying SBC with the Giants.

    The A’s can take that contract to the bank and get the entire 120M upfront and pay it back over time at a reasonable interest rate. The banks will line up for this all day long.

    Therefore naming rights are a huge piece for the A’s to get the park built in this day and age. The Giants used Charter seats as you mentioned and if the A’s do not go that route then they will need that upfront $$ from naming rights to build the stadium privately.

    Good article, your #s are solid…..

  8. By the way, the Giants are still claiming that the “revenue” coming out of the South Bay is absolutely necessary to guarantee payments at AT&T Park? Questions for the Giants (which have yet to be answered): 1) “Revenue” from where? Which companies and number of season ticket holders? 2) Where’s the proof that these companies and season ticket holders would immediately abandonded the Giants with the A’s in San Jose? Of course these questions are rhetorical because the “revenue coming out of the South Bay” bull shit is just that…BULL SHIT! But I’m pretty sure MLB determined that a long time ago. By the way, debt service on AT&T Park sunsets in 2017 (or is it December of 16?); it’s a no brainer that something will be worked out for the two years Cisco Field is in existence and the debt payments remain on AT&T.

  9. Sid,
    I also believe the A’s will sell sections of Cisco Field to other companies much like the Sharks sold a portion of HP Pavilion to Comerica Bank; naming rights in a certain portion of The Tank. I can see it now: The “iTerrace,” “Adobe club section,” “Brocade Bar,” “Ebay party suites,” etc.

  10. @ Tony – funny to see you mention my company on a site about baseball, but also gives some ammunition about local marketing power with arenas. I can’t say the same about E.Coli-seum though :X

  11. it would be interesting to see what going to the post season could do for those charts. Lets say the A’s have a run like they had 71-75 or 88-92 or 00-06, thats a lot more revenue over several years.

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