Sticker Shock – The SBL dilemma

I’ve been puzzling over the Santa Clara Stadium Authority matter for a couple of weeks now. While I picked up a few tidbits of useful information about the 49ers stadium project, it took a look at an otherwise innocuous Newsday item for the whole thing to click. In the blog post, the NY Giants admit their once impressive, 60,000-name waiting list has been exhausted in the team’s PSL sales efforts. That means they’ve gone through the existing season ticket roll plus the waiting list – probably 130,000 subscribers – and they still haven’t sold them all. While the Giants and Jets express confidence that they’ll eventually sell out (they have another year to do it), the pickings start to get slim once they get past the diehard types.

$330 million translates into $24.75 million per year for 40 years of annual debt service. However, I don’t expect a massive Stadium Authority loan for the entire amount. It makes more sense to use as much upfront money as possible. For the SA, that upfront money will be in the form of PSL’s. How much? It’s impossible to say at this point, even for the Niners. It stands to reason that a large portion, perhaps half of the $330 million, will be signed over to PSL’s, whose revenue comes as the stadium opens. This is virgin territory for the Niners, who haven’t subjected their fanbase to any significant premium seating charges yet.

In the wake of the Giants’ very elastic demand for PSL’s, the Niners have to formulate their Stadium Builders License sales strategy very carefully. I’m sure they have several Ivy League grads pumping out different models right now for the Yorks and Andy Dolich to pore over. It gets more complicated once taken within the context of the Stadium Authority’s $330 million funding responsibility. Let’s refresh the funding mix again before we get into the details.

* Principal refunded if Raiders move in permanently

Tim Kawakami first broached the subject of PSL’s for both the 49ers and Raiders in February. Alas, the issue didn’t get much traction for various reasons. Teams usually don’t want to talk about PSL’s until it’s time to start selling them. In the case of the NY teams, info was sent out around this time last year, just over 2 years removed from the planned opening of the still unnamed Meadowlands stadium. With the 49ers planning to start construction sometime in early 2012 and opening in time for the 2014 season, it’s possible that they wouldn’t start talking SBL’s until the summer of 2012. In Santa Clara’s case, the mix of variables that will form the Stadium Authority’s share make the whole funding picture a bit murky. It’d be great to know what the SA’s funding mix will be come next spring’s election, but all of the variables make it incredibly difficult to confidently predict how it will go. It’s a strange dilemma for sure, as it would be in the stadium proponents’ best interest to release as much information to the public as possible, yet the team doesn’t want to scare fans three years early with talk of specific SBL pricing.

Since we can’t expect specific numbers from the team, let’s put up two hypothetical scenarios that could show how it could work. Throughout the team’s documentation, they have shown confidence that the different revenue streams could not only take care of the SA’s share, they have to potential to provide an operating surplus for the City. Naturally, it makes sense to be skeptical of such claims, though from running the numbers, there are instances where it could happen – at least in terms of paying off whatever debt service is due for the SA share.

For the sake of argument, let’s assume that the goal is to get at least half of the $330 million from SBL sales. If successful, the required debt service would drop to $12.4 million per year at 7%. That’s a fairly manageable figure. From the table above, here’s how the flows would be constructed (annual amounts):

  • $12.4 million in debt service
  • – $7 million for naming rights (40 years)
  • – $2 million for ticket taxes ($2.50 per ticket for all events)
  • – $2 million for soft drink pouring rights
  • – $1 million for beer pouring rights
  • – $1 million for concessions rights

That’s $13 million in revenue against the debt service. Not bad, right? Of course, everything has to fall into place. Some company will have to pony up for those naming rights. In fact, even though Cisco already has a deal in place with the A’s, I wouldn’t put it past them to sign a deal for Santa Clara as well, especially if the Raiders move in (Cisco was recently named to replace GM in the Dow Jones Industrial Average). In addition, the team would have to sell out games and other events pretty consistently, and those other sponsorships are extremely important as well. As I mentioned in a previous post, what if companies don’t pony up $7 million? What if they offer only $4 or $5 million (Cisco will pay $4 million/yr for Cisco Field)? Does the SA hold out until they get the deal they want? If they do, who takes care of that revenue source? The term sheet states that “The Stadium Authority will make a good faith effort to issue bonds or enter into other financing arrangements secured by and paid from Naming Rights Revenue.” Can’t issue bonds if there’s no naming rights sponsor, can you?

Back to the SBL’s. While the 49ers might have been able to spring the idea on fans during their 80’s-90’s salad days, today it seems almost preposterous. The team was dangerously close to having games blacked out last season, which when combined with the litany of Raiders blackouts, makes the Bay Area rather ignominious in terms of its football fandom. I doubt that the Niners could take the approach the Giants and Jets took, which was to tack a PSL fee to every single seat in the stadium. Nor could they assign insanely exhorbitant PSL fees like the Cowboys (50 yard line club = $150k per seat!). Instead, I put together a scenario in which the 49ers attach PSL’s to about half of the new stadium seats, in only the prime locations (sideline & club for the most part).

This achieves the goal of cutting the $330 million share in half or more. The remainder would translate to $11 million/year in debt service, which is no small discount. Again, this assumes a sellout of available SBL’s, which is no small feat. The market may be far less hospitable to the concept, and the SA/49ers Stadium Company should be prepared for the possibility that they won’t sell out. If they sell 80% of available SBL’s, the incoming revenue looks more like this:

That’s over $30 million less than if SBL’s were sold out. Required debt service on the remainder would be $13.3 million/year. Suddenly the SA is at risk of running deficits just for this portion, nevermind the regular operating costs of the stadium. And if the market responds by buying only 50% of available SBL’s? It’s Mt. Davis all over again, and not even the Raiders becoming roomies will help.

If the Niners and the City want to be completely upfront about the deal, at some point they need to provide realistic figures and projections for the $330 million SA share. It may be premature to do it now, but sometime before the end of the year is not unthinkable. There is a decent chance for the deal to work out well for the City if everything falls into place. To be intellectually honest with the citizens of Santa Clara, stadium proponents should explain what happens if everything doesn’t fall into place. Caveat emptor, Santa Clara.

Some related questions to pose:

  • Is the SA share sequenced last among the various funding mechanisms?
  • At what point does the SA/49ers Stadium Company decide when to go for stadium bonds for this share?
  • If the SA is completely responsible for this share, what protections will be in place for the City?
  • If the SA share is constrained to actual “Construction Sources” (raised funds), what will be the first corrective steps if those sources fall short?
  • How much can realistically be value engineered away to deal with the shortfall?
  • What precludes the SA from going back to City in the future, as the Yankees did when they needed to get additional money to finish New Yankee Stadium?

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