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 stadiumhighly 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.
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.
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.