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27Oct/1110

NFL IN LA: FINANCING A STADIUM IN LOS ANGELES, PART 3

NFL in LA Financing a football stadium part 3By Jaboner Jackson 8 am | Part 3 of 3 | Forget political issues, location, and the benefits and drawbacks of urban versus suburban stadiums—the only element that matters when it comes to building a stadium to house an NFL team in Los Angeles is financing.  Financing refers to the raising of monies to pay for all aspects of stadium design and construction.  The reason why the Raiders left Los Angeles after the 1994 season was financing—the Los Angeles Memorial Sports Commission did not have the money to renovate the Los Angeles Memorial Coliseum.  Two weeks ago, I reviewed financing an NFL stadium in Los Angeles by examining how real life valuation of NFL franchises is determined.  Last week, I explored NFL stadium financing in Los Angeles by giving real world valuations for the three NFL teams in California, the San Diego Chargers, San Francisco 49ers, and Oakland Raiders.  Today, I take a look at how both AEG and Majestic Realty are battling it out finance an NFL stadium.

AEG and Farmers Field

Through the Memorandum of Understanding (MOU) between AEG and the City of Los Angles, both parties have publically put forth financing numbers for Farmers Field.  The numbers presented in the MOU were developed by Convention Sports and Leisure International (CSL), a consulting firm that most recently did work on MetLife Stadium (formerly New Meadowlands Stadium) in East Rutherford, NJ.  CSL’s analysis is as follows:

Table 1. CSL’s Financing Breakdown for Farmers Field

Total Cost of Farmers Field

$1.2 billion

NFL G3 Financing

$150 million

Personal Seat Licenses

$150 million

AEG Cash Contribution

$450 million

AEG Loan Contribution

 

Loan: 30 years, 6.5% interest rate

$450 million

 

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What CSL Got Right

The most important aspect about CSL’s analysis is the AEG contribution in terms of real money. CSL pegs this number at $450 million, which is within the range that the FOOTBALLPHDS have been hearing as well. In layman terms, this is AEG’s “down payment.” AEG will put up $450 million of real cash money to build Farmers Field.

CSL also nailed the loan element of their projections.  In our discussions with our former colleagues in the investment banking world, the numbers we have heard for the interest rate on a 30-year construction note was generally between  between 6.5% and 7%, although one source did peg the loan at a higher rate of 8% because of the riskiness of the project. 

CSL also accurately assessed that AEG will receive financing directly from the NFL for a portion of the construction cost, which was referred to as G3 financing under the last two Collective Bargaining Agreements.  (Technically, the new CBA no longer refers to NFL financing for new stadium construction as G3 financing but for consistency and simplicity’s sake, we will continue to refer to NFL financing for new stadium construction as G3 financing in this article.  Nonetheless, you can refresh your memory on G3 financing here.)

CSL also correctly projected a loan-to-cost of approximately 40%, which is standard for stadium projects these days.  A loan-to-cost represents the percentage of a loan in comparison to the cost of the total project.

What CSL Got Wrong

CSL missed on the true construction cost of Farmers Field.  We believe that $1.2 billion is a conservative estimate for the construction cost of Farmers Field and that real world figures will be at least $1.6 billion and may even edge near $2 billion.  AEG has a history of cost overruns and underestimating construction cost.  Both Staples Center and LA Live came in significantly over budget.  One of the main reasons why AEG sold parking lots around LA Live over the past few years was to finance the escalating cost of LA Live construction.

CSL also missed the mark on the actual value of G3 financing.  The amount of G3 financing in CSL’s projections are based on the old Collective Bargaining Agreement.  The new Collective Bargaining Agreement will allocate 1.5% of revenues for new stadium construction, which would end up being $135 million for the NFL fiscal year starting March 2012.  If Farmers Field is the only newly constructed stadium to break ground in NFL fiscal year 2012, it will likely get the entire $135 million.  This is of course assuming an agreement with an NFL team for relocation, which we believe will be the San Diego Chargers.  However, if the Vikings are able to get a new stadium off the ground as well, this money will be divided between the two new stadium projects.  Subsequent fiscal years will provide additional funds for constructing both these stadiums and a stadium in the Bay Area.   

Majestic Realty and LA Stadium

As first reported by LA Times, Ed Roski and Majestic Realty have recently changed the terms of its offer for finding an anchor tenant for LA Stadium.  Roski will purchase a 30%, non-controlling interest in a relocating team at a market valuation and turn over the 600 acres of the LA Stadium site in City of Industry to the relocating team.  The relocating team will then finance the cost of LA Stadium.  Our financial breakdown for the cost of LA Stadium is below.  We have based our projections on a $900 million total cost for LA Stadium rather than Majestic’s projected cost of $800 million since we believe the $900 million is more in line with current estimates, especially since Majestic’s projection of $800 million was from two years ago.

Table 2. FOOTBALLPHDS Financing Projections for LA Stadium

Total Cost of LA Stadium

$900 million

G3 Financing

$135 million

Personal Seat Licenses

$120 million

"Down Payment" by Team

$360 million

Construction Loan

$285 million

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Penciling in the San Diego Chargers

The most important element to financing a new stadium is real cash money.  As I previously stated, the layman’s term for this cash contribution would be a “down payment.”  Since we believe that the Chargers are the clear frontrunner for relocating to Los Angeles, we have dug deeper into the “down payment” on LA Stadium.  Since this is a team contribution, the Charges can defray most of the $360 million “down payment” via the money received from Roski for a 30% equity sale.  We have used our real world valuations from Financing A Football Stadium in Los Angeles, Part 2, which are also currently being used in NFL circles. 

Table 3.  “Down Payment” Analysis

FOOTBALLPHDS Real World Valuation of Chargers

 

Funds Received by Chargers from Ed Roski for 30% Equity Ownership

Out-of-Pocket Contribution by Chargers for "Down Payment"

$790 million (low end)

$237 million

$123 million

$900 million (high end)

$270 million

$90 million

 

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It is important to note that the Chargers can defray a significant portion of their “down payment” through the funds they get from Roski for a 30% equity sale.  If the Chargers and Roski agree on a $790 million valuation, which we consider the most likely scenario since this is our current valuation of the Chargers in their current stadium, the Chargers and Spanos Family will have to outlay only $123 million in cold hard cash rather than $360 million. 

But even this outlay remains a significant obstacle.  It is worth noting that the Chargers have been vague thus far in terms of real cash contribution to a new downtown San Diego stadium.  In a radio interview with KPBS in August, Mark Fabiani of the Chargers stated that the Chargers would contribute $300 million towards the new San Diego stadium, but it is unlikely that this would be the true cash contribution by the Chargers.  Rather, this would likely be the combined contribution of both a “down payment” and a construction loan.  If we assumed the usual loan-to-construction value of 40%, we can deduce that the real cash contribution by the Chargers would be $120 million while the construction loan would constitute $180 million.

The Winner

Despite its higher construction cost, the true cash outlay or “down payment” for an NFL team remains Farmers Field.  Since AEG is financing the bulk of the stadium in exchange for a landlord-tenant arrangement, the initial outlay for an NFL team is minimal.  But for LA Stadium, a relocated team must put up $360 million.  Furthermore, the relocated team for LA Stadium must secure financing of the construction loan, which has become increasingly difficult in the current debt market. The FOOTBALLPHDS have heard of two occasions over the past six weeks where NFL teams have failed to secure financing commitments from the investment banks with which they have been working.  It is harsh climate for financing Brand Spanking New Stadiums but AEG clearly has the upper hand for the battle of Los Angeles.

 

References:

Financing a Football Stadium in Los Angeles, Part 1 (10/2011)

Financing a Football Stadium in Los Angeles, Part 2 (10/2011)

Evaluating LA Stadium (10/2011)

LA Times: Majestic Changes Its Offer (10/2011)

Final Stack Ranking of Teams Headed to Farmers Field (08/2011)

Mark Fabiani Refutes the FOOTBALLPHDS (08/2011)

MOU Between AEG and City of Los Angeles: FOOTBALLPHDS Google Docs

G3 Financing (07/2011)

Remembering the LA Live Deal (07/2011)

Remembering the Staples Center Deal (07/2011)

 

jaboner@footballphds.com

twitter.com/footballphds

Comments (10) Trackbacks (0)
  1. According to these numbers then the Vikings would be the team most likely to play at Industry because they would be putting out less money in Industry than they would in Minnesota. I would think that the Zilfs would be using Industry as a major bargaining chip with their negotiations with the Minnesota lawmakers.

    • It’s just a bargaining tactic by the Wilfs talking about LA. If they wanted to move, they wouldn’t be hassling the legislature like they are.

  2. quite frankly neither of these deals look that appealing on paper in terms of risk/roi so it’s no wonder teams are struggling to attract financing…with all of the new stadiums that were built over the past 10 years, investors now have a large sample of comp data to see if any of the business cases or pro forma’s are actually coming in anywhere near their assumptions and I’m guessing they are not performing as expected…sure a big part of the issues can be attributed to the down economy but another part that we’re seeing across the boards in corporate america is the cutting back of corporate expense budgets that fueled the massive increases of local stadium revenue over the last 20 years….It may be decades before we return to that level of willingness to fork out $$$$ just to watch sports in a luxury environment.

  3. You have to believe that Anschutz will win out because he has the deeper pockets. When L.A. Live went over budget, he didn’t bat an eye. He ponied up the extra money. Compare that to other projects in Downtown that went belly up or never even left the ground when financing dried up.

    • the thing is with aeg is that anshcutz also never pays full market price for anything and I don’t think there’s enough of of a revenue guarantee (or a padded bottom line funded by taxpayer concessions) with this project as compared to staples and la live…the convention business has been in steady decline for a decade and the nfl just doesn’t generate as much traffic as basketball, hockey or baseball.

  4. Wake me when there’s a new stadium and a team in it.

  5. The league money would seem like it needs a few years to replenish for the teams to have access to it. If the NFL wants stadiums in LA, Minnesota, Oakland, Santa Clara, and San Diego, that would be almost a billion dollars of league money. So it make sense that only 3 or 4 stadiums will get built. LA, Minnesota, and 1 for Northern California, and maybe 1 for San Diego if the Chargers stay. Oh let’s not forget Buffalo needs money too.

    I don’t see how the NFL is going to get this done.

  6. I’m tired of the NFL asking for public money. Forget Occupy Wall Street. Occupy NFL headquarters.

  7. I can see both projects going belly up. Even though Anschutz is a billionaire it’s not like he has a billion dollar check he can just write and pay for this thing. He needs to raise money for it like everyone else.

  8. If LA can’t finance a stadium how will SD or SC?


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