By Jaboner Jackson 8 a.m. | Last week, footballphds.com delved into AEG's recent missteps with their planned downtown Los Angeles stadium, Farmers Field. We examined the NFL's concerns with a team's "fixed return" and investigated delayed designs for Farmers Field. Despite these missteps, AEG remains squarely focused on securing the San Diego Chargers as their anchor tenant. This has paved the way for Majestic Realty to hone in on the Oakland Raiders for their competing stadium in City of Industry, Los Angeles Stadium (LA Stadium). Today, we detail how AEG's faltering, estate tax planning, and debt financing creates the perfect storm for the Raiders' possible return to Los Angeles.
AEG And The Raiders
Long before it was picked up by Yahoo! Sports and ESPNLA, we reported that AEG had had preliminary discussions with the Oakland Raiders about relocation to Los Angeles. However, these talks between AEG and the Raiders failed to advance, and AEG focused their undivided attention on the Spanos family and Chargers instead.
Since the securing of an anchor tenant is a complex process involving myriad financial, legal, and regulatory issues, stadium developers are unable to reach advanced negotiations with multiple teams. Developers, such as AEG and Majestic, must zero in on a specific team instead. For this reason, we never discussed the Minnesota Vikings as a true candidate for relocation to Los Angeles, since they were never a true contender for relocation.
But this is the reason why both AEG and Majestic need to focus on only one team, especially in this advanced stage of the NFL in LA game.
Financing Not An Issue for LA Stadium
Footballphds.com has long maintained that the only issue that matters when it comes to building Brand
Spanking New Stadiums is financing. Financing refers to the raising of monies to develop projects. In the case of football stadiums, financing refers to the raising of debt financing. Although others in the media have expressed hesitation about Majestic's ability to secure financing for LA Stadium, financing is not an issue for LA Stadium.
The most important reason why financing is not a concern for LA Stadium relates to Majestic's own debt capacity. Majestic is the country's largest private industrial developer. Each year, Majestic secures in excess of $1 billion in construction and permanent financing. Majestic is a real estate development company whose core competencies involve the securing of debt financing for large scale construction projects. Majestic will not have problems securing construction and permanent loans for LA Stadium.
Also of importance is the recent Santa Clara Stadium deal, which we have covered extensively on this site. The Santa Clara deal contains $850 million in debt financing as brokered by the investment banks of Goldman Sachs, Bank of America/Merrill Lynch, and U.S. Bank. We have previously described this transaction as a "pure debt deal," meaning that a minimal cash outlay by the City of Santa Clara (through the Stadium Authority) and the San Francisco 49ers (through 49ers Stadium LLC) was utilized to secure this financing. Put simply, the Goldman Sachs-led financing for Santa Clara Stadium is equivalent to buying a house with no money down.
This second point is especially important considering the manner in which Majestic aims to finance LA Stadium. As first reported by Jason Cole of Yahoo! Sports this autumn, Majestic plans to turn over shovel-ready land in the City of Industry to the relocating team. This relocating team will then finance the stadium, meaning that the relocating team will obtain the loans needed to construct LA Stadium. Accordingly, Santa Clara Stadium provides a framework for a relocating team to build an NFL stadium for essentially no money down, a process we will examine in depth next week.
Raiders And Estate Taxes
Prior to his death in October 2011, Al Davis owned 47% of the Oakland Raiders per CSN Sports. Upon his death, this 47% equity stake in the Raiders was inherited by Al Davis' wife, Carole Davis (Carol Davis). Accordingly, no estate taxes are currently due on the Raiders, since spouses have an "unlimited marital deduction." But upon Carole's passing, the team will be inherited by Mark Davis, the son of Al and Carole Davis. At this time, estate taxes will be due on the team.
Accordingly, Carole and Mark Davis will have to plan for estate taxes. For NFL franchises, selling an ownership stake to pay for the estate tax is most feasible. Other estate planning measures, such as life insurance policies and trusts, do not adequately cover the enormity of estate tax bills for $740 million franchises. Even though publically the Raiders have maintained that they engaged in sophisticated estate tax planning prior to Al Davis' death, we do not believe that Mark Davis will be able to settle his estate tax bill upon his mother's passing without selling at least a part of his eventual 47% ownership stake in the Raiders.
It is worth noting that the Raiders are not unique in this situation. Estate tax planning was the reason why the Spanos family retained Goldman Sachs in 2010 to explore a 30% equity sale in the team. (The Spanos family and Goldman Sachs are no longer exploring an equity sale for estate tax planning purposes.) Estate taxes were also the reason why Chip Rosenbloom and Lucia Rodriguez, the children of Georgia Frontiere, sold their 60% of the St. Louis Rams in 2010 to Stan Kroenke. The Frontiere children needed to pay their estate tax bill.
Estate taxes in 2012 will be 35%. Estate taxes in 2013 and beyond are less clear. Since federal estate taxes are a current source of Congressional debate, estate taxes are in flux. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 expires after 2012, at which time estate tax rates are set to increase up to 55%. This could change depending on Congressional action.
Accordingly, Carole and Mark Davis are faced with uncertainty regarding their estate tax situation. If Carole Davis were to pass away before 2013, Mark Davis would inherit not only the team but also an approximate $121 million tax bill.
Ed Roski, the billionaire owner of Majestic Realty, is looking to buy a 30% ownership stake in the anchor tenant for LA Stadium. Mark Davis will be able to sell a 17% ownership stake to Roski. This would maintain Mark Davis' equity share at 30%. An ownership share of at least 30% is required by the NFL for managing control. Accordigly, Roski would have to acquire the remaining 13% ownership stake from other Raiders limited partners. Assuming a 35% estate tax rate, Mark Davis will raise the necessary $121 million required for settling his estate tax bill by selling 17% of the Raiders to Roski.
Santa Clara Stadium Situation
As we reviewed in our definitive work on financing Santa Clara Stadium, the Oakland Raiders will not be a second tenant for Santa Clara Stadium. The 49ers are taking a large financial risk for Santa Clara Stadium and will not allow the Raiders to increase their own unshared revenues without the Raiders taking on any financial risk in the construction of the stadium. Additionally, the 49ers will have management control of Santa Clara Stadium. The Raiders will not allow another NFL team to manage their game day experiences. The Raiders will not be playing in Santa Clara.
O.co Coliseum Situation
Although there has been speculation about a new football stadium in Oakland, there is no tangible basis for this speculation. With the Oakland A's already setting their sights on a new baseball stadium in San Jose, O.co Coliseum (Oakland Coliseum) will continue to struggle financially. For the fiscal year ending June 2011, O.co Coliseum lost in excess of $17 million in day-to-day operations.
Despite public proclamations by politicians, Oakland lacks the bonding capacity to finance a new stadium. Renovations to O.co Coliseum under G4 financing are a possibility but unlikely considering the NFL prefers football-specific stadiums rather than combined baseball-football venues. The Raiders lease at O.co Coliseum will end after the 2013 season, at which time the Raiders will satisfy all twelve factors for relocation that the NFL utilizes.
Perfect Storm for Raiders to Return to Los Angeles
With AEG focused squarely on the San Diego Chargers as the anchor tenant for Farmers Field, we believe that Majestic Realty has begun to zero in on the Oakland Raiders as the anchor tenant for LA Stadium. The AFC West battle for increased franchise valuations and Brand Spanking New Stadiums in Los Angles has begun. May the best stadium developer--and team--win.
Later this week, I explain in layman's terms the estate tax planning situation of the Oakland Raiders. And next week, I detail how to build a Brand Spanking New Stadium without using any upfront money.
References from Footballphds.com
Relocation Fees for Los Angeles (12/2011)
G4 Financing (12/2011)
Our Interview With TouchdownLA.com (12/2011)
Financing Santa Clara Stadium, Part 1 (12/2011)
Financing Santa Clara Stadium, Part 2 (12/2011)
Jaguars Not Coming to LA (11/2011)
Nuts and Bolts of LA Stadium (10/2011)
Majestic Realty and LA Stadium Primer (10/2011)
AEG versus Majestic Realty (06/2011)
CSN: Raiders and Estate Planning (10/2011)
Oakland A’s to San Jose (12/2011)