By Jaboner Jackson 8 a.m. | As our Wonderful Readers are well aware, most of our trailblazing and definitive NFL in LA articles pertain to financing issues regarding new stadium construction. Since financing is the only aspect of new stadium development that matters, we follow the money trail to determine which stadiums will and will not get built and which teams are candidates for relocation. Much of our financial analysis is geared towards NFL and stadium executives, who regularly read footballphds.com for our definitive financial analysis, the sophistication of which simply cannot be found elsewhere. Since much of our NFL in LA is of a technical nature, many of our Wonderful Readers have asked me to gear a series of articles towards the layperson to elucidate some of the basic tenets of stadium financing. In anticipation of our ongoing financial analyses regarding stadium projects in Los Angeles, San Diego, and Santa Clara, we will lay down the foundation for our Wonderful Readers with Financing New Football Stadiums 101: Cash Financing.
Types of Financing
There are three general ways to finance a new football stadium. These three methods are cash financing, equity financing, and debt financing. Usually, all three methods are available and used for financing new stadiums.
Cash financing refers to putting cash into a project. This would be analogous to paying all cash to buy a house.
Equity financing refers to selling part of the ownership stake in the stadium and using these proceeds to fund the stadium. This would be analogous to asking a rich uncle to pay for half of a house in exchange for owning half of the house.
Debt financing refers to taking out a loan or some other form of debt to build a stadium. This would be analogous to taking out a mortgage for buying a house.
Fictional Cash Financing Example
For elucidation, we will employ an example for a fictional Footballphds.com Stadium. Three individuals, Rock Mayock, Darryl "Doubletap" Jenkins, and Jaboner Jackson, wish to build a football stadium in Long Beach, CA, where two of the three FOOTBALLPHDS grew up. They would like to revitalize their hometown by building a 15,000 person stadium on the beach. Since the stadium only seats 15,000 people and does not have frills or luxuries, the stadium only costs $100 million.
Thankfully for the FOOTBALLPHDS, they have $100 million because they auspiciously won the lottery on New Year's Eve when Rock Mayock went to the 7-11 to buy soda and came back with lottery tickets instead. Accordingly, they form a limited liability company, Footballphds Stadium Company, LLC (PhDCo), to own and finance the stadium. The facts of the stadium are:
1. $100 million total cost for Footballphds.com Stadium.
2. The FOOTBALLPHDS have $100 million to invest through PhDCo.
Accordingly, the FOOTBALLPHDS decide that they are ready to build their 15,000 stadium on the beach of Long Beach, CA. Since they have the money, PhDCo writes checks to the architect, construction company, and City of Long Beach, amongst others, to build the stadium. And three years later, the 15,000 capacity Footballphds.com Stadium sits on the beautiful beach of Long Beach, where flag football games and Leprechaun In The Hood conventions are held.
Advantages of Cash Financing
Since the Footballphds.com Stadium is only hosting local flag football games and the occasional Leprechaun In the Hood convention, the stadium is not making much money. In fact, in the first year it is performing quite poorly. But since the FOOTBALLPHDS financed Footballphds.com stadium with cash, they do not have to worry about paying back any loans. Accordingly, they can humor themselves with their vanity stadium project and not have serious concerns about going bankrupt.
Disadvantages of Cash Financing
It turns out that after a slow start, flag football games and Leprechaun In The Hood conventions do brisk business in year two for Footballphds.com Stadium. By the end of the second year of operation, Footballphds.com Stadium turns a tidy profit. Since the stadium was financed 100% with cash, there are no tax shields. Specifically, there is no interest expense. Accordingly, the FOOTBALLPHDS pay a large tax bill on the tidy profit, which makes all of their ex-wives angry because the huge tax bill makes the FOOTBALLPHDS late on their alimony payments.
Real Life Examples of Cash Financing
No football stadiums have been financed with 100% cash. And no football stadiums will ever be financed with 100% cash, no matter how wealthy the potential stadium developer is.
And this is an important point to remember. Many in the popular press cite the "Bank of Anschutz" when referring to financing AEG's planned downtown Los Angeles football stadium, Farmers Field. People erroneously refer to the "Bank of Anschutz" to mean that no matter how expensive Farmers Field will be, Philip Anschutz, the multibillionaire owner of AEG, can simply write a check to cover the cost. Even AEG itself has been guilty of propagating such an idea. Tim Leiweke, the President of AEG, said this summer that AEG has "got a guy [Anschutz] willing to write a check for a billion."
But such a statement is erroneous. There is no "Bank of Anschutz" for financing Farmers Field. Anschutz will not write a check for $1 billion. Rather, AEG will utilize a combination of cash, debt, and equity financing for Farmers Field, a situation we will explore more fully in our other lessons on Financing New Football Stadiums 101.
In our next financing lesson, we will review equity financing with real-life examples before diving deeply into debt financing. Meanwhile, if you missed any of our definitive NFL in LA work, you can always catch up here.
Photo: Edwin Jimenez, Team Photographer