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31Jan/1215

NFL IN LA: FINANCING A NEW FOOTBALL STADIUM 101, EQUITY FINANCING


By Jaboner Jackson 8 a.m. | Part 2 of 3 | Last week, footballphds.com started a three part series covering the basics of new stadium financing.  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 cannot be found elsewhere.  Since much of our NFL in LA analysis 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 our first article, we covered cash financing, the most straightforward type of stadium financing.  In anticipation of our ongoing financial analyses regarding stadium projects in Los Angeles, San Diego, and Santa Clara, we continue to lay down the foundation today for our Wonderful Readers by focusing on Equity 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.  For clarification on cash financing, please see our example from last week.

 

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 Equity Financing Example

 

We will return to our previously used 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 has only moderate luxury touches, the stadium only costs $100 million.  The FOOTBALLPHDS form a limited liability company, Footballphds Stadium Company ("PhDCo"), to own and finance the stadium.  PhDCo is set up by the FOOTBALLPHDS' legal counsel as follows in Table 1:

 

Table 1: Initial Equity Structure of PhDCo

OWNER

SHARES OWNED

PERCENT OWNED

Rock Mayock

34

34%

Darryl "Doubletap" Jenkins

33

33%

Jaboner Jackson

33

33%

TOTAL

100

100%

 

Fortunately for the FOOTBALLPHDS, they won $100 million in the lottery on New Year's Eve when Rock Mayock went to the 7-11 to buy Doritos and came back with lottery tickets instead.  Unfortunately for the FOOTBALLPHDS, they have already spent $50 million of that money covering short positions on the euro.  Accordingly, they have only $50 million to build the stadium.  The facts of the stadium are:

 

1. $100 million total cost for Footballphds.com Stadium.

 

2. The FOOTBALLPHDS have only $50 million to invest through PhDCo.

 

3. The FOOTBALLPHDS need to find $50 million additional to build Footballphds.com Stadium.   

 

Accordingly, they set about looking for equity investors to help finance the stadium.  PhDCo's Chief Financial Officer, Rock Mayock, goes about creating an equity structure for possible investors.  Mayock proposes the following to the rest of the FOOTBALLPHDS:

 

1. Sell shares in PhDCo to private investors in the amount of $1 million per share.

 

2. Sell 50% of PhDCo to private investors.

 

Everyone agrees that this is a good plan because this will raise the $50 million that PhDCo needs to build the stadium.  But the FOOTBALLPHDS have no idea where to find investors.  Accordingly, they decide that they will hire an investment bank to help them in the process.  Jackson pulls up his Rolodex and calls his former colleagues from the investment banking arena to see who might be interested in working with the FOOTBALLPHDS.  Eventually, the FOOTBALLPHDS decide to hire Goldman Sachs to help them find investors. 

 

Within a few weeks, Goldman Sachs has received commitments from ProFootballSquawk and EZPNLA to buy 25 shares each.  After all the papers are signed, ProFootballSquawk and EZPNLA each own 25% of PhDCo and the FOOTBALLPHDS collectively own 50%. 

 

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 now, 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 Lingerie Football League (LFL) games and Dinoshark conventions are held.  The final equity structure for PhDCo is in Table 2.

 

Table 2: Final Equity Structure of PhDCo

OWNER

SHARES OWNED

PERCENT OWNED

Rock Mayock

17

17%

Darryl "Doubletap" Jenkins

17

17%

Jaboner Jackson

16

16%

ProFootballSquawk

25

25%

EZPNLA

25

25%

TOTAL

100

100%

Advantages of Equity Financing

 

Since Footballphds.com Stadium is only hosting LFL games and Dinoshark conventions, the stadium is not making much money.  In fact, it performs poorly during the first year.  But since PhDCo has no debt, they do not have to worry about paying back any loans.  They do not have serious concerns about going bankrupt at this time.  Mayock, Jenkins, and Jackson are quite content with their vanity stadium project and watching LFL games in a mostly empty stadium during year 1. 

 

PhDCo equity partners, ProFootballSquawk and EZPNLA, are less enamored.  After all, they each paid $25 million to invest in Footballphds.com Stadium.  They want a Return On Investment (ROI).  Since they are equity partners, they decide that they will start to use their marketing muscle to bring in more stadium patrons.  They start promoting the LFL and Dinoshark conventions.  By year 2, the stadium is doing quite well because of the promotion, and the stadium is regularly selling out.  In year 2, the stadium turns a tidy profit.

 

Disadvantages of Equity Financing

 

In year 3, PhDCo receivers two offers from two different companies for Naming Rights on Footballphds.com Stadium.  The first offer is from State Barn Insurance for $50 million over 20 years.  The second offer is from Lagunitas IPA for $50 million over 20 years. 

 

ProFootballSquawk and EZPNLA want to choose State Barn Insurance for the national exposure that the name will bring while Mayock, Jenkins, and Jackson want to choose Lagunitas for the free brews.  A vote is scheduled for Valentine's Day to decide on the naming rights.  In a shrewd move, ProFootballSquawk and EZPNLA convince Jackson to change his mind for State Barn one day before the vote in exchange for helping him out on his alimony payments to his seven ex-wives.  The final vote ends as such:

 

Table 3: Vote on Naming Rights

VOTER

VOTES FOR STATE BARN

VOTES FOR LAGUNITAS

Rock Mayock

--

17

Darryl "Doubletap" Jenkins

--

17

Jaboner Jackson

16

--

ProFootballSquawk

25

--

EZPNLA

25

--

TOTAL

66

34

 

Accordingly, the once powerful and cohesive FOOTBALLPHDS are now split into two factions.  By selling equity, the FOOTBALLPHDS lost management control of PhDCo and Footballphds.com Stadium (which will now be called State Barn Stadium).

 

Real Life Examples of Equity Financing

 

Equity financing is a crucial element to stadium construction.  In the cases of Farmers Field and LA Stadium, both developments will have several investors.  Investors for Farmers Field include AEG, Casey Wasserman, and Magic Johnson, amongst several others.  Investors for LA Stadium include Majestic Realty and the relocating NFL team, amongst others.  In both cases, investors will be exclusively from the private sphere, meaning that the municipalities in which the stadiums are built--Los Angeles and City of Industry respectively--will not own equity positions in the stadiums. 

 

This is in contrast to most other NFL stadiums, which are mostly owned by municipalities, counties, and states.  For example, all three current NFL stadiums in California, Qualcomm Stadium, O.co Coliseum, and Candlestick Park, are owned by public entities.  The City of San Diego owns Qualcomm Stadium, the City of Oakland and Alameda County own O.co Coliseum, and the City of San Francisco and County of San Francisco own Candlestick Park. 

 

Despite being owned privately, Farmers Field and LA Stadium will differ as to whether relocating teams own an equity portion of the stadium.  AEG's current financing plans for Farmers Field do not include a large equity portion for the relocating team, although this element is in flux as part of ongoing negotiations between AEG and the NFL.  Meanwhile, Majestic Realty's current financing plan for LA Stadium is predicated on the team the majority equity position in the stadium. 

 

***

We wrap up our Financing A New Football Stadium 101 course by examining Debt Financing, the most important and complex part of stadium financing in Part 3.  Until then, you can catch up on all of our definitive NFL in LA work here. 


 

 

References:

Financing 101, Cash Financing (01/2012)

Definitive NFL Stadium Guide Version 1.5 (08/2011)

Geek Week and Naming Rights (07/2011)

Photo: Stanton Jack

jaboner@footballphds.com

 

 

 

Comments (15) Trackbacks (0)
  1. I now know!

  2. What % equity will AEG dole out? What % of Staples do they own? That might be a blueprint.

    • If they don’t have to, they won’t. People sell ownership for money and AEG doesn’t need the money. I don’t even think Magic will be an owner anymore. He’s focused on the Dodgers now. He can have control of the Dodgers. With whatever NFL team AEG gets, he would be second fiddle. I also don’t think stadium ownership is that important because like they said most stadiums are city owned. What matters is team ownership. The mayor of San Diego is trying to say that the San Diego should own part of the Chargers if they build a new stadium. He understands the money is with the team not the stadium.

  3. Selling an equity stake in your organizaiton is always tricky because at some point you (the creator of the organization) have to relinquish control to satisfy the other equity holding interests. If AEG was smart they would vie for a controlling equity share of the Chargers/Rams/Raiders/Vikings or whoever comes to Famers Field. That way they get the marjority share of the stadium, year round stadium revnue, NFL team, NFL TV money, merchandising, concession, ticket and parking cash streams.

    • +1 I agree that control for a team is important but I don’t think it’s necessary for Farmers Field. Look at the Lakers and Clippers. They both play in Staples Center but AEG doesn’t have controlling ownership.

  4. Going back to what LA Fan said about Magic turning his attention to the Dodgers instead of the NFL and Farmers Field. I am not sure that is true because the top 10 bids accepted by bankruptcy court for the Dodgers have pushed the purchase price upwards of $2 billion. Using AEG’s rough figures for Farmer’s Field construction cost (just over $1 billion) plus the cost of a team ($900+ million) the NFL is a better investment.

    • The Dodgers will get a $1 billion TV contract because in MLB teams can negotiate their own local contracts. In the NFL, teams can’t do that. So that might not be true.

  5. So, what do the Football Pre Meds think of Rams owner Stan Kroenke bidding on the Dodgers?

  6. You have to think that Kroenke could be setting himself up nicely to own an NFL team and MLB team in Los Angeles. The Rams are a big mystery, Kroenke is the head of the NFL relocation committee to Los Angeles and his ties to AEG are well known. Last but not least, Tim Leiweke was the head of the Denver Nuggets for quite some time. Jeff Fisher is also a former USC great. Stan Kroenke has to be interested in Farmers Field, especially if he’s given the right deal.

  7. Kroenke and Anschutz are tight like that. You know they be pulling some shady shit behind closed doors to make sure Farmers gets built and the Rams come back to LA.


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