ESPN.com - What's the lease you can do?

ESPN.com: Sports Business

Thursday, September 19, 2002
Updated: September 23, 1:08 PM ET
What's the lease you can do?

By Darren Rovell
ESPN.com

When the San Diego Chargers opened the exhibition season at home against the Arizona Cardinals last month, San Diego taxpayers paid about $1.6 million for 30,306 tickets that went unsold.

It was just one of the many ways professional sports teams have forced local municipalities to ensure their profitable financial future in recent years.


	Even with its aging stadiums like the Rose Bowl, Los Angeles remains an attractive option for teams looking to leverage new lease deals.

Call it the flawed economics of what it takes to be a big-league city.

Over the past 15 years, an estimated $20 billion in taxpayer money has been committed to finance sports stadiums in markets across the country. Tens of millions more have been committed to entice teams to remain in their cities, like San Diego's ticket guarantee for the Chargers, despite a lack of quantitative data that shows a bankable return for the investment.

The artificial scarcity of teams created by the four major leagues has served in their teams' best interests, leveraging the opportunity to play in new facilities elsewhere for sweetheart stadium leases that promise guaranteed revenue, yet still allow teams an escape clause. The Chargers and Indianapolis Colts both have such deals now and could look to Los Angeles, the nation's No. 2 television market, in an attempt to pressure their current cities into another, more lopsided deal within the next four seasons.

In 1995, the city of San Diego signed a deal with the Chargers that includes a $78 million expansion of Qualcomm Stadium and requires the city to purchase the difference every time the Chargers fail to sell 60,000 tickets for games through 2007. As the Chargers' fortunes have declined on the field and fewer fans have filled seats in the stands in recent seasons, the city has paid the team more than $25 million for unused tickets, reducing its total earnings from the lease to about $2 million.

Although Chargers officials accurately note that other cities, like Baltimore, have given NFL teams rent-free leases, city officials note that Qualcomm's 15,000-car parking lot sits on land is worth about $200 million. And if that were not enough, the Chargers have the right to seek a new lease elsewhere during an 18-month window if player salaries exceed a threshold tied to the team's revenue.

"Our city is not a model for how it should be done," said Ron Roberts, chairman of the board of supervisors for San Diego County. "The ticket guarantee combined with the escape clause is absolutely ludicrous."

To get out, the Chargers would have to pay 60 percent of the outstanding debt on stadium renovations, which Roberts says comes to about $35 million, a measly amount for a team that could expect to make riches elsewhere.

As part of the Colts' RCA Dome lease negotiated with the city of Indianapolis in 1998, the city has to ensure that the team's revenues meet the league median in two of the last three years of the lease (2004-2006). If the city does not, the Colts would have the option of moving the team beginning with the 2007 season. With analysts predicting the Colts will continue to remain in the bottom third of league revenues, Indianapolis mayor Bart Peterson said payments to the club could exceed $10 million for each of the two years the city chooses to pay.

Because local revenues are what differentiate the bottom line for NFL teams, it's not surprising that the Colts are near the bottom. Despite a $23.7 million luxury suite and club seat renovation in 1999, they play in a 19-year-old facility with the smallest capacity in the league (57,890), and the team's ticket price is below the league average.

Playing in the nation's 25th largest television market also doesn't help the Colts compete with other teams in larger cities in the local broadcasting revenue category. Even before 2004, if the team doesn't exceed targets in either ticket or broadcast revenue, the city will pay the difference.

Most likely
forwarding addresses

A look at the five cities most likely to land a new major-league sports team:

Washington
The nation's capital, without a Major League Baseball team since the Washington Senators moved to Texas after the 1971 season, is a possible destination for the Montreal Expos. But before the city has a chance, the league, which now owns the team, has to deal with the Racketeer Influence and Corrupt Organizations Act (RICO) lawsuit filed by the Expos' former minority owners.

Another issue: Baltimore Orioles owner Peter Angelos could put up a fight over territorial rights.

Los Angeles
The nation's No. 2 television market, which has been without an NFL team since 1995 when the Rams left for St. Louis and the Raiders for Oakland, is the most likely destination for the next NFL team. As of now, the league isn't ready to expand again and L.A. continues to serve as great leverage for cities that want sweetheart deals from their current cities.

If the league really wants to make the move happen, despite the multitude of plans by individual stadiums and the tough political environment, L.A. could have a team in the next five years.

Charlotte
The city is clearly focused on getting an NBA team back, but critics have said that the $231 million current financing plan for a new arena is not enough to lure a new team. Given the NBA's apparent interest after the Hornets moved out, the city is well in the race when the league decides to expand to 30 teams.

Portland
Although Microsoft mogul Paul Allen reportedly is not interested in being an owner, the most populous city (television market: 23) without a Major League Baseball team -- is competing with Washington, D.C., for the Montreal Expos.

The Triple-A Portland Beavers play at PGE Park, which can be expanded to 21,000 seats. The state legislature never voted on funding for a major-league ballpark last year.

Las Vegas
The fastest growing city in the country has seen its population grow by a factor of 30 since 1940. But with the gambling industry in town, and especially with in-state events now on the board, it is unlike that a sports league would allow a team to move to Sin City.

The NBA is nervous enough with Sacramento Kings owners Joe and Gavin Maloof owning The Palms, a $265 million, 42-story resort in town.

"It's in the back of every city official's mind," Peterson said. "If we don't take care of the Colts, someone or some other city will."

Despite reports that Colts owner Jim Irsay would entertain offers from Los Angeles, Peterson said the city controls the team's destiny.

"The bottom line is that as long as we do what we have the option to do, the lease runs through 2013," Peterson said. "That means that there is nothing in this lease that is not within our control. Unlike some other cities, we are on the right page with the team and if the team feels there's a better deal that would be helpful, we could be willing to renegotiate."

Irsay did not return calls seeking comment to ESPN.com, but has denied that he has had serious discussions with officials in Los Angeles.

Peterson said he believes keeping the Colts would be a smart investment for the city since "the intangible benefit of having an NFL team in town is so significant that it will probably dwarf what you might be able to clearly establish in an economic study.

"When the team is really on a roll, it galvanizes the city and unifies it in ways that is hard for almost anything else to do," Peterson said. "Having sports teams enables us to compete with other cities for the top employees in the business world and, in that way, it's just one piece of a large mosaic that can improve the quality of life here."

Washington State University sports economist Rodney Fort, who has written three books on the economics of sports, says experts are only beginning to study the psychological benefits of having a sports team in a city. Despite cities supporting teams with hundreds of millions of dollars in public stadium subsidies, Fort says the psychological benefit is likely in the range of "tens of millions of dollars."

But a complete dollar-for-dollar analysis by a city supporting sports teams is still tough to determine, said Mark Fabiani, special counsel to Chargers president Dean Spanos and formerly deputy mayor of Los Angeles from 1989-93.

"The total economic returns are hard to quantify, but they cannot be discounted," Fabiani said. "Up the road in Los Angeles, the Lakers have brought the community together. It's what the janitor, valet parker, lawyer and venture capitalist can all talk about when they are in an elevator together. Very few things in society could bring people together like a local sports team can."

Although team officials often claim the local economy receives a boost from having a sports team in town, sports economists like Fort said the revenue generated by teams are merely displacing other dollars that would be spent on the local economy.

"Show me the data that says that if the Canucks leave Vancouver there is less dollars being spent in the community," Fort said. "Maybe people won't be as happy spending that money, but they'll still spend it."

But organizing groups in Washington, D.C., and Portland, Ore., both of which are hoping to woo the Montreal Expos to their city, say there are benefits to be had in financing the needs of a professional sports team.

"Academics have made a cottage industry of debating the returns," said Fabiani, whose team reportedly has failed to sell a third of its 113 luxury suites this season. "But all you have to do is look at the cities that have lost teams and several years later, without much exception, there are cities willing to spend hundreds of millions of dollars to get another team there. Why is it that Houston said to the Oilers, 'Don't let the door hit you on the way out!' and then soon after they were paying millions to get an expansion team."

Vancouver mayor Philip Owen said the Canucks have created more business in Vancouver, from manufacturers of napkins and chocolate to attracting more business for lawyers and accountants.

"I find it hard to believe that the same guy that spends $40 on a hockey ticket, would be spending the same $40 on groceries if he didn't go to that game," Owen said.

Having already lost the Grizzlies to Memphis last year, Owen said he's comforted by the appearance that U.S. taxpayers are getting tired of footing the bill for public subsidies. Combine the weakness of the Canadian dollar with the city's inability to pass an income tax for visiting professional athletes and the failure to create a sports lottery, and Vancouver can't compete with U.S. cities that easily impose ticket and hotel taxes.

	“	It's what the janitor, valet parker, lawyer and venture capitalist can all talk about when they are in an elevator together. Very few things in society could bring people together like a local sports team can. ”
		— Chargers special counsel Mark Fabiani on the psychological benefits of having a sports team

"The money that these cities have been giving is so atrocious," Owen said. "Not only are people getting tired of the economics of it all, but some of the money has to do with corporate support and, in the age of corporate fraud, the days of agreeing to deals that don't make much sense could be over."

While Owen is relying on the economic downturn to keep cities from approaching his NHL team, Darryl Dunn, general manager of the Rose Bowl, is counting on prospective NFL cities balking at funding a new $500 stadium. The Rose Bowl is currently working with the NFL to land a long-term tenant in Pasadena, should a team wish to move.

While Dunn says making the historic stadium NFL-ready would require hundreds of millions of dollars in renovations, including more than tripling the current 46 luxury suites and building 10,000 club seats, Dunn said he believes a new owner could responsibly finance the renovations himself.

"Public sentiment across the country is that cities are more averse to funding sports teams," Dunn said. "Nothing against smaller cities, but the economic return is going to be much smaller there than in Los Angeles. With no public subsidy, you can do very well in this market."

Public dollars were available for Ray Wooldridge, owner of the NBA's Hornets, who moved his team from Charlotte to New Orleans after the 2001-02 season. But when Charlotte citizens wouldn't promise the Hornets a new arena, Wooldridge and co-owner George Shinn turned to New Orleans, where the city promised to make $15 million worth of renovations, including more luxury suites, to the 18,500-seat New Orleans Arena. The city agreed to finance a permanent practice facility at the price of $6.5 million, to provide $130,000 to renovate the Alario Center, the team's temporary practice facility, and signed a 10-year lease for the Arena, with two five-year options that the team has the right to exercise.

"The NBA is a proven successful enterprise," said Wooldridge, who noted that a recent study of New Orleans found the team could bring $100 million annually to the local economy. "If one city doesn't want to support a team, another city looks at that team and says, 'We want to grow; we want to be affiliated with a major professional sports franchise."

Still, the New Orleans deal is good enough that Wooldridge, who said he lost at least $20 million in his last year in Charlotte, figures he can turn a profit this year.

As soon as the Hornets left Charlotte, its city council reaffirmed a $231 million financing model for a downtown arena, and potential owners -- including Boston businessman Steve Belkin and former Celtics great Larry Bird -- emerged. NBA deputy commissioner Russ Granik and consultant John Moag met Friday with Charlotte city manager Pam Syfert and her negotiating team to discuss long-term lease arrangements in the city, according to city councilwoman Lynn Wheeler.

Perhaps for the first time since the latest stadium boom began in the early '90s, cities are looking for a return on their investment.

Over the past decade, the city of Cleveland has financed $617 million for the construction of stadiums for the Browns ($287 million for Cleveland Browns Stadium), Indians ($180 million for Jacobs Field) and Cavaliers ($150 million for Gund Arena), plus $145 million in additional costs on infrastructure related to the Gateway District, which includes Jacobs Field and Gund Arena.

"Our sports teams have to be more successful given the investing we've done," Cleveland mayor Jane Campbell said. "We're suffering because they are suffering."

NHL struggling
for leverage

Restricting the amount of franchises has served sports owners well in leveraging sweetheart deals, but that balance has been upset in the NHL because of the number of teams that are currently on the market.

At least three teams -- the Dallas Stars, Buffalo Sabres and Vancouver Canucks -- are either selling or rumored to be looking for a new owner. With the Collective Bargaining Agreement coming to an end in 2004, few cities and perhaps fewer potential owners would be interested in taking on the burden of a team with the loom of a work stoppage.

Tom Hicks, who owns both the Stars and Texas Rangers, has put his hockey team on the block, though major interest in the team has not emerged as yet. Dallas Mavericks owner Mark Cuban has said he doesn't want the team, and computer magnate and Texas resident Michael Dell, who was recently named the 11th richest American by Forbes Magazine, has no interest either.

"Michael is not buying a sports team," Dell spokesperson Anne Miano said.

-- Darren Rovell

The Cavs haven't made the playoffs since the 1997-98 season. The Browns haven't had winning seasons in each of their first three years, after the city successfully wooed an expansion team when the old Cleveland Browns left for Baltimore in 1995.

The Indians slashed their payroll by $30 million this season and will finish the 2002 season with a sub-.500 winning percentage for the first time since 1993.

"We were anticipating receiving $2 million more from the Indians than we will take in this year," Campbell said. "Not only is attendance down and we'll lose the ticket tax money, but we'll lose about $600,000 from the 2 percent we get on all wages paid because the team cut its payroll from $90 million to $60 million."

Campbell said cities that financially support major-league sports teams can no longer afford to finance stadiums and give sweetheart leases to privately held teams, then watch those teams be mismanaged.

"One of the real challenges is how we make sure cities that have made these incredible investments really become partners in the effort to have successful teams," Campbell said. "The investments we have made building stadiums and providing financial support have been made at a considerable sacrifice and we think we should have a place at the table as far as what decisions our teams are making."

Other public officials also are starting to think about the responsibility sports teams have to cities after a huge public subsidy is financed. This June, at the Conference of Mayors, where mayors of cities with populations of more than 50,000 meet to discuss issues, Campbell said there was an informal discussion about "how to resolve the issue of cities putting up money and then having no input."

Although it seems like Campbell and others are finally looking to make the means justify the ends, Fort said he doesn't see conditions changing -- at least in the NFL. There are still too many potential owners and too many potential cities that would love to have a team.

"If the league offered a 33rd team there would be at least 10 to 15 cities bidding for it, offering the same type of deals cities offer today," Fort said.

Darren Rovell, who covers sports business for ESPN.com, can be reached at darren.rovell@espnpub.com