When sports team owners are considering the possibility of moving stadiums, there are a lot of different factors to take into account. In many cases, teams will be staying in the same general area in order to preserve their loyal fan base, but some have moved further afield in search of less expensive locations and rents. But how can owners determine ahead of time whether such a move will be financially prudent? One of the most trusted and accurate methods is to employ an independent valuation firm to provide documented support for moving to a new stadium.
Calculation methods
What does a firm like Appraisal Economics use to determine the worth of a potential stadium lease? Three different approaches, as it turns out, which, when used in tandem, offer a more complete picture of the financial risks and benefits of everything from leasing a new stadium to acquiring a player. The Income Approach is used most often with assets that make a direct and immediate profit; the Market Approach is used for marketable tangible assets and some specific intangibles; the Cost Approach covers assets that cannot be assigned an obvious price point. These methods can each be employed based on the specific asset being valued so that the resulting conclusions are more precise.
While some comparisons can be made using statistics from recent stadium transactions in other cities, a lot of the analysis will be made based on local data, as population and disposable income levels in different areas can vary widely. Our company will do a thorough examination of additional income that the new venue and its team would generate, including concessions, corporate suites, tickets, and parking, as well as naming rights and signage income. Other advantages that a new stadium brings include higher-profile players and naming rights. These would be balanced out by any additional expenditures to get a clear picture of the true value of a new lease.
A Case Study
A new stadium was under construction and scheduled to be completed by the start of the Major League Baseball season. The team had been dissatisfied with the existing venue for a number of years as it was a multi-purpose venue shared by a local NFL football team and lacked the intimate setting that characterized most of the more recently constructed ballparks. Moreover, from an economic standpoint, the old lease agreement provided rights to many of the revenue streams derived from baseball activities such as concessions, signage rights and suite rentals, to the stadium owner instead of the team.
The cost of the new stadium was underwritten by the state and legislation was approved for the construction of a new specific-use ballpark. As groundbreaking and construction began, the original cost estimate continued to be modified and based on revised engineering and other analyses, an additional $50 million was added to the stadium cost. The team’s portion was about 20 percent of the total, with public funding picking up the remainder. Additional scope changes included a Skybox Club premium priced area, a special children’s area, and closed-circuit television, to enhance the overall baseball fan experience at the ballpark. The team expected to garner revenue from certain activities in the new stadium for which it did not have any such rights under the old stadium.
We estimated the additional operating income as the difference between the actual operating income in the existing stadium and that projected in the new stadium. We computed total revenue and total cash operating expenses (excluding player salaries, as they are discretionary) in the two venues, then capitalized this difference into a value. Finally, we deducted the team’s share of stadium financing costs, equal to the sum of the team’s actual debt financing associated with the new stadium plus the present value of unfunded stadium costs, to conclude a value of the new stadium rights. A positive value less any lease rental expense indicates the lease value for the new stadium.
For more information on our sports team valuations, contact us today at Appraisal Economics!