Holes in Industry NFL stadium plan
Experts find issues with developer's estimates and financing of project
It is a 600-acre blank canvas in the City of Industry, nestled east of Los Angeles and north of Orange County, for the league to paint the perfect picture of what the NFL experience should look like.
The colorful schematics illustrate surfers in wave pools, gondolas in which fans fly over the site, concert stages, an "NFL Experience" area with punt, pass and kick competitions, a BMX course, and a Harley Davidson Cafe with an area for fans to show off their classic bikes and cars.
It looks almost too good to be true, which is the prevailing feeling of some who have seen and heard the proposal since it was first announced April 17, 2008.
Next week will mark the two-year anniversary of the site receiving an environmental exemption from then-California Gov. Arnold Schwarzenegger, which was supposed to clear the way for construction to begin. Yet, heading into the fourth year of the stadium's pursuit of an NFL team, there has been no movement.
So what's wrong? How could a plan that looks so good on paper apparently look so bad to NFL teams in desperate need of a new stadium?
SHOW ME THE MONEY
There is a simple, one-word answer to why Los Angeles has been without an NFL team since 1995: financing.
Virtually every new sports venue in the country receives some form of public financing. California historically has been unwilling to provide public financing, so Los Angeles has had to find a way to privately finance a stadium. Since the Raiders and Rams left Los Angeles 16 years ago, 22 NFL stadiums have opened and five others have undergone major renovations. Approximately 50 percent of the funds used on these stadiums were provided by public sources, according to Conventions, Sports & Leisure International.
"The biggest hurdle [in Los Angeles] has always been the financing of the stadium," said Eric Grubman, executive vice president of the NFL. "That has been a tough task, which has probably gotten tougher over the last five years. The reason it's gotten tougher is stadiums have gotten more expensive."
There has been some confusion recently as to what the financing plan is with the project in Industry, which is being spearheaded by Majestic Realty Co. president Ed Roski and vice president John Semcken.
The original plan, from the day in 2008 that Roski announced his intention to build a 75,000-seat open-air stadium, was for Roski to own a full or majority share of a team.
Those plans changed after Anschutz Entertainment Group, owned by Roski's friend Philip Anschutz, announced a competing proposal for Farmers Field, a 70,000-seat retractable-roof stadium in downtown Los Angeles that would be attached to the Los Angeles Convention Center and adjacent to the AEG-owned-and-operated Staples Center and L.A. Live. (Disclosure: ESPN LA offices are located at L.A. Live.)
Roski helped build Staples Center with Anschutz, and owns a piece of the Lakers and Kings with him.
AEG's financial plan calls for the company to own only a minority interest in the NFL team that moves into Farmers Field. AEG president and CEO Tim Leiweke said Anschutz would like to buy a third of the team, which is the same percentage he owns of the Lakers.
Selling a minority interest in the 30 percent range might not be appealing to NFL owners seeking to relocate to Los Angeles, but it's certainly better than selling all or a majority share of the team, as Roski had been proposing.
Roski adjusted his plan to remain in the game and now is seeking a similar percentage interest in a prospective team. Where the two plans differ, and ultimately go in different directions from a financial feasibility perspective for NFL owners, is in the fact that Roski does not want to own or operate the stadium if he is not the majority owner. In fact, he likely would hand over the 600-acre lot to the majority owners of the NFL team.
Semcken explained the Roski financial plan in an interview that took place in late September. A Majestic official working on the stadium plan confirmed the financial plan was still in place as of Wednesday night and noted that all ownership scenarios, minority or majority, were still in play as well.
"We are going to buy a percentage of a team, period," Semcken said. "There are two transactions. There's a stadium transaction and a team transaction, and they are not related. We are going to buy a percentage of a team that wants to move to Los Angeles because they like our stadium. One of our prerequisites is we want to be one of the owners. We think it's important to have a local owner. All we've asked for is a meaningful piece. Thirty percent is the figure we've generally thrown out there. Then, together with the team, we will finance a stadium, and the stadium ownership will be the same as the team ownership by the same percentage."
As the majority owner of the stadium in this proposal, the team would have to finance the stadium?
"No, the team pays nothing for the stadium," Semcken said. "The stadium pays for the stadium."
Assuming an NFL owner is willing to sell 30 percent of his team to Roski at market rate and own the majority of the stadium Roski is proposing for nothing, how would the stadium be financed?
"In rough terms, we know our stadium and our headquarters facilities are going to cost $800 million together, not separately. The all-in cost for both will be $800 million," Semcken said. "So we'll sell personal seat licenses for somewhere around $300 million; that gets you down to $500 million. Then the new NFL financing program will make $150 million available. Now we're at $350 million. Then we go to the bank and figure out what it's going to take to get a $350 million loan.
"If our interest rate is 7 percent for 30 years, just like a mortgage on your house, the payment is $28 million a year; that's the debt service. If the interest rate goes up, then our debt service will go up. When we get our naming rights deal, it will be between $25 million and $30 million per year, maybe more. So we're probably going to collect more than we need in debt service. All of the other revenues after the game day expenses and operational expenses for the stadium, all of the sponsorship dollars will now go to the team, which again is broken up by percentages. If we own 30 percent, we would get 30 percent of those revenues."
Much like the stadium's schematics, it all looks good, until you start talking to people in the league and those who finance stadiums and arenas.
WHICH CAME FIRST, THE CHICKEN OR THE EGG?
Perhaps the biggest hole in Roski's plan, before you even start inspecting the financing, is the timeline for when those financing conversations would take place. Semcken said serious financing conversations regarding the stadium, such as a naming rights deal and sponsorships, would not take place until a team moved to Los Angeles because "there's not going to be anybody to finance a stadium until you have a team, so it's a waste of our time."
“The problem with that logic is that it is unlikely any team would move to Los Angeles unless the financing of a new stadium was secure, and the league probably would not approve such a move without that guarantee. As one league official said, "We can't afford to fail again in Los Angeles. When we go back, we have to get it right."
There is a chicken-or-the-egg problem with [Roski's] plan because no team would agree to move for something that is uncertain and speculative. If you're sort of backing into numbers that aren't based on experience elsewhere, I would think most teams aren't going to buy in to it to begin with because it leaves them ultimately responsible if it doesn't materialize, especially if they own a majority of the stadium.” -- John Gillespie, expert on stadium financing, regarding Majestic Realty's City of Industry NFL stadium plan
Another team executive who has spoken with both Los Angeles stadium groups said it would be impossible for a team to relocate unless the financing of a new stadium was nailed down and there was some kind of completion guarantee on the stadium. "You can't have a situation where you move to Los Angeles and are stuck playing at the Coliseum or Rose Bowl for 10 years because your financing plan fell apart," the executive said. "No team's going to take that risk. The league's not going to take that risk."
John Gillespie, now retired, was an investment banker for 18 years with Lehman Brothers, Morgan Stanley and Bear Stearns, and was a sought-after adviser and financier of major sports facilities and franchises including Camden Yards, The Ballpark in Arlington, Pepsi Center, Miller Park and Staples Center. He worked on many projects that came to fruition and others that didn't, such as the Los Angeles Coliseum renovation attempt and a new ballpark for the Boston Red Sox.
"There is a chicken-or-the-egg problem with [Roski's] plan because no team would agree to move for something that is uncertain and speculative," Gillespie said. "If you're sort of backing into numbers that aren't based on experience elsewhere, I would think most teams aren't going to buy in to it to begin with because it leaves them ultimately responsible if it doesn't materialize, especially if they own a majority of the stadium."
Gillespie noted that with Roski's plan, any team that moved there would assume the risk of financing and building the stadium as the majority owner, whereas in downtown, AEG would assume all that risk because it would own and operate the stadium while the team shared in the revenues, similar to AEG's deal at Staples Center with the Los Angeles Lakers.
It was just one of the many problems Gillespie and others had with Roski's plan.
THE NUMBERS DON'T ADD UP
Economists interviewed for this story take issue with Roski's assertion that his stadium and team headquarters facilities would cost a combined $800 million. That is the figure Roski used when he announced his project in early 2008 and the figure he is sticking with now if the project were to break ground in 2012. A Majestic spokesperson also said the figure could end up being less than $800 million.
"I don't know how they would build all that for $800 million today," Gillespie said. "As time goes on, you need to factor in inflation into your budget."
Two new stadiums have opened in the NFL since 2008, and the construction cost of each was more than $1 billion, with Cowboys Stadium in Arlington, Texas, costing $1.3 billion, and MetLife Stadium in New Jersey costing $1.6 billion. The cost of the proposed Minnesota Vikings stadium in Arden Hills is $1.1 billion, and the cost of the proposed San Francisco 49ers stadium in Santa Clara is $1 billion.
Semcken said Roski's stadium will cost less because of the unique topography of the site. By building the stadium into the ground, rather than above the ground, construction costs and materials needed, such as steel, will be less relative to other stadiums of similar size and scope, he said.
After reviewing the project, Victor Matheson, a sports economist and an associate professor of economics at the College of the Holy Cross in Worcester, Mass., is unconvinced.
"Majestic's numbers do not add up," Matheson said. "$800 million would make the stadium half the price of [MetLife Stadium]. If the NFL is moving back to L.A., it wants to move in style. If the NFL wants to move into a low-end facility, it already has options in the Coliseum or Rose Bowl. I figure they are short a couple hundred million dollars there."
“Comparatively, the projected cost of Farmers Field is $1.2 billion. According to a study by Conventions, Sports & Leisure International, the consulting firm that analyzed the Farmers Field deal for Los Angeles city officials, AEG's financing plan includes $150 million from personal seat licenses, $150 million from the NFL's financing program, a $450 million investment from Anschutz and a $450 million bank loan. At a 7.5 percent interest rate over 30 years, the annual debt service on that loan would be $38.1 million and paid for from the stadium operating revenue, according to AEG officials.
I'd put Majestic's financing plan somewhere between 'optimistic' and 'pie in the sky.' No stadium in history has gotten $28 million a year in naming rights money, and $300 million for seat licenses sound like a reach as well, especially in this economy.” -- Neil deMause, author who has testified before Congress on the politics of financing of sports stadiums
The $150 million difference in personal seat license projections from Industry and Farmers Field raised the eyebrows of a couple of economists, who said either Roski believes he will be able to sell twice as many seat licenses in Industry or he did not factor in losing half that revenue to taxes since PSLs are taxable. Dan Beckerman, chief operating officer and chief financial officer of AEG, said CSL's PSL figure of $150 million is the net after income taxes, meaning they are projecting to earn about $300 million gross.
"You would probably be more likely to see Eric Dickerson suit back up for L.A. than see a stadium pay for itself solely with PSLs, naming rights and the NFL $150 million payment," Matheson said.
There also is a problem with the naming rights projection of $25 million to $30 million per year over 30 years. AEG was able to sell the naming rights for its stadium to Farmers Insurance for $700 million over 30 years. It is the largest naming rights deal in sports and pays about $23 million annually. At the time of the deal, Cowboys Stadium and the new Meadowlands stadium had been unable to sell naming rights despite already being in use. The Meadowlands has since changed its name to MetLife Stadium after completing a 25-year deal worth $17 million to $20 million annually with MetLife. Cowboys Stadium is still seeking a naming rights deal and reportedly is looking for a 30-year deal averaging $30 million per year, which the Meadowlands, the only NFL stadium that is home to two teams, was hoping for before lowering its expectations.
"The assertion that [Roski's group] will get $25-30 million per year in naming rights is high," said Andrew Zimbalist, a professor of economics at Smith College and the author of "Unpaid Professionals: Commercialism and Conflict in Big-Time College Sports."
"The naming rights market is trending down, and some stadiums can't even get naming rights deals at all. The downtown Los Angeles project and the New York Giants and Jets stadiums got naming rights deals for about $20 million per year, but are you going to get more than that in the City of Industry? It's not realistic."
"I'd put Majestic's financing plan somewhere between 'optimistic' and 'pie in the sky,'" said Neil deMause, who co-wrote the book "Field of Schemes: How the Great Stadium Swindle Turns Public Money Into Private Profit" and has testified before Congress on the politics and financing of sports stadiums. "No stadium in history has gotten $28 million a year in naming rights money, and $300 million for seat licenses sounds like a reach as well, especially in this economy."
AEG's naming rights deal does not service the debt of the stadium. Under the Industry plan, the naming rights would service the debt.
"The one-time PSL fee component goes towards stadium construction, but on an ongoing basis, there will be club seat fees, luxury suite fees, sponsorship revenue and naming rights revenue, and in our conversations with various teams that we've been talking to, the teams participate in all of those revenue streams in a very meaningful way," Beckerman said. "A significant piece of the naming rights deal will go to the team. They will also get a significant share of club seats, suites and sponsorships. They will also play in a state-of-the-art stadium in downtown Los Angeles where they can sell their own tickets and sell their own team-specific sponsorships. In the case of the teams that we're talking to, they will make significantly more than they're currently making in their current situation."
Conventions, Sports & Leisure International estimates the annual operating income for an NFL team at Farmers Field would be $53 million, one of the highest in the league, which would be more than double what Forbes magazine's estimate is for the San Diego Chargers ($24.7 million), the team most commonly linked to a move to Los Angeles.
I'LL TAKE CARE OF THAT
When Roski and Semcken have talked about the financing of their stadium, they often have cited Staples Center as an example. The biggest problem with that comparison is that arenas and stadiums no longer are financed the way Staples Center was in 1999.
"The landscape has changed a lot since Staples Center," said Gillespie, who was a Bear Stearns managing director in charge of the firm's sports financing group when he worked on the Staples Center financing. "You had to have guarantees behind certain things. You had to have sold a certain amount of sponsors and have the naming rights in place. On the luxury suite and club seat level, you had to hit a certain threshold level and provide guarantees. You also had to have some kind of completion bond or guarantee, which basically gives the lender comfort that the project is going to be completed, and those are not available anymore. A lot of things aren't available anymore. Banks are not lending a lot. They are pretty risk-averse. It's just a lot harder to get when you have much higher cost for these facilities; the cost-overrun figure is going to be a lot higher.
"So now banks look to a person or company that is credit-worthy and has the financial wherewithal to stand behind and ensure the project will be completed. You now need someone with some corporate standing or a large amount of money that will put equity into the project as well and come up with the shortfall if it's necessary, if there are cost overruns or things like that."
No one is currently putting any equity into Roski's project, and no one is guaranteeing he or she will make up the shortfall if necessary.
At the very least, the majority owner of the team and stadium would need to put in a good chunk of his or her own money to get the financing process started.
"Banks are not going to finance 100 percent of your house based on what you say your income is going to be in the future," Gillespie said. "You got to have some equity put into it, and I'm not seeing any equity in this plan. It's all off of revenues in the facility."
Roski partnered with Anschutz to develop Staples Center in 1999, but his company is not in the arena, stadium or entertainment business. Majestic is a commercial real estate developer of master-planned business parks, industrial parks, warehouses, distribution facilities, office buildings and retail centers.
The location of the venue, the demographics of the population surrounding it, the existing facilities in the area and the number of events that will be held in the venue also are considerations.
"If you have a place that is a proven entertainment location with certain amenities and facilities already there, and people are used to coming there and there is transportation access and the location is one where you have better demographics, with wealthy people and businesses that would buy suites and club seats, that can be the difference between a facility that is financially feasible and one that isn't," Gillespie said. "It's hard to conceive of that being realistic for a football stadium that only has 10 games a year in Industry. Why would someone want to go to a hotel there? Why would someone want to go to dinner or the movies there? If you're putting this in the middle of an industrial area, it's hard to conceive of that being successful. You're losing most of the Westside and the Valley because of the location."
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Semcken declined to get into specifics when contacted Wednesday.
"AEG has more ways to earn revenue from the existence of the stadium than does Majestic Realty, given L.A. Live," said Mark Rosentraub, a University of Michigan sports management professor who has consulted on stadium projects. "That changes the cost elements and returns, and for that reason, AEG can offer things that the City of Industry will not be able to provide. There are difficulties with every project and the proposal for the Convention Center [expansion] will be a challenge, but AEG has met each of their challenges in the past, and as a result I am confident they could do exactly as they have proposed."
That same confidence does not exist in the City of Industry, where there are still major questions with Roski's stadium financing plan and disputed projections for the stadium cost, seat license revenue and naming rights deal. Not to mention an insistence that a team move to the site before a financing plan can begin to take shape.
"All of this accounts for why no one is taking this deal after so many years. There is significant uncertainty," Gillespie said. "There's a reason you have a project that's been out there with a vague financial structure that hasn't had any takers. Uncertainty is what keeps investors from being willing to finance it and teams from being willing to commit to it."
Arash Markazi is a columnist and reporter for ESPNLA.com.