I was struck recently by the cost of sports stadiums. For example, a new Mets stadium in New York City is to cost about $800 million, or about $15000/seat. The new football stadium for Minnesota's Gophers is to cost $250 million or more, or about $5000/seat. Let's consider whether these stadia meet a P/E ratio giggle test.
For the uninitiated, the P/E ratio is the price to earnings ratio--cost to profits, roughly speaking, and is a wonderful indicator of whether an investment is good or not. For an established business, a P/E ratio of below 10 is good, and above 20 is bad. The stock market is around 20 at this point--word to the wise.
Gophers first. They play six games at home per year, and the approximate share of the take that could be given for the stadium is 30%--40% goes to the visiting team, and some needs to fund the home team--though they don't have travel costs. Assuming $50/seat (probably about twice the actual amount), each game could result in about $750,000 of stadium revenues for a total of $4.5 million annually. P/E ratio: about 55. Ouch.
Now the Mets. Same revenue per game, but 81 home games per year. Annual take for the stadium: $60 million. P/E ratio: 13. Not too bad--at least if the stadium gets that cut. Somehow I doubt this is the reality.
Long & short of it; even if sports teams paid 30% of the gate in rent, public funding of them doesn't make much sense.
Postscript: when Wrigley Field was built 93 years ago, it cost approximately $250,000, or about $5 million in today's dollars to build a stadium with 14,000 seats. Like today's stadiums, it was built with brick.
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11 comments:
I haven't studied this enough but it seems like the owners always come out ahead and the city/state ends up footing the bill. So in that sense, it's a win for the owners and lost for the taxpayers.
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Sorry Bert. Here's how: http://help.blogger.com/bin/answer.py?answer=1203
Might consider it.
Mercy Now, take a look at the link as well; it turns out that apparently all taxpayers, including the poor, are increasingly funding the entertainment of the rich. Yikes.
From your link: "In fact, every outdoor stadium and indoor arena in the metropolitan area either will be replaced or renovated - with a good deal of the money coming from taxpayers, no matter what the teams and elected officials say."
Oh and why did a big chunk of federal money go into the Big Dig, initially estimated @ $1.5 billion but ended up @ $12 billion and it still has problem? The only thing I know is you and I are in the wrong business.
Quite right, we're in the wrong business....but on the other hand, I'd rather be able to sleep at night after having done a good job, than to toss & turn after having stolen a few billion from government.
One way to also look at this is in terms of net present value. A typical weighted average cost of capital, or discount rate, for most going concerns that mix equity and debt for funding is conveniently around 10%. This means that if you take the cost per seat and divide it by 10 you get the annual revenue required to make the project a break even.
Take the Mets stadium. In order to make $15000 per seat over the lifetime of the project, you need $1500 per year over 81 games. That's about twenty bucks in total revenue per seat per game--not awful. Even better would be to figure out the projected life of the stadium and do the math from there, but it won't be that different.
Now, the Gopher stadium. Five grand per seat over six games is a ludicrous eight hundred bucks PER GAME per seat. A flat impossibility.
Conclusion? The Mets stadium seems to make some kind of sense; the Gopher's not at all.
Oops. Five grand per seat, divided by ten. Eighty bucks per seat per game. Still, for college sports, unlikely.
Seems like "net present value" is corresponding quite well with a P/E of about 10, no?
I still doubt that stadia get anything close to 30% of the gate, though. Thanks for the business lesson!
If you throw in parking, concessions, advertising, and other revenue streams, these stadiums are not bad deals...for a private business. That's the arguement. If an owner can get the stadium for free, why would he invest his own capital? Where municipalities have refused to give away stadiums, in some cases the places have still been built with private money which proves their business value.
There is, however, a distinction between private business and state-run teams. The state has chosen to be in the education business, and so the decision about a football stadium needs to be made upstream from the athletic department. The state could get out of the education business entirely (which would suit me fine), or it could choose to position itself as an other-than-Big 10 university (and I don't mean just athletically) which would be the U of Chicago route. But if it chooses to position itself as a Big 10 institution, it really has no other choice than to build an on-campus football stadium.
Going the Chicago route might not be all bad--of the Big 10 universities, only Northwestern and Michigan manage to have academics ranking up with Chicago's.
I'd personally give them an on-campus stadium like Michigan State's. No brick, no luxury suites, no fancy glass. Just a simple, functional stadium that the alumni can "doll up" if they like.
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