WASHINGTON — The debate over whether or to what extent public funds should be used for professional sports facilities has been reignited in part because of growing revenue in the sports market, according to a new report from Wells Fargo Securities.
At a press conference before the Super Bowl, reporters asked National Football League Commissioner Roger Goodell about developments with specific stadiums. That signifies that the issue is "very high on the public's consciousness," Randy Gerardes, a Wells Fargo senior analyst and author of the report, told The Bond Buyer.
President Obama's fiscal 2016 budget proposed prohibiting tax-exempt bonds from being issued after 2015 to finance professional sports facilities. The budget did this at the same time it incentivized private investment in other types of infrastructure, like surface transportation, Gerardes said.
Government officials in a number of regions in the country are interested in attracting new sports teams and teams in existing markets have stadiums that are "economically obsolete" and don't have the revenue generators, such as luxury seats, that newer facilities have.
There is a need for public involvement in helping teams, but constituents are divided over how much public involvement there should be given the constraints on municipalities' budgets, Gerardes said.
"Some argue there is not much economic value to sports or their associated facilities, while others identify the city or institution by the team that represents it in athletic competition," the report said.
The report, released Friday, tries to "take the emotion out of the debate" and discuss the fundamentals of sports financings and considerations for investors, the report said.
Sports-related revenue growth is strong. The four segments in the North American sports market — gate revenue, media rights, sponsorship and merchandise — are expected to grow at a compounded annual growth rate of 3.9% from 2014 through 2018, according to PwC data cited in the report. Revenue from media rights and sponsorships has grown faster than gate revenue and merchandise sales, and media rights contracts have helped lead to increasing team valuations.
Wells Fargo expects revenues associated with stadiums' real estate to grow over the medium term. Stadiums' contractually obligated revenues include those from premium seating. While premium seating has favorable credit features because the buyers of the seats make longer-term commitments, "we wonder whether we may be approaching a saturation point with premium seating," the report said.
Premium seating already makes up as much as 20% of the seats in newer stadiums and as much as 40% of seat-related revenue. And Fitch Ratings has pointed out that some teams are offering a larger percentage of shorter-term contracts on premium seats. "Shorter-term agreements increase risk to both changes in market conditions and/or on-field performance but may also allow revenue maximization through more frequent price adjustments," the report said.
Features of sports facility financings can help protect investors in the event of a lockout or strike, according to the report. Much of the contractually obligated revenue, such as premium seating, is paid well before a sports season starts, and many bonds are insured. Additionally, most stadium bonds are secured by sales or excise taxes, and revenues from these sources will flow even if games aren't played due to labor unrest. But sales and excise tax revenues can be volatile, the report said.
Several NFL teams have expressed an interest in relocating to the Los Angeles area. The battle to enter this market highlights the importance of non-relocation agreements in project financings, though they are less important for holders of tax-backed stadium bonds, Wells Fargo said.
Bonds can also be used to finance spring-training facilities, which sports teams can relocate to more easily. For example, Palm Beach County, Fla. is planning to issue $130 million of revenue bonds to finance a spring training facility for the Houston Astros and the Washington Nationals. The bonds will be secured by a covenant to budget and appropriate, though the plan is for debt service to be covered with hotel occupancy tax revenue.
"We view spring training facilities as nonessential projects, and the limited time spent in spring training reduces the magnitude of any economic benefit associated with having the facility," the report said. "Likewise, stadium revenue bonds subject to appropriation carry a greater degree of risk, particularly should stadium tenants no longer utilize the facility."
In addition to financings of professional sports facilities, bonds are also being issued to finance college sports facilities. But universities will not all see the same increases in student enrollment and revenue for the athletic program as a result of the new facilities.
"Therefore, we think the bigger issue for some universities is whether athletic program investment 'crowds out' investment in other educational areas," Wells Fargo said. "In addition, large-scale projects like stadiums increase leverage and may weaken credit metrics."
