Spending on construction of new sports facilities grew at a staggering rate post 2007. A total of 13.4 billion is being spent on around 81 arenas and other major as well as minor sport facilities in and around the U.S. at least through 2010. The involvement of exceedingly high sums of money has put the topic of Financing of new stadiums and playing arenas under intense discussion. The construction of a new stadium or playing arena is a very costly job which can sometimes exceed several hundred million dollars. In the pre-1990's era most of the sports facilities were mainly funded through public financing, however with the passage of time as the financing requirements for constructing new sports facilities increased, so did the financing methods also evolved accordingly. In the preceding paragraphs a discussion on major financing techniques mainly used for constructing a new sports facilities are outlined.
Public financing for major sports arenas is mainly done by heavily subsidizing the construction process of these stadiums. The main argument of local governments favoring the use of tax payers' money for construction of sports facilities is that these facilities will
The main sources of public financing for building new sports facilities include sales taxes, general obligation bonds, beneficiary taxes, tax increment bonds, revenue bonds and proximity taxes. In the ensuing paragraphs some of the most important of these sources of public financing will be discussed.
Sales Tax: A generalized sales tax is an important mechanism used by local governments to finance the construction of new stadiums. The state or county in which the stadium is being built increases the local sales tax amount with the collected revenue contributing towards the construction of the new facility. The construction of GABP (Great American Ball Park) was done by using this mode of financing. The facility costing $297 million was mainly financed through tax payers' money collected by a half-cent raise in the amount of local sales tax (Gwartney, Sobel, & Macpherson, 2006).
General Obligation Bonds: G.O. bonds are the most common types of bonds issued by states and local authorities. These bonds are backed by the taxing power of the issuer and are also called 'credit obligations'. The construction of stadium in Oita, Japan was mainly financed through revenues obtained from general obligations bonds of the Oita Prefecture (Horne & Manzenreiter, 2013).
Tax Increment Bonds: These are special tax bonds that are used for promoting a single defined target development in a particular defined area. Tax increment financing represents a local authority's decision to forgo taxes from the stadium owner in order to encourage the owner to build the facility in local authority's neighborhood. By provision of tax increment financing the local authority hopes to see escalation in property prices in its neighborhood. The tax increment bonds were used to finance the construction of Vikings stadium in the Anoka County; out of the total $790 million spent on the construction of the stadium around $230 million were generated through tax increment financing (Yost, 2006).
Private Financing
The main sources of private financing include owner contributions, selling stadium naming rights, loans from local businesses, personal seat licenses, league contributions and bank loans.
In the following paragraphs some of the most important of these sources of private financing will be discussed.
Owner Contributions: Owner contribution refers to private contribution made by individuals. The Gillette Stadium in Foxboro, Massachusetts is an excellent example of one such facility; it was entirely funded by owner Robert Kraft at a price of $325 million (Woods, 2011).
Personal Seat Licenses: Personal seat licenses (PSL) is a financing option in which fans are provided the opportunity to purchase specific seats in the stadium. The individual purchasing the seat is considered the owner of the seat and is able to resell the particular seat. The price for owning a personal seat licenses (PSL) can range anywhere from $1000 for a seat farther away from the field to several hundred thousand dollars for a strategically located seat in the field from where the spectators can get a good view. The PSL financing strategy was used by Buccaneers owners to fund the construction of a new stadium in Tampa Bay (Rosner & Shropshire, 2011).
Selling Stadium Naming Rights: Selling stadium naming rights is one of the most lucrative private sources of revenue generation. Naming rights include the right to rename the entire stadium as well as the right to rename entryways into the stadium and various fields around the stadium.
Bank Loans: Another main source of private funding assisting new stadium construction includes the loans provided by banks. Almost all new stadium constructions are helped to some extent by the loans provided by financial institutions. The United Center was built in 1994 at a total cost of around $175; almost 80% of entire financing came from loans provided by private banks. The Busch Stadium was also constructed using financed using bank loans (Fried, Shapiro, & DeSchriver, 2008).
Financing the Purchase of a Sports Franchise
Most of the sports franchises are owned by a group of investors in a limited partnership almost always controlled by a lead owner. The twentieth century saw the remarkable evolution of sports into an industry, as the value of sports franchises increased fewer individuals were able to buy a sports team on their own giving rise to the idea of more than one owner for a sports franchise. For instance Boston Celtics is owned by six partners and NBA Atlanta Hawks is owned by nine partners. Although the value of sports franchises runs into billions of dollars, there are a number of factors that can affect the value of a sport franchise. Some of these factors include variables such as the financial strength of the sports franchise or if a new or an existing franchise is being sold. Another main factor that prospective sport franchise owners need to remember is that besides owning large sums of money they must secure permission to own a sports franchise by the ownership committee of the league in which the prospective owners want to own a team.
Many different methods exist for financing the purchase of a sports franchise, while some people may use external financing options such as debt financing and equity financing to get ownership rights others may turn to financial institutions to get the required sum of money, still other people look to family and friends for acquiring funds necessary to buy a sports franchise. It then becomes evident that a number of different methodologies exist for financing the purchase of a sports franchise; it is up to the particular financial condition of the prospective owners to decide which method is most suitable for them.
External Financing Sources
The two most popular external financing sources are equity based financing and debt based financing; each of them is described in more detail in the following paragraphs.
Equity Financing: Obtaining equity financing is a very popular financing technique frequently used by individuals and groups to assist in purchasing new ventures. This mode for obtaining finance is less risky but more expensive than traditional debt financing. The option to go for equity financing should be a joint decision of all the partners since it involves giving up a portion of the business' ownership. The process of equity financing involves seeking equity financing from investors by issuing membership shares in a sports franchise. There are several advantages of equity financing that counterbalance its disadvantage of being risky; first it reduces a sport franchise owner's personal risk in a business, second it eliminates bank as a potential business partner in the operations of the sports franchise. One excellent example of sport franchise purchase through equity financing is that of the sale of The Cleveland Indians. The Cleveland Indians was bought by an investment group headed by Larry Dolan in November 1999. The investment group bought The Cleveland Indians stock for approximately $320 million and became the majority owner of the Major League Baseball's team. Other well known examples of sport franchises sold through equity financing include the sale of National Basketball Association's team Boston Celtics and the sale of the well-known football team Orlando Predators (Wong, 2010).
Traditional Debt Financing: A sports franchise can be financed by taking the traditional path of debt financing. Debt financing is the process of acquiring funds through loans or selling corporate bonds. Loans are actually borrowing agreements whereby the borrower agrees to pay the borrowed amount at a set time and at a set interest rate. The acquisition of Manchester United by the US sports tycoon Malcolm Glazer in 2005 provides an excellent example of the purchase of a sports franchise mainly financed through debt financing. The $1.47 billion purchase bid involved a contribution of $503 million by the owner himself, the other huge contribution of $490 million or around 33.33% of the overall money came from lenders (Fried, Shapiro, & DeSchriver, 2008).
Family and Friends
Friends and acquaintances are also a very popular financing source that can ably assist in the purchase of a sports franchise. A friend or a relative can also play the role of an 'angel' investor; an angel investor is a major investor who can contribute up to several millions for helping the purchase process of a new venture. One of the most well known angel investors in the sports industry is Paul Allen, the owner of Seattle Seahawks and Portland Trail Blazers (Rosner & Shropshire, 2011).
Venture Capitalists
Venture capitalists are professional investment organizations that invest in growing businesses. Venture capital financing is an innovative form of financing that has actively replaced traditional financing mechanisms over the past few years. Almost all the sports franchise purchase decisions are financed to some extent by the venture capital financing.
The above discussion reveals that sports franchise purchase operation involves spending huge sums of money as evidenced by the sale of the famous football club Seattle Seahawks which was purchased by Microsoft Co-founder Paul Allen for $200 million and the sale of Texas Rangers baseball club for $250 million in 1998. The high price of the sports franchise aside there are also numerous advantages of owning a professional sports team. In the last quarter of the twentieth century the value of sports franchises has more than doubled, a small proof of this fact can be provided by looking at the current value of Patriots. In 1994, Kraft paid $172 million for the Patriots which was a league record at that time, since then, the value of team has increased considerably and is now valued at more than a billion dollars (Danielson, 2001). Today the rising appeal of professional sports teams means that a great number of people are interested in buying these franchises; while it is an economically attractive investment option to invest in a sports franchise, prospective owner must examine in detail available financing options.
