[CP Story] Calgary Can't Afford an Arena

[Cube Inmate]

All else being equal, what does the useful lifespan of the arena have to be to turn this into a break-even proposition? The Saddledome, approaching 35 years old, is considered obsolete because ...

(a) the roof design cannot physically accommodate modern stage shows, and
(b) there isn't enough interior space to provide all the "premium" revenue-generating services that other arenas offer

It's not crumbling down. The central location, near public transit, is perfectly good. The hockey-watching experience is very good. My point is that I don't see why we have this expectation of only a 35-year "useful life" for a new arena. We should expect that the next arena can last for at least 50 years, and plan it with the ability to renovate / adapt.

[GGG]

Originally Posted by Bingo

10% is a pretty standard downtown Calgary capital hurdle for today. It was 15% as early as three years ago. I doubt prominent Calgarians would be that much different on their own holdings as they have access to investments that suggest it should actually be much higher.



Don't think anything is rigged. The model was run to solve for an unknown using a possible outcome of zero profit on 10% NPV, which to me is a logical starting point.

I'm happy to run any version of the non hockey related revenue though.

Have seen cost over runs on the building suggesting $600M on a few occasions.

Sorry rigged was the wrong word. It's just that making the assumption of outside revenues related to NPV ensures that any contribution of the ownership more than that value will show as a poor investment.

Which is why I do not believe that the flames initial position would be the one that they find acceptable from an NPV point of view. Given that they will have to give up something to make a deal they wouldn't start at the break even hurdle. So they enter the negotiations at being break even on a 15% NPV but are willing to settle for 10.

So I guess my question would be assume that the owners offer breaks even using a 15% NPV what is the value proposition on the cities offer with a 10% NPV.

[longsuffering]

Originally Posted by CorsiHockeyLeague

Does concert revenue play into things as well?

Originally Posted by Textcritic

I assume that is part of non-hockey revenue.

Originally Posted by Bingo

30% was honestly a plug to get the investment back to zero using the Flames offer, and a starting point, and the biggest variable in the model as I had Edmonton to set ticket prices and the ticket surcharge

The franchise value comes down to what I'd do. If I owed the Flames (or a portion) I'd see it as a legacy item for my family that would never be sold and therefore not a true investment figure.

And as I said it's a pretty small year over year change to ponder vs the losses of the investment to build an arena. Even if it went up by 5% a year over the next five years you'd only see the value at an uptick of roughly $85M vs the $285M investment hit to build the thing on their own.

I think the non-hockey revenue assumptions need some work because that is one of the big revenues stream that the new building is supposed to unlock.

If the Scotiabank Saddledome calendar is to be believed, the building sat dark for virtually all the period May-September) with just 15 events on the calendar.

Seems low but if the 'dome is only used 100 - 120 days/year think how much potential revenue exists in those dark nights.

April, May and June are problematic because dates have to be held for a potential Stanley Cup run, but nonetheless.

Utilization of the building is the key to profitability and ROI. Somehow, I think it the model should reflect that. It impacts the Flames bottom line and the ability to generate ticket tax revenue.

I think it would interesting to play with the proceeds of a ticket tax based on building utilization. Ideally utilization assumptions could be risked (P100, P90, P50, etc.) and incorporated into the model.

And big thanks Bingo for doing this and generating this discussion.

[longsuffering]

Originally Posted by Bingo

10% is a pretty standard downtown Calgary capital hurdle for today. It was 15% as early as three years ago. I doubt prominent Calgarians would be that much different on their own holdings as they have access to investments that suggest it should actually be much higher.



Don't think anything is rigged. The model was run to solve for an unknown using a possible outcome of zero profit on 10% NPV, which to me is a logical starting point.

I'm happy to run any version of the non hockey related revenue though.

Have seen cost over runs on the building suggesting $600M on a few occasions.

I also think that the 10% discount is too high. I'd like to see it at 5% tops.

Maybe you remove franchise appreciation from the model in return?

[Bingo]

Originally Posted by longsuffering

I think the non-hockey revenue assumptions need some work because that is one of the big revenues stream that the new building is supposed to unlock.

If the Scotiabank Saddledome calendar is to be believed, the building sat dark for virtually all the period May-September) with just 15 events on the calendar.

Seems low but if the 'dome is only used 100 - 120 days/year think how much potential revenue exists in those dark nights.

April, May and June are problematic because dates have to be held for a potential Stanley Cup run, but nonetheless.

Utilization of the building is the key to profitability and ROI. Somehow, I think it the model should reflect that. It impacts the Flames bottom line and the ability to generate ticket tax revenue.

I think it would interesting to play with the proceeds of a ticket tax based on building utilization. Ideally utilization assumptions could be risked (P100, P90, P50, etc.) and incorporated into the model.

And big thanks Bingo for doing this and generating this discussion.

Agreed.

I guess the best way to do it would be to pull the data from Rogers for the last calendar year and see how many nights it was utilized.

That would be a starting point.

The other issue is the city too. ... Edmonton has a great new arena, but I'm sure they're not getting the same interest as MSG, or even Toronto. I think I saw Katy Perry is playing MSG for 7 straight nights this month. So you can't go across the league as an average for blackout nights./

Next issue is impact of nights that are being utilized. The Hitmen, Roughnecks and Inferno don't pull in the same crowds as the Flames and likely don't spend as much money as the Flames crowd as well. So even that has a night that is blacked out on the calendar that only generates 30-40% of what a Flames night could.

[Bingo]

Originally Posted by longsuffering

I also think that the 10% discount is too high. I'd like to see it at 5% tops.

Maybe you remove franchise appreciation from the model in return?

I can look at it, but I really disagree.

My work has 10% as the absolute line in the sand, and 15% a pretty recent memory for oil and gas capital.

These guys have huge investment opportunities in front of them with big returns, tying up their capital would need a pretty base return assumption or it's not worth it.

Remember this is the rate that future cash flow is discounted not a return on investment.

[edslunch]

Originally Posted by Finger Cookin

Forbes valued the Oilers as worth $166M in 08-09 vs $445M in 15-16. How that valuation changes after the first year with the new arena remains to be seen. Presumably the revenue will spike, but the operating/financing costs probably will too.



The annual compounded return on $166M to $445M in 7 years is a shade over 15%.

Have to take Edmonton value with a grain of salt for the next few years as the new arena coincides with the Oilers turning the corner to respectability if not contender status and McDavid staking a claim to best player in the league. Whatever bump they see is influenced by multiple factors.

[longsuffering]

Originally Posted by Bingo

I can look at it, but I really disagree.

My work has 10% as the absolute line in the sand, and 15% a pretty recent memory for oil and gas capital.

These guys have huge investment opportunities in front of them with big returns, tying up their capital would need a pretty base return assumption or it's not worth it.

Remember this is the rate that future cash flow is discounted not a return on investment.

Understood, but is your model solely intended to be a 'Flames case' or could it not also be a taxpayer or community case representing some reasonable negotiable scenarios?

[GGG]

Originally Posted by Bingo

I can look at it, but I really disagree.

My work has 10% as the absolute line in the sand, and 15% a pretty recent memory for oil and gas capital.

These guys have huge investment opportunities in front of them with big returns, tying up their capital would need a pretty base return assumption or it's not worth it.

Remember this is the rate that future cash flow is discounted not a return on investment.

10% is a reasonable hurdle the flaw in the assumptions is that the Flames first offer gives them only a break even investment on a 10% NPV. 10% can't be the hurdle and the opening offer.

[Frequitude]

Hell of a job. Nicely puts into perspective what I'm actually asking the Flames to pony up when I rant "Eff you Ken King. 1/3, 1/3, 1/3 or you can eat it". $110M is quite a rich ask.

So the real debate lies in how, if at all, to split about $275M of negative NPV. No easy answer to that one.

[Ace]

The Calgary Next presentations sucked...but ever since cutting out the stadium this has become way less interesting to me. I honestly thought the point of a new building was to make more revenue, but this sure shows how insignificant that is in the grand scheme of things.

I suppose the missing piece of the equation is the assumption that at some point the Dome will, in fact, be obsolete. So there will be a capital expenditure required at some point, now it's just an issue of how long can they push the dome, and equate from there.

New building would be great, but the dome without dodge trucks is satisfactory for me. McMahon is... ugh

[marsplasticeraser]

Originally Posted by Bingo

I can look at it, but I really disagree.

My work has 10% as the absolute line in the sand, and 15% a pretty recent memory for oil and gas capital.

These guys have huge investment opportunities in front of them with big returns, tying up their capital would need a pretty base return assumption or it's not worth it.

Remember this is the rate that future cash flow is discounted not a return on investment.

Longtime lurker. Great job on doing this research and work. I am posting only because the NPV at different discount rates is probably the missing piece of the puzzle.

While 10% is a good lower bound and I agree that 15% is a more likely figure for most companies, those figures are to account for risk. While I don't know the correct discount rate, I don't see similar risk on this investment as there are in other industries. It feels more like a utility, in that the future cash flows are pretty easy to estimate And have low volatility to the downside.

I'd love to see impact of discount rates of 4%, 6% and 8% under both scenarios if it's easy to run.

One idea you may be thinking as well is that the city can raise capital at 3.5-4%(or other municipalities can, no idea on Calgary specifically). If a lower discount rates solves a lot of this then it seems like a deal where the city fronts the money and takes a bigger return could solve a lot of the issues in this negotiation. .

[442scotty]

Great write up. And maybe this is why CSEC wants Calgary Next. It’s a huge project involving creating a whole new world class entertainment district including commercial, residential and sports/entertainment. I’m just guessing that if done right, in their minds, everyone would benefit financially in the long term. People who don’t normally like going downtown (my wife and I for one) would start coming down for the variety and quality not to mention the out of towners who would be drawn in. A new arena in the present location doesn’t really work as well I suspect

[442scotty]

And another thing about Calgary Next... They need to do a better job drawing it up. Do it right or don’t do it at all...

[ikaris]

Originally Posted by Bingo

OK easier than I thought.

Moved the building inception up from 2024 to 2021 meaning they broke ground at some point in 2019 and finished in time for the 2021-22 season.

CSEC NPV loss on 100% model is now $221M, down from the longer build model that was $283M

Thanks Bingo. I think this is a better number to use. When you factor in appreciation of the franchise at about 4-5%, how does change the number? If its around $60-75M Now we are looking at ~161M. It think this shows that the City offer is very reasonable. There is definitely some room for movement (eg. City finances ticket tax, rental or property tax is discounted).

[CampbellsTransgressions]

Each team has a salary cap of 70 million yet they can't afford an arena... something is amiss here.

Maybe time to give the players a wakeup call. None of us other private sector workers have our offices paid for by the government.

[GaiJin]

Originally Posted by CampbellsTransgressions

Each team has a salary cap of 70 million yet they can't afford an arena... something is amiss here.

Maybe time to give the players a wakeup call. None of us other private sector workers have our offices paid for by the government.

After reading the first page, I had the same thought simmer up as well. The players are simply making too much for some of the franchises to be self sustaining and stand alone in some of the markets.

[Itse]

Originally Posted by CampbellsTransgressions

Each team has a salary cap of 70 million yet they can't afford an arena... something is amiss here.

Maybe time to give the players a wakeup call. None of us other private sector workers have our offices paid for by the government.

Yeah I think that's an inescapable conclusion.

[Table 5]

Yeah, I've been saying this for a while. While we're all arguing about this on a Flames level, the reality is that the system is truly broken at the NHL level. If costs are so high in the league that only 4 teams out of 31 are viable, than the system is broken. They need to change the way they operate, not a public bailout.

Infrastructure improvements need to be part of the Cap and operational budget. This league needs a drastic cut in salaries, and a dedicated fund for arena building.

[PeteMoss]

Originally Posted by Table 5

Yeah, I've been saying this for a while. While we're all arguing about this on a Flames level, the reality is that the system is truly broken at the NHL level. If costs are so high in the league that only 4 teams out of 31 are viable, than the system is broken. They need to change the way they operate, not a public bailout.

Infrastructure improvements need to be part of the Cap and operational budget. This league needs a drastic cut in salaries, and a dedicated fund for arena building.

The Flames are viable now. They don't need a new arena to be viable. I've been to Joe Louis arena in Detroit in the past few years. Sure it was old but it was fine. Hockey arenas used to be able to last 50+ years. This idea that arenas have a 30 year life span is new.