[CP Story] Calgary Can't Afford an Arena

[Bingo]

Originally Posted by marsplasticeraser

I'd respectfully disagree that billionaires don't enter 3% returns for investment decisions. HNW individuals typically have a portfolio with a range of risk-weighted assets generating different returns. Their portfolio will almost certainly include fixed income and utilities that return 1%-5% and have (theoretically) lower volatility than higher risk investments.

From what I've seen the city typically uses their actual cost of capital in their financials, which would be 3%-4%. That's if they bother to include a discount rate at all (they've improved in the last administration it seems, but I recall they often would not discount future cash flows at all!)

It seems there are a few on here who are interested in what a lower discount rate does to the calculations, so why not run it just for interests sake? If you've built the model how I expect it's simply changing one number.

Will do!

[Bingo]

OK with that assumption the numbers clearly change. The owners owning the building 100% generates a NPV5% return of $188M

I still think that's incorrect though ... not sure where we can solve that. I think speaking to the low risk portion of their portfolio isn't really a match for a $500M-$600M outlay with the number of unknowns that an arena build encompasses.

[marsplasticeraser]

Originally Posted by Bingo

OK with that assumption the numbers clearly change. The owners owning the building 100% generates a NPV5% return of $188M

I still think that's incorrect though ... not sure where we can solve that. I think speaking to the low risk portion of their portfolio isn't really a match for a $500M-$600M outlay with the number of unknowns that an arena build encompasses.

Wow, that was more than I was expecting. Thanks for running that. If I'm the city and have that information (which they likely do) it totally explains their negotiation approach and why they see their offer as very fair.

Based on this 5% scenario a deal seems pretty easy. Limit owners up front contribution (maybe none?) and have them pay property tax and rent for use of the building, the amount being less than the additional revenue it will bring in and more than enough to service the debt. City wins, Flames win.

I just realized that the above scenario then actually mimics any other leasing scenario. It's very simple to understand, the decision to do it or not is easy and almost anybody can calculate the returns. I wonder if the Flames are making this more complicated in an attempt to confuse people.

[Finger Cookin]

Asking a dumb question - do most other industries fund capital projects from their operational budgets?

[Frequitude]

Let's just call a new $600M stadium a $200M NPV loss.

That makes sense to me and helps justify my belief that the right amount for the city to kick in, whether that be by cash or CRL, is 1/3.

[GGG]

Originally Posted by Bingo

Nope ... still a loss.

Loss of $65M

Are you increasing your profit by 3-5% each year. I can match your numbers if I don't appreciate profit. I end up with them -13 million with 3% increase in profit each year and +28 million with 5% increase in profit each year. I think the profit increasing at rate of inflation is reasonable.

[Jay Random]

The trouble with increasing profit at the rate of inflation is that you then need to discount the future value of the asset at the same rate. If you wind up with an asset whose value goes up if measured in nominal dollars but down in constant dollars, that isn't really a profit – though it will certainly be taxed as if it were, which makes the deal even worse.

[GGG]

Originally Posted by Jay Random

The trouble with increasing profit at the rate of inflation is that you then need to discount the future value of the asset at the same rate. If you wind up with an asset whose value goes up if measured in nominal dollars but down in constant dollars, that isn't really a profit – though it will certainly be taxed as if it were, which makes the deal even worse.

doesnt applying the discount rate to the cash flow when you sell the asset at the end account for the inflation on the franchise value?

[Jay Random]

Originally Posted by GGG

doesnt applying the discount rate to the cash flow when you sell the asset at the end account for the inflation on the franchise value?

I take your point. It can, but it doesn't account for the tax on the phantom capital gains due to inflation when you sell the asset… and after that things start to get hinky.

The other issue is that you proposed increasing the profit by 3-5% per year entirely on account of inflation. If inflation averages that high over the life of the arena, you need to take that into account with a higher discount rate. Bingo's proposed discount rate, I should think, is based on an expectation that recent monetary trends will continue, that inflation will average well under 3%, and money will remain cheap.

It would be interesting to see what happens if you back inflation out of the figures altogether, say by lowering the discount rate to 8% and including only expected profit increases above the inflation rate.

[GGG]

I don't have the spread sheet in front of me but I think 7% was the break even point if you fixed profits at 24 million and appreciated the franchise and depreciated the dome. What this excercise does show is that owning a sports teams is a vanity project rather than a primary investment. Or the franchise valuations aren't reflective of the earnings.

[Bingo]

Originally Posted by GGG

Are you increasing your profit by 3-5% each year. I can match your numbers if I don't appreciate profit. I end up with them -13 million with 3% increase in profit each year and +28 million with 5% increase in profit each year. I think the profit increasing at rate of inflation is reasonable.

Set the model to 2.5%

[Philly06Cup]

Here I thought a new arena would be a win-win situation for the city and team. Your model shows it to be a lose-lose. Fascinating indeed

[powderjunkie]

Originally Posted by New Era

Except they can't. The Flames can't institute a "tax." If they upped the cost of tickets to start building a war chest for a future building, that become HRR and they have to give 50% to the players. Doesn't make sense. They are better to go through the process and have the City institute the ticket tax and recover the casts that way.

No reason they can't work with the city to start that tax now (or could've done so any time in the last 30 years). All you need to do is build in a contingency use for that money in the event a new building is somehow not desired/required in the future (NHL folds...about the same probability as Flames leaving town) - any taxes from hockey tix are used to fund local arenas, any taxes from concert, etc. tix are used to fund the arts.

Each side would compete for our gets to take 'credit' for whatever money is accumulated in the fund - the fair thing to do would simply be subtract from the project total costs and not factor into negotiations at all, since the only fair way to categorize is 'user fee'.

[EldrickOnIce]

Originally Posted by powderjunkie

No reason they can't work with the city to start that tax now (or could've done so any time in the last 30 years). All you need to do is build in a contingency use for that money in the event a new building is somehow not desired/required in the future (NHL folds...about the same probability as Flames leaving town) - any taxes from hockey tix are used to fund local arenas, any taxes from concert, etc. tix are used to fund the arts.

Each side would compete for our gets to take 'credit' for whatever money is accumulated in the fund - the fair thing to do would simply be subtract from the project total costs and not factor into negotiations at all, since the only fair way to categorize is 'user fee'.

You may not be familiar with HRR?

[442scotty]

I don’t know if anyone asked, but for all those complaining about spending their hard earned tax dollars on an arena, how much money would it cost the average taxpayers, per month, to make a significant contribution to the team?

And I asked my wife if she would be good with an extra $10 a month in taxes so we could get a new arena. I was shocked when she said NO!! I would and probably more...

[GGG]

Originally Posted by 442scotty

I don’t know if anyone asked, but for all those complaining about spending their hard earned tax dollars on an arena, how much money would it cost the average taxpayers, per month, to make a significant contribution to the team?

And I asked my wife if she would be good with an extra $10 a month in taxes so we could get a new arena. I was shocked when she said NO!! I would and probably more...

The problem with this logic is that you start with the 300 million city contribution and divide by 1 million and get 300 and divide by 35 and get about $8 double it cause half is interest and you get about $16 per year per person so say $40 a house. But that assumes that everyone is on board. The problem is that them you have to treat everyone's pet project like that.

We want a field house, new LRT, new over passes, bike lanes into the suburbs, Macleod trail made people friendly..... each one of these items you could probably find 100k of people saying yeah that's a great idea and it will only cost each tax payer $x. But put all of the wants together and you get a 20% tax increase and you have spent that tax capacity for the next 30 years.

All capital needs to be fought over against a very long list of needs and not given away because it's only $5 per month. The real number needs to make sense not the monthly car payment expressed over 8 yrs.

[longsuffering]

Originally Posted by Bingo

Set the model to 2.5%

Have you run any scenarios where non-hockey related revenue rises above 30%?

It would be interesting to see the impact of the Flames increasing non-hockey revenue (year over year) by 10% (from 30% to 33% total) or 20% (to 36%) or even 25% (to 38.25%) on the bottom line. Heck, to be conservative you might leave the first year or two of the new arena at 30%, then 5 years assuming growth to 33%, another 5 years assuming growth to 36%, etc.

I'd like to see what that results in.

[CSharp]

The title of this thread should be, "Flames Organization Can't Come Up With Money to Pay for New Arena". Calgary certainly can afford a new arena - just not at the expense of all the taxpayers paying for it. Flames organization is a private corporation and so it should be funded by it's own money or through other joint ventures without any public money involved.

Secondly, the City of Calgary already said that it will support the Flames organization:
1) if it's built on public land, then that 1/3 will be paid back through tax or through lending means
2) through ticket says, which is a sharing between the two parties.
3) the City of Calgary will put in the cost of demolishing the current arena and the cleanup prior to building the new arena

To me, that sounds like a heck of a deal, especially when the private organization only pays for 1/3 of the price of the actually development of a private building!

If the Flames organization wants everything their way on private land and doesn't want to pay back what is lent to them, well eff that! Everyone pays for this, yet more than half the city probably won't even access the building more than 10 times in their lifetime. SaddleDome - if it's not broken, don't fix it. It's good where it is and it's still an iconic structure in the city. If the Flames organization can't come up with the money to build a new arena, don't build it. I'm sure all the Flames fans, including myself, will support the Flames if they're still called the Calgary Flames, but just don't ask everyone to pay a hefty price for a new private arena.

[Jay Random]

Originally Posted by CSharp

The title of this thread should be, "Flames Organization Can't Come Up With Money to Pay for New Arena".

Of course they can come up with the money. But they're not stupid enough to spend it for a negative return.

[powderjunkie]

Originally Posted by EldrickOnIce

You may not be familiar with HRR?

That's why the city would institute and have control* of the tax revenue. The bigger problem may be whether the city has the authority to institute that kind of tax (completely unrelated to the NHL).

If the owners have handcuffed themselves from supporting the sustainability of their own business, then they can address that in the next CBA.

As much funding as possible for any future infrastructure like this should come from user fees. No reason Stamps tix shouldn't do this, too (actually should have been doing it for the last 20+ years...)