[CP Story] Calgary Can't Afford an Arena

[nfotiu]

Originally Posted by Itse

Yeah I think that's an inescapable conclusion.

It always seemed unsustainable to me that the NHL went for a salary cap that the average team could afford, but without significant enough revenue sharing. Sure, it helped create competitive balance on the ice, but it basically allows the rich teams to get richer, and the poor teams to beg for public assistance and count on local TV deals that paid way too much money compared to the actual number of people watching games.

I suspect that the cap actually increased overall salaries more than they would have wihtout a cap. It also makes it very tough to correct the salaries to what the market should be.

[Bingo]

Originally Posted by longsuffering

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?

No it's both.

It takes cash flow from both sides and presents it in the same 10% discounted fashion.

The tax if included goes to the Flames, unless I can get confirmation that they will be loaned that money by the city, which I don't think has been said to date.

[Strange Brew]

It does seem as though the NHL's business model is predicated on the basis that the vast of majority of franchises require some sort of public subsidy to survive.

That or some other entity (NBA team) with which to share costs of a facility.

[Bingo]

Originally Posted by PeteMoss

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.

Your comment had me thinking ... are they?

Best way to look at that is to go back to the franchise evaluation and look at it.

So the Flames are worth 410M, lets call the Saddledome what 110M? making the purchase price 520M

If you roll out 18M in operating income and add it to 30% in non Flames events at the dome, and then add in 5% appreciation on the Flames with 5% depreciation on the Dome.

This gives you a $75M loss in 20 years of owning the team if you bought it today.

That's not a big investment loss, but they're not printing money. Not too many people are happy generating $22M in profit utilizing half a billion dollars in capital.

I agree with others ... the NHL is currently setup with the assumption that rich people should own them without making money as a public service.

[PeteMoss]

We hear time and time again that owning a team is done for reasons not related to return on investment.

If these guys don't want to do it for that reason anymore - find the next rich guy who does.

[Bingo]

Originally Posted by PeteMoss

We hear time and time again that owning a team is done for reasons not related to return on investment.

If these guys don't want to do it for that reason anymore - find the next rich guy who does.

You don't see a long term problem with needing to find a custodian with deep pockets to keep a franchise afloat?

[Flamenspiel]

^^Your 75 million loss case is really for prospective new owners, not for the current ones. Its like if you bought a property in Calgary in the 90s and charge market rent it generates a tidy profit. A new purchaser would have trouble breaking even. Really the Flames are positioning themselves as if they are new owners starting from zero.

Perhaps a clean break is required, a new owner would have a better case for a "loan" with generous terms. From a city perspective, call the Flames bluff, if they are so badly off they will sell the team.

I know its tough for people in the "Sports Industry" to except that most people just don't care and really only follow the Flames if they are on a winning streak and begin to believe in them, but that's the way it is in Calgary. This is not Winnipeg or Edmonton, people came here for the mountain lifestyle, demographics, jobs, affordable housing or other things. If anything, the Flames are really just icing on the cake for most citizens.

[PeteMoss]

Originally Posted by Bingo

You don't see a long term problem with needing to find a custodian with deep pockets to keep a franchise afloat?

Very possible its a bubble that will burst, but as long as you've got rich guys out there, they will want their play things.

I'm sure if you used your model to determine if you should buy a team for the value they are - you would come up with it being a bad investment. But you'll still have people putting in offers at that value.

[Table 5]

Originally Posted by Bingo

I agree with others ... the NHL is currently setup with the assumption that rich people should own them without making money as a public service.

The problem is also that those rich people, instead of fixing their business model so they can be profitable, assume that public dollars will make up for that crappy setup.

This league (and probably others) needs to have a vastly lower cost structure to be a viable business. It all starts with player salaries...they are not based in reality.

[Passe La Puck]

Originally Posted by Bingo

You don't see a long term problem with needing to find a custodian with deep pockets to keep a franchise afloat?

It is a huge problem. One they need to fix, not tax payers.

[Bingo]

Originally Posted by Passe La Puck

It is a huge problem. One they need to fix, not tax payers.

Man these bumper stickers get tiring.

I'm not advocating a hand out. I just boiled the whole thing down to a bad investment. Period.

If the owners want to take on a bad investment, they can do so. I don't think anyone should expect them to.

If the city wants to contribute massive tax dollars to a bad investment, they can do so. I don't think anyone should expect them to.

If the two sides decide it's the right thing to do as a partnership they can do so. If they don't, I get it.

[Flash Walken]

One thing incongruent about this argument, and maybe this is the wrong thread for it, is that as fans we are told time and again that owning a sports team is not a money maker. That rich owners don't own sports teams to make money.

We've also heard from Ken King that there are better places to make more moneythan in Calgary.

So then, at what point do arguments about rate of return or economic impact or NPV become moot?

If the owners are saying "Here is the business case for the arena" at the same time they are saying "if we applied a business case, we wouldn't own a sports team", how do they justify asking for public money at all?

Is the rationale here that the City should throw bad money after good towards a stadium because the Flames owners decided to make a bad investment in a sports team that doesn't make money?

What is the philosophical stand here, that because the flames owners generously agree to lose millions of dollars a year (in their words), that the city should pony up and do the same?

How can you have your cake and eat it too in this situation? Either the team makes money and there is economic incentive to build a new arena to improve revenue or the team doesn't and it makes no sense to build a new arena to improve revenue because the team doesn't make money anyway and these benevolent owners just like owning a sports team for the sake of it.

[Bingo]

Originally Posted by Flash Walken

One thing incongruent about this argument, and maybe this is the wrong thread for it, is that as fans we are told time and again that owning a sports team is not a money maker. That rich owners don't own sports teams to make money.

We've also heard from Ken King that there are better places to make more moneythan in Calgary.

So then, at what point do arguments about rate of return or economic impact or NPV become moot?

If the owners are saying "Here is the business case for the arena" at the same time they are saying "if we applied a business case, we wouldn't own a sports team", how do they justify asking for public money at all?

Is the rationale here that the City should throw bad money after good towards a stadium because the Flames owners decided to make a bad investment in a sports team that doesn't make money?

What is the philosophical stand here, that because the flames owners generously agree to lose millions of dollars a year (in their words), that the city should pony up and do the same?

How can you have your cake and eat it too in this situation? Either the team makes money and there is economic incentive to build a new arena to improve revenue or the team doesn't and it makes no sense to build a new arena to improve revenue because the team doesn't make money anyway and these benevolent owners just like owning a sports team for the sake of it.

I agree with some of that.

I think the "other places to make money" statement is silly. Sure they may be able to get a free building in Seattle, but where would Seattle rate in operating income once landed?

Maybe really high, but if that's the case given the climate there should be a lineup of 18 franchises looking to move there.

Chances are it's bottom 1/4 of the list and a terrible move for the ownership group as a whole.

So does Seattle buy the Flames and move them there? They could, but then they'd have to spend up to the half billion dollars to buy the team and then plug into a free arena with limited operating income.

Don't see that either.

I do however think the Flames ownership group from era to era have been a great custodian of hockey club through many ups and downs while funneling a lot of money to charity and not caring that they could have invested their money more wisely.

[Flash Walken]

Let's take CSEC at their word that they don't take money out of the team and instead re-invest that capital back into the club.

Is there a variable in your model for a scenario where the team doesn't make any money on the arena, and if so, what does that funding model look like.

I don't see it as a very compelling argument from CSEC to the city that they've gone from being prepared to not take any profit off the Flames to wanting to make money off the flames and needing the city to spend money on a new arena in order to do so.

Like their numbers for CalgaryNEXT and the terms of the cities repayment for this new project, something doesn't make sense here.

[Frequitude]

Bingo, I'd also like to kindly request it be done at 5%.

O&G tends to use about 10% because that reflects the risk premium of the oil & gas industry. I am of the belief that the risk premium of a hockey team and arena ops is much lower. Not quite simply the cost of debt (~3%) but much closer than 10%.

[GGG]

Originally Posted by Bingo

Your comment had me thinking ... are they?

Best way to look at that is to go back to the franchise evaluation and look at it.

So the Flames are worth 410M, lets call the Saddledome what 110M? making the purchase price 520M

If you roll out 18M in operating income and add it to 30% in non Flames events at the dome, and then add in 5% appreciation on the Flames with 5% depreciation on the Dome.

This gives you a $75M loss in 20 years of owning the team if you bought it today.

That's not a big investment loss, but they're not printing money. Not too many people are happy generating $22M in profit utilizing half a billion dollars in capital.

I agree with others ... the NHL is currently setup with the assumption that rich people should own them without making money as a public service.

The Forbes valuation of 410 includes 121 million for the dome. I think that makes them slightly positive.

[Bingo]

Originally Posted by Frequitude

Bingo, I'd also like to kindly request it be done at 5%.

O&G tends to use about 10% because that reflects the risk premium of the oil & gas industry. I am of the belief that the risk premium of a hockey team and arena ops is much lower. Not quite simply the cost of debt (~3%) but much closer than 10%.

But this isn't a facility operation company. It's a group of men worth billions of dollars. They don't enter into 3% returns for their capital. I think 10% is very very conservative as a hurdle, plus I'm applying the same hurdle to the city.

[Bingo]

Originally Posted by GGG

The Forbes valuation of 410 includes 121 million for the dome. I think that makes them slightly positive.

Nope ... still a loss.

Loss of $65M

[Flash Walken]

Originally Posted by Bingo

But this isn't a facility operation company. It's a group of men worth billions of dollars. They don't enter into 3% returns for their capital. I think 10% is very very conservative as a hurdle, plus I'm applying the same hurdle to the city.

But they do enter in 3% returns on their capital. We've heard the president of CSEC say they don't make money on the investment. We've heard how they forego revenue by staying in Calgary.

If this is indeed a toy for them, if their statements are true in regards to operational losses etc, then obviously they are willing to take less than optimal return for something they just want.

So either the team makes more money than they are saying which throws off the model, or they are willing to eat bad monetary investments if it gets them something else.

In this instance, a new, updated arena would get them substantially more revenue and a venue for their other investment, the flames, to remain viable in the long term.

[marsplasticeraser]

Originally Posted by Bingo

But this isn't a facility operation company. It's a group of men worth billions of dollars. They don't enter into 3% returns for their capital. I think 10% is very very conservative as a hurdle, plus I'm applying the same hurdle to the city.

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.