An Informed Discussion Of Stadium Finances

A key point in the stadium renovation kerfuffle is this: is the addition of luxury boxes financially sound and is there a reasonable alternative that allows the university to finance long-overdue structural improvements to the stadium? The argument in this space has been a little unfulfilling -- basically "I trust Martin and every other AD who has added luxury boxes" -- but without the financial acumen to parse out the details of the competing proposals that's all I'm left with.

This has been a huge failing on the part of the MSM when discussing the renovations: no newspaper has actually sat down with a neutral business-talking professional and hashed out the details of the competing (<-- might want to scare quote that) plans. Instead they just quote Pollack and various university administrators and provide no useful information whatsoever.

What follows is a discussion that took place on The Victors, a Michigan message board. The format of the board is such that posts die after a couple days and links within hours, so no links are provided; you'll have to trust that I didn't go insane and have this argument by myself and decide to post it as a discussion amongst other people.

Anyway, after a couple days of extensive conversations about the renovations, a poster named "rekker" came forward with a look inside the finances of the project. Rekker, like myself, is clearly pro-boxes, so keep that in mind. He is also clearly well acquainted with some inside baseball of the athletic department and has seen reports that have not been released publicly (or, if they have, have not been well-publicized):

I read the various threads on Big House renovations earlier. This is an attempt to clear up some misunderstandings about renovation costs and various financing options. These are informed, but not official Athletic Department, numbers.

1. The situation:

The Big House is an historic structure that many people love. But it is also far below modern standards in almost every area. This includes:
- Concourse areas at about 50% of recommended area per patron
- Flow into and out of the stadium at less than half the recommended rate (10-15 minutes to enter just prior to game time)
- Far too few concession areas. Temporary nature of these limits food quality as well
- Far too few restrooms and conditions that are medieval
- Until recently, a crumbling concrete foundation
- Aging and inefficient systems (power, water, HVAC, etc.)
- A press box that is (literally) a safety hazard. It is in danger of falling down.

All these things need to be addressed. Because so little was done to the stadium for so many decades, the fixes are incredibly expensive. Addressing all of these things (with the exception of the press box) will improve the game day experience for EVERYONE who attends a game.

2. Cost Breakdown:

It is somewhat difficult to separate the various categories of costs, because many costs serve multiple purposes. A key point of dispute is how to allocate common costs. For example, rebuilding the press box alone requires quite a bit of structural work (somewhere in the range of $30 million). Adding luxury boxes to the press box structure (west side only) increases the cost only incrementally (around another $20mm).

Since much of the renovation will benefit everyone, I believe it is reasonable to:

(a) Start with the things that absolutely need to be done and cost those out. These are (concrete replacement, replace benches, redo utilities). The cost of these "must do" items is around $45 million (+/- 10%); then

(b) Add items that benefit everyone and cost these out. These include improving concourses, adding second level concourses, and rebuilding concessions ($30-35mm), widening aisles and improving bathrooms ($15-20mm), and rebuilding the press box ($30mm)

-- total for categories (a) and (b) is $120mm to $130mm

(c) then add the discretionary items (club seats, boxes, club level, etc.). These total around another $100 million.

3. Translating this into annual costs. We have two potential projects to consider:

"Basic" project -- (a) and (b) alone, with a project cost of around $125mm. If we assume a capital cost of 4.5%, and repayment over 25 years, annual payments on this "basic" project would be just about $8.4 million.

"Luxury" project, with a total project cost of around $225million. If we make the same assumptions about cost of capital and repayment, annual payments on the "luxury" project are $15.1million.

4. Options for paying.

So, how should the AD pay for the projects? There are three basic options.

4.a We could charge all existing ticket holders a per game surcharge until the project is paid off. Quite a few schools have done this.

Assume 7 home games per year and 107,000 purchased tickets per game. The PER GAME ticket surcharge would have to be $11.22 per ticket per game for the next 20 years. If we chose to exclude student tickets, the surcharge on everyone else would go up.

4.b We could add more seats to the stadium. Pollack often suggests this, but the math doesn't work out.

Assume 10,000 more seats (ignoring for the moment that this would suppress demand and cut the waiting list dramatically). For the 10,000 new seats to pay for the "basic" renovation, the seats would have to sell for $120 per seat per game ($8.4mm / 7 games / 10,000 seats). Put another way, assume these seats averages $50 per ticket, they would only generate about $3.5 million annually, or approximately 40% of the cost of the basic renovation.

So, this option does not come close to paying for the basic renovations.

4.c Let the 4100 people who would like a premium experience pay for the whole thing. The basic math is as follows:

3200 club seats. Average required donation is 2500, plus the $350 ticket cost. Add in some parking and concessions and call it $3000 per seat per season (this is very conservative and does not assume any extra donations). This leads to $9.6 million in incremental revenue.

83 boxes at an average license fee of $70,000 per season. This leads to another $5.8 million in incremental revenue.

So, the "luxury seating" costs around $6.7 million per year, but generates around $15.4 million in incremental revenues. The cost of the total project is around $15.1mm, so the revenues generated by the luxury seats pay for all of the improvements!!!

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The bottom line is that the "luxury seating" pays for the entire project, even though it accounts for only around 40% of the project costs. The only way Pollack and the "Save the Big House" crowd show it doesn't work is to assume that the entire $226million cost is only for luxury boxes. They then add things like interest to the cost--which anyone who has taken even basic finance will tell you makes no sense because it is double counting.

Note that this analysis also assumes that every box and club seat holder contributes only the minimum amount. Because locations are determined by donations, many people will contribute much more than the minimum, thereby ensuring that the people in the premium seats pay for everything.

Pollack his buddies refuse to acknowledge a couple things.

1. That major renovations are badly needed and that the majority of the costs of this project will benefit everyone at the Big House.

2. That their alternative financing options don't come close to paying for badly needed renovations. Martin's plan puts the entire cost on 4000 people who are happy to bear it. Pollack's approach hoses everyone and doesn't cover the cost, he just doesn't like to admit it out loud.

3. That the Big House has never been egalitarian. Regents sit in a Regents box. Until the PSL was implemented, tickets between the 20s w
ere allocated on a "who you know" basis. I know people in the AD, so I was able to acquire 45 yard-line seats a few years ago—no payment, no waiting list. This is the antithesis of egalitarian. Pollack likes this mythical kind of egalitarianism because he is connected. But it shuts out everyone who is not. Scarce resources have to get allocated somehow. Given that the AD needs money to compete, allocating seats via donations is much more "fair" than doing it through the old boys network.

4. Demand for both the boxes and club seats is strong. The AD just sent out a brochure to Big Ballers (annual 5k contibutions) about two weeks ago. They already have deposits on 35 boxes and around 1,000 club seats. 90% of Victors Club members have not even been contacted year and inventory is already running short.

5. Finally, the fact that opponents are whining about "process" just shows that they have lost on the merits.

The stadium renovation came before the Regents four times. Pollack spoke to the regents once. He asked for and was given a spot to speak at a second meeting, but he didn't show up. He is whining about being denied a chance to make his point FOR THE THIRD TIME!!! Does anyone think that if Pollack would have been allowed to address the Regents one more time, he would have changed any votes? Obviously not.

Everyone who knows about other schools experiences with luxury seating, and about the finances of the project believes that this is a slam dunk. 99% of the objections are either of the type "I don't understand and you can't proceed until I do" or complaining about process.

None of that matters now. Martin and the AD are bringing the Big House into the 21st century and creating a financial model that will allow U-M to compete for decades.

An initial complaint:

Ignoring the rest of the post for a minute, do you really think that point 5 is valid?

If I come thump you on the head and take your wallet, you might well complain both about the outcome (I now have your money) as well as the process by which I got it. Just because you complain (or as you say "whine") about the process doesn't "show" that you are "wrong on the merits".

Come on, if you are going to try to be levelheaded and analytical here, resist the urge to chuck in stuff like that.

Rekker responds:

I don't agree. Pollack and most opponents major talking point over the past few months has been that he couldn't get on the schedule for the final Regential approval.

I am not trying to say that the process was perfect. It wasn't. But then no process is. It was not, however, snuck through. The renovation came before the regents 4 times--with public comment. Martin and the AD discussed it in numerous interviews and held a series of public info sessions, also with long and long-winded public comment.

The people who make the decisions are fully aware of what the objections are. They allowed opponents to make their case and then made their decision. That is very different than suppressing comment. Pollack (and I assume your) position was heard loud and clear. You just lost the argument. Your voice wasn't supressed.

If the opponents best argument is about whether the agenda for the 4th hearing was announced 48 or 72 hours in advance, that tells me the rest of their argument is pretty weak.

From a strict logic point of view (like your wallet example) opponents could have both a process and a substantive point. But since 99% of the objections are now about trivial process points, I think the best interpretation is that they really don't have a substantive point.

A rebuttal from an off-board person who's pro-Pollack:

This is from a friend of mine who is very pro-Pollack and the other Save the Big House folks. I thought your take was great. What's your response to his?
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I guess i just didn't realize michigan stadium was such a sh!thole. no wonder most people only make it to one game a year. i'm trying to figure out how we can sucker 110000 people to put up with such squalor for 2-4 hours every saturday, i guess we can just chalk it up to billmo's brilliance...

this is one guy's opinion, he can make up numbers and "facts" and twist them anyway he wants. the big house plan is another guy's opinion, they can call each other all the names they want but it doesn't change the actual facts. below are the high level points of the big house plan, but most importantly for me it doesn't destroy the stadium visually or alter its character...and it increases capacity by 10000. Also, keep in mind all this bullsheeet about how they'd HAVE to raise ticket prices to pay for the project without Martin Boxes is a load of crap. The PSL's bring in an additional $12 mil/year, 99.99% of that is pure profit baby. The department has $40 mil in cash stashed away. The true cost of all of the renovations minus the Martin Boxes is more like $50 - $60 mil (this is directly from an Ann Arbor News graphic of the different proposals based on info provided by the Athletic Department). Do the math on how long it would take to pay off with no ticket surcharge.

The Big House Plan:

1. Was developed by a national, all-volunteer team of Michigan architects

2. Adds 10,000 bleacher seats instead of private luxury boxes, bringing capacity to 117,001

3. Achieves all consensus goals outlined by U-M officials for the stadium, including a new press box with modern facilities for U-M officials and the media, wider seats and aisles, ADA-compliant seating, and more restrooms and concessions

4. Costs $93.1 million (including debt service)

5. Pays for itself without a ticket surcharge and generates net revenue from day one

6. Protects Michigan Stadium's quos status as the biggest in the country

Rekker responds:

First of all, my numbers are solid (based on documents from the AD and from Barton Malow, the construction company).

Second, there are a couple of logical errors in your friend's response. The PSL money and the cash on hand already exist. You can't start new spending and say "it pays for itself" because your plan involves raiding the cookie jar.

The "basic" plan described below comes in around $125 million, or $8.4 million per year. The "Save the Big House Plan" people used to say they could do things for $60million, then $90million. But it was pointed out that they leave a lot out (utilities, second level concourses, etc.). My impression was that they had stopped talking about the financials of their plan because they are so farcical.

As to the raiding the cookie jar fallacy, consider the following. Let's say you have saved $100,000 for retirement, but you wife wants to buy a Mercedes for $105,000 and wants to spend the retirement money. She indicates that she thinks she can make $10 a week ($500 a year) with the new car by delivering meals on wheels. If she came to you and said "the new car pays for itself over 10 years" ($10/week * 10 years = $5200) would you agree? If so, I hope you never plan to retire.

That is what the STBH plan consists of. Grab a bunch of resources already commited to other things and claim that this grab "pays for" their plan.

Doing the financials the way I did (project incremental costs, project incremental revenues, match them up and discount) is the right way to do this. The STBH financial plan is three card monty.

These guys have a goal and are simply backing into "plans" that support the goal, whether these plans make sense or not. They then try to shift the burden to the Athletic Department to prove their farcical plans are wrong.

That's not how these things work. U-M has a system. The athletic department is responsible for its own finances. It works with the U-M CFO to work out details and make plans. They then present these to the President and
th Regents for approval.

All of this has happened, with input along the way from the public. Just because some joker like John Pollack makes up some numbers and demands equal billing with the officials authorized to make these decisions does not mean that everything must come to a halt until he is satisfied (which we all know he never will be).

Another anti-box complainant:

...it will take 25 years or so to pay this off, so on an economic basis, it won't generate any new revenues for the athletic department until about 2035.

What it will do is change and update the stadium and, as you say, use the well-heeled folks to pay for it all.

However, your financial scenario predicts a revenue income stream of only a few hundred thousand more than the required debt servicing on the project.

It also assumes that all 83 luxury boxes will be rented each season for the entire payback period and that the preferred seating also will be purchased during that time.

To quote Aesop, you are counting your chickens before they've hatched.

In my experience, that's a pretty large and likley very wrong assumption and I would bet a large sum of money that every box will not be leased each season over a quarter century as competition for entertainment dollars grows, the Michigan economy fluctuates, and the fortunes of Michigan football ebb and flow.

In your economic scenario in only takes 5 luxury boxes to not be leased, and that puts you under the required annual revenue stream needed to be generated to service the debt.

Also, you cannot assume that the average $70,000 yearly rental fee will stay the same (I would assume that it will increase), and that as a result of increases, tenants will be gained and lost.

My guess is if you keep a lease rate of 90 percent (about 74 suites), you will be doing well.

As Winged Victory has stated, there are private donations the university is trying to generate and counting on to help offset the initial cost of the project. But once again, that makes another assumption -- that the cost is going to remain $220 million.

No doubt this is the price as best can be figured today. But U-M will be extremely lucky if that is the end cost for such a large project (I'm going to make an assumption that Bill Martin has already accounted for that) because cost overruns are almost certain to occur.
As you've probably heard, the prices of metals is skyrocketing currently because of growing demand for steel in Asia, and given the amount of steel in this project, it's going to be affected.
Also, you cannot be sure that ADA compliance and other architectural unknowns aren't going to pop up and push the cost higher. And then you have the weather, which can either lower your costs by cooperating, or increase them by not cooperating.

Overall, you've nailed the numbers pretty good, but I still think the numbers your state are too rosy a scenario given the unknowns.

However, as you say, what are the alternatives? Funding stadium upgrades by raising ticket prices to the point where you risk alienating your core base of customers seems like a bad bet. And a ticket surcharge might work, assuming it will be dropped after the improvements are paid for. But I have seen few public entities willing to do that. Once they get a taste for the extra money rolling in, they find a way to make it permanent.

Rekker:

1. The key point is not whether the club seats and boxes generate a few hundrew thousand more or less than the entire carrying cost of the rennovation. The key point is that they cost around $100mm and generate enough cash (to a first approximation) to pay for a $226 million project.

2. Most of this stuff has to be done anyway. using my assumptions, these "have to do to bring us up to acceptable" items cost around 8.4 million a year. The AD COULD fund that stuff out of it's overall surplus, but why do so if people like Rick Waggoner, Bill Davidson, and Steve Ross are saying "let me fund it". The incremental cost of the luxury seating is around 6.7mm per year (15.1 - 8.4). If the luxury seating generates 14.5 instead of 15.4 mm per year in revenues, U-M is still FAR FAR ahead of where it would be without the luxury seating.

3. Most assumptions in the AD projections are very conservative. For example, carrying costs will be fixed but required donations are likely to increase 3-4% annually.

Also, I have assume NO donations beyond the required minimums. These levels will clearly be exceeded--probably by 7-10 million per year.

You are right that there are potential downside risks. But these are more than offset by the deliberate ignoring of a lot potential upside risks.

If this were an investment in which they were selling equity, I would be buying lots and lots of equity. That's not to say it is riskless, but the overwhelming majority of the uncertainties are on the upside, not the downside.

A second response from an informed poster:

you hit on an important point, which is why the Athletic Department hired a firm to research the demand for the boxes, as well as prices ect. I have never read a copy of the report, but seem to recall that their recommendations were that M could build as many as 100 or so boxes and that the average cost could be much higher than it is, and that the demand was there. The athletic department intentionally chose a number of boxes (83) that was well below what it was projected they could sell them at, and an average cost that was well below the recommendations ($70,000 or so). In fact, I believe the minimum cost was raised from $45,000 to $55,000 based upon the fact that the research showed the $45,000 figure was way below market value.

And I believe that the only stadium that had trouble selling all of its luxury boxes and club seating was MSU. Even then, the reports from MSU were that, even though there luxury boxes were not all sold, the luxury boxes led to a very significant increase in private and corporate donations directly from the box owners, and more than justified the construction of the luxury boxes.

This gets to an important point, which is that Martin's projections did not include any increase in donations, income from selling the names of the luxury boxes (apparently there is some demand for this), income from selling the names of the concourses and common areas, and a very significant bump in advertising revenue from having permanent concessions areas with far more visible advertising space, as well as the second level concourses and the staircases. This income will be very significant and was not included in any of the calculations.

How much will the naming rights bring in? Rekker:

The donation for naming each tower was well into seven figures.

I don't think the AD would be happy to see the exact number out there, but it was several times more than a million.

Right, all this comes with an "OMG INTERNET" disclaimer, but I see no reason to believe any of these people are taking the gullible for the proverbial "ride". If there is an anti-box counterpoint to the numbers expressed above that's significantly more rigorous than the one Rekker demolished, send it to me and I'll post it up for people to evaluate.

I kind of doubt such a thing exists, but, hey, Notre Dame won a game against a BCS school. Miracles happen.