Luxury Box Mailbag!

Submitted by Brian on August 28th, 2009 at 4:48 PM

On Thursday I posted my impressions of the luxury boxes going up in 2010 and offhandedly mentioned that Michigan is constructing a money factory, or "mint." A reader challenged those assumptions with numbers:

I am quite surprised that you describe the stadium expansion as a "money factory" or anything like it. Remember, the cost of this project (even if it comes in at budget) was set at $235M. [Editor's note: He later corrected this email: the overall cost for the renovations was $226 million.] 

Looking at the Athletic Department numbers, and assuming they sell every seat and find folks to pay for everything they put a price on for naming rights, I don't see this as anything more than a break-even proposition.  They list $56.3M in naming rights ($33.45M of which is apparently spoken for), which gets the amount they need to finance (I am assuming they are financing it, but even if they are not, there is at least an opportunity cost for the money they are using) down to $178.7M (235 minus 56.3).  Taking your $5.7M number for the Suites revenue per year, you can add $1M for Indoor Club Seats (250 @ $4000 per), $6.2M for Outdoor Club Seats (2750 @ an assumed average of $2250), and $1.3M for Chairback Seats (650 @ $2000). The annual total is approximately $14.2M.  At that annual payment, it would take 30 years to pay off $178.7M at a 6.88% interest rate.  At a 5% interest rate, it would take 20 years.

In 20 years, these "luxury" places will need considerable renovation, I would guess.  If they do not sell all of the naming rights or all of the seats, they will have to pay for a longer time to get this paid off.  Even Mr. Martin never said this was to be a money maker.  He claimed it was the only way to pay for needed upgrades to the existing stadium. However, now, the aisle widening (which I do not really understand, because the bottlenecks are the entrances to the sections, and I don't think they can do anything about those) is not happening as part of this original project (which is to be done in 2010), and the seat widening may not happen at all.  I agree that they seem to be doing a first class job of what they are doing, but, other than to provide a few rich guys with fancy digs, I do not see this project as a financial winner.  Please help convince me I am missing something. 

I thought the assumptions above were pessimistic. Not all of the money in the renovations is going to the boxes and holding revenue constant over a period of ten or twenty years is excessively conservative. Also, the assembled media was told specifically that the seat widening was on and given a timeline for that process. But I am not a business guy and I don't have the numbers at my fingertips to dismiss his point out of hand.

So I asked a guy who goes by the handle "rekker" who's close to the project and has been providing solid information on the construction since it was announced. He responded like so:


This guy is reasonably coherent, but his analysis contains a couple of big, incorrect assumptions and logical flaws. I’ll start with the analytical problems. I’ll then present what I think of as the proper way to consider this project.

1. Your emailer assigns the entire cost of the project to the luxury boxes and club seats. That’s wrong. The project consists of three distinct elements. Because they are intertwined, it is difficult to assign a precise share of the cost to each piece, but these are approximations.

  • Long-neglected maintenance – including replacing all foundational concrete, replacing all benches, replacing all mechanical systems, replacing the press box, which is structurally unsound, etc.

    The approximate cost of this (absolutely necessary) work is $60-75 million. Even if it there were no stadium renovation or premium seating, this work would have to be done over the next few years.

  • Improvements that make the game day experience better for everyone. This includes new (double-decker) concourses, wider aisles, wider seats, new and more bathrooms, new concession areas, etc.

    The cost of these “improve everyone’s experience” is about $75-90 million. So for items (a) and (b), we are now up around $150 million.

  • The cost of the towers, which contain the club seats, luxury boxes, and the new lounges. [Editor's note: also the new press box.] The incremental cost of these is around $75 million.

2. The cost and financing details are much friendlier than proposed.

  • The project cost is $226 million, not $235 million.
  • The athletic department is covering $36 million of this cost out of existing reserves. They also plan to raise $40-50 million in naming opportunities ($33mm is in hand). So the net debt needed for the project is actually about $140 million (not $178 as he suggests).
  • Because of the financial crisis, the AD was able to get a great rate on the bonds it issued for the project. They came in at just over 4%. Because the interest rate was so low, the AD decided to finance a total of $190 million, but this allowed it to retain about $50 million is cash reserves as a cushion. Net borrowing (since the cash reserve can be used at any time to pay off the debt) is $140 million.
  • The carrying cost of $140 million at 4% (assuming a 20 year payoff of the principle) is $10.3 million.

3.The likely donations from the boxes and club seats  are likely to be higher than the minimum required.

  • The 82 boxes will provide a minimum of $70,000 per box ($5.7 million), but the AD estimate is that top-up donations given to secure better locations will bring this up to between $7 and $8 million.
  • His estimates for the club seats are reasonable, but again too low. He presents the absolute minimums.

    Club seat (and chairback revenues) will total at least $8.5 million. In reality, competition for the better seats it driving donations up. Zone 1 club donations are averaging about $5,000, vs. the minimum requirement of $3,000. This likely won’t play out over all seats, but the AD is confident that the club and chairback seats will produce more than $10 million in incremental revenue.

  • So the total incremental revenue will come in at between $14.2 million and $18 million.

How to think about the project

UM has a large need. Maintenance had been neglected for decades, the bathrooms are medieval, and the flow in and around the stadium is horrible.

The AD could undertake a $150 million stadium improvement project with no luxury seating (items 1a and 1b above), and no clear way to pay for it. This would mean about $100 million in borrowing and a roughly $7.3 million annual financing cost. Or the AD could add luxury seating for an additional $75 million cost ($225 total), and ask those 4000 rich people people to cover the cost of the whole project.

Option 1 would require something like a $10 per game surcharge on all 100,000 tickets sold for every game for the next 20 years (7 million per year, 7 games, 100,000 tickets per game).

Option 2 has no surcharge for regular ticket holders. The overall project costs about $10.3 million per year to pay off, but the luxury seating crowd generates somewhere between $14.2 and $18 million per year in incremental revenue.

The AD has been generating annual surpluses of $5 million to $9 million for the past few years. Adding $4 – 8 million to this while covering the entire cost of the stadium expansion seems like a pretty great investment. And remember, this is all being done with no cost to the 100,000 plus people who will sit in the bowl each week.

Before someone objects that not all the seats are sold, I’ll admit they are right. But 70% of both the boxes and club seats are sold. And this is with a year to go. Even if not one more seat is sold, the current reservations would generate $9.9 million, just a few hundred thousand short of the carrying cost for the entire project. I’d bet on the over on this one.

While the project is perhaps not literally a “money factory”, it is about the closest thing we’ve seen in Michigan for many years.

[/insider, back to me]

We all love the Big House but we've probably all got horror stories about missing half a quarter because of congestion or excessive lines or (especially for women) bathroom overcrowding. And then there's always that one guy—you know that guy—who will battle you for every millimeter of space in your seat. And don't get me started on Incredibly Pointy Knee Guy.

When I took the tour, the SID repeatedly pointed out the new walkways, concourses, and points of sale across the stadium. The seat and aisle widening will be complete by 2013. And the entire stadium will be brought into ADA compliance. And the net cost to the bowl is zero, with the AD netting somewhere between $4 and 8 million per year above and beyond paying off the loan. Whatever issues you have will Bill Martin—and I have a few—financial acumen cannot be one of them.



August 28th, 2009 at 5:14 PM ^

Enjoyed the breakdown - the renovation was absolutely necessary. The way everything breaks down, it sounds like Bill Martin knew what he was doing and it is a solid investment. It's nice to get info on the numbers. Now here's to UM having a higher number on the scoreboard than WMU come saturday!


August 28th, 2009 at 5:24 PM ^

As much as Martin gets ridiculed for his management of the coaching search and the football scheduling practices of the last few years (and justifiably so), he has done an incredible job of remaking the athletic campus. Given his background in real estate and construction, it should not be a surprise.


August 28th, 2009 at 5:26 PM ^

Hi everyone. Thanks to Brian for reaching out. I am happy to contribute to the board, and to attempt to answer any questions you have about the financial aspects of the project.

The project is turning out VERY nicely. Lots of investment, but it will have a huge effect on everyone's game day experience -- concourses, crowd flow, bathrooms, concession areas, and of course very nice places for the suit guys.

People don't seem to realize how rare it is for have an athletic department that support itself. And that can pull of projects like this without asking for subsidies from the University (Ohio State) or surcharges on all students (MSU for Breslin).

Some aspects of Bill Martin's tenure are debatable. But anyone who questions his financial acumen is deluded. On that dimension, at least, he's the best in the country.


August 28th, 2009 at 8:49 PM ^

Yes. I've seen sketches and some plans.

The Practice facility will be located on the east side of Crisler - jutting out from the east side into the first few rows of the parking lot. It will be connected to Crisler. A couple nice features:

- there will be offices, locker rooms, video, hang out areas, PT/trainer areas, and practice courts for both the men's and women's teams.

- the finishing will be very very nice.

- the coaches believe that this will have a very positive effect on the programs. With the current setup, basketball offices are at Weidenbach hall (on State Street), but practices and trainer stuff is at Crisler. There is no "hang out" area. So the programs are split, with lots of running back and forth. There is no area that they really "own," like Football owns Schembechler hall and the Glick facility.

With the new practice facility, the basketball operation will be all together. Areas for coaches, video, trainers, and practice. It will be their space, and they won't have to share it with the Indian pow-wow or academic events.

- the facility will be integrated with the existing training areas under the east side of Crisler, and there will be an entry tunnel from the facility into Crisler (just to the left of the current visitors bench).

- Crisler renovations are a couple years down the line. They include a covered entry way (including stairs) on northeast corner. Also plans to completely redo the concourses -- bumping them out a few places, putting in an M-Den, and getting rid of the dusky old display cases. Plans (not finalized) to upgrade concessions and retailing.

Other things include new seating, painting the ceiling, new systems, etc. They are considering, but have not settled on putting in a premium seating area.

All in all, it will be a nice upgrade, but nothing like the giant leap forward that we are seeing with the big house project.


August 28th, 2009 at 5:28 PM ^

not to mention, though Brian does bring it up at the end, that part of this renovation included a court mandated renovation for wheelchair access, etc. ballparking this between 10-20 million to make the necessary changes without this renovation, that removes 1-2 years of "financing that was financially unsound" from the math.

Go Blue!

ATX Wolverine

August 28th, 2009 at 5:29 PM ^

Financial acumen is clearly a strength of Martin's, but it also helped that the project was financed at a great time. I wonder how things would have changed if we were talking about financing this project now versus a couple years ago. I'd guess the project would have been scaled back a bit and the net borrowing would have been lower.


August 28th, 2009 at 6:02 PM ^

I think you misread the analysis my friend. It is BECAUSE of the financial crisis that Martin was able to finance this project so cheaply. Bond financing is different from debt/equity financing. Buying a bond, especially one from a public/government entity is considerably safer than giving an individual or company a mortgage. As such, in times of crisis, investors flock to bonds as a financial safe haven driving yields lower, i.e 4% on the stadium bonds or US treasuries near 0% last fall.


August 28th, 2009 at 8:44 PM ^

"It is BECAUSE of the financial crisis that Martin was able to finance this project so cheaply."


"Bond financing is different from debt/equity financing."

Bonds ARE debt.

"Buying a bond, especially one from a public/government entity is considerably safer than giving an individual or company a mortgage."

California? Iceland? Municipalities?

"As such, in times of crisis, investors flock to bonds as a financial safe haven driving yields lower, i.e 4% on the stadium bonds or US treasuries near 0% last fall."

This SOLELY applies to US treasuries. Also, stadium bonds aren't publicly traded, so they aren't exactly going to be appreciating in value in anything near how you'd think about UST.


September 13th, 2009 at 2:53 AM ^

you sir, are an idiot. You clearly have no knowledge of modern finance:

bonds are a form of debt or course, but quite different than equity financing.

"This SOLELY applies to US treasuries. Also, stadium bonds aren't publicly traded, so they aren't exactly going to be appreciating in value in anything near how you'd think about UST"

WRONG: First, all bonds are publicly traded in one form or another... I would know.. I'm a fucking bond trader. Second, Muni bonds are one of the most heavily traded bonds on the market. They are safe, moderate in yield and risk, and usually have high credit guarantors.

Again, I go back to your above statement: It does NOT soley apply to USTs. It applies to all bonds. I know for a fact that these bonds can be traded because I do it all day for a living.

I can assure you that plenty of the investors that purchased stadium bonds (backed by UM credit - AA rated) haved sold, traded or arbritraged their positions in these bonds in some matter (ie, i have traded them).

I hope you enjoy Bonds 101 FX, cause you really have no clue.

Your are a financial FAIL

OMG Shirtless

September 13th, 2009 at 3:04 AM ^

What the fuck is your problem? You dig up a post from weeks ago and bitch on a night like tonight? You should be basking in the glory of THE KNOWLEDGE's prediction. The fact that you would correct someone on a topic like this in the middle of the night after a Michigan victory means you are some kind of fucking loser that I don't ever want to be associated with.


September 13th, 2009 at 3:20 AM ^

you know what... you are probably right. but the fact is he was totally wrong and i never had a chance to respond. the timing is terrible but a coincidence. Shock is a consistently negative poster who gets his points by belittling other posters comments. i saw his response to mine, albeit very late, and corrected him... just as you did mine. maybe i am a loser as you say, but i am a loser who knows what the fuck he is talking about and has two michigan diplomas hanging on his wall.

no dis to you, but shock is a dick.


September 13th, 2009 at 4:43 PM ^

First, go ahead and dig up some posts where I have points from belittling other posters.

Second, I do know what I'm talking about and your finer points are incorrect.

"As such, in times of crisis, investors flock to bonds as a financial safe haven driving yields lower, i.e 4% on the stadium bonds or US treasuries near 0% last fall."

This SOLELY applies to US treasuries. Also, stadium bonds aren't publicly traded, so they aren't exactly going to be appreciating in value in anything near how you'd think about UST.

I did slightly misspeak here, I meant exchange traded, not publicly traded. In times of financial crisis, money flows to very liquid, safe instruments. Stadium bonds sure as shit don't fall into those categories. Specifically, construction backed bonds and CMBS has been getting it's shit handed to it. While I realize that the UM endowment essentially backs the Stadium bonds, the notational outstanding isn't really enough to drive appreciation. It would make no sense for investors to drive the yield below par on 4%, 20year Michigan bonds, when they could have constructed 20 year duration out of 10 and 30 USTs, which are AAA, have comparable yield, and are much more liquid.

I apologize that my misspeak set you off on a rant, but my points still hold.

"Second, Muni bonds are one of the most heavily traded bonds on the market. They are safe, moderate in yield and risk, and usually have high credit guarantors."

Again, California, Iceland, Municipalities?

I do love the fact that you point out you have 2 Michigan diplomas on your wall. Guess what, I have 2 diplomas too, but I don't bother to hang them on my wall because I'm not an arrogant prick that ever feels the need to reference where I got my degrees from to win an argument.


August 28th, 2009 at 5:39 PM ^

I am incredibly pointy knee guy. I'll admit to that. At 6'6", I do my best to keep them out of your back, but there's really nothing I can do.

Michigan Arrogance

August 28th, 2009 at 5:51 PM ^

this was all stated at the time of the regent approving the project. BM himself, in the FAQs about the project stated the necessary and unavoidable renovations needed to the EXISTING structures. building the new ones was the most financially effecient way to operate.


August 28th, 2009 at 5:54 PM ^

Thank you for the excellent financial analysis.

I was one of the alums who opposed the improvements for fear that the "purity" of the Michigan Stadium and the Michigan experience was being compromised. I was wrong. Any facility needs upgrading. This is a clever way to have a few high rollers pay disproportionate sums to benefit the masses. The analysis is very persuasive.

When I was a very young lad--over 50 years ago-- I ran the ticker tape from one room in the Michigan Stadium press box to the announcer, who then broadcast the Slippery Rock score to the fans over a PA system. Such a primative technology. But the fans would roar in collective amusement and delight. Today, every fan has an IPOD or Blackberry and has no need to rely on the antiquated ticker tape for information. But we fans still need to roar in collective amusement and delight. That is the essence of the Michigan Stadium experience that must be preserved.

It matters not whether the scoreboard is manually operated or lit up with millions of pixels; it matters not whether skyboxes are perched over the masses; it matters not whether there are ten urinals or a thousand. What matters is that 100,000 plus believers gather on Saturday and, with goose bumps of expectation, roar in collective amusement and delight for the Meechigan Wolverines. Go Blue!


August 28th, 2009 at 5:54 PM ^

the too late now Option 3

1) smaller scale towers, suites, and lounge additions. Perhaps two levels instead of three.

2) Second deck(s) or extensions of the bowl large enough to get to 120,000 initially, with allowances for further expansion.

3) $500 Bond issues sold to season ticket holders, in addition to the financing mentioned in the text. Even at 25% participation that's still $12.5M.

I was not (and am not) one of the "Save the Big House" people. I just think that this renovation should've included an expansion of the bowl from the start. It sounds like their talking about it now that Texas is getting close in capacity (and has plans to go to 115,000).


August 28th, 2009 at 6:05 PM ^

I agree that it would be nice to have a larger bowl with greater capacity, but the magnificence of the the Press Box/towers/luxury boxes seem to be escaping you.

Maybe the next round will add seats, but I think the largest stadium in the country arms race thing seems to be a little played out.


August 30th, 2009 at 10:04 AM ^

Sorry, but I don't think we would've had any trouble selling 10,000 more seats. Remember that: a) these renovation decisions were made over 5 years ago, b) many people who were on the Wait List for years dropped out, and c) the PSD in the end zone is only $50.

Further, we would/could have done it in stages, reaching 120,000 over several years.


August 28th, 2009 at 6:01 PM ^

William C. Martin, MBA '65, Michigan Business School [now Ross School of Business]

That right there folks is the Michigan Difference, hell yeah.


August 28th, 2009 at 6:03 PM ^

I think it helps that they hired brilliant architects who got a feel of the soul of the stadium and simply made it more grand. Other than the future capacity issues, i have never understood why anybody would oppose the expansion after seeing the sketch mock-ups.


August 28th, 2009 at 7:46 PM ^

Kinda funny but when I saw the sketches of this project I wanted them to make the new structures go all the way around the stadium - kind of like Lambeau Field. I found it funny that I wanted more when there are so many people who want less.

Also one other thing to mention is the POTENTIAL for more games being played at the Big House. If we actually get the world cup game, for example, wouldn't that be significant revenue for athletic department? Events like that want high quality press boxes and lots of suites so perhaps that's a beneficial side effect of all this we haven't even thought of.


August 28th, 2009 at 7:49 PM ^

Oh one other thing I meant to mention. If you have people paying all this money for a suite - shouldn't they expect the majority of the season to be at the Big House (7 or 8 games a year at least right). That would justify Bill Martin's scheduling practices in the future if he does that. I wonder if people will be disgruntled when we go to UConn - assuming we don't buy ourselves out of that contract first.


August 28th, 2009 at 10:00 PM ^

Brian, at the end of this mentions other issues he has w/ Martin. Anyone know what these are? Has he posted on this and I missed it?

Granted, I'm no insider, but from what it looks like he's done/doing a fantastic job in all aspects... of course there was the boating excursion at a very inopportune time, and yes, that was pretty poor judgment, but other than that things seem to be stellar under Martin... plus I can forgive him for the boat trip b/c it all worked out and we got RR.


August 28th, 2009 at 11:01 PM ^

It's mostly that Martin is *too* into money. The renovations to Yost put a damper on the student section and forced the band to move away from their endzone spot because club patrons thought it was too loud. Various football scheduling decisions are irksome.

Also the football coaching search, though it ended well enough, was a fiasco. I still think he's an A-/B+ AD and will be remembered as Canham II.

Bando Calrissian

August 29th, 2009 at 1:35 AM ^

There are a lot of big-time donors who are growing extremely tired of how "into" money Bill Martin is. There are a lot of people who have given within their means for 30-40 years, from the initial Canham passing of the hat, the years when the Victors Club could meet in a conference room in Crisler Arena, when there were exactly two rows of parking for Victors Club members in the parking lot next to the tunnel. They weren't necessarily millionaires, but they were led to believe they would be valued members of the Michigan family (and given a certain level of appreciation) for their substantial donations.

So many of those people are being pushed out because apparently their decades of loyalty and still substantial giving mean nothing when there's a corporation willing to pony up what would be a year's salary for a luxury box.

It's gotten to the point for a lot of people where they feel, in little ways, accruing from year to year under Bill Martin, the Athletic Department has made it known they don't give a crap. They just want the money. Now, there's something to be said for the fact that they need the money, but at the same time, Michigan isn't other schools. We're a family, we're a place where loyalty and tradition mean something. As Fritz Crisler said, and Bo reiterated, "tradition isn't something you can buy at the corner store." Unfortunately, it is something you can buy at Weidenbach Hall.

I'll also say this: there was a point in time where our new football practice facility would be named after someone like Tom Harmon or Dan Dierdorf, not a steel executive with a fat checkbook.


August 29th, 2009 at 2:09 AM ^

I'll also say this: there was a point in time where our new football practice facility would be named after someone like Tom Harmon or Dan Dierdorf, not a steel executive with a fat checkbook.

The point in time you refer to was mostly before Title IX, when football had to become a cash cow to support over a dozen money-losing women's sports teams (along with some money-losing men's teams as well). That also was in the days when tuition at U-M was cheap. (Tuition for scholarship athletes is now one of the biggest expenditures the athletic department has. Unlike most other schools, it does not get a tuition break from the university for out-of-state athletes.) The reality is that we have to come up with more money than ever before to run a successful program. Do you want the football team to keep practicing in a badly cramped Fieldhouse with a traditional name or a state-of-the-art facility named for a donor?

(BTW, we would have never named a building after Harmon or Dierdorf, because they never served as coaches or administrators.)


August 29th, 2009 at 7:57 AM ^

So, you don't want Martin to aggressively seek out money, you don't want donors who build practice facilities acknowledged, you want to enjoy all the amenities and you want all the privileges to go to people who gave modest amounts of money 30 years ago when Michigan didn't have any women's sports to support. If you knew your history you'd know that Yost had to deal with many people just like you, and happily he either ignored or defeated them.


August 29th, 2009 at 1:53 AM ^

Honestly, I don't think our coaching search was particularly atypical. It seems like the average program that conducts a national search gets turned down by its first choice, flails around wildly for a little while, before finally landing somebody. I think we just don't pay as much attention when it happens to other programs. If RR wins big, few will care about the process. Heck, Bo wasn't Canham's first choice, either.

Michigan Arrogance

August 29th, 2009 at 9:31 AM ^

don't blame BM for the OOC sched. blame the BCS and the NCAA.

and i'm not sure blaming him for pushing for moneymoneymoneymoneymoneymoneymoneymoney is fair either. i mean, welcome to 2009. we can't operate with a coaches meeting room with wooden stools and rusty nails for to hang your jacket on anymore.

if you want UM to compete to championships and the national level most years, you need the funding. 2 dozen victors club members can't do it alone. maybe 3o years ago they could, but not anymore.

and has the AD provided a % of clubs seats or suites sold to corporations? i was under the impression that many companies are dropping this kind of stuff.


August 29th, 2009 at 7:44 AM ^

The improved concesssion venues are not added into you analysis. If you are able to get in and out of the bowl easier (partially thru the elevated concourse), and the concessions are improved in a way that there is less waiting, there is likely to be an increase in concession revenue as well.


August 29th, 2009 at 8:34 AM ^

Adjusting the numbers for inflation makes the decision even more financially compelling. The prices of the suites and club seats (unlike the debt service payments) will likely go up each year, resulting in greater incremental profit over time. For example, if you take your conservative numbers of $14.2 million of increased revenue and $4 million of increased profit per year in 2010 and grow it at 3% per year over 20 years, the increased revenue collected from the renovations in 2030 is $25.6 million and the increased profit is more than $15 million.


August 29th, 2009 at 11:13 AM ^

Look at the athletic dept revenues as of two years ago:

1.Ohio State----------$109,000,000
2.U of Florida--------$108,000,000
3.U of Texas----------$105,000,000
4.U of Tennessee------$ 95,000,000
5.U of Michigan-------$ 89,000,000

tOSU has a $20 million lead, way ahead on facilities. Those who are nostalgic for the Ol' Big House need to do a sleepover in one of the Men's restrooms featuring the whiz-on-the-floor "urinals." They were outdated back in the day.

Hell yes let the high rollers underwrite as much of the cost as possible. I get real tired of the "I've had these seats for 50 years" crowd. The reality, compared to other schools, is that people have been underpaying for years.