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.