Why this may be the sweetest stadium deal yet for Carl Pohlad and the Twins
Fine Print, Huge Profits
by Britt Robson
     |
The deal is very straightforward in its broad outlines. Unlike so many previous stadium packages, this one proposes no complex schema for dragooning multiple government entities into contributing, and no menu of various taxes and targeted user fees; it doesn't take a lot of financial doublespeak to describe the basics. The tedious accounting usually required to add up and parse out who gets what percentage of the money derived from the stadium's many revenue streams--naming rights, signage, club seats, luxury suites, ticket price increases, and concession, catering, and restaurant income--isn't necessary this time. It's simple: All those moneys flow to Carl Pohlad.
Among the dozens of people who showed up to voice opinions about the Twins stadium plan before the Hennepin County Board of Commissioners on the last Tuesday in April and the first Tuesday in May, two loose but distinct groups stood out. One comprised local business boosters from the Downtown Council, the Chamber of Commerce, and the Convention and Visitors Bureau. With unanimous fervor, they predicted the stadium would be a far-ranging catalyst for the economy and well-being of downtown, if not the entire county. This theme has been a staple of practically every stadium-construction push across the country in the past 15 years, but economists have steadfastly maintained that there is no economic growth associated with new stadiums; attractions like new ballparks simply reshuffle the spending of disposable entertainment dollars in the areas where they are built. (The most frequently cited of these studies is a Cato Institute paper published in 2000 by economists Dennis Coates and Brad Humphreys, "The Stadium Gambit and Local Economic Development.")
The other group practiced what wealthy people in victimization mode refer to as class warfare. These speakers demanded to know why, in a time of chronic budget deficits and cuts to core services like health care and education, they should be compelled to provide hundreds of millions of dollars to the 282nd richest man in the world, through a process expressly designed to quash their legal right to hold a referendum on the matter.
Only one person among the more than 60 speakers identified himself as an economist--Kenneth Zapp, who teaches in the College of Management at Metro State. Zapp began by citing recently negotiated stadium deals in New York and St. Louis (the latter a comparable market to Minneapolis) in which the teams and other private interests will be paying the vast majority of the costs, and wondered why "the Hennepin proposal has it backwards [with]...the public paying 75 percent." Then the economist essentially called Pohlad's $125 million contribution a sham, claiming that the various revenue streams provided to the Twins in the deal will easily reimburse him that amount. "In other words," Zapp told the commissioners, "you are giving the team a stadium."
Although many details of the stadium proposal remain sketchy, both the county and the team point to fundamental parameters of the deal that they call nonnegotiable. (Among them is the insistence that the tax not be put to a public vote.) And under those terms, Zapp's contention seems irrefutable: The public would be better off allowing Pohlad to keep his $125 million and instead taking a cut of the various revenue streams generated by the new facility.
The most prominent and lucrative example of this is the phenomenon known as club seats. These are targeted to well-heeled fans who anticipate bringing their friends and business associates to Twins games in groups of two or four or six rather than the 20 or 30 people required to justify the cost of a luxury suite. Like the suites, these club seats are not right behind home plate or the dugouts; their desirability is tied to their proximity to meeting rooms, restaurants, and private social areas further up in the stadium bowl, as well as perks such as access to nearby parking and private elevators.
Right now, the Twins obviously derive no revenue from club seats, which don't exist at the antiquated Metrodome. The preliminary design for the new stadium provides for 4,000 club seats. According to the respected industry website sportsvenues.com, the annual cost of each club seat for major league baseball stadiums ranges from $3,024 to $4,947. Assuming the Twins land right in the middle of those figures, at $4,000 per seat, that's $16 million in additional revenue, each year, if all the club seats are sold.
But that's only the beginning of the revenue to be made from club seats. Dana Warg was once intimately involved in the management of Target Center as an executive for Ogden IFC. His current duties as senior vice president for facilities at AEG include assisting with the operation of the Staples Center in Los Angeles, as well as staging events and providing services at sports facilities around the country. Warg says that there is significantly more profitability in the "premium sales" of food and beverages in the "function rooms" that adjoin the club seats. "You cater more upscale items to that clientele. There are carving areas and buffet stations, something you don't see in the Dome." Most of the time, he points out, club seat buyers are businesspeople entertaining friends and clients--and they don't want to skimp on services. "They simply write it off as the cost of doing business," Warg says, adding that "the cost for the buffet and the drinks is often more than the cost of the tickets. What I mean by that is, indirect revenues are as important or even more important than direct revenues in this business now. These are services that are expected today, and people don't mind spending money if you have a quality product to sell."
Given that there is typically a 35 to 45 percent profit margin on concessions, one could conservatively estimate another $4 to $5 million per year in premium food and beverage to club seat holders. Speaking on background, another sports facilities executive with knowledge of the local market agrees that $20 million in annual profits from club seats at the new stadium is "probably not unreasonable."
Then there are the luxury suites. The current design for the new stadium anticipates 60 suites, and sportsvenues.com calibrates their worth at $89,997 to $177,661 apiece per year. Assuming the Twins are on the low end at $100,000 per suite, that's another $6 million in annual revenues, another huge upgrade over their arrangement at the Dome, where the Vikings receive all the luxury suite money. Under the current stadium plan, Pohlad would also control revenues from naming rights, which can conservatively be estimated at $2 million per year (which would be less than what the Wild receive from Xcel Energy). And after the suites, there is all the other signage in and around the stadium, adorning everything from dugouts to highlight screens on the scoreboard to concourse walkways. Bill Lester, executive director of the Metropolitan Sports Facilities Commission, which operates the Dome, says that the commission currently receives between $1.5 and $2 million per year in the split of signage revenue with the Vikings and Twins, and says that $2 million in annual signage revenue beyond naming rights "is a conservative estimate" for what a new stadium would yield.
The most obvious revenue enhancement from a new stadium stems from increased attendance. One of the more thorough and nuanced studies of the attendance bump in new ballparks comes from Craig A. Depken II, an economist at the University of Texas at Arlington, who calibrates an average increase of 10,226 people during the first year of operation, dwindling down to an increase of 2,472 by year five of the new stadium's operation, with a five-year average increase of 4,911 patrons for each game, or approximately 400,000 additional people each year. Twins President Dave St. Peter, the team's chief negotiator of the stadium deal, says Depken's figures seem low, and more appropriate for a 10-year average increase. So if we telescope that number out a decade, that's four million more people passing through the turnstiles, providing more ticket and concession revenue for the team. Right now, Lester's MSFC operates concessions and provides the Twins with 35 percent of the adjusted gross concession revenue from the first million fans and 45 percent after that threshold has been reached.
There are myriad other smaller revenue streams the team might be able to tap, ranging from personal seat licenses (essentially guaranteeing fans their season tickets into the future), to larger media contracts in keeping with heightened public interest (and thus ratings) for the team in its new ballpark, to major music and cultural events that could be held at the stadium when the team isn't playing. In any case, St. Peter told City Pages that he expects the Twins to increase revenues by $40 million a year in the new ballpark, and it's probably safe to assume the team is guessing on the low side for public consumption.
Let's move over to the debit side. Twins fans may not be aware that since baseball's new collective bargaining agreement went into effect in 2002, the team has been receiving approximately $18 million a year in revenue-sharing money, most of it from George Steinbrenner and the Yankees. As satisfying as it is to contemplate Steinbrenner's continued bankrolling of the Twins, nobody knows how the revenue-sharing formula will change when the CBA expires next year. St. Peter says the Twins' goal is to be in the middle of the pack among major league baseball franchises when it comes to generating revenue, which would mean it would neither receive nor pay out anything under the revenue-sharing formula. Under the current formula, Pohlad can deduct the $10 million a year he'll pay to operate and manage the new stadium, but not the principal or interest on his up-front $125 million contribution.
But there is another lesson in the Twins' history of being on the receiving end of MLB revenue sharing, and it augurs against another argument long used to justify building a new stadium--specifically, that it will ensure the team can maintain a payroll high enough to stay competitive more consistently. Revenue sharing proved that increased revenues could simply be pocketed, as the Twins demonstrated in 2000 when the revenue sharing they received actually exceeded their $16 million payroll. St. Peter emphasizes that all of the Twins' profits from the new ballpark will be poured back into the team, but it's hard to forget that he represents an owner whose proclaimed contribution to a previous stadium deal was later discovered to be a loan--with interest.
Last but hardly least, there is the golden parachute that will be available to Pohlad or his heirs: the potentially staggering increase in franchise value that starts accruing once a new ballpark enters the picture. The Seattle Mariners saw an increase in franchise value from $107 million to $251 million between the announcement that Safeco Field would be built and its 1999 opening; in the five years that followed, Forbes's estimate of the team's value grew to $396 million as of last year. That's an increase of nearly 400 percent, and an anomaly as stadium stories go. So consider also the case of Petco Park in San Diego. When the city ran out of money and construction of the park was stopped in 2001, the franchise value dropped about 6 percent compared with the previous year, from $187 million to $176 million. After more bonds were approved and construction resumed, the estimated franchise value began growing again, reaching $265 million by the time the park finally opened last year, an appreciation in value of just over 50 percent in three years' time.
Forbes's estimate from 2004 placed the Twins' value at $168 million. Considering how thoroughly the team will control the revenue streams associated with the new park, an appreciation of 50 percent in franchise value between now and the stadium's opening would probably be conservative. That means the Twins could sport a price tag in the $250 million range or more by the time fans enter the place for the first time. What if Pohlad chose to reap his windfall profits and sell? Under the terms of the deal, the most the county could recoup is 18 percent of the purchase price (a percentage that diminishes year by year until it disappears altogether 10 years in the future). Eighteen percent of $250 million would come to a $45 million return for county taxpayers on their $353 million investment.
Then again, why should the Pohlads sell at all? Keeping the team would mean continuing to harvest the proceeds from club seats, luxury suites, concessions, ticket prices, naming rights, and signage--while Hennepin County continues to collect $28 million a year to pay off the stadium bonds.
NEXT PAGE: The "sudden" deal for a twins ballpark was negotiated secretly for almost a year
About CP Staff
From the Archive
- Best of the Twin Cities: Intro (Cover Story - Apr 27, 2005)
- In Da Club: STNNNG at the Entry and Buck 65 at the Quest Rockers avoid collision at Entry show, Rapper-storyteller impresses drunks in bathroom (In Da Club - Apr 13, 2005)
- Film Fest Coverage II: The Sequel The M-SPIFF's second week brings 'The World' and more (Film - Apr 6, 2005)
- I'm in Love with That Song: The All M.I.A. Edition (I'm in Love with That Song - Mar 23, 2005)
- La-La (Means I Love You) Coming alive with Ashlee Simpson, Brother and Sister, Soweto Gospel Choir (In Da Club - Mar 9, 2005)
- A Real Rock 'n' Roll Radio Station... for Your Pledge of Just $10 a Month? Paul Demko, Diablo Cody, and Dylan Hicks offer three takes on MPR's new baby (Cover Story - Mar 2, 2005)
- We Heart Huckabees! The Everything Movie lands on all four of our film critics' top 10 lists (Cover Story - Jan 5, 2005)
- Artists of the Year 12 Rods, Jon Stewart, Howard Stern, Quentin Tarantino, Garrison Keillor, MF Doom, Lawrence Lessig, Randi Rhodes... (Cover Story - Dec 29, 2004)
- More articles from the CP Staff Archive...
