Ominous title right?
Don’t worry Calgarians, you’re not alone. They can’t afford one in Edmonton, and when you look across the National Hockey League and place a brand new arena in every market given their current cash flow very few can honestly say it’s a sane move to make.
At least if the Forbes numbers on NHL operating income are to be believed.
Digging Into the Numbers
Trying to assess NHL finances is more of an art than a science. You hammer away on Google for the better part of two days finding snippets of information here, anecdotes found in vague references there, and with that you hope that these tiny pieces of the puzzle will direct you towards what could be a believable summary.
Along the way you are forced to make assumptions on a host of things that pull the model you are building deeply into the realm of a hypothesis, leaving cold hard facts deeply in the rear-view mirror.
But here it is; only 4 NHL cities would be able to afford building a new building starting with ground break in 2019 if you assume that such a project shouldn’t happen if the decision was based on simple net present value rules.
So before we get to Calgary, and before we get into funding models, and the massive argument over public money into private arenas and stadiums lets look at the project in the most simplest of terms;
- The building costs $600M
- That total will be paid out in 2019
- The money will come 100% from a hockey team’s ownership
- The building will take 5 years to build
Said building wouldn’t be looked at if the team’s ownership group didn’t see an uptick in revenue through more events and higher ticket prices as this isn’t about bathroom lines or variety for pizza brands on the concourse.
So lets also assume a few additional things to help build the future of this fictitious franchise;
- Ticket prices without a new building rise by 2.5% a year
- The uptick in the average ticket price when the new building opens is 40% (close as I could find on the Oilers)
- Non hockey revenue is calculated as 30% of hockey revenue regardless of ticket price (so the non hockey events would go up with the hockey revenue when you move into your new home).
- I’ll hold attendance for hockey revenue flat as new building smell hasn’t done a lot for the Devils or Islanders, and we’d assume the franchises with the most success in building a new building are probably already close to capacity.
- Luxury boxes are omitted as they seem to fall within the hockey operating income totals of Forbes and therefore would see an uptick along with the ticket prices.
Now we have a cash flow model for each franchise as some sniffing around has given me the average ticket price and attendance for each franchise which I can then use to tie back into Forbes hockey revenue and hockey operating income.
So what spits out?
Only the Toronto Maple Leafs, New York Rangers, Montreal Canadiens and Chicago Blackhawks are in a position to make this investment if you assume wealthy people who own sports franchises aren’t likely to throw money into a terrible investment after decades of making good investments to get themselves wealthy in the first place (or in financial terms the dollars have to be break even in NPV 10% discounted to 2017 dollars).
Every other franchise has to take what appears to be a foolish investment in order to get the brand spanking new arena that every hockey fan and franchise covet.
Why do these centers make money on this investment? As I’m sure many of you have deduced from the group of four, they all exist in huge hockey centers that are not only populous, they are dedicated in that they have a historical love for the game. Los Angeles is huge, but it doesn’t make the list because the ratio of actual hockey fans in the city are considerably less than the aforementioned four. Cities like Calgary and Edmonton have great hockey fan densities, but don’t have the overall population to make it work to the same extent.
The results drill down to the average ticket price as Montreal, Toronto, the Rangers and the Hawks have four of the five highest ticket prices in the National Hockey League. They have huge centers with a density of hockey fan that allows them to charge more, and then based on the assumptions above, have the ability to charge even higher if they were to go forward with new arenas with construction commencing in 2019.
Now the Rangers are charging more since they just did a massive renovation to MSG, the Leafs are only half way through the 35 year life cycle of the ACC, and the United Center still has 10 years left to go to reach that magic age of 35; Montreal has seen 21 birthdays in their Bell Center. Therefore their high prices are at least somewhat tied to a “newer” arena already, though none of the examples have brand spanking new facilities.
If the Rogers Center in Edmonton was being pondered right now it would lose Katz $163M as a net present value investment. I’m sure he can afford it, but it doesn’t look to be a prudent investment.
The East Village project in Calgary as it stands would lose the Flame’s ownership group $283M, once again not actual dollars, but as a net present value investment, something that wealthy investors tend not to see as a logical course of action.
Looking at Early Proposals
So what happens if you start plugging in the CSEC details as we know it into the model? From what I can gather to date the Flames want the city to pay for 52% of the project, and plan a ticket tax to cut into the amount left for their group to pay. The Edmonton ticket tax has come in at 7%, so we will assume the same for the Calgary model. We will also assume the Flames get a property tax break and don’t have to repay the city a dime.
What does this do to the model projection? It essentially moves the Flames to break even (surprise!) and the city to a position of losing $285M in net present dollars. Clearly there are many levers to pull in a deal as complicated as this, but on the surface it sure looks like the CSEC have many of the same assumptions and are just passing the buck to the city. They haven’t chased down a profitable investment, but they’ve looked to move the investment cost to the city like they did in Edmonton.
From what I understand of the city’s proposal; that is the city picks up 33% of the costs and the Flames have to pay them back through a mechanism (I’ll assume a property tax bill of $7M annually), things come out a little more equitable with the city losing $138M and the Flames losing $39M. Adjusting the city’s offer for non cash items you reduce their stake to essentially a 20% contribution to a $600M arena, putting the city’s losses at $67M, and the owners at $110M.
If a deal is to be made it sure seems like the city offer with the next wave of negotiations to entail around non cash items the likely source.
That is, if you believe a new building makes sense in this market at all.
There is truth in the statement that the Flames are staying put regardless of their rhetoric as a new market is likely to fall in line with the other 26 that would lose money building a new arena, and not the glorious four that can literally burn money.
If it’s going to happen it will quite likely take an acknowledgement from both parties that they are willing to take an investment loss in order to put something in Calgary that the market can’t really afford. If the partnership can’t be forged then it’s up to one side or the other to take the larger brunt of what looks like an imprudent investment..
Glad its not up to me.
Hoping this piece created a discussion about the assumptions and levers, as I’m certainly not trying to spin this negotiation in either direction.
