Estimating Market Rent for Major League Stadiums
Kinnard, William N., Jr., Geckler, Mary Beth, Real Estate Issues
NTRODUCTION: BACKGROUND TO THE RESEARCH
In April 1997, an article titled "Team Performance, Attendance, and Risk for Major League Baseball Stadiums,"' was published as part of the Real Estate Issues series on counseling opportunities in the major league sports industry. That presentation noted the growing importance of venue revenues2 to both the owner of the stadium (typically a municipality, county, or public authority) and the owners of the team franchise. The emphasis in the article was on Major League Baseball stadiums, although many venues were dual-sports facilities housing National Football League (NFL) teams as well.
The reported findings demonstrated the importance of gameday ticket revenues to both the stadium owner and the franchise. In recent years, however, gross ticket revenues have represented a declining percentage of total venue revenues. Not surprisingly, on-field performance by Major League Baseball (MLB) teams was a major determinant of attendance, which determines revenues from ticket sales as well as concessions and parking. Moreover, the dollar volume from sales of short-term licenses on luxury boxes/suites and club seats tends to fluctuate directly and nearly proportionately with on-field team success (particularly in the preceding year).
Within the framework of subsequent assignments to value leasehold/possessory interests of major league teams in both MLB and the NFL, we have been required in each instance to estimate market rent. Moreover, we served as consultants in the 1989-1990 property tax appeal of SkyDome in Toronto, as well as its 1995 sale. In both those cases, the identification of market rent payable by the tenant MLB franchise was a major issue.
This manuscript presents the results of analyzing the body of lease and rental data for MLB, NFL and dual-sport stadiums. The indicated market rent model derived from that analysis is also shown.
FEASIBILITY ANALYSIS AND VALUATION OF LESSEE INTERESTS
Table 1 lists the new MLB and NFL stadiums built in the 1990s, major renovations of existing stadiums, and new construction under way or planned as of 1998. Virtually every existing or planned MLB and NFL venue is on that list. At least one feasibility study was conducted for each project, whether completed, in process, or proposed. Feasibility studies are necessary to obtain project financing, much of which takes the form of debt plus "equity" participations represented by the sale of such intangibles as naming rights, exclusive product sales rights, or advertising rights in the new or renovated stadium. Indeed, sale of these intangibles has provided a major proportion of the up-front money that constitutes "equity" in recent major league stadium construction projects.
In any feasibility study, anticipated revenues are necessarily forecast (often optimistically). One of the major elements of revenue, but far from the only source, is the rent to be paid by the tenant franchise for the use of the stadium. Because the lessor is typically a public body, that rent is required to be "market rent," which is defined by the Appraisal Institute as, "the rental income that a property would most probably command on the open market, as indicated by current rentals being paid and asked for comparable space, as of the date of the appraisal."3
Over 30 MLB and NFL leases were studied as part of the research on which this article is based, to identify what (if any) market pattern of rentals exists. Information on other leases came from the publication, Inside the Ownership of Professional Sports Teams: 1999.4 Both NFL and MLB leases specify and distinguish carefully between "rent" paid by the lessee franchise and revenue-sharing by the stadium owner (nearly always a public body) with the lessee franchise owner. These leases are signed well in advance of construction, and provide an important basis for acquiring both equity participations and debt financing. Typically, therefore, the analysis of "feasibility" incorporates a consideration of market rent.
In addition, property tax authorities in many states are empowered to assess and tax the leasehold interest that a private lessee-user holds in tax-exempt real estate (especially that which is publiclyowned). In some jurisdictions (e.g., California), the "Possessory Interest" held by a private lessee on publicly-owned property is taxed as the present worth of net operating income based on market rent (or occasionally as the present worth of net market rent). In other states (e.g., North Carolina), the leasehold interest of a private lessee in publiclyowned real property is taxable when the present worth of market rent exceeds that of contract rent. In either set of circumstances, the market value of the lessee's interest in the stadium real property is measured via income capitalization, which in turn requires an estimate of market rent.
Finally, in the relatively rare instances of privatelyowned major league stadiums whose owners are not the team franchises themselves (e.g., SkyDome in Toronto, the New Baltimore stadium, Ericsson Stadium in Charlotte), income capitalization is also employed to value the stadium real estate for property tax purposes. Once again, market rent is one of the necessary ingredients in the analysis.
THE NATURE AND MEANING OF MARKET RENT
For purposes of this analysis, the differently worded definition of "market rent" from the International Association of Assessing Officers, with the same meaning, is more to the point:
"The rent currently prevailing in the market for properties comparable to the subject property. Market rent is capitalized into an estimate of value in the income approach."5
The critical point in both the Appraisal Institute and IAAO definitions is that rental data are to be derived from "the market" for comparable or competitive properties, which consists of major league stadiums located throughout the U.S. and Canada. The data reviewed for this research were the rents called for in 22 MLB leases and 25 NFL leases in force as of 1998. The results of those lease reviews are summarized in Tables 2 and 3 for NFL leases, and Table 4 for MLB leases.
It is important to reiterate the fact that both NFL and MLB leases differentiate carefully between payments made by tenant team franchises that are labeled "rent," and allocations of revenues from such items as naming rights, concessions, advertising, or parking. All of these latter items, unless identified explicitly as part of "rent" (e.g., Denver Broncos, Dallas Cowboys, Arizona Cardinals, Chicago Bears, as indicated in Table 2), are revenues that would normally come to the owner of the stadium. In the current market, however, they are increasingly shared by the stadium owner with the franchise team as an inducement either to come to the stadium, remain at the stadium, or both. Nevertheless, they do not represent "rent," nor do they serve as indicators of market rent.
If revenues from concessions, parking, advertising, luxury boxes/seats, or naming rights are shared between the stadium owner and the franchise team, it is because the stadium owner chooses to do so. A tenant has no inherent legal right to venue revenues which are generated at or by the real estate. Accordingly, such revenue sharing (or allocation solely to one party or the other) is not part of rent, regardless of the method of collection and distribution. This is analogous to the collection of taxes by the team as part of ticket revenues, and their subsequent distribution to the taxing authority (local, county, or state).
THE MARKET RENT MODEL FOR MAJOR LEAGUE STADIUMS
Market rent information from 25 NFL franchise leases is presented in Tables 2 and 3. One tenant franchise (Philadelphia Eagles) would not provide the requested information. Moreover, three NFL stadiums are owned by the team, while the Carolina Panthers' stadium is owned by a related private corporation.
Similarly, Table 4 provides rental information for 22 MLB leases. Five MLB stadiums are owned by the team, and one stadium (SkyDome) is privately owned by an investment group.6
The information provided in Tables 2 and 3 for NFL franchise leases and Table 4 for MLB franchise leases indicates that there is a rather wide range of percentage rent payments. Yet the underlying formula is remarkably consistent: Rent is paid as a percentage of gross ticket sales revenues. This is the NFL stadium market rent model. As noted earlier, four NFL franchises also pay a percentage of "luxury" seat revenues: the Arizona Cardinals, Chicago Bears, Dallas Cowboys, and Denver Broncos. It is noteworthy, however, that these four leases all pre-date 1990, with the most recent (Broncos and Cardinals) dating from 1987. No such arrangements are found in any subsequent leases.
As Table 3 shows, with the exception of the Tampa Bay Buccaneers lease of 1996, the leases signed after 1990 generally called for a lower rent percentage than did earlier leases. It is also instructive to note the effective rent percentage being paid by the Tennessee Oilers in their former Houston venue, which may help explain the relocation of the franchise.
Table 4 summarizes the effective rental rate for 22 MLB franchises, in ascending order of percentage. All of the MLB leases also provide that rent shall be calculated as a percentage of gross ticket sales revenues. Thus, the market rent model for major league sports stadiums is simple and straightforward: the lessee team franchise pays rent as a percentage of gross revenues from ticket sales.
Calculation of Market Rent
For NFL franchises, the median and modal rent percentage is 10 percent of gross ticket sales revenues. More leases call for less than 10 percent than require rent in excess of 10 percent. Moreover, the percentage rents for most of the reported leases signed in the 1990s are at substantially less than 10 percent of gross ticket sales revenues. Nevertheless, 10 percent of gross ticket sales revenues was selected and used as the best indicator of market rent for NFL stadiums over the past three to five years.
For MLB stadiums, on the other hand, the mean effective rental percentage rate is 6.7 percent of gross ticket sales receipts, while the median is 6.75 percent. This is noticeably lower than the percentage for NFL stadiums. A number of factors combine to explain this difference.
First, MLB teams play eight times as many home games (81) as do NFL teams (10, including two exhibition games). Second, home attendance at MLB stadiums averaged 2,150,000 in 1996, which is approximately 4.5 times the average of NFL home attendance between 1992 and 1996. At the same time, average ticket prices for MLB teams were approximately one-third the average ticket price for NFL games. Interestingly, however, the average gross ticket sales revenues were approximately the same for all NFL teams combined, as compared with the average for all MLB teams combined.
The important finding is that rent payments for NFL team franchises and for MLB team franchises are both calculated effectively as a percentage of gross ticket sales revenues. Over the period covered by the data in our analysis, the indicated market rent for NFL teams and stadiums is 10 percent, while for MLB teams and stadiums it is 6.75 percent.
There is a pattern in the rentals paid by NFL and MLB teams. The model is that market rent is a percentage of annual gross ticket sales revenues: 10 percent for NFL teams and stadiums, and 6.75 percent for MLB teams and stadiums. These are not immutable percentages, however. Both MLB and NFL leases show wide ranges in effective rental percentage rates. Moreover, with increased competition among cities for both NFL and MLB franchises, new stadiums and new leases show trends toward lower levels of percentage rents for the team franchise tenants. It is reasonable to expect market rents to decline as even lower percentages of gross ticket sales revenues are experienced for new stadiums, new leases, and renegotiated lease renewals in the foreseeable future.
From the point of view of financial feasibility for NFL or MLB stadiums (dual-sports stadiums are currently out of vogue), rental payments from the tenant team do not represent the only revenue source to the public owner. With increased competition for franchises as local tenants, however, the trend is toward giving away larger shares of those other, alternative revenue sources, either to attract or to retain the MLB or NFL franchise tenant.
Market rent remains an important consideration in valuing the leasehold interest/possessory interest of the tenant team franchise, or in evaluating project feasibility. Therefore, ticket sales and attendance still matter. Attendance determines not only gross ticket sales revenues, but also revenues from concessions and parking, and even on-site advertising rates. Attendance also affects revenues from those luxury boxes or club seats available for sale on a game-by-game basis, which in turn influences total venue revenues.
In the final analysis, it is still preferable for both the franchise owner and the stadium owner to have a winning team. As our April 1997 article demonstrated unsurprisingly, winning teams enjoy higher average attendance. If no-shows have already paid for season tickets, their absence still has an impact on concession and parking revenues. In a zero-sum game, which is what NFL and MLB teams play, winning more often than losing enhances market rent, leasehold value, and stadium feasibility.REI
1. Kinnard, William N., Jr., Mary Beth Geckler and Jake W. DeLottie, "Team Performance and Risk for Major League Baseball Stadiums: 1970-1994,' Real Estate Issues, April 1997. 2. In the literature of US major league sports (baseball, basketball, football and hockey), stadiums and arenas are termed "venues." The proceeds from ticket sales, premium seating licenses or fees, food and beverage sales, program sales, souvenir sales, parking and on-site advertising are all called "venue" revenues. See, for example, Friedman, Alan, and Paul J. Much, Inside the Ownership of Professional Sports Teams: 1999. Chicago, IL: Team Marketing Report, Inc., 1999.
3. Appraisal Institute, Dictionary of Real Estate Appraisal, Third Edition. Chicago, IL: Appraisal Institute, 1993, p. 221.
4. Friedman, Alan and Paul J. Much, Inside the Ownership of Professional Sports Teams: 1999. Chicago, IL: Team Marketing Report, Inc., 1999.
5. International Association of Assessing Offices, Glossary for Property Appraisal and Assessment. Chicago, IL: IAAO, 1997, p. 84.
6. As an interesting aside, both SkyDome (Toronto Blue Jays) and Ericsson Stadium (Carolina Panthers) are privatelyowned facilities on leased publicly-owned land. Contract Rent for each is $1.00 per parcel per year. SkyDome is on two parcels.
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ABOUT THE AUTHORS
William N. Kinnard, Jr., Ph.D., CRE, is president of the Real Estate Counseling Group of Connecticut; Professor Emeritus of Real Estate and Finance at the University of Connecticut; and a principal in the Real Estate Counseling Group of America. Dr. Kinnard has participated in the valuation of ownership and leasehold interests in major league stadiums in the U.S. and Canada and also testifies regularly as an expert witness on appropriate methodology for valuation of property and intangible assets. (E-mail: firstname.lastname@example.org)
Mary Beth Geckler, CRE, served as a commercial real estate lender at (Continued on page 44)
two regional banks in Connecticut, after nearly a decade in conducting market research, analysis, and providing advice to public agencies and educational institutions. Since 1990, Ms. Geckler has specialized in market proximity impact studies; the evaluation of investment risks associated with acquisition, disposition, or development; identification/ quantification of investment risks associated with property contamination and stigma; review of special purpose property appraisals; and litigation advice/support activities. (E-mail: recgc(mail.snet.net)…
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Publication information: Article title: Estimating Market Rent for Major League Stadiums. Contributors: Kinnard, William N., Jr. - Author, Geckler, Mary Beth - Author. Magazine title: Real Estate Issues. Volume: 24. Issue: 2 Publication date: Summer 1999. Page number: 36+. © 2009 The Counselors of Real Estate. Provided by ProQuest LLC. All Rights Reserved.
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