FINC 3

causes of overestimating

-analyses do not account for reverse time-switchers -economic impact analyses often neglect to account for important opportunity costs -another potentially important opportunity cost is the impact from visitors who would have come to town under normal circumstances but were unable to because the event filled all of the hotels to capacity -what is often called economic impact is really gross economic benefit, because it includes all spending, even by local residents, and it does not account for the costs of hosting the event -most egregious cause of overestimating economic impact is that the analyst has some incentive to find a very large impact -for an unethical analyst, the easiest way to obtain a large economic impact estimate is to count all attendees at an event toward economic impact, not just relevant or incremental visitors page 319, 320

how to describe vistors

-casual visitors -time-switchers -incremental visitors exhibit 12.1 show breakdown of attendees at event page 303, 304

common mistakes in estimating economic impact

-causes of understanding - estimates being too low is the fact that it is impossible to account for all local corporate spending that relates to an event -some events produce economic impact fro visitors who come to town because of the event but do not attend the event itself -how researchers treat blank survey responses can affect the final results - counting a blank response as zero lowers the overall estimate of economic impact -often fiscal impacts are not fully accounted for -most measurements account only for current new spending, ignoring the possibility that an event might cause an increase in the number of future visitors to the community -most economic impact analyses do not account for psychic impact, even though it could be an important factor in some cases page 317, 318, 319

market demand analysis for a sport facility feasibility study can be divided into the following subsection

-individual ticket demand -corporate demand (club seats, luxury suites, and sponsorship) -event activity -facility specifications and operating estimates exhibit 11.2 page 283

two phases of a feasibility study

-initial phase, Phase I feasibility study, test whether a more in-depth analysis should be undertaken - it is typically based on secondary sources of information, including comparisons with other sport facilities and other similar cities or communities quicker to complete and is significantly less costly than a more in-depth study general purpose is to present the information that the parties need in order to proceed with project development discussions -Phase II - done if the project passes muster from Phase I more in-depth study is completed, based on primary data that are generated specifically for the study lays out a specific financing plan (whereas a Phase I financing analysis will show a number of possible financing sources) actual site selection (not just possibilities) facility design details and renderings, a market demand analysis based on primary research about location (not just comparisons to other facilities and cities) and primary research on economic impact page 280, 281

parts of a feasibility study

-market demand -location, construction cost, and engineering -financing -economic and fiscal impact exhibit 11.1 page 281, 282

types of multipliers

-output multiplier aka sales or transaction multiplier -income multiplier -employment multiplier page 311

how do the recipients of initial direct spending generally re-spend it five ways

-with other private sector businesses in the same local economy - on inventory, maintenance, and so forth -with employees who reside in the same local economy - as wages, tips, and so on -with local government - as sales taxes or property taxes -with non-local governments - as sales taxes or taxes on profits -with employees, business, or organizations who reside outside the local economy first three types of spending recirculate money through the local economy the last two are considered leakages - they reflect the degree to which a region is not economically isolated but engages in commerce with other regions page 309

operations impact

Impact generated through daily operation, from games and other events page 316

economic impact

The net economic change in a host community resulting from spending attributed to an event or facility. page 302

incremental visitors

Visitors who came to town because of the event and would not have come to town otherwise. The direct spending of this group is fully counted in economic impact. page 304

multiplier

a number that helps researchers quantify indirect and induced economic, impacts, by measuring the change in output for each and every industry as a result of the injection of one dollar of direct impact into any of those industries page 309

annual revenues

additional useful information in a ticket demand analysis is the annual revenues of the sport arenas in comparable markets these revenues would suggest how successful these facilities are if half of the facilities are struggling financially, this would indicate that if Sacramento were similar to those markets, we might expect its facility to struggle as well - unfortunately, revenue information is generally not available additionally, each tenant has its own method of accounting for facility revenues, making comparisons difficult moreover, the winning prospects of the tenant(s) of a sport facility certainly affect ticket sales. however, reliance on a winning team over a few decades is not reasonable, given the tenuous and temporary nature of winning in team sports. typically, an analyst assumes an average-quality team when conducting a feasibility study information on competing sport franchises is useful in assessing ticket demand page 287

output multiplier

aka sales or transaction multiplier measures the indirect and induced effects of an extra unit of direct spending on ECONOMIC ACTIVITY within the local economy this multiplier relates direct expenditures to the increase in economic activity that results from the spending and re-spending of the initial direct spending pag 311

financing analysis

an assessment of how much money will be needed to build the facility page 281

corporate demand

an important factor in sport facility market demand is corporate demand for season tickets, club seats, luxury suites, and sponsorships, which directly affect facility revenues page 287

cost-benefit analyses

analyses of the cost of a project in relation to its potential benefits in terms of a sport facility, a cost-benefit analysis assesses whether there is likely to be enough demand for events at a new facility and enough corporate support for sponsorship of the facility these two assessments determine whether there is a MARKET for the project additionally, a feasibility study analyzes how to fund a project, where it should be located, its cost, and its scale - it may also include information on the operation of the facility once it is in place or methods to secure a major tenant page 280

financing

another crucial analysis in a feasibility study is an assessment of the cost of financing a facility and the sources of that financing to determine what sources of financing are available, we ask question such as, it is possible to institute or raise a car rental tax and use the proceeds to help fund the construction? this analysis is another iterative process the money that is available for construction affects the type of facility that can be built, and vice versa the initial driver for money decisions is the number and types of expected events and the expected market demand this basic information helps determine the appropriate number of seats and suites, which in turn allows us to calculate initial project cost estimates the economic and fiscal impact estimates provide information about the amount of incremental money that will flow into the local economy, including sales taxes ex: page 298 page 297, 298

event activity

another element in determining market demand or penetration for a feasibility study includes a competitive analysis of the supply of facilities and primary research on potential events this is different from a comparables analysis, where we are trying to find similar situations from which to learn page 291

spending by local residents

another measure that may indicate the demand for sport facility event tickets is retail spending by local residents exhibit 11.3 - page 285 to derive this measure, we divide the total retail spending within 30 miles of the relevant arena by the population and then scale the result by a cost of living index FORMULA adjusted per capita spending = (retail spending / population) x (100 / cost of living) page 286

spending

because spending by local residents typically should not be counted in an economic impact study, it is very important that the analyst differentiate between event attendees who are visitors (those who live outside the geographic impact area) and those who are local residents (those who live inside the area) page 303

how to derive a multiplier

categorize the spending that represents indirect and induced economic impacts page 309

five scenarios

create input/output tables that disaggregate the economy into industries and quantify the flow of goods and services among them then mathematically derive multipliers that describe changes in output that result from changes in input apply a separate multiplier to each of the 528 industry groups page 309, 310

results of market demand analyses

end result of a market demand analysis is an estimate of expected quantities sold and prices for tickets, luxury suites, concessions, merchandise, sponsorships, and any other revenue streams, and the revenues generated from each one this information will be used in the economic impact analysis, the analysis of financing, and the engineering analysis ex: calculation of economic impact depends partly on the number of people attending events at a facility in the analysis of financing, concessions revenues and naming rights (a form of sponsorship) are often capitalized, and their value helps pay for the cost of construction this affects the overall assessment of financing sources - the size of the facility is of course a significant factor in engineering and land use decisions if a larger facility is built, not only might location be affected, but the overall cost will be higher and financing will be affected the type and quality of the facility also affect demand, especially with respect to luxury suite sales and sponsorship higher-quality suites, which are more expensive to build, might elicit higher demand once again, the feasibility study is an iterative process, with many layers of adjustment and readjustment page 297

facility specifications and operating estimates

exhibit 11.9 page 295

multiplier table

exhibit 12.5 page 311

direct impact

expenditures on a project or event that contribute to economic impact, also called direct spending - may involve secondary or primary research page 305

analysis of the fiscal or tax implications of economic impact

first, the analyst must understand the tax code for the city, county, or state - a daunting requirement -second, the task of separating tax revenue according to recipient, such as a city, county, or state government, can be difficult -third, accounting for tax-exempt spending by visitors and relevant local organizations can be time consuming, and it often results only in estimates of those exemptions -fourth, accounting for the tax effects of indirect and induced impacts requires information that is not always readily available examples on page 313, 314 page 313

two important parameters of events must be determined in the beginning stages of an analysis

geographic area or impact type of spending page 303

size of population

given that sport facilities are useful for a number of decades, it is important to consider the expected population growth of the area surrounding the facility perhaps a market that is currently relatively small shows a large expected growth over the next two decades (ex: Las Vegas, Nevada) exhibit 11.3 compares the 14 NBA markets that are closest in population to Sacramento in 2000, as measured by the number of people living within a 30 miles radius of downtown Sacramento (a possible location for the new arena) page 284

indirect economic impacts

impact that occur in the area of impact that represent the circulation of initial visitor expenditures (direct impacts) the total of the successive rounds of spending constitutes the indirect impact estimate, which will be explained below page 308, 309

age

in addition to the size of the population, the age distribution of the population is another factor to consider when analyzing ticket demand in comparable markets the target market of many NBA teams is people between the ages of 25 and and 49, because these are likely ticket buyers exhibit 11.3 - page 285 - lists the percentage of the population that falls within this age range, along with the index - Sacramento's population has a relatively high proportion of the target market page 285, 286

primary research: corporate spending surveys

in addition to the visitor survey, the researcher may undertake a survey of the event management group, host committee, sponsors, and so forth to determine local corporate spending that is related to the event THAT WOULD NOT HAVE OCCURRED OTHERWISE as with visitor spending, it is important to distinguish between corporate spending that would have take place anyway and corporate spending that would NOT have occurred otherwise example on page 308 page 308

a feasibility study is often conducted prior to a team moving to town

in this case, the analysts employ secondary research methods similar to the techniques used in determining market demand one method is to evaluate primary studies that have been conducted in other cities for similar projects, making adjustments to account for the differences in circumstances between the primary studies and the subject salary an assessment of common denominators, such as both cities having an NBA team, can also be helpful page 316

secondary research

involves the analysis of data that have already been generated for other purposes but might provide information for the question at hand ex: an analysis of attendance at other new sport facilities around the country page 283

measuring event costs

many economic impact studies do not provide estimates of the costs of generating economic impacts it can sometimes be difficult to determine the full costs of hosting an event and the entities responsible for paying those costs page 315

equity

measure of fairness page 221

employment multiplier

measures the direct, indirect, and induced effects of an extra unit of spending on EMPLOYMENT in the local economy measures the number of full-time equivalent jobs supported in the local economy as a result of visitor expenditures page 311

income multiplier

measures the indirect and induced effects of an extra unit of spending on the level of HOUSEHOLD INCOME in the local economy it is the ratio of change in income to the initial change in expenditure it is the CLEAREST indicator of the effect of economic impact on the residents of the host community page 311

naming rights and other sponsorship revenue

naming rights are the largest single sponsorship revenue source for a sport facility a simple analysis of the comparable market information in exhibit 11.6 shows that a new sport arena would generate about $2 million annually in naming rights and sponsorship we obtain this estimate by starting with the average naming rights revenue for the six comparable markets page 291

arena size and ticket return

one method for estimating the optimal size of an arena is, once again, to look at comparable markets shows how to calculate arena size with comparable markets exhibit 11.10 page 296 page 295, 296

corporate depth

or the depth of a market's corporate base, provides information for predicting corporate-related revenues one measure of corporate depth is the number of headquarters of Fortune 500 companies in the local area we may also compile more detailed measures of the number of companies of certain sixes in an area we may also compile more detailed measures of the number of companies of certain sizes in an area exhibit 11.4 gives the number of companies with annual sales of $10 million to $50 million, and with $50 million or more in comparable markets page 287, 288

using the data to calculate ticket demand

page 287

the spending of casual visitors and time-switchers should not be fully counted as new spending; only their incremental spending - the spending above and beyond what they would have spend - should be counted

page 304

indirect and induced spending methodology

page 308-309

example of indirect and induced event spending analysis

page 311, 312 formula on page 312

other facility revenues

primary revenue sources for a facility other than ticket revenues and rent are concessions, merchandise, and parking base an estimate of concessions revenue on average per capita concessions sales for events in comparable markets obtaining access to this type of information is one of the challenges of conducting a feasibility study parking revenue estimates are based on a long history of data on the number of cars per event attendees generally we expect that a parking space is utilized for every 4.5 attendees page 296, 297

geographic area of impact

should be determined early in the study generally, the geographic region selected is the region that is considering funding the event or facility this definition of the impact region allows for a proper cost-benefit analysis different definitions of the geographic area of impact will affect the amount of economic impact that is measured page 202

displaced spending

spending by local residents on an event that would have been spent elsewhere in the local economy if the event had not occurred for this reason, it is not counted as part of economic impact example on page 303 page 303

measuring economic benefit

step 1 - to analyze direct spending, which has two components (shown below) -incremental visitor spending - as opposed to the spending of time-switchers and casual visitors, direct spending by incremental visitors is fully counted in economic impact - the goal is to measure the amount of spending in the geographic area of impact that goes to local businesses -organizational spending - how much do the event host committee, the event management company, corporate sponsors, and other related entities spend in the geographic area? page 305

horizontal equity

suggests that individuals with similar incomes should pay similar amounts of a tax page 221

construction impact

the amount of money that comes into the community during the construction phase that would not otherwise have entered the community - has been perhaps the most controversial aspect of sport economic impact analysis in general, if a city government spends money to construct a building, the net economic impact must be measured in terms of the foregone alternative uses of the same funding (opportunity cost) - would other uses have had a greater or lesser economic impact? typically, government spending is not considered to generate economic impact for a specific project, because that money could have been spent on another project this is similar to the reason why spending by local residents is not generally considered to add to operational economic impact - if a resident spends money at a football game, then he or she will not spend that money at the movies or for other local entertainment page 317

market demand

the demand in the marketplace for a facility for a sport facility, necessary to measure in order to determine whether the facility will attract enough events, patrons, and corporate dollars to justify its construction the likely demand is also important for establishing the specifications of the facility in terms of seats, luxury suites, club seats, parking spaces, and square footage researchers who are conducting a feasibility study use both primary and secondary methods to estimate market demand page 282, 283

induced economic impact

the effect of direct and indirect economic impacts on earnings and employment as the initial spending and subsequent spending occur, a portion goes to local residents and to the local government in the form of taxes increases in demand resulting from the economic impact lead to increases in employment, which will affect earnings when we report these impacts, we describe employment impacts in terms of full-time equivalent (FTE) jobs and earnings impacts in terms of dollars of personal income page 309

primary research

the generation of information directly for the purpose of the study ex: survey of fans the interpretation of survey results about intent to purchase requires caution the old adage that people vote with their feet and not their mouth suggest that respondents may say one thing, but when it comes time to part with their money, may do another best to rely on BOTH secondary and primary research whenever possible page 282

income

the income of the local population is an indicator of its ability to purchase tickets to facility events exhibit 11.3 - see that Sacramento's median household income is below the 14 team composite average of 105 - a more detailed analysis of income - specifically, the percentage of households whose annual income is greater than $100,000 shows a similar result - households with larger incomes are more likely to purchase season tickets (as opposed to single-game tickets) or club seats sport facilities offer tiered pricing and quality at the bottom of the scale are the "cheap seats" which are often sold on an individual-event basis - season ticket seats are closer to the playing surface, and event better seats - club seats - are very close to the action and provide other amenities at the top of the pricing tier are luxury suites, which are small rooms that overlook the playing surface and provide tables, food, TVs, bathrooms, and more, in addition to seating the fact that the percentage of households with income greater than $100,000 in Sacramento is below the NBA average suggests that it would be more difficult to sell season tickets and club seats in Sacramento than in the average market, all else being equal page 286

secondary research

the market demand analysis discussed in Chapter 11 provides an estimate of the number of events that will take place at a facility and the expected attendance at those events an economic impact study using secondary research begins with attendance estimates from the market demand analysis and adds other information about the expected patrons, such as what percentage are visitors and how much money they will spend often, this information is gathered from comparable events in other locations page 305

leakages

the movement of money out of the geographic area the larger and more diverse the geographic region, the less leakage, all else being equal, because a large region is usually relatively self-sufficient page 309

capture rate

the percentage that is spent locally page 315

multiplier effect

the ripple effect from the initial spending (the direct impact) this effect consists of indirect and induced impacts page 310

incremental spending

the spending above and beyond what they would have spent typically not practical to measure the incremental spending of time-switchers and casual visitors it is difficult to know how much these individuals spent because of the event, beyond what they would have spent on their visit had the event not taken place since we usually cannot measure the incremental spending of casual visitors and time-switchers, we might use an estimate from some other source or simply state that this spending was not measured and the final estimate should be considered a lower bound for the economic impact page 304

comparables analysis

the use of information from comparable markets is similar to the use of comps for valuation in the case of a sport facility feasibility study, it is based on the idea that if sport facilities are successful in comparable cities, then a facility will be successful in the city that is the subject of the study the researchers of a feasibility study are trying to measure the expected value of various revenue streams in order to predict the financial health of the proposed facility an assessment of comparable markets and their facilities can provide insight about what to expect if a facility is built page 283

location, construction costs, and engineering

these analyses focus on the hard costs (construction costs, improvements to the actual building) and soft costs (fees, engineering, consulting, movable items such as furniture) of facility construction, architectural and engineering renderings, infrastructure issues (such as roadway or exit ramp construction, widening of streets, and traffic flow), environmental impacts, water and sewage needs, and so forth page 298

reverse time-switchers

those local residents who leave town during the event period because of the event expenditures that reverse time-switchers would have spent in town are instead spent outside the local area only mega-events, when local residents expect traffic congestion or anticipate the possibility of renting their home out to visitors for a profit, typically for time-switchers page 321

primary research: spectator surveys

to determine direct spending, we often create a survey instrument ( a questionnaire) to guide interviews with event patrons in order to determine whether they are local residents or visitors, how much money they are spending because of the event, and other information that may be helpful exhibit 12.2 is a simple survey for measuring direct spending for an event the data provide an estimate of the amount of spending per capita per day for incremental visitors for the different spending categories page 305, 306

individual ticket demand

to estimate ticket demand, we may use comparables analysis consider that a sport arena may host 150 events annually - these event will generate revenue from purchases of tickets, concessions, merchandise, and parking - typically, we would look at the local population of likely attendees to see how it compares with other markets that have similar sport facilities with similar tenants -ex: on page 284 in such a feasibility study, the researchers would study demographic and lifestyle information such as age, income, and purchasing habits of local residents or residents within 30 miles of the facility many private companies also provide market demographics, ethnographics, and lifestyle information down to the city block page 284

indirect economic impact

total economic impact - direct economic impact page 313

the measurement of a sport facility's economic impact can be controversial because the results are often cited as evidence in debates over how much public funding the facility should receive

true a facility will also provide direct spending impacts, like those of a team this methodology for measuring a facility's operational economic impacts is similar to that for events and teams page 316

measuring the economic impact of an event is a formidable task, but measuring the economic impact of a team is even more complex

true a team may be thought of as a series of events ex: 81 games for an MLB team page 315

when enough spectators are surveyed, one can estimate how much the typical visitor spends and how long he or she stays

true given the percentage of survey respondents who are local residents versus visitors and an estimate of total attendance, we can estimate the total population of visitors at the event similarly, we can extrapolate the findings for the sample in terms of spending to represent the spending of the entire population exhibit 12.3 shows some intermediate calculations that were initial steps in measuring the economic impact of the 2004 MasterCard Alamo Bowl example on page 307 page 306, 307, 308

the manner in which the local economy is defined - especially in its size - affects the values of the multipliers

true in a smaller local geographic region, more game attendees will probably be visitors this is an advantage to the local economy - however, smaller geographic areas suffer from a greater degree of leakage, because a small geographic region is less self-sufficient than a large region page 310, 311

if a county government contributes funding for a sport facility, then the residents and businesses of that county are paying for the investment, and it is appropriate to determine the benefits that the county receives - not some other county or area - and compare the benefits to the costs

true in reality, any major sporting event has an area of impact that is a continuous region, not divided by city or county boundaries and the impacts decrease with distance from the event location page 303

a feasibility study incorporates many cost-benefit analyses

true page 280

an economic impact analysis is a type of cost-benefit analysis (an analysis or study of the cost of a project in relation to its potential benefits)

true page 302

economic impacts are often subdivided into direct, indirect, and induced impacts

true page 305

it is possible, but complicated, to measure the economic impact on more than one area

true page 308

the largest single expensive item is player salaries

true page 315

economic impact analyses often neglect to account for important opportunity costs

true page 321

the sport industry, more than most other industries, is about fanaticism, emotion, and community; to leave these impact out of an analysis is to miss an important part of the picture

true the reason the public funds museums, zoos, and orchestras are that these institutions enhance the community page 320, 321

facility revenues are typically split between the facility and the major tenant or tenants

true there may be more than one major tenant, especially in the case of a facility that hosts both an NHL team and an NBA team an estimate to facility revenue is necessary to determine whether market demand is sufficient to generate revenues for the major tenant(s) and to pay facility financing ex: page 295 page 294, 295

to estimate the capture rates of franchise spending, we can audit the team's spending patterns

true this is not often done, because of the high labor costs required to do so aside from organizational spending and employment, measuring the economic impact of a team is similar to measuring that of an event page 316

to produce a conservative estimate, we do not count spending by local residents and by causal visitors and time-switchers toward economic impact, because we assumed that the spending would have occurred even if the event had not taken place

true page 318

casual visitors

visitors who were already in town for another reason and decided to attend the event page 303

time-switchers

visitors who would have come to town at another time, but opted to come to town during this time instead, in order to attend the event page 304

suite and seat revenue potential

we can estimate the amount of revenue that can be generated by luxury suites by studying the results in comparable markets exhibit 11.5 shows suite revenue potential analysis page 290

competitive analysis

we directly investigate existing facilities (stadia, arenas and amphitheaters) that might compete with the subject facility for hosting events a sport facility essentially has two types of clients: attendees who show up for events and event property owners (or team owners) who decide where to hold their events or games page 291, 292

1986 tax reform act

(a significant overhaul of the tax system) prohibited tax-exempt bonds from being used to fund sport facilities where a single organization would be responsible for 10% or more of revenues aka, a facility that hosted many different event buds did not have a major tenant could use tax-exempt bonds, because the facility would be deemed a public use facility, whereas a facility with a single tenant could not use tax-exempt bonds -these laws caused the interest rates on bonds used to pay for sport facilities to increase (in order to give the same competitive return to investors as tax-exempt bonds) -since these bonds cost more to use, other sources of financing began to develop that were not affected by these recent legal changes such as sales taxes and hotel and car rental taxes page 220

sin taxes

(taxes on alcohol and cigarettes) fail the user pays or benefits principle, because the users of a sport facility are not the ones being taxes, except by coincidence also fail the horizontal equity principle, because people with the same ability to pay (similar income) will pay different amounts of tax, depending on whether they smoke or consume alcohol -if lower income people smoke more than higher income people, then a sin tax will fail the vertical equity principle as well however, sin taxes are efficient at generating revenues, because their demand is price inelastic (the demand does not change much as a result of a price change) a related effect of taxing specific products or services is that the tax is shared by the consumer and producer (depending on their relative elasticities) hoteliers will oppose a hotel tax, because it will cut into their profit and make them less competitive with hotels in other destinations - even if the hotel tax raises the expected amount of revenue per hotel guest, it may reduce the number of guests page 221-222

benefits of new stadiums

- generate higher revenues from tickets, concessions, sponsorship, merchandise, personal seat licenses, luxury suites, premium seating -NFL teams see about 85% increase in local revenues from new stadiums and franchise value increase of 35% -incentive to perform on field performance -NFL rules - last paragraph page 210

advantages and disadvantages of GOBs

-do not satisfy the benefits principle, because everyone in a given jurisdiction pays for the facility, not just those who benefit -does satisfy the efficiency principle, because they are not burdensome or difficult to understand and cannot be easily avoided -may or may not satisfy the horizontal and vertical equity principles, depending on whether the largest sources of funding for the general fund follow those principles property taxes may satisfy the vertical equity principle, assuming that the individuals who earn more income own higher valued property and pay higher taxes -advantage - from the bond buyer's perspective is taht they are generally tax exempt, meaning that the buyer does not pay taxes on earnings from these bonds. this allows the interest rate on the bonds to be low compared with taxable bonds ex: page 224 page 224

goals of public versus private parties

-franchises are concerned with league restrictions, site/design control, facility control/ management, revenue control, and cash flow -financing goals of team owners are to maximize contractually obligated income and minimize debt service payments and coverage requirements - team owners also desire a strong voice in the design of a facility in order to maximize COI -team owners have desired complete management of the sport facility - this allows them not only to control scheduling for their teams but also to schedule other events, such as family shows financing goals of government in these partnerships are to maximize the credit quality of pledged revenues, maintain debt service coverage, and maintain a reserve fund government agencies tasked with overseeing sport facilities also care about resource allocation, the amount of public financing required, the impact on the government's borrowing credit, the government's share in the upside of a facility, and the possibility that the team may relocate if the facility is not built page 237

private sources of funding

-included the capitalization of revenue streams from the facility (naming rights, premium seating and sponsorship) and borrowing against those to pay for construction page 220

public funding sources

-initially were sales taxes, property taxes, and stadium rent, but funds increasingly came from hotel and rental car taxes and other taxes page 220

psychic impact of new sport facilities

-is an externality -may justify public subsidies - the team is not able to charge residents for being happy about the local team -feel good factor - existence value - Sanderson quote - bottom of page 213 -loss of a local team, if it moves to another city, may be so devastating in terms of psychic impact that a public investment if justified -key task for politicians is to find a way for those who benefit to pay for it and those who do not care about or benefit from sports to pay for nothing page 213, 214

why do sport teams receive large amounts of public funding?

-leagues have control over number of franchises in an area and can prevent others from coming in -threat of relocation - can threaten to move so the city throws money to keep them -HOMETOWN CITIES DO NOT WANT TO SEE THEIR TEAMS MOVE these reasons have resulted in unprecedented growth in construction of sport facilities page 214 - NOT TOO SURE SO CHECK THIS OUT

methods available for using sales taxes to pay for facilities

-one is to raise the sales tax rate a small amount and "pay as you go" - this covered most of the public financing for Bank One Ballpark (now Chase Field) -issue government bonds and pay them off through an increase in the sales tax - in this method, the payment period is longer (and more interest is paid) but the cost each year is lower than the "pay as you go" method - small increases in sales taxes do not impose a large burden on any one specific person or group, so strong opposition is often less likely - whether or not it is justified ex: page 227 -to fund a facility through sales taxes limited to those collected from the facility itself or from a district in the immediate vicinity - may include a diversion of current sales taxes related to the immediate region or funding through new sales taxes that will be collected at the facility, with or without an increase in the sales tax rate page 227, 228

incentives to build new stadiums

-page 210-211

three waves of financing

-pre-WWII wave - most facilities were privately financed -post war wave - growth in public financing -1987 - present - began with Joe Robbie Stadium, ushered in a constantly changing array of complex and creative financing methods page 219-220

reasons for investing public money in new sport facilities

-provide economic impact to the community -increase national and international awareness of the city and enhance its image, thereby increasing future tourism (and possibly firms and families relocating to the city) -provide a cornerstone for economic development in a blighted or underutilized area -generate civic pride among residents, or give the city "major league" status -provide quality of life services similar to public parks and museums -provide positive externalities, including psychic impact (the emotional impact of having a local sports team) -generate political capital for local politicians page 212

difference between stadia and arenas in terms of public finance

-stadia are much more expensive overall -arenas are much less expensive to build overall and they can attract many more events so private financing is more feasible - about 200+ events per year page 218

controversy regarding benefits to political jurisdiction

-those who gain the most from the construction of a new sport facility are not always those who pay for the facility's construction and upkeep - because many of hte benefits may not materialize sufficiently to justify the expense -most studies measuring the economic impact of sport facilities fail to ifnd enough net gain to a community to justiry the often large public outlays - but non-economic reasons like psychic impact may justify it page 214

feasibility studies are undertaken to determine the practicality and likely success of such projects as:

-whether a city should build a community recreation center, a profession sport stadium or arena, or a public pool whether a metropolitan are should lure a sport team to won, and how it could be done -whether a city should bid to host a major sporting event -whether an athletic director should build a new facility or renovate an existing one -whether a university should add a locker room to the campus recreation center -whether an entrepreneur should open a new health club -whether a small town should build a new soccer field page 280

two important points of analsyis of costs of stadium construction and how much the public bears

1) calculations of stadium construction costs typically do not include the cost (or opportunity cost) of land acquisition and forgone taxes -public stadium financing often involves giving away the land or leasing it cheaply and forgoing various taxes such as sales tax and property tax, that would normally be collected from the stadium - long estimates these amounts would add as much as 57% to the construction costs 2) lease arrangements with teams have become more beneficial to team owners than they used to be, often allowing the owners to receive all forms of revenue from the stadium (including non-sporting events) with the city collecting a very small annual rent for the stadium's use ex: Baltimore Ravens' football stadium, cost about $200 million with the public paying 90% of the costs. the team pays no rent and keeps all revenue streams, while the city authority covers the costs of maintenance and game-day staff. not hard to know why Art Modell moved the team from Cleveland to Baltimore page 219

historical phases of facility financing

3 phases page 215 - 216

public good

A good that is non-rival and non-excludable meaning that its consumption by one customer does not prevent another customer form consuming it and the team cannot prevent someone from enjoying the good page 213

franchise free agency

The threat of relocation to another city (often motivates the city to help build the facility for local team) -if the team can not realistically move, it may not be able to obtain a significant subsidy -some subsidy may be justified if the quality of the stadium, if it were financed solely by private investment, would be less than what he market demands ex: Washington redskins page 214

lease revenue bonds

a version of revenue bonds in which the revenue stream backing the payment of the bonds is a lease ex: a 20 year naming rights deal (which is a contract or lease) may be the source of funds to pay off lease revenue bonds as opposed to a tax on ticket sales (which is not a lease, but an expected or forecasted revenue stream) example on 226 page 226

certificate of participation

an instrument that a government agency or non-profit corporation set up to build a facility will sell to one or more financial institutions to obtain the initial capital for construction. then, the agency or non-profit leases the facility either directly to the tenant(s) or to a facility operator and uses the lease payments to payoff the COP COPs are backed by lease payments, they are riskier than GOBs and therefore have a higher interest rate - however, they do not require a public vote, so they are often used because they circumvent direct decision-making by voters they also typically do not count against the debt ceiling of the political jurisdiction, depending on applicable law page 224-225

more common forms of public financing for stadia and arenas

appendix 9.A

why have financing methods changed so much in recent decades?

beginning in the mid 1970s, the US has experienced a general revolt with a push toward more privatization of public services - hence, private industry has had to share in the cost of providing services that the public used to provide through the tax system this general trend, along with increased public awareness of the true costs of stadium financing and who most directly benefits (team and owners) has forced team owners to increase their private financing of stadia page 220

positive externalities (of new sport facilities)

benefits produced by an event that are not captured by the event owners or sports facility ex: sport bars benefit from having sporting events in town -there are positive externalities from sports, for which the local team does not collect payments page 212-213

efficiency principle

calls for a tax to be easy to understand, simple for government to collect, low in compliance costs (meaning that it is not expensive for taxpayers to calculate and pay) and difficult for taxpayers to evade for a tax to be effective in raising tax revenues sufficient to pay for a stadium, it should be applied to products or services with low price elasticity of demand page 222

private return on new facilities

can be quite substantial page 235

public subsidies for stadium development

can help push a league over the threshold to offer more expansion franchises -Baade and Matheson show that stadium subsidies have evoked expansions in major professional sports in the United States, moving the number of teams closer to the socially optimal level page 213

vertical equity

concerned with the taxpayer's ability to pay, typically calling for a tax that does not cause poorer persons to bear a disproportionate share page 221

two principles of public financing

equity principles efficiency principles page 221

public financing sources

exhibit 9.6 page 223

private financing

financing that does not use public dollars page 214

revenue bonds

form of public financing that is paid off solely from specific, well-defined sources, such as hotel taxes, ticket taxes, or other sources of public funding if the specific source of funding does not meet expectations, the bonds will not be paid off in full thus, when compared to GOBs, the interest rates are higher for revenue bonds and a debt service reserve is necessary require a debt service coverage payment - an annual payment into an escrow account to cushion against the risk of the revenue sources backing the debt being insufficient therefore, the total cost of using revenue bonds is much higher than that of GOBs because of the added risk advantage - because the funding is from a narrower source than GOBs, revenue bonds can be tailored to satisfy the benefits principle, especially is a ticket tax is used for sport-related construction, revenue bonds typically have terms of 15 to 30 years, generally do not require voter approval, and do not count against the debt ceiling of the political entity using them source of funding expected to grow over time, page 225 page 225

financing sources

general sales tax - just about everyone in a community pays a little when using this ticket tax - only attendees of events at the facility pay when using this page 241

most compelling justification for public/private partnerships

in effect, the users or beneficiaries who frequent the district fund the facility over time through their use of the district these mega-real estate projects are often developed by partnerships of public and private entities private developer might build the facility and the surrounding district, with the help of many private businesses this issue of who pays, along with many others, is a matter of public policy page 237

tourism taxes

include taxes on hotel stays and rental cars, and may also include food and beverage taxes in certain districts under these plans, visitors to the area, not local residents ( to the extent that local residents do not rent cars locally) help finance the stadium the success at the ballot box for these types of financing has been high DRAWBACKS -however, residents of one city will be tourists in another city, and they may then face high hotel and car rental taxes -the number of tourists to a city may decline as the cost of visiting that city increases event planners (including those in the sport industry) are especially sensitive to hotel and rental car taxes when they are planning major, heavily attended events page 228, 229

payments in lieu of taxes (PILOT)

is common when the land used for a stadium does not generate property taxes (because it is owned by the government) page 232

indirect sources of public financing

land donations infrastructure improvements tax abatements page 232, 233

general obligation bonds

last for 20 years or so, with the debt and interest payments paid each year directly out of the general funds of local government(s) coffers -the general fund of a government (city, county, or state) is the pool of money that the government has collected via taxes and other revenue sources and uses to pay for all government programs except those that specifically, by law, require separate funding page 219-220

result of positive externalities

local team may underinvest in a stadium or a sports league may decide not to launch a new franchise because it is not financially worth it to the team or league - may be worth it to the city and residents though - -issue is that the private business (team) cannot charge for the full value of its business to the community - therefore, the quality of the stadium or the number of teams in the league will be less than what the public wants - not socially optimal -public subsidy might be justified on these grounds page 213

sale of government assets

local, regional, and state governments own a great deal of land, and at times they determine that its best use is in the hands of private industry some sport facilities have been partially financed through government sales of land, with the proceeds serving as a direct source of financing land may also be an indirect source of of financing page 229

state appropriations

many sport facilities receive some funding from the state governments local students might be more apt to back a stadium project if they know that some money is coming from the state ex: miller park received $36 million from the state of Wisconsin page 229

construction cost index

measure of inflation in the construction industry can use CCI to ajust stadium construction costs for inflation in order to compare all stadia in real dollars ex: page 217 page 217

general inflation

measured by the consumer price index page 217

insurance wrap

method of raising the investment grade of revenue bonds payments are insured this method can reduce the interest rate of the bonds, but the insurance expense increases the costs page 225

Securitazation

most often used with financial instruments that pay interest, instead of COIs or revenue streams because COIs provide known and consistent payments they can be securitized in this way as can other predictable revenue streams page 236

tax increment financing

only "incremental" (additional or new) taxes generated from a certain source (traditionally property taxes) finance the facility and those incremental tax revenues would not exist without the facility the original uses of the taxes collected at the base value are still funded - only the additional tax revenues are used to pay the facility costs for this type of financing, a base year and tax assessed value is determined - after the facility is built, any increases in tax revenues resulting from the improvement of the area are used to pay off the tax increment bond this method captures the assessed valuation growth within a certain TIF district (a predefined area that is geographically related to the facility being built) if the area does not witness increased tax revenues, then the TIF bond may fail - that is essentially how tax increment financing works like revenue bonds, TIF bonds are riskier than GOBs page 226, 227

benefit principle

or user pays principle, states that those who benefit from a particular project ought to be the ones tax for funding a stadium, a ticket tax on sporting events would satisfy the benefit principle much more than a cigarette tax page 221

stadium funding sources

page 211

historical analysis of construction costs

page 217 - 219

examples of the use of revenue bonds in sport facility construction

page 225, 226

ownership

page 238, 239

payment terms

page 239

voter approval

page 239

responsibility for cost overruns

page 239, 240

management of future revenue streams

page 240, 241

deficit reduction act of 1984

prevented tax-exempt bonds from being sold to finance luxury suites page 220

why aren't sport facilities 100% privately financed, like the buildings of other industries?

private investors may not be willing to build spectacular palaces that lure many high-profile events because much of the revenue will flow to businesses outside the building page 235

price elasticity of demand

refers to the percentage decrease in the number of units sold compared to the percentage increase in the price of the product ex: an elasticity of -0.5 means that raising prices by 10% reduces sales by 5% a product with a high price elasticity of demand would see a substantial decrease in the quantity sold if a tax were imposed, which would offset much of the proposed tax gain page 222

contractually obligated income

revenue stream that a team receives under multi-year contracts ex: San Francisco Giants signed luxury suite holders to five and seven year contracts and club seat holders to three and five year contracts, thus nearly guaranteeing those revenue streams page 236

lotteries and gaming revenues

state-run lotteries and local gamines establishments are creative non-sport sources of financing generally considered regressive, failing the horizontal equity principle because people with lower incomes play the lottery or engage in gaming activities more often, and spend a higher proportion of their income or wealth in doing so than those with higher incomes proponents of the use of lottery and gaming revenue often note that these activities are optional page 231

feasibility study

study conducted to determine whether a project is likely to be practical and successful, considering such items as engineering, land use, financing, demand, and economic impact page 280

disadvantage of general obligation bonds

that their use may limit the amount of other bonds that the city, county, or state can use for schools, bridges, and other projects these political jurisdictions are limited in the total amount of bonds (or debt) that can be outstanding or owed, and debt ceilings vary across jurisdictions additionally, any voter approval that is needed can raise the total cost of the financing - it is not surprising that the use of GOBs may require a vote, because the funds to pay off GOs are public dollars, mostly supplied by residents page 223

naming rights

the right to place a firm's name on a facility (a form of sponsorship) - is paramount to getting a new stadium financed and completed page 240

public financing

the use of public funds to finance a project page 214

player income taxes

those in favor of charging athletes of visiting teams an income tax draw a parallel to the use of non-resident taxes, such as tourism taxes, to help fund a sport facility it seems logical that the athletes who benefit format he facility should help to fund it many states and cities tax the income of visiting players, usually charging between 1% and 4% of the salary earned during the athlete's time within the state or city most of the revenues go into the political jurisdiction's general fund because minor league athletes and those outside the "Big 4" are not necessarily taxed, this tax raises questions of fairness, although it satisfies the vertical equity principle page 231

revenues from tickets and parking

to satisfy the benefits principle, many facility financiers are turning to ticket taxes and parking revenues or taxes to help pay for construction and maintenance costs typically, these sources do not cover the bulk of financing, but they can make an important contribution many political jurisdictions require a vote to raise taxes but in some situations a "surcharge" does not require a vote economics of a tax versus a surcharge are not much different, yet the law in many page 230, 231

negative externalities

traffic congestion caused by sporting events page 213

general growth in the demand for sports and subsequent revenues enabled owners to justify paying part of stadium costs

true -city officials, recognizing this growth in demand and revenues, fought hard to convince owners to help pay for construction in 1987 Joe Robbie discovered new revenues available from leasing luxury suites and used the initial lease payments (and guarantees of future payments) to finance part of construction Carolina Panthers invented the modern use of personal seat licenses in 1993, generating about $150 million in revenues recent developments by sport leagues, including the G-3 fund in the NFL, have helped team owners find cheaper financing options to help pay for stadia page 220

sports represent a socially-consumed commodity

true Allan Sanderson said this page 213

tourism and food and beverage taxes generally fail the benefits principle, because tourists (as well as hoteliers and car rental operators) are not necessarily the users of sport facilities

true although F&B taxes do not satisfy the benefit principle, they do typically fulfill some sense of vertical equity, in that people with higher incomes spend more on food and beverages outside of the home and hence pay a larger share of the taxes than people with lower incomes page 228

sport fans gain from new stadia with enhanced offerings, better amenities, restrooms, food, and so forth

true although ticket prices usually increase in new stadia, more fans attend games in these stadia, providing evidence that fans consider themselves better off page 212

typically, private sources fund the more expensive facilities in larger markets because the economics of the facilities can justify it

true ex: higher luxury suite, premium seating, sponsorship, naming rights, and more events also, the threat of a team leaving for another market is less serious ex: LA Lakers can't easily leave because of the LA in the name page 218

ticket taxes and personal seat licenses do satisfy the benefits principle, because users of the facility pay them

true however, these sources usually cannot fully fund the public's portion of the cost of a stadium a television tax on sport channels might satisfy the benefits principle and generate substantial funding page 222

it is important to make comparisons over time with real costs, not nominal costs

true nominal costs are unfortunately often the basis of comparisons stadiums are much higher quality than they used to be with more amenities so the quality-adjusted costs may actually be lower than in previous eras page 218

public financing remains a major source of funding for sports facilities

true pae 221

cities and their businesses and residents may or may not be better off with a new stadium, depending on the cost to the city

true page 212

leagues, and not just their individual teams, desire new construction, because all members benefit through revenue sharing of increased ticket sales

true page 212

the fact that the team cannot charge local restaurants fro increased customer traffic means that this aspect of a sporting event is a public good and the team cannot prevent someone from enjoying the good

true page 213

the types and methods of financing, not just the amount, have changed over the three waves of construction

true page 219

public financing principles determine the financing sources that are appropriate for a given project

true page 221

although the use of money from the general fund is on the decline compared to other techniques, it is still popular enough tot have helped fund sport facilities for the Milwaukee Brewers, Cincinnati Bengals, Detroit Lions, Houston Texans, and Tampa Bay Lightning

true page 222

as voters have become more adamant in opposing large amounts of public support for sport facilities, proponents have been reducing the use of sales taxes and instead have begun to tax non-residents

true page 228

most sport facilities are publicly owned and leased to the team, which exempts them from paying property taxes altogether

true page 233

trend in funding of new sport facilities appears to be shifting away from tax increases

true public officials are now looking to alternative sources of capital including: -taxes generated directly from the facility, the team, players, and other facility -taxes generated from redevelopment surrounding the facility -special assessment sin a uniquely identified sports and entertainment district page 236, 237

sales tax revenues are the most common source of public financing for sport facilities

true some facilities use only sales tax revenues for the public portion of financing page 227

the trend toward more private financing has halted or stabilized in the past few years

true sport leagues and their owners still have leverage in negotiating with cities, especially smaller ones, because they can move to another location if a deal is not to their liking although voters are more aware of the true financial costs and benefits of publicly financed facilities page 221

dominant paradigm going forward in stadium financing is public/private partnerships, with teh major tenant generating equity via stadium-related revenues and additional capital provided by a municipal bond that is also backed by stadium revenues

true this paradigm does not preclude the use of revenues not directly related to the stadium, such as hotel and car rental taxes, but it places the onus of payment on those who use and benefit from the facility page 236

in nominal terms, the costs of old stadia were a small fraction of the costs of new stadia

true - about 12% it was also about half as expensive to build old stadiums exhibit 9.4 page 217

sin taxes

type of financing source that generally receives less opposition, presumably because the items being taxes are considered socially undesirable these taxes are regressive, because people with low incomes tend to spend a higher proportion of their income on cigarettes and alcohol, relative to those with high incomes the taxation of cigarettes and alcohol is sometimes claimed to have a side benefit of reducing smoking and drinking, but this assertion is paradoxical because if the use of cigarettes and alcohol were to decline significantly, insufficient tax revenues would be generated to make sin taxes a feasible financing mechanism these taxes remain less common than tourism taxes page 229, 230

sources of private financing

unlimited in the sense that an owner can use whatever money he or she possesses if he or she chooses billionaire owners can tap their private net wealth - however, many choose to tie the financing sources to the franchise itself rather than to their own finances ex: most stadium financing packages include annual rent payments from the team ot the owner of the facility - however, annual rents range from zero to a few million dollars page 235

calculate the annual payment for a general obligation bond

use payment schedule table exhibit 9.9 page 233, 234

reallocation of existing budget

used in very few cases uncommon method because the public is often not willing to reduce funding for existing government programs in order to build sport facilities page 232

utility and business license taxes

utility taxes are state and local taxes on energy consumed, which are collected along with customers' utility payments general business taxes include state and local corporate income taxes and sales and use taxes collected from businesses page 232

three major ideas of equity

vertical equity horizontal equity benefit principle (or user pays principle) page 221

general obligation bonds

were historically the most common method of facility financing, besides tapping into the general fund, and they continue to be very common because they spread the cost of a facility over a 20 or 30 year period -refers to the fact that the issuer has a commitment to repay the principal plus interest through whatever means are necessary, including tapping into the general fund of the city, county, or state risks of buying GOBs are lower than the risks of buying others page 223

asset-backed securities

when a franchise may package guaranteed COI or expected revenue streams together and sell bonds based on these assets this technique is called securitazation page 236

important issues in regard to financing

who will own the facility? should the public financing package be put to a vote? what should be the payment terms? who will be responsible for cost overruns? who will pay the costs of and keep the revenue from future revenue streams? what sources of public financing can be used? page 238