Estimating the Market Value of Sports Facilities


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This presentation describes the process for estimating the market value of professional sports facilities. The original analysis was done based on Tampa's St. Pete Times Forum hockey arena when it was in litigation over it's property tax assessment.

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Estimating the Market Value of Sports Facilities

  1. 1. Estimating the Market Value of Major League Sports Facilities Presented By: Tim Wilmath, MAI Hillsborough County Property Appraiser’s Office Prepared For: Florida Chapter IAAO Spring Conference Lake Mary, Florida April 7, 2004 Photo: Raymond James Stadium, Tampa Florida
  2. 2. Topics <ul><li>New facility construction. </li></ul><ul><li>Public/Private Partnerships between local government and sports teams. How this partnership has affected value. </li></ul><ul><li>Approaches to Value - Cost/Market/Income - what works - what doesn’t. </li></ul><ul><li>Measuring economic life and depreciation of sports facilities. </li></ul><ul><li>Mass Appraisal and Stadiums/Arena valuation. </li></ul>
  3. 3. Sports Teams * As of August 2003 Make that 30
  4. 4. Sports Teams Where are the Teams and Venues? The 112 professional hockey, football, basketball, and baseball teams in the United States are located in thirty-nine metropolitan areas. These 112 teams play in 102 sports venues.
  5. 5. Sports Venue Construction Of the 102 professional sports venues in the U.S., 71 have been built since 1990. As the adjoining table illustrates, 37 have been built since 1999.
  6. 6. Sports Venue Construction
  7. 7. Public/Private Partnership <ul><li>Since the 1960’s, the burden of paying for the construction of new sports facilities has fallen more and more on local government. </li></ul><ul><li>Local governments shoulder the cost of these new sports venues because they perceive various benefits from hosting professional sports teams in their cities. </li></ul><ul><li>When cities resist paying for the construction of new facilities, teams threaten to relocate (and often do). </li></ul>
  8. 8. Public/Private Partnership The partnership between local government and professional sports teams is critical in the estimate of market value for stadiums and arenas. Both local government and sports teams are “market participants” in the construction, purchase, ownership and operation of sports venues.
  9. 9. Government-built and -owned ballparks transformed teams from owners to renters. It is always easier for a renter to move to get a better deal. So, government officials who advocate taxpayer-funded sports facilities to attract or keep a team virtually ensure that teams will continue issuing threats and moving. “ Build it and they will Leave” Photo: Charlotte Bobcats NBA Arena currently under construction.
  10. 10. Market Value Some argue that the benefits local government receives from their participation in sports venue construction and ownership are largely non-economic and should be ignored in an estimate of market value. Photo: St. Pete Times Forum, Tampa, Florida This argument is typically raised in ad-valorem tax cases in an effort to reduce the property’s tax assessment.
  11. 11. Valuation Approaches 1. Sales Comparison Approach 2. Income Approach 3. Cost Approach
  12. 12. Sales Comparison Approach The sales comparison approach is a method whereby the appraiser estimates value by comparing the subject to similar properties which have recently sold. Adjustments are then considered for various applicable factors.
  13. 13. Sales Comparison Approach After the Lakers and Kings moved to the new Staples Center, the Great Western Forum in Los Angeles sold in December 2000 for $22.5 million. The purchaser was the Faithful Central Baptist Church, who converted the Forum to church use. The change in use from a major league sports facility to a church would render this sale unusable for valuing existing (and operating) major league sports facilities.
  14. 14. Sales Comparison Approach The Pepsi Center in Denver Colorado, the NBA Nuggets, and the NHL Avalanche sold in July 2000 for a reported price of $460 million to real estate developer Stan Kroenke.
  15. 15. Sales Comparison Approach The Savvis Center in St. Louis and the St. Louis Blues NHL team sold in September 1999 for a reported price of $100 million to Wal-Mart heirs Bill and Nancy Laurie.
  16. 16. Sales Comparison Approach The Jack Kent Cooke Stadium and the Washington Redskins sold in January 1999 for a reported price of $800 million (a record price for a U.S. sports franchise) to a group headed by Daniel M. Snyder.
  17. 17. The three previous transactions included the stadium or arena, a professional sports team, and personal property. There is no accepted appraisal methodology for allocating the purchase price between the franchise, venue, and personal property. Accounting allocations are largely subjective with tax implications as the primary consideration. Sales Comparison Approach
  18. 18. Sales Comparison Approach An accurate analysis of a transaction would require complete access to the purchase documents and the financial records of the team and venue.
  19. 19. Sales Comparison Approach Gary A. Battuelo, MAI cautioned against using sales that included both real estate and business in his article entitled Appraisal Issues in the Valuation of Extremely Large Buildings , (Appraisal Journal, October 1996): “ A building that is part of a business sale and has a price allocated to it as a portion of the overall going-concern cannot truly be used as an item of real estate market data.” Photo: Adelphia Stadium, Nashville Tennessee
  20. 20. Cost Approach The Appraisal of Real Estate 12th Edition notes the following: The sales comparison approach is usually not applied to special-purpose properties because few similar properties may be sold in a given market, even one that is geographically broad. To value special-purpose properties, the cost approach may be more appropriate and reliable (Page 419). Photo: New Orleans Arena - Home of the New Orleans Hornets
  21. 21. Income Approach The Income Approach reflects the value of a property's earning power based on the capitalization of its income.
  22. 22. Income Approach 1. Direct Capitalization method using market rent, expenses, vacancy, and capitalization rate. 2. Valuation of going concern then allocating value to Real Estate. 3. Discounted Cash Flow with projections of team/venue cash flows. Options for applying Income Approach
  23. 23. Income Approach Landlord Tenant Most professional sports venues are owned by local government and leased by a professional sports team. Rent is often“free” or well below a rate that would justify construction (below market). Lease rates are not based on an expected return to the investment.
  24. 24. Income Approach Why do local governments give stadiums away or rent them to sports teams for below-market rent? <ul><li>Stadiums and teams create jobs and revenue </li></ul><ul><li>Stadium construction brings $ into local economy </li></ul><ul><li>New businesses </li></ul><ul><li>Urban Renewal </li></ul><ul><li>Media & tourism draw </li></ul><ul><li>The intangible benefits of community pride in becoming a “major league sports city.” </li></ul>
  25. 25. Income Approach Measuring the market value of a sports venue using “below market” rental rates between local government and sports teams would be improper because the rental rates do not reflect all the benefits that accrue to the landlord. Photo: Gaylord Entertainment Center, Nashville, Tennessee
  26. 26. Income Approach This relationship between landlord and tenant is not unique. Regional mall owners often lease buildings to “anchor” department stores at below market rental rates to attract tenants to in-line mall space and to obtain the free advertising that mall anchors provide.
  27. 27. Income Approach Measuring the going concern value for an operating sports team and then allocating this value between team and arena is unreliable. There is no accepted appraisal methodology for making this allocation (as there is in hotel valuation).
  28. 28. Income Approach Utilizing a discounted cash flow with business income and expense projections is also unreliable because sports franchise cash flows are notoriously unstable and unpredictable; therefore, any forecasting is subjective at best. Photo: Paul Brown Stadium, Cincinnati, Ohio
  29. 29. Income Approach N. Y. Yankees v. The Tax Commission of the City of New York In the reproduction cost less depreciation approach to valuation, income of a business operated on the premises is no evidence of value of the real estate …..the court is of the opinion that the proper method of evaluating the stadium is by the reproduction cost less depreciation.
  30. 30. Cost Approach The cost approach reflects the current cost of reproducing or replacing the improvements, minus the loss in value from depreciation, plus land value. Photo: Fleet Center, Boston, Massachusetts
  31. 31. Cost Approach Components of the Cost Approach 1. Replacement Cost 2. Depreciation 3. Land Value Photo: Great American Ballpark under construction in Cincinnati, Ohio (2000)
  32. 32. Cost Approach Replacement cost is fairly easy to estimate.
  33. 33. Cost Approach Land value is also a straight-forward approach using comparable sales. The fact that the site is improved with an arena or stadium has no bearing on the land, as though vacant.
  34. 34. Cost Approach Since estimating market value for professional sports facilities requires reliance on the cost approach, the accurate estimate of depreciation becomes imperative. Physical Depreciation - Loss in value due to wear and tear Functional Obsolescence - adverse effect on value resulting from defects in design that impair utility. External Obsolescence - adverse effect on value resulting from undesirable factors external to the property
  35. 35. Cost Approach Physical Depreciation - Loss in value due to wear and tear. The most common method of measuring physical depreciation is the age/life method. Effective Age/Useful Life = Physical Deprecation % Effective age is an observed value based on the overall condition of the property. Useful life is defined as the period over which a structure may reasonable be expected to perform the function for which it was intended.
  36. 36. So how long do major Sports Facilities last? Photo: Three Rivers Stadium demolition - 2001 , Pittsburgh, Pennsylvania Cost Approach
  37. 37. The emperor Titus opened the Colosseum in Rome in AD 80, approximately 2000 years ago. Although gladiators no longer battle at the Colosseum, the structure still exists. Sports venues constructed in the 20 th Century have not been so enduring. Cost Approach
  38. 38. Cost Approach 26 professional sports venues have been demolished since 1991 Add Philadelphia’s Veteran Stadium
  39. 39. Note: Facilities built after 1960 are only lasting 25 - 30 years. That’s not to say that all “older” venues are obsolete, however, it is fair to say they are becoming an “endangered species”. Cost Approach
  40. 40. Endangered List Civic Arena (Mellon Arena), Pittsburgh, PA, built in 1959 Busch Stadium, St. Louis, MO, built in 1966 The Houston Astrodome, Houston, Texas, built in 1965 Yankee Stadium, New York, N.Y., built in 1923
  41. 41. Cost Approach Functional Obsolescence - adverse effect on value resulting from defects in design that impair utility. For sports venues, functional obsolescence may exist for the following reasons: <ul><li>Inadequate parking </li></ul><ul><li>Lack of restaurant facilities </li></ul><ul><li>Lack of retail facilities </li></ul><ul><li>Lack of club seats/sections </li></ul><ul><li>Obstructed sight-lines </li></ul><ul><li>Narrow concourses </li></ul><ul><li>Ingress/Egress Problems </li></ul>These items mostly affect older venues. Modern facilities are typically built with modern features.
  42. 42. Cost Approach External Obsolescence - adverse effect on value resulting from undesirable factors external to the property For “conventional” properties, external obsolescence is estimated by capitalizing income loss caused by external forces or extracting the depreciation from market sales. Photo: Tropicana Field, St. Petersburg, Florida
  43. 43. Cost Approach As a special purpose property, economic viability is measured by the ability of the improvements to achieve their intended purpose, i.e., highest and best use. When factors outside the property cause the improvements to perform at an inferior level, economic obsolescence exists. Photo: Candlestick Park (renamed 3Com Park at Candlestick Point after a new sponsorship deal in 1996) closed for baseball after the 1999 season as the Giants moved into Pac Bell Park
  44. 44. Cost Approach The factors that drive a sports venues success include:  Population (both overall and per sports team)  Local Market Age Profile  Local Market  Household Income  Entertainment Spending Characteristics  Corporate Depth  Television Market  Radio Market These same factors are used in feasibility studies to predict if a sports venue will be economically viable.
  45. 45. Cost Approach A market must have sufficient population to support a professional team. Large populations usually translate into high attendance. It is no accident that most major professional sports teams exist in the largest U.S. markets.
  46. 46. Cost Approach The presence of additional teams in a given market likely has an affect on a teams ability to generate desired attendance.
  47. 47. Cost Approach Sports and entertainment events generally attract a younger audience; hence the age makeup of the local population can affect attendance.
  48. 48. Cost Approach Household income affects a patron’s ability to support the venue through the purchase of event tickets, novelties, and concessions.
  49. 49. Cost Approach Entertainment spending is important because it indicates how much of a local residents disposable income could potentially be spent on sporting and entertainment events.
  50. 50. Cost Approach The success of sports arenas in the modern era is largely dependent on corporate support via the purchase of luxury suites, club seats, season tickets, sponsorships, and naming rights.
  51. 51. Cost Approach Similar to population, the presence of additional teams in a given market likely has an affect on a teams ability to generate desired sponsorships, club seat sales, and naming rights deals.
  52. 52. Cost Approach Another important factor for gauging the potential success of a major league sports venue is the depth of the local television market which is measured by Nielsen Media Research through the “Dominant Market Area (DMA).
  53. 53. Cost Approach The market area for sports arenas is also defined by the geographic area covered by local radio . Radio broadcast media refers to radio coverage as the “Continuous Market” (CM) population.
  54. 54. Cost Approach Although the previous demographic, social, and economic factors are important measures of an arena’s potential success, actual performance in the following categories should also be reviewed. <ul><ul><ul><li> Attendance </li></ul></ul></ul><ul><ul><ul><li> Average Ticket Prices </li></ul></ul></ul><ul><ul><ul><li> Luxury Suite Sales </li></ul></ul></ul><ul><ul><ul><li> Sponsorships </li></ul></ul></ul><ul><ul><ul><li> Broadcast Revenue </li></ul></ul></ul><ul><ul><ul><li> Arena Naming Rights </li></ul></ul></ul>
  55. 55. Cost Approach Green Bay ranks 125 th in terms of population among U.S. Metropolitan Statistical Areas. Regardless of Green Bay’s small population, annual attendance at Green Bay Packer football games has exceeded 97% since the construction of Lambeau Field in 1957.
  56. 56. Cost Approach Poor team performance is often cited as the source for poor stadium or arena attendance. A review of attendance over a five-year period should provide a reasonable indication of market support.
  57. 57. Cost Approach In addition to attendance, other actual performance factors include average ticket prices, luxury suite sales, broadcast revenue, and naming rights deals.
  58. 58. Cost Approach NFL teams obtain the vast majority of their revenue from television revenue, while NHL teams obtain most of their income from gate receipts. Poor attendance does not affect NFL teams to the degree that it does NHL teams.
  59. 59. Cost Approach Does team performance affect the value of the real estate? *A major league sports facility cannot achieve highest and best use without the presence of a major league sports team.
  60. 60. Mass Appraisal The IAAO’s text, Property Assessment Valuation states: The assessor needs skills in both mass appraisal and single-property appraisal - mass appraisal skills for producing initial values in a revaluation, and single-property appraisal skills to defend those values and to appraise exceptional special-purpose properties that do not lend themselves to mass appraisal techniques (Page 286 – Green Book).
  61. 61. Mass Appraisal The dilemma for tax assessors is how far should they go to arrive at a supportable estimate of value?
  62. 62. The End