How Batting Averages Can Impact a Stadium’s Bond Rating

Still, the season was a huge win for Citi Field. Before the 2015 World Series, the country’s top credit-rating agencies upgraded the creditworthiness of more than $600 million of outstanding debt­—used to build the Queens ballpark—that was, in industry lingo, “junk.” The stain on the bonds’ certainty stemmed partially from years of poor performance by the Mets.

Moody’s Investors Service, one of the top credit-rating agencies in the country, would later go on to upgrade the debt, indicating that the team would indeed meet its financial obligations. This was the highest it had been in five years, and the Mets’ World Series appearance with an anticipated sales increase the next season was cited as a key reason.

Similar to underwriting an office or retail lease that factors in a tenant’s bottom line, bond debt on sports arenas is underwritten in part by the “wins” column. More wins, and a potential appearance in the postseason, means more tickets, concessions and merchandise sales. More sales equals more revenue, meaning it can pay off its rent or, in this case, its debt.

“With any bond rating, part of the rating depends mostly on the ability to pay,” said Glenn Gerstner, the head of the sports management department at St. John’s University. “Generally speaking, when a team performs better [its] revenues tend to go up.”

Financing a sports arena, a very niche sector of the commercial real estate world, has been one of the most controversial types of projects in recent years. At times they have come at the expense of the taxpayer and at the expense of key infrastructure projects, according to the critics. In other cases a good team or one season has been used to leverage public financing, only to see wins go down the following year. Municipalities have borrowed at rates that will haunt them for generations.

“How do you explain that the money is there for sports teams, but not for basic needs of a community?” former Rep. Dennis Kucinich, a critic of local governments backing arenas for privately owned teams, told Commercial Observer. “It’s kind of like a household where dad forgets to put food on the table and pay the rent or the mortgage and goes out gambling.”
The construction financing method for Citi Field, also used to build Yankee Stadium in the Bronx and the Barclays Center in Brooklyn, is a unique method that’s since been banned by the Internal Revenue Service (the arenas were grandfathered in).

“There are a million different stadiums and a million different ways to finance them,” said Neil deMause, the author of Field of Schemes: How the Great Stadium Swindle Turns Public Money Into Private Profit. “There’s a lot of throwing things at the wall to see what sticks. It’s very, very common to cycle through multiple, different financing schemes, even sometimes after they’ve been approved.”

For the purpose of this story, we’re only going to look at baseball stadiums (and it’s not only because we’re excited about spring training being in full action). A ballpark is typically open air and has a single tenant who might only use it 81 days out of the year. And more often than not, the debt comes through a public bond issuance.

The case of Citi Field and Yankee Stadium dates back to the late 1990s, when the city of New York was working to get both the Mets and the Yankees new parks. The economic depression following 9/11 benched the plans until the mid-2000s before things started warming up again.

To secure the financing to build each park, the city struck an agreement with each team—neither of which had previously paid property taxes because its stadium was on parkland and thus exempt.

As widely reported, the city leased land to the Mets in Flushing and to the Yankees in the South Bronx. Tax-exempt bonds were issued to finance the construction through the New York City Industrial Development Agency. On a semi-annual basis, the teams pay down their debts through payments in lieu of taxes, or PILOTs. Those PILOTs would be set, however, to the cost of the debt service in a given year—not necessarily to what the property taxes would have been.

Going this route allowed each team to sell government tax-exempt bonds, which had a lower interest rate and would save both the Mets and the Yankees money in the long run.
Teams typically “want to do a municipal bond because the interest is tax-free to the investor,” Gerstner said. “It saves [the teams] a lot of money in interest.”

But not everybody was waving a foam finger in support. Critics believed there was a mismatch between what was charged and what was indebted. Because the PILOTs were set to whatever the debt bill was in a given year, that might have been lower than what the team would have owed in property tax. Under this theory, the city was losing money it could have collected even though the teams previously hadn’t paid property taxes.

The IRS responded in 2009, ruling that this route could no longer be taken and that PILOTs had to be calculated based on what the real estate tax would be—not the debt service.
So how did the Mets, a team typically in the upper reaches of the most valuable franchise lists, wind up with a “junk” rating for Citi Field in the first place?

It began in 2010, a year after the ballpark opened, when one of the companies that insured the bonds ran into financial trouble. Standard & Poor’s and Moody’s each downgraded almost $700 million in debt to BB+ and Ba1, respectively, while still giving it a stable outlook.

While that mostly had to do with the insurer, the Amazin’s own problems would begin to come out of left field. Citi Field’s bonds were once again downgraded in December 2011 because of poor attendance records, as well as the team’s financial losses which stemmed from investments with Bernard Madoff. Only 2.4 million people turned out that year, according to statistic tracker Baseball-Reference.com, meaning that per game, an average 29,044 out of 41,800 seats were filled.

Earlier that year the team had shopped around selling a stake in the Mets to reap some cash. Now-President Donald Trump entertained the idea of buying it, as did Vitamin Water founder Mike Rispoli. A minority stake was sold to a few silent partners who included comedian and pundit Bill Maher.

A year later, in December 2012, S&P once again downgraded Citi Field’s debt—this time to the BB rating, which is two levels below investment grade. An S&P analyst told The New York Times at the time that the team’s poor performance on the field—and the accompanying impact on ticket sales and money to pay down the debt—would continue to impact the ratings. The Mets finished 2012 with a 74-88 record and an average 27,689 fans per game.

Between those abysmal years and 2015, things started to look up for the team. A rotation of young starting pitchers—namely Matt Harvey, Jacob deGrom and Noah Syndergaard—and sluggers like Yoenis Cespedes started turning heads throughout the whole country. The Mets clinched their division that season and finished 90-72.

The Mets wound up profiting significantly from the come-from-behind 2015 season, when they were expected to come in second place. The team reported to bondholders that Citi Field-related revenue—ticket sales, advertising, parking fees—was up for the first time in five years. Newsday wrote that the strong financial showing at the ticket window was a 30 percent increase from a year earlier, when the Mets had a 79-83 record.

After the Mets clinched the National League pennant in October 2015, Moody’s issued a report indicating that, win or lose, the team’s financial status was looking up. The report noted that all but one of the teams who had played in the World Series since 2002 saw an increase in ticket sales the next year—even if they didn’t take home the prize. For instance, the Kansas City Royals saw a 38.4 percent attendance increase in 2015, the year after losing the World Series to the San Francisco Giants.

“In the long run, the benefit of a strongly performing team with higher home game attendance and greater media attention can translate to more competition for future sponsorships that will likely lead to higher advertising revenues, which account for just over one-third of total annual revenues,” the report indicates.

Moody’s that month upgraded the outstanding bond debt on Citi Field to Baa3—a significant step up from the previous Ba1.

“The upgrade and investment grade rating also reflects the stadium’s evidenced revenue resiliency, which notably rebounded in 2015, when the team made its first World Series appearance since 2000, and is expected to remain strong in the near term,” the June 2016 report read. “The rating also recognizes the inherent variability of the team’s performance that could affect cash flows over the long debt term.”

And attendance jumped in 2016 to nearly 2.8 million (an increase of 400,000 from five years before) over 81 regular season games and one wild-card game in which the Mets were eliminated from the playoffs. That was an 8 percent rise from a year earlier and the highest attendance number since Citi Field opened in 2009 when 3.2 million spectators went through its gates.

“Winning means that you have more people at the stadium and you have more revenue from selling hot dogs, selling tickets, selling hats,” said Dave Kaval, the president of the Oakland Athletics.

Financing a stadium outside of New York City gets hairier because approval for all of this funding typically has to go through a public referendum, according to Gerstner, the sports professor.

“That’s normally a city law where certain types of borrowing have to go through a referendum,” he said. “They’re those questions at the top of the ballot that no one looks at when they go in the voting booth.”

DeMause, the author whose book first published in 1998, said the better performing the team during due diligence, the easier it is to arrange the financing.

“There are two ways to argue for a new stadium,” he said. “One is, ‘Our team sucks, we need a new stadium so we can be good again.’ Which usually doesn’t work very well, because if your team sucks, nobody cares. Or, ‘Our team is great. If you don’t give us a new stadium, you’ll never see this again.’”

The latter option, he added, is often the better route. “This is very, very common,” he said. “If you’re trying to get a new stadium you compete that one year.”

Gerstner pointed to the instance in which the San Diego Padres leveraged its All-Star roster to secure financing in the late-1990s to build what is today Petco Park. The Padres boosted their roster for the 1998 season, making it all the way to the World Series that October (the Yankees swept the team). The following month, voters went to the polls to determine whether the team could build the stadium. The city invested $300 million into the project, while the Padres invested $115 million, according to news organization Voice of San Diego.  

Following the approval, however, the Padres traded away key players and lost others to free agency, Gerstner noted. The team finished fourth in its division with a 74-88 record.

“Maybe the stadium would have passed anyway, but we’ll never know,” Gerstner said. “It certainly didn’t hurt that the team made the World Series.”

In some cases, local governments can come under fire for investing in a ballpark. That’s what happened with Miami-Dade County after it invested $400 million toward the construction of Marlins Park. A 2013 report in the Miami Herald determined that $91 million in bond issuance to finance the stadium would end up costing taxpayers $1.2 billion by the time the debt matured. The final cost was so high, the paper noted, because the county delayed the payment by 15 years, thus driving up the interest.

Even before that snafu in South Florida, the controversy around public funding for these private entities was in the national spotlight. Kucinich, who served eight terms in Congress before retiring in January 2013, held a series of hearings on the matter in the late 2000s.

The Ohio lawmaker told CO he had been concerned by the loans cities were making to these public uses. His issue was that money was being invested into sports arenas instead of other infrastructure needs, such as roads or bridges.

Unlike the Big Apple or Miami, other cities might lack the financial wherewithal to undertake such a large bond issuance. Sports teams have thus had to turn to good old-fashioned capitalism to get a stadium built.

In Oakland, Calif., the Athletics are currently looking to build a new stadium. Since moving to the Bay Area in 1968, the team has played at the 51-year-old Oakland-Alameda County Coliseum where it has won four World Series.

Most likely, Oakland will give the team land to develop, according to deMause, who added it might be better than a loan since land in the Bay Area is among the most expensive in the country. However, construction of the ballpark will be privately financed.

“It’s sort of a backhanded subsidy, but I think they might actually find a way to make that happen through private financing,” deMause said. “That’s a place where something that doesn’t involve a ton of public money might succeed.”

To facilitate this high-stakes construction, the team hired Kaval as its president. Before heading the baseball team, he ran the San Jose Earthquakes soccer team and oversaw the construction of its privately financed Avaya Stadium.

Kaval told CO that the Earthquakes’ $100 million stadium was funded mostly through equity provided by the team’s ownership group. No loans were taken out for the building, which opened in March 2015.

“Here in California, this is pretty much a private financing-only environment,” said Kaval, who also teaches a sports management class at Stanford University that examines the various ways to finance stadiums. “You just kind of have to know that when you hatch a project. That’s what we did in San Jose with Avaya. That’s the plan here for the Athletics in Oakland. You just need to make sure you can create a pro forma and a business model for your club that can support either the debt payment or a reasonable return on the equity investment that you’ve made in the endeavor.”  

One possible option is to build a commercial and retail complex around the stadium, similar to the one under development around Avaya Stadium. By creating a destination surrounding an arena, it creates more of an experience, Kaval said. That becomes more crucial in baseball, when an ordinary Tuesday night game could only draw in a few thousand fans.

“We’ve learned from what we did at Avaya Stadium about what works and what doesn’t work,” he said. “We’re trying to do everything we can to maximize and leverage that experience with a larger project here in Oakland.”

Funding these types of projects becomes more controversial and garners more attention because of the human aspect attached to them, Gerstner said. Although an individual or a group of people may own a team, fans still believe it belongs to them—oftentimes willing to shell out taxpayer dollars to ensure they stay in a given city.

“The economics of professional sports is unlike any other industry. And it all starts with that, where people feel an investment with that team—even though it’s a business like any other and they’re looking to maximize their profit like any other,” he said. “People lose their minds when teams [threaten to leave] because they feel like it’s part of the fabric of the city. A lot of teams give the city their identity.”