Disadvantages of Leasing Out Stadiums
In the previous article, we have already taken a look at why sporting franchises prefer to lease out stadiums instead of building them from scratch.
We are now aware of the various benefits that accrue to franchises if they lease out stadiums instead of building them. However, it would not be appropriate to look only at the benefits of leasing and not look at some of the disadvantages and missed opportunities that are commonly associated with leasing.
In this article, we will have a closer look at the disadvantages associated with leasing stadiums over long periods of time.
- Expensive in the Long Run: Leasing stadiums is cheaper and more convenient in the short run. However, most of the lease contracts have escalation clauses built into them.
Sometimes these clauses can have variable escalation rates linked to indexation. This means that there is a fixed percentage by which the leasing costs increase every year. Leasing contracts are very long-term in nature.
It is not common for leasing contracts to be drawn out for a period of thirty years. Hence, over a period of time, the money paid out in the form of lease rentals can add up to a lot.
- Loss of Tax Breaks and Subsidies: If a sporting franchise has to build its own stadium, then it will generally have to take on a lot of debt. The end result is that they will have to pay out a significant amount of money in the form of interest. However, there is a silver lining to this story. This significant interest expense can be used to reduce the taxable income of the franchise. As a result, the amount of taxes paid can also be drastically reduced.
Thus, owning a stadium provides the franchise with a tax shield which is more valuable than the one obtained by renting. Also, there are many local municipal governments that provide financial help to the franchise in the form of subsidies. The overall cost of ownership is drastically reduced when these factors are taken into account.
- Loss of Sponsorships: When a sporting franchise owns its own venue, it can generate an additional source of income from the same. This can be done by selling the naming rights to the venue.
There are many corporations who are willing to pay significant sums of money to the franchise in exchange for the naming rights. This additional revenue can also help reduce the overall cost of ownership. However, when a franchise decides to lease out its stadium, it loses out on the revenue generated via sponsorships, naming rights, and renting out the venue for other events.
- Possible Relocation: Generally, sporting franchises are able to continue operating in the same stadium for decades. This is because they are able to renew the lease contract with the local government and continue. However, this situation may change due to circumstances that are beyond the control of the franchise.
For instance, it is possible that the local municipal government may go bankrupt and as a result may have to auction its assets. The stadium may be one such asset that gets auctioned and may be bought out by another party who is not willing to continue with the contract.
The problem is that there are not many stadiums in a particular city. A new stadium requires many years to build and hence if a stadium lease ends abruptly, then the sporting franchise is left in disarray. They are compelled to relocate to a different city. This can be catastrophic for the franchise since their fan base is heavily concentrated in their base locations and their revenue model is dependent upon their fan base.
- Payments for Damage: Sporting stadiums are large arenas that host thousands of people at the same time. It is not possible for the host to control the crowds and monitor their behavior, no matter how well the event is managed. There are instances wherein fans end up causing some damage to the property if they get upset as a result of poor performance by their team.
If the stadium is leased out, the owner will consider the lessee to be responsible for this damage and will try to recover the amount from them. It is true that the lessee can reimbursements from their insurance company if they have taken out insurance. However, the probability of receiving a significant reimbursement is quite low.
- Inability to Make Improvements: Last but not least, in most cases, lessees do not have the right to make improvements to the stadium. Also, it does not make financial sense for the lessee to invest capital in the stadium since they do not own the property. This makes them dependent upon the lessor if they want to make some capital improvements and enhance their fan experience or satisfy the conditions of the franchisor i.e. the league.
Most of the time franchises are able to work out an arrangement with the franchisor. However, their inability to do so can have significant consequences.
The fact of the matter is that leasing out a stadium can be a prudent financial decision. However, it does come with some disadvantages.
The downside needs to be carefully weighed before a decision is taken regarding leasing a stadium.
Authorship/Referencing - About the Author(s)
The article is Written By ‚ÄúPrachi Juneja‚ÄĚ and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Finance in Sports Management
- Sports Management Companies: Sources of Financing
- What is Sports Franchising?
- Sports League Franchise Agreement
- Revenue Sharing in Sports Leagues
- Issues in Revenue Sharing in Sports Leagues
- How Salary Caps Work in Sports Leagues?
- Advantages of Salary Caps
- Disadvantages of Salary Caps
- Alternative To Salary Caps: Luxury Tax
- Sources of Revenue: Broadcasting Rights
- How are Broadcasting Rights Revenue Split Amongst Franchises?
- Common Issues with Revenue Generated from Broadcasting Right
- Digital Media Rights and Sports League Financing
- Sports League Sponsorships: A Primer
- Types of Sponsorships Given to Individual Players
- The Economics of Sports Leagues
- Why Do Sponsors Fund Teams in Sports Leagues?
- Title Sponsorship and its Disadvantages
- Advantages of Title Sponsorship
- Team Sponsorship: Advantages and Disadvantages
- Objectives of Sponsorships
- Factors Affecting Selection of Sponsorship of Sports Event
- Risks Associated with Sponsorship from Sponsor‚Äôs Perspective
- Risks Associated with Sponsorship from Sponsored Entity‚Äôs Perspective
- Level Based Sponsorship (Tiered Sponsorship)
- Issues With Sponsorship Levels
- Evaluating the Effectiveness of Sports Sponsorships
- Issues Related to Sponsorship Evaluation
- Source of Revenue: Fantasy Sports Leagues
- Benefits of Fantasy Sports Leagues
- Source of Revenue: Sports Merchandising
- Issues With Merchandising
- How are Organizational Aspects of Sports Leagues Linked to Finance
- The Optimal Size of a Sports League
- Why are Professional Sports Franchises Increasing in Value?
- Use of Price to Revenue Ratio in Valuing Sports Franchises
- Factors Impacting the Valuation of a Sports Franchise
- Income Approach to Valuation of Sports Franchises
- Valuation of Sports Franchises: Discount Rate Calculation
- Issues in Determining Discount Rate for Valuation of Sports Franchises
- Valuation of Sports Franchises: Discount Rate Calculation
- Replacement Cost Approach Advantages and Disadvantages
- Valuation of a Sports Franchise: Market Approach
- How Team Performance Affects Valuation?
- Issues With the Valuation of Sports Franchises
- Impact of Technology on Sporting Finance
- Revenue From Releasing Players for International Tournaments
- Private Equity Investments in the Sports World
- Disadvantages of Private Equity Investment in Sporting Franchises
- Why do Sporting Franchises Lease Out Stadiums?
- Disadvantages of Leasing Out Stadiums
- Accounting for Stadium Leases
- Lease Accounting: Right of Use Asset
- The Case Against Government Funding for Sports Stadiums
- Public-Private Partnership in Stadium Financing
- Advantages of Public Private Partnership Model
- Risks in Public-Private Partnerships
- What is Sports Tourism?
- Pros and Cons of Sports Tourism
- How Sporting Franchises Help Billionaires to Plan Their Taxes
- What is Jock Tax and How is it Calculated?
- Jock Taxes: Pros and Cons
- Valuation of a Player
- Financial Doping and Financial Fair Play
- Pros and Cons of Financial Fair Play Rules
- Debt Funding in Sports Franchises
- Involvement of the Franchisor in Debt Funding
- Debt Ceiling in Sporting World
- Pros and Cons of Debt Ceilings in Sports Leagues
- Securitization and Sports Finance
- Types of Securitizations in Sporting Franchises
- Advantages of Securitization in Sports
- Disadvantages of Securitization in Sports
- Accounting for Player Contracts
- Impairment in Sporting Franchises and Player Contracts
- Accounting for Players Who Have been Promoted Internally
- Why Government Should Not Invest Public Money in Sports Stadiums Used by Professional Franchises