Opinion: Daily Journal

Calling foul on Charlotte’s soccer stadium plans

Before joining the John Locke Foundation, I spent 28 years in the sports industry as an executive, investment banker and consultant. I’ve studied and worked with lots of the sports leagues and have been involved in various transactions and consultations — including several sports venue financings. I am a big believer in the future of soccer in the U.S. because I understand the incredible affinity people have for the sport all over the globe and because I’ve seen the ever-increasing values of Major League Soccer clubs and their content.

I’m also a big fan of Richard Luker, founder of the ESPN Sports Poll and a futurist who predicted this growth of soccer in the United States. Luker has excellent data on consumer trends in the sports and leisure industry. All of this is to say that I think an MLS club in North Carolina, whether it be in Charlotte or Raleigh, or both, is a good, long-term proposition for the league, the communities and the club owners. There are smart ways to accomplish this goal … and then there is the way the Charlotte bid has been moving forward.

Charlotte City Council took a positive step Thursday by canceling a meeting that had been scheduled to consider the proposal. It’s not yet clear, though, whether the Charlotte plan will face any substantial changes.

From what I know about MLS, it has developed a very successful formula for how to select expansion markets. There are essentially three elements: 1) a growing market that has proved it can support soccer at the corporate, attendance, and development levels; 2) a credible local owner with significant financial wherewithal, operational strength, and a vision for the future; and 3) a soccer-specific, modern stadium, seating between 20,000 and 30,000 or a solid financing plan for how and where to build one.

In the case of Charlotte, there is no question that Bruton and Marcus Smith are excellent operators who know how to plan, promote and manage events, and they certainly have the financial wherewithal as billionaires. As regards the soccer support component, I think Charlotte has the potential to be a strong MLS market in time, but it does not have a great history of supporting soccer at the professional level or even at the developmental level — like Raleigh, for example. However, the migration of well-educated, professional, younger people to the area makes that less of a concern to me in the long run.

Now, let’s get to the big issue. It’s the issue that seems to be a problem in a lot of cities vying to be part of the future expansion: stadium development.

As my colleague, Julie Tisdale, correctly outlined in this article, the stadium financing plan proposed in Charlotte is a bad idea. It’s also a bad deal. It’s a bad deal not just because local billionaires don’t need taxpayer subsidies to develop soccer-specific stadiums they will operate while their club is the anchor tenant. It’s also a bad deal because said billionaires have asked county taxpayers to loan the money for their own private “contribution” to the stadium.

That’s right. In a city known nationally for its banking acumen and considerable resources, Bruton and Marcus Smith want a loan from taxpayers in Mecklenburg County.

If you look at recent, major-market, stadium development projects, you’ll see that a shift has occurred away from “public/private” financing toward private financing or mixed-use development partnerships with private developers committing significant financing costs, which has dramatically reduced the size of the public (taxpayer) commitments.

Take a look at what Raleigh’s Steve Malik is proposing as an MLS stadium financing strategy for his North Carolina FC if you want to see a glimpse into the future of sports venue financing. While he hasn’t said much publicly, it is widely believed that Malik and his partners will be financing their proposed stadium through a mixed-use, real estate development project that does not require “heavy lifting” from the public.

Even if the City of Charlotte and the County of Mecklenburg were to become the bankers for this MLS stadium and loan the funds, which would be a bad move in my opinion and in the opinion of many economists who’ve studied the economic benefits of sports facilities for decades, the return on the money for the public would be miniscule in comparison to the return on the valuation of the essential asset of the club itself. If you look at the compound annual growth rate of MLS club values since 1995, you find a healthy rate of 16 percent. Keep in mind, this growth rate has occurred during a period of time when MLS was without a major television contract and when almost all of the clubs were struggling to turn a profit.

In 2014 MLS and U.S. Soccer signed a new, eight-year television and media-rights deal with ESPN, Fox Sports and Univision. For the first time in MLS history, all three television partners feature an exclusive MLS match of the week. The new deal represents a 500 percent increase over the previous contract. MLS now has average attendance numbers (greater than 20,000 per match) surpassed in the U.S. only by the NFL and MLB. What’s more, as the number of available markets diminishes with expansion (supply), the demand for the remaining markets will rise.

All of these factors point to rapid valuation increases of the individual clubs. An assumption that the Smiths’ asset will increase over the next 25 years by around 400 percent is not unrealistic. Based on what has been widely reported, it appears the county would receive a total return on its loan of 40 percent after 25 years. That’s a great deal if you can get it as the club owner, and I don’t blame the Smiths for trying to get their venue financed by others. They are making an investment of $150 million to acquire the franchise and will likely have to spend more to develop all of the required resources to create a financial success.

But that’s their decision. That’s how the free market works. If the Smiths believe in the long-term deal here, they should fund the majority of the project and reap the rewards, or they should find equity and debt partners and share the rewards. They should not ask the public to assume the risk and fund a large portion of the deal. Nobody will complain about how much money the Smiths make as a result. All parties will win. Here’s hoping the taxpayers and their elected representatives come to their senses in Charlotte. Thursday’s 5-3 vote from county commissioners in favor of the plan offers a bad signal, but the city council’s later action offers some cause for optimism.

Jon Pritchett (@tobbacoroadguy) is senior vice president of the John Locke Foundation. Prior to joining the foundation, Jon was a partner in a Chicago-based investment bank; vice chairman at French West Vaughan; CEO of AstroTurf USA; president of ScheerSports; and vice president at Host Communications during a 28-year career in private business. He is a North Carolina native.

  • Darius Little

    Great read!

    • Jon L. Pritchett

      Thank you, Darius.

  • caesar

    No taxpayer funds should be expended for ANY professional sports stadiums.

    • Jon L. Pritchett

      Appreciate your reading and viewpoint, Caesar.

  • Dan Grondy

    Good job, Mr. Pritchett.

    • Jon L. Pritchett

      Thank you, Mr. Grondy. Glad to know you’re engaged on this issue, but I’m not surprised!

  • Luth Stirner

    One of the areas that left-libertarians and conservatives can surely agree – lets hold off on the corporate welfare.

    Separately, is possibly for a city to gain an ownership stake in a sports franchise in exchange for fronting the costs of facilities? Financing a reliable government on the ups-and-downs of a sports franchise is obviously not a great idea, but I wonder if there is something that prohibits taxpayers from being able to reap the rewards of successful franchises that they invest in every time a stadium is built.

    • Jon L. Pritchett

      Thanks for the reply. While I think we all agree that it’s best to keep our public dollars focused on core services and not subsidizing favored industries, I think your entrepreneurial idea is worth considering. Why not let the public get a piece of the action on the backend if a subsidy pays off for the tax payers? As long as the public is shielded from the risk, I’m for it. However, I’d rather have the free market picking the winners and taking the risk and reaping the rewards.

      • Luth Stirner

        If it were up to me, all sports franchises would be operated like the Green Bay Packers, but that’s the left-libertarian cheesehead in me.

        But seriously, I feel like tax-payers get the short end of the stick when in comes to all kinds of corporate boondoggles. Who really owns the oil and gas reserves located under the NC continental shelf? John Locke had some solid concepts, but it’s hard to imagine how any agrarian “homesteading” property rights concepts apply to the bottom of an ocean which is used by so many different people and industries. I’d like to be err more on the side of a Norwegian sovereign-wealth-fund-to-sustain-generations than a Nigerian crony exploitation and corruption model.

  • Mytemp420

    Many problems with this whole fiasco:
    1) HB2, or so we’ve been led to believe, no one wants to visit our state since Roy Cooper wants dudes to have full access to women’s bathrooms and locker rooms. MLS and ESPN won’t come here.
    2) MLS is not a good league, and in fact is quite terrible. 4th rate players, and the highest paid ones will leave for Europe, or the new emerging markets like China.
    3) MLS business model, with the only real revenue from team franchise fees, will soon wither on the vine. Looks at paid patrons vs discounted tickets, and no one would invest their own dollars on this.
    4) The Smith’s have the money to foot the entire bill. Heck Marcus Smith owns a Porsche worth 1.5 million dollars! It’s a SWEET ride, but to “loan” or give billionaire’s this type of money is absolutely insane. If it’s a good deal, Old man Bruton would jump all over it with his own cash.
    5) Finally the City and County officials are pushing this as investment in the Elizabeth area….where there’s little room for more development, but tried to push this as a catalyst for the trolley folly that the taxpayers will always have to support. Our city leaders are freaking idiots, and thieves.

    • Jon L. Pritchett

      Thanks for your comments. While I don’t have an argument with most of your thoughts, I know for a fact that the MLS business model has changed with the new media deal and with dramatically greater attendance figures. Keep in mind, the single entity legal structure of MLS has allowed the league to keep player wages in line with revenues so owners don’t overspend and collapse the model. It may not be anything like the UK or European player quality, but MLS has arrived as a legitimate league in the US.

      • Mytemp420

        OK, you just admitted the MLS will never be able to contend with the international leagues, and Amercan’s can be fed a pile of crap, yet not know the difference. 3rd division English leagues will be able to poach the MLS since they have salary constrictions. Outside of Clint Dempsey (injured, old, barely a factor on the world stage when he was relevant), name one player that the average American taxpayer/supporter would want to watch?? I can name zero. Spending millions on a 4th rate product is silly, and one can look to the USFL, Arena league football, Grand national Nascar, and even single A baseball for the lack of quality the MLS brings. I’m a huge futball/soccer fan, will watch any major international match that doesn’t include the USMNT (horrid), but would rather watch youth league than the crap the MLS brings to the table. More teams, more revenue for the owner of the MLS, will only dilute the current lack of talent. Mark my word, in 10 yrs, the MLS will not exist in it’s current form since it’s only growth model is “expansion fees, and new media” which will collapse once the ponzi-like model is exposed. This is why the Smith’s are smart enough to ask the taxpayers to take the risk….Again if it was a good deal for ownership, Bruton and Marcus would be all in without tax payer support.
        Attendance mean very little is tickets are discounted or given away.

        • Jon L. Pritchett

          Again, I buy your argument that the talent level is superior in other parts of the world but sold-out stadiums in places like Kansas City, Portland, Columbus & Seattle (where tickets are not discounted or given away) are examples that demonstrate soccer can be a viable sport in the U.S. without bringing in the world’s best players. However, I believe it’s a long-term play that correlates directly with consumer trends in America – influenced by the world. You are right about the need to expand carefully, as MLS is doing, in order to avoid a dilution of the product and to ensure each expansion market has the essential elements needed to sustain a club through the growing pains of developing a following. All that aside, this is still a risky investment and therefore it should be made by private partners and not by the the public, in my view. Thanks again for your comments.

        • Luth Stirner

          The popularity of soccer in the US is growing and has sooo much potential, especially as the US becomes more integrated and exposed to the global soccer fandom. If eastern europe can sustain basketball leagues I’m sure the US can sustain a viable soccer league, your valid points withstanding. That said, American football is the best sport ever conceived by man (minus the infinate commercial breaks).

          • JmThms

            I like American football, but it is a weird, overblown production more than a real sport. Certainly not a pure sport. It’s a spectacle of sorts but could never be The People’s Game for the planet. That title belongs to soccer, as it should.

    • JmThms

      MLS is a good league, and is improving. A league doesn’t have to be EPL level to be good. Good/bad is relative and a matter of opinion.

      MLS business model is NOT expansion fees. Expansion fees are normal for every expanding league. That goes hand in hand with the fact that MLS is a growing league, and that growth phase will almost of necessity result in greater expenditures. The business model is slow, controlled growth, keeping pace with – but not exceeding – the general cultural growth of the sport in the US. Its obviously a good investment or there wouldn’t be the demand for expansion that there is.