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.