The Sports Mortgage: Equity Seat Rights Are Latest Financial Concoction ~ market folly

Friday, October 2, 2009

The Sports Mortgage: Equity Seat Rights Are Latest Financial Concoction

Well, we thought we had seen it all. But just when you think financiers are done dreaming up crazy investment concoctions, we get this: The Sports Mortgage. It is exactly what it sounds like, a mortgage for your seat at a stadium. While this is far and away from our usual topic of hedge fund portfolio tracking, we found the topic intriguing and wanted to explore it further. This is a brand new model for sports economics and there a few teams implementing what they are calling 'equity seat rights' for their stadiums. This marks a possible trendsetting move away from traditional means of financing new stadiums, expansions, and renovations through a combination of corporate sponsorships, taxpayer dollars, and various other loans.

This new model is obviously in its infancy but there are already two willing collegiate participants and possibly already one professional sports team. The University of California-Berkeley is funding their stadium expansion through equity seat right sales. Whoever buys these rights essentially owns their seat(s) in the stadium for up to 50 years, provided they make the payments with interest. It truly is a mortgage for your seat and once you pay for it, you own it. So, let's get this straight: you can now finance your purchase of a little 3 foot by 3 foot area with a seat in it. Upon hearing this, we jokingly thought to ourself, "Gee, does that mean I can just go in the stadium whenever I want and sit in my seat? I mean I own that seat, I can do what I want with it?!" Here's the proposed expansion at the University of Kansas:

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The other day the Wall Street Journal provided a new look at this possible phenomenon by writing, "Cal plans to sell about 3,000 seats under the plan and hopes to raise $270 million. The school's best seats cost $175,000 to $220,000 apiece over a 50-year term, while the cheapest sell for $40,000 per seat for a 40-year term."

And yet, even with the woes of subprime default literally right behind us, we can now look forward to the die-hard sports fan mortgaging their life away so they can own that one little seat where their beloved team plays. Obviously, fans will have to be approved for financing in order to secure their seat mortgage. But, athletic programs and teams will be touting this fact to lure potential buyers: you won't have to deal with price hikes. In fact, rising ticket prices would actually be to the buyer's benefit. As the Wall Street Journal writes, "During the life of the seat right, the owner can treat it like a house, selling it at a higher price than he paid. The right is tied to the franchise in any venue and would even transfer to a new city if the team moved, though the seat owner could sell in any situation." Oh, great, just what we need, people to start thinking of their stadium seats as a house with a price that will always rise! That doesn't sound like a recipe for disaster at all, does it? And here's what started it all: Mr. Weisbach, the original propagator of this idea in 2004 said, "Why don't we make seats into condominiums?" Right. A little 3 foot by 3 foot condominium with a seat in it can be yours as long as you pay for it with interest. But remember, prices will go up, up, up, remember? Mr. Weisbach, by the way, is leading the charge of these new equity seat rights as chief executive of the aptly named Stadium Capital Financing Group, which interestingly enough is a subsidiary of Morgan Stanley.

Putting our sarcasm aside for a moment, we had a few initial reactions to this news as it really only makes sense in a few scenarios. Firstly, if you know for a fact that you'll be going to those games for multiple decades, this can potentially make sense to lock-in. The main thing we're unsure of here is if the interest rate is fixed or not, as that would ultimately shift the equation around. Not to mention, you still have to account for price hikes/declines, inflation, and other factors. Secondly, the prime opportunity we see here is with storied teams/franchises that have rich tradition and a history of winning. Naturally, one would think that these seats will be the most highly sought after and the most likely prone to price appreciation due to either supply/demand imbalances or an inflated 'premium' due to the team involved. Speculators, anyone? While this 'buy your seat' setup can make sense to a specific type of fan dependent on the specific team, we can't but help to point out the looming recipe for disaster. Are they really going to market these things like houses that you can 'sell at a higher price than you paid'?

We don't mean to be too cynical or critical of the idea as it is still in its infancy and does offer additional stadium financing opportunity beyond the typical means. The positive here is that it allows athletic programs and teams to secure funding for stadium renovations that they've been seeking for years. Cal's football team has been trying to raise money for the past 25 years to overhaul their stadium. Not to mention, professional teams are always looking for new ways to generate revenue as many can't restructure debt or are losing credit lines due to the crisis. These new equity seat rights are a prime alternative to conventional funding methods. We also see that the University of Kansas is funding their new 3,000 seat luxury stadium addition by selling seats. The equity seat right program is cleverly not labeling interest 'interest,' but instead an 'annual administrative fee' that will tack on an extra 6% to the seat price. To get an idea of the pricing, a seat with 30 years worth of tickets will cost $105,000 each at Kansas, with prices becoming unfrozen after that term. Here's an example of their pricing structure of their premium product 'Gridiron Club':

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Yet, despite these high costs, Cal has already sold two-thirds of their available seats from this program and you can't knock that figure. Recession? What recession? While this could be a one-off data point, you can bet more schools and teams will be looking into this option going forward. What will be interesting is to see whether this catches on more in the college sector or in professional sports. The WSJ writes that, "The first professional sports team to try the plan could be Tottenham Hotspur, a London-based English Premier League soccer club that's awaiting government approval to build a new 60,000-seat stadium in pricey North London. The team is currently holding forums with fans to determine what amenities to offer and how much to charge. The mortgage idea is especially attractive in England, where many soccer teams are struggling under large debt loads and where public funding for sports venues is rare."

And that right there is a nice niche that equity seat rights can slide right into. When teams cannot secure funding for their stadiums, they can turn to this new model. It's interesting to see that Tottenham Hotspur could be the first professional team to try this as it reminds us of some very old posts we wrote here at Market Folly. In the past, we had detailed the possibility of investing in alternative sectors by buying publicly traded sports teams. And in a follow-up piece we specifically looked at Tottenham Hotspur as a potential candidate. Now that this sports mortgage model has popped up, it has reminded us of the topic of investing in asset classes investors typically don't have access to.

Unless you're a private equity fund or a billionaire, you typically can't buy sports franchises. While there are a few publicly traded franchises left overseas, the wild majority of teams are not open for the retail investor to go out and buy a stake in. While buying an equity seat right does not buy you a stake in the team directly, it essentially buys you a stake in the team's potential for success. After all, increased success typically would yield increased demand for tickets and would provide reason for price hikes. We are all for providing new asset classes for investors to diversify into. However, the problem here is we're pretty sure you shouldn't look at this as an investment. On one hand, it's technically a very very very tiny piece of real estate, but on the other hand its not an ownership stake in the team. It's probably best to just treat it like what it really is: season tickets to the games... for decades to come.

The main thing to take away here is that the game is possibly changing when it comes to stadium financing. It sounds a bit absurd at first pass, but this could very well catch on and pave the way for a new funding model for sports stadiums. We'll just have to see how well things turn out for the guinea pigs who have shifted to this model in the middle of a troubled economy. It looks like this offering can fill a niche, but only time will tell. Let's just hope the people buying these things aren't fairweather fans that will look to dump their seat should the team start doing poorly. At the same time, it makes us think that instead of shows like 'Flip That House' with mortgage interest rates, we'll start seeing a new series called 'Flip That Stadium Seat.' Hopefully not.

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