In Defense of Greedy Billionaires

Yup, you read it right. I’m here to defend billionaires. And not just and greedy billionaires, but the worst of the worst! Sports team owners! Boooooo!!!!

What’s the issue? People are mad that the Washington Commanders are building a new stadium and the city of DC is paying for part of it. This is outrageous and must be stopped!!!

But is it? I will argue that, more often than not, owners are making fairly low returns on these investments and are doing it for civic pride, rather than profit.

Will I change many minds? Probably not. It’s easier to hate irrationally than to decide based on the evidence, but let’s see if I can persuade anyone.

The New Stadium

OK, so what exactly is going on? The Washington Commanders played their games in DC for a long time. About 25 years ago they built a new stadium in the Maryland suburbs.

Everyone agrees that stadium is, to put it kindly, a dump. The new owner thus wants a new stadium and DC wants the team to return.

An agreement was announced this week for the team to return to DC on the site of their prior stadium from last century.

The new stadium is projected to cost about $4B with the team paying close to $3B (plus any overruns) and the city of DC contributing a little over $1B.

Cue the aggrieved complaining how unfair it is that DC is “bailing out” the “greedy owner”. Can’t these rich billionaires pay for the stadium all by themselves?

Well, I suppose they can, but they never would, because you don’t get to be a billionaire by spending large sums of money at unacceptable returns.

And most sports stadiums are built at unacceptable returns.

The DC Perspective

Most new stadiums are built nearby the existing one. Thus, one can argue the city generates no incremental revenue if it participates in a project and just does it for defensive reasons (a hedge on the team following through on a bluff to move to another city).

However, given the Commanders left DC proper a generation ago, there are clear economic benefits to the team returning. DC has already had success revitalizing Chinatown with the basketball/hockey arena (who also returned from the Maryland suburbs) and the Navy Yard area with a baseball stadium.

So there is a proven track record of economic growth and revitalization from building stadiums. In other words, DC will get a return on its investment (though hard to quantify how high).

Thus, it seems fairly ridiculous to not expect them to contribute in some way, just as they would to any other economic development plan.

Stadium Finance Math

The team’s math though is trickier. They are likely looking at something like $200M/yr in interest expense. If team owner Josh Harris were making this decision for his private equity firm Apollo, he would likely require incremental profit of $500+M to commit $3B of capital.

However, since he is acting in his personal interest, my guess is his hurdle is more like $300+M/yr of increased profit.

Is this feasible? The short answer is probably not.

The Commanders generate about $600M in revenue annually. That is in line with most teams. The exception is the Dallas Cowboys who make over $1B but they are in a different tier given their marketability.

So can a new stadium take the team’s revenue from $600M to $900M? I don’t see how that is likely.

The Commanders already get all the revenue from their current decrepit stadium. Sure, they can raise prices, but that only makes a small impact.

Over a season, the team will sell about 500,000 tickets. Even if you raised the price of each ticket by $100 (which is not feasible as it would generate intense PR backlash), that only leads to $50M/yr.

There might be some other ancillary ways to increase revenue (seat licenses, concessions, etc.) but I’m guessing it’s hard to get more than $100M. That would mean they can’t even service the debt payments!

I’ll assume I’m being too conservative and maybe they see a way to get $200M of incremental revenue through developing the area surrounding the stadium. Even then, this is just breakeven vs. the cost of borrowing.

In other words, the IRR is 0%! And Josh Harris didn’t get to be a billionaire by investing at 0%. So what else may be going on?

Intangible Returns

Billionaires, as we know, like to put their names on stuff. I think Ken Griffin may have renamed nearly every major public building in Chicago by now.

In other words, not every decision is purely financial.

I suspect Harris views returning the team to the site of its historic stadium in DC is a point of civic pride, similar to building a museum.

Thus he is willing to accept a lower return than if he were investing Apollo’s money. But that doesn’t mean he’s a sucker.

He likely realized there was no way to even breakeven if he funded the entire $4B cost. He likely asked the city to fill the gap and contribute enough where he was still willing to move forward.

If the city didn’t pitch in, the stadium wouldn’t get built, which would leave the team and the city worse off.

Benevolent Billionaires?

Not all sports stadium deals are as altruistic as this one appears to be. In fact, Harris also recently agreed to a new stadium for his basketball team in Philadelphia under different circumstances.

In that case, his NBA team shares an arena with the local hockey team, but he is the tenant. Thus, he is losing out on a lot of revenue by not having his own building.

He will go from 0% to 50% ownership of the new arena and it will cost “only” about $750M to increase his revenue by probably $75+M/yr. That’s a solid return and more of an economic decision than a philanthropic one.

So not every owner should be feted for spending on a stadium. But some should.

Yet you never see a story about a new stadium discuss the owner’s economics. The discussion is always about how much the host city has to contribute and whether that is “fair” or the “greedy billionaire” taking advantage of the citizenry.

I don’t see how people can form a coherent opinion on the topic without information on the ROI of the stadium for the owner.

You Don’t Get Rich Building Stadiums

The lesson here is building stadiums is a pretty crappy business endeavor. In most cases, the ROI is not palatable and they would never get built if judged solely on the financial merits.

Cities aren’t asked to participate in order to turn an OK deal into a windfall. Rather, they are being asked to provide a subsidy that allows the return to be marginal enough for the project to proceed rather than never break ground.

We can discuss whether cities should provide those subsidies, but, let’s be honest, your states and cities provide lots of subsidies for lots of uneconomic activities every day and people don’t complain.

And they would complain more if the team moves out of town because they couldn’t find an economic way to build a new arena. Ask the people of St. Louis or Seattle about that.

So I hope this analysis provides some context that not every situation is the same and the fans, media, and, especially, politicians should do a little homework before passing judgment on something they know little about.