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Crowd-Free Games Threaten Financing Shake-Up for Pro Sports Stadium Developers

Prolonged Droughts in Income May Send Owners Scrambling to Make Debt Payments

Crowd-free games pose financial challenges for pro sports venues including the soon-to-open, $5 billion SoFi Stadium, home to the Los Angeles Rams and Chargers and the most expensive stadium in NFL history. (Los Angeles Stadium and Entertainment District at Hollywood Park)

As U.S. professional sports leagues embark on seasons in empty arenas, the absence of crowds and their spending in and around stadiums not only threatens financing for the venues but it could disrupt surrounding communities and businesses.

Stadiums built years ago — from New York to Kentucky to Florida to Georgia — may face challenges making debt repayments because of the potential loss of millions of dollars they normally derive from more than just tickets, but from revenue from high-profit boxes, corporate luxury suite sales, food concessions and other tax-generating retail sales. And smaller, independent businesses may not be able to survive, getting replaced by chain outlets as the pandemic wears on with no indication when tourism can rebound.

“There is this issue of uncertainty,” credit analyst Trevor D’Olier-Lees of S&P Global Ratings told CoStar News. “We’re going to be in this period for a while where people will be saying, do I want to spend money on a ticket to a game or do I want to attend this event in my company’s corporate suite at the stadium?”

The questions come as the MLB recently started a pandemic-shortened season of professional baseball games with no stadium crowds and limited travel between cities, and the NBA playoffs began with all audience-free pro basketball games played inside the Walt Disney-owned ESPN Wide World of Sports Complex at Walt Disney World near Orlando, Florida. The NFL is still aiming to play this fall, but full details on pro football's actual debut, including the presence of crowds, are yet to be finalized.

If the pandemic wears on without the creation of a vaccine or other treatment, professional sports teams will run a greater risk of missing their debt payments, may be forced to sell minority stakes in their franchises or find partners to bolster their finances, one expert said. Pro sports leagues that loaned teams money could face problems in getting repaid, while municipalities could lose out on tax revenue they derive from hotel occupancy, because of the missing fans from those hospitality sites, while returns could be at risk for investors in revenue bonds used to build stadiums. And downtown areas that depend on stadiums to support their restaurants, bars and stores can be challenged.

In addition to S&P, DBRS Morningstar, Fitch Ratings, Moody's and UBS Group have all issued reports sounding alarms about the financial challenges stadiums will probably face with seasons shortened and fans banned, or their attendance drastically reduced, because of the COVID-19 outbreak. And taxpayers could also be hit because tax revenue from businesses could be diminished, at least temporarily.

D’Olier-Lees, a senior director in S&P’s New York City office, said much depends on how long the current pandemic uncertainty lingers as multiple industries look to rebound in an age of social distancing and mask-wearing. But with most states listing sports stadiums among the last venues expected to fully reopen, the analyst said full financial recovery for pro sports may not arrive until late 2021 or early 2022.

Debt Reserves Cushion

Michael Goldberg, a senior vice president in DBRS Morningstar's sports finance group, told CoStar that “the last thing we want to do is downgrade a bunch of ratings because of a temporary event when things are going to get back kind of to ‘normal’ within a year or two. So, we’re looking to avoid a knee-jerk reaction, but I think we would be naive to say that things are going to get back to normal in a year or two. I think a sporting event is probably the last thing that people are going to be comfortable returning to if you have 75,000 people packed into a stadium."

Many stadium financing arrangements are structured with reserves that cover some debt payments, according to Goldberg.

"So a lot of these deals are in good shape, at least from a liquidity standpoint, to get through a difficult period of six to 12 months," he said. "But I think we’re going to be revising all of our assumptions for 2021 where we assume games continue in 2020 but with no fans and 2021 maybe in the first quarter of the year at 25% capacity, and the second quarter we’re at 50% capacity, and then we work back to maybe 90% capacity by maybe the end of the year."

Goldberg also cautions that "while the financing mechanisms of most current U.S. stadiums are in no immediate danger of collapse, prolonged droughts in crowd-related income could send teams and project developers scrambling for alternative sources to keep debt payments current," he said.

NFL owners approved providing Los Angeles Rams owner Stan Kroenke another $500 million in league financing, with an extended payback period, for what has become a $5 billion stadium — the most expensive in league history — in suburban Inglewood, California, set to open later this year. Kroenke had already borrowed $400 million from the NFL.

Officials with the Rams, who are also redeveloping the surrounding former Hollywood Park racetrack as a mixed-use development around the stadium, declined to comment to CoStar. The Rams and their tenant partner in the stadium project, the Los Angeles Chargers, have reportedly expressed concerns about lower-than-expected revenue from season ticket and luxury box sales, along with potential hits to gate revenue this fall.

In a July 14 report, Fitch said the NFL "increased the team borrowing limit in late May to $500 million from $350 million to allow franchises greater flexibility to borrow to strengthen balance sheets. Nevertheless, unprecedented financial pressures may be exacerbated across sports leagues where more highly leveraged teams do not benefit from financially strong ownership groups. Minority or limited partner sales of a portion of a franchise to raise liquidity may be an option for distressed franchises."

Bond Watch

Fan-free games also have funding implications for pro stadiums completed years ago, long before the pandemic, including potential cash-flow issues for teams, developers and cities that financed projects through revenue bonds.

S&P recently issued a cautionary “watch negative” placement on bonds issued by Jets Stadium Development. The Jets entity issued a total of $650 million in bonds to finance the NFL team's portion of costs for the venue now known as MetLife Stadium in East Rutherford, New Jersey, a project spearheaded by owners of the NFL's New York Giants and opened in 2010.

The Jets-owned entity, also known as StadCo, derives its revenues from sources including luxury suites, club seat premiums and naming rights. “Specifically, we do not yet know how many games will be played with fans in the stadium during the 2020 season, or the impact it might have on StadCo's revenue and liquidity,” S&P Global analysts said in a July 2 report.

S&P notes that its credit-watch listings are not bond ratings, but rather cautionary assessments regarding factors that could impact the ability of parties to pay off debt on project-related bonds.

D'Olier-Lees said it appears the Jets entity is taking steps to shore up liquidity to ensure that bond payments can continue uninterrupted, and other project operators may need to do the same depending on completion timetables among other factors.

Earlier this year, S&P issued similar cautionary assessments for completed New York stadiums housing MLB’s Mets and Yankees. Rival credit rating firm Moody’s last month went even further, downgrading the credit rating for Queens Ballpark Co., owner of Citi Field where the Mets play, to Baa3, one notch above “junk” status, citing a “weakened liquidity position” created by a pandemic-shortened upcoming season.

Moody’s revised its outlook on the Mets entity, Queens Ballpark, from stable to negative, citing delays in starting the 2020 season tied to the pandemic and also labor contract disputes. “As a result, [the ballpark] continues to rely on equity contributions from the owners as pledged revenues are insufficient to cover costs, including debt service,” Moody's analysts said in a report.

Moody’s also changed the outlook on the owner of the stadium housing MLB’s Yankees, from stable to negative, citing "unprecedented challenges" related to the same pandemic and labor contract issues. The Yankees credit rating remains at Baa1, three notches above “junk” status, Moody’s said.

The Jets and Mets declined to comment. The Yankees didn’t respond to a request for a comment.

Falcons’ Bonds Review

S&P this year lowered is outlook related to bonds backing BB&T Center, home to the NHL’s Panthers in Sunrise, Florida. Also, Moody’s placed bonds backing Mercedes-Benz Stadium, home of the NFL’s Atlanta Falcons, on a review for potential downgrade. Falcons and Panthers stadium officials did not respond to requests for comment.

The stadiums that Fitch tracks haven't missed any payments or defaulted yet, according to Chad Lewis, senior director of infrastructure and project finance at the ratings firm.

“We’ve been going through the portfolio on a case-by-case basis, and I think you’re starting to see some pressures in certain areas," Lewis said in an interview. "But again I think we see a lot of stability with this idea of long-term contractually obligated income [flowing to stadiums] from naming rights, sponsorships ... not to say that if this extends late into next year that you couldn’t see additional pressure on some of these.”

Fitch's July 14 report discussed the impact that the uptick of coronavirus cases in the U.S. South and West could have on sports, perhaps preventing fans from coming to stadiums into mid- or late next year.

"Fitch continues to monitor some Fitch-rated stadium and arena transactions that will likely need to be negotiated with lenders to waive certain debt covenants," the report said. "Quarterly look-forward or backward-looking coverage tests and other technical debt covenants may be missed but Fitch believes transactions have significant liquidity to cover near-term operating expenses and debt payments."

Fitch is also "digging into" the impact that the outbreak will have on revenue that stadiums as well as arenas usually derive from concerts and other nonsports events, which are also on hold during the COVID-19 outbreak, according to Lewis.

Awaiting Tourism Rebound

Another question facing stadium developers and cities is when tourism will fully recover, as tourism-related business such as hotel stays and car rentals account for a big portion of taxes collected nationwide to pay off bonds on pro stadium projects.

The Wall Street Journal, citing data from the Brookings Institution research firm, reported that more than 40% of nearly $17 billion in tax-exempt municipal bonds sold to finance major-league stadiums since 2000 were backed by new taxes to be imposed on hotel room stays and car rentals. That’s the predominant source of bond pay-off revenue nationwide, more than the 35% derived from general sales taxes and 20% from general public revenue.

About 65% of arena project bonds in the NBA rely on tourism taxes, followed by just over 50% in the NFL and 30% in MLB. The figure is about 15% for the NHL, according to Brookings data.

Jeannine Lennon, a municipal credit strategist at UBS Global Wealth Management, in a report discussed how stadium financing tied into sales taxes and hotel taxes.

"These types of bonds can be secured by a variety of municipal revenues — ticket sales, parking revenue, sales taxes, hotel occupancy taxes or ultimately supported by a general obligation or lease by a sponsoring local government," she wrote. "Given the various ways this sector operates, often makes them difficult to put in a one-size fits all bucket. Though some debt obligations will remain fairly stable, others may become deeply distressed due to the loss of events." Many of the mixed-use stadium projects in the works nationwide are far enough in the future that the coronavirus may have little or no impact on attendance. But others are proceeding soon enough that developers and communities may need to calibrate revenue expectations for sports and nearby commercial development.

That includes the Rams project, and other soon-to-open mixed-use projects such as the Las Vegas stadium housing the NFL's Raiders, set to open later this year.

“If you are a developer at the Rams stadium project, you might have to rethink how many of those high-end condos you're going to be able to sell in a given time,” said Paul Hardart, a professor at New York University's Stern School of Business.

Hardart said the pandemic has accelerated trends that were already growing, including consumers’ penchant for staying home to watch sports and movies on their high-tech big screens and order out for delivered food. Lingering hesitation to venture outside the home could force developers to up their game in terms of what's included in stadium-related projects.

“It may take a while before people want to go out and spend on restaurant meals or sports events,” Hardart said. “If money is tight, or if they can get the same experience from home, the first things that people will cut out are those high-ticket events.”

Small Operator Fallout

The makeup of businesses that become tenants near ballparks could be changed significantly by the pandemic. While cities have been pushing toward more localized experiences to bring a distinctive character to new mixed-use projects, it's the smaller independent local operators such as bars, restaurants and small retailers that have been hardest hit.

That means projects could be dominated by national chains that have better weathered the pandemic and continue to scout locations in new high-profile venues including stadium developments, translating possibly into a less compelling commercial draw for local fans of major sports teams.

“In many ways, the independent bars and restaurants are like other retail businesses — they are also real estate businesses in terms of their success being very much dependent on having the right location,” Hardart said, adding an entire ecosystem of vendors, suppliers and retail businesses will be at risk the longer sports remains on hold.

Hardart said stadium project planners will also need to rethink elements within their projects, in ways that will promote social distancing and hygiene for the foreseeable future. That could mean more touchless, high-tech food delivery and payment services inside and adjacent to stadiums, and more distancing between tables at on-site restaurants. Mixed-use developers may need to expand their current plans for outdoor dining areas.

On the project financial side, S&P’s D’Olier-Lees said some stadium project developers may need to make provisions similar to what's been done at major U.S. airports, which have had to grant rent concessions or renegotiate leases with food and retail tenants in the pandemic.

But for projects already built or close to starting construction, cash flow could be impacted — with developers looking to find alternative income sources — if coronavirus impacts linger and team owners are forced to issue refunds or other discounts to concession tenants, corporate luxury suite owners or other season-ticket buyers.

Downtown Revitalizers

Cities such as Louisville, Kentucky, may need to find alternatives to funding not being brought in by discretionary visitor spending to support stadium projects. S&P last month lowered its credit rating for the Louisville Arena Authority, which operates a 22,090-seat multi-use facility known as KFC Yum Center that opened in 2010 and hosts college basketball games, concerts and other events, from BBB to A-.

Analysts said the downgrade on $378 million in bonds backing the Louisville arena reflected pandemic-related operating difficulties expected over the next year, along with recessionary impacts on tax collections by a funding district established by the city and Jefferson County.

“The arena's resilience in the event of an economic downturn is bolstered by guaranteed government support payments amounting to approximately 40% of its revenue, which reduces the dependency on basketball and other entertainment events,” S&P analysts said. Louisville arena officials did not respond to requests for comment.

Credit rating agencies will be watching to see whether the pandemic has long-term impacts on tax generation in Louisville and other cities with similar stadium funding arrangements, said D’Olier-Lees.

San Diego-based economist Alan Nevin noted that sports-oriented project leaders, like most commercial developers, have their eye on a long-term vision based on what has worked in the past.

In places such as San Diego, California; Atlanta, Georgia; Baltimore, Maryland; and Green Bay, Wisconsin, pro sports venues have proven to be significant long-term generators of economic and social activity where it never before existed in struggling downtowns and suburban areas. Other cities including Boston, Massachusetts; Chicago, Illinois; and Oakland and San Francisco, California, are looking to do the same with their own projects in the works.

But it could take time to see a return of tourism and local nightlife on the level that attracts commercial tenants to climb aboard the visions of stadium developers, when so many businesses near existing closed sports and entertainment venues are now struggling.

“Developers generally are thinking beyond just the current year,” said Nevin, director of economic and market research at construction consulting firm Xpera Group. “But there are so many elements, especially people, that you need that make for a vibrant downtown.”

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