A Taxpayer-funded Stadium is a Financial Own Goal for St. Louis

Today I read a column from Benjamin Hochman in the St. Louis Post-Dispatch that made my blood boil. Hochman was attempting to counter the argument put forth by Governer-elect Eric Greitens that taxpayer-funded sports stadiums are "welfare for millionaires". I happen to agree with the governor-elect that taxpayers have no business speculating on sports stadiums, but that's not what made me sigh and shake my head at Mr. Hochman's column.

He's entitled to his (wrong) opinion that building a Major League Soccer (MLS) stadium using taxpayer funding would be good for St. Louis and spur economic growth in the city. What I take issue with is presenting a nonsensical investment scenario as sound practice such as in the following excerpt: 

"Let’s consider it this way. A house appraises at $150,000 — but someone buys it for $240,000 and plans to wait for it to increase in value, just to see a return. The house’s investor understands that buying the house could benefit the whole community, so it’s worth this initial cash loss.

Well, Forbes says an MLS franchise, in a market similar to St. Louis, is worth $150 million. But SC STL is willing to invest $240 million (paying for the MLS expansion fee and some of the stadium), acknowledging that it could take eight to 10 years to make the money back."

The way I read it, Hochman is arguing that taxpayers should support the "partnership" offered by SC STL because the ownership group is ready and willing to overpay to bring an MLS franchise here by putting up 65% of the cost of the project. This is apparently worth it to the benevolent owners of SC STL because it will benefit the whole community now and then they'll worry about recouping their investment down the line when the value of the team has appreciated.

One problem, of course, is that this is NOT a return on investment. In the house example, if you paid $240,000 for a $150,000 house, you would need the house to appreciate in value by 60% just to break even. At that break-even point your "return" is a big fat ZERO. No intelligent investor would take that deal and expect to come out ahead more often than not.

However, there is a reason that such a senseless investment scheme could make sense to the ownership group behind SC STL if they get some help from the city. In broad terms, Major League Soccer is a single entity made up of all the teams in the league. The ownership group of each team holds one "share" in the league and thus the profits or losses of individual teams are shared equally. Through normal operations, MLS loses money each year, but in order to buy into the league, you need to pay a hefty expansion fee which has increased with each additional team. This expansion fee is shared among the existing owners.

The way I see it, even though SC STL would be paying for 40% of the cost of construction in order to get a stadium deal done, this is a small price to pay for an opportunity buy a share in the league with their $150 million expansion fee. They won't get such an opportunity without a new stadium to operate in. SC STL has presented this as evidence that they're being a generous partner in the deal. While they're only paying for some of the cost of the stadium, they're paying for all the cost of the expansion fee. How nice of them!

Although, according to Forbes (via Hochman) that $150 million is exactly what the team would be worth once it is up and running. Since ever-increasing expansion fees are the only way MLS owners are currently making any real return, having a share of the league pie (and any future expansion fees) is the only appreciating asset in the deal. The league owners' hope is that by the time MLS stops expanding, the league will be profitable and the value of each share (team) will go up value. There's no guarantee the league will be profitable in the future, but as long as new money keeps coming in via expansion fees, those holding a share in the league will get paid. If you're thinking this makes MLS seem like a Ponzi scheme, you're not alone. 

So, if we apply this to Hochman's example, here's what's actually going on: SC STL wants to buy a house that's worth $150,000 right now, but the price tag to acquire it is $350,000. Their proposal is that SC STL will pay $150,000 for the house only (exactly what it's worth) and will own the house free-and-clear. To satisfy the seller, they still need to come up with the remaining $200,000. To do this, SC STL is proposing that they put up $80,000 (40%) as long as the taxpayers will take out a loan for $120,000 to cover the remainder.

When it's all said and done, SC STL would own a house worth $150,000 that they paid $230,000 for. That's a 53% premium, but assuming the house is truly worth $150,000 and they're bringing their own money to the deal, they'll have a 65% equity position. The taxpayers will owe $120,000 on their loan and own nothing except conjecture from SC STL that doing this deal will improve the value of adjacent homes in the neighborhood, create jobs because they'll hire people to cook, clean, and do maintenance at their house, and also create new tax revenue by having out-of-towners to come visit them and spend money at nearby bars, restaurants, and hotels. I think it's pretty obvious that the SC STL proposal is not a benevolent investment partnership, but more like a bait-and-switch.

The potential benefits to the taxpayers of such a deal may indeed come to fruition, but what if they don't? What if the addition of an MLS team doesn't create any additional revenue for the city after all? The SC STL ownership group will very likely make a return on their investment no matter what because they own the only appreciating asset in the deal, a share in MLS along with a cut of any future expansion fees. The ownership group would also receive 100% of any profits from a future sale of the team. If "build it and they will come" doesn't come true, the city could take a total loss on their end of the deal even while the ownership group pockets a healthy profit. Does that sound like a "partnership"?

If the projections do come true and enough new revenue is created to pay the taxpayers back in full, what was the return on investment for the risk they took funding the unsecured end of the deal? Even if there was an actual net positive return for the city over the life of the stadium lease, time and again we've seen sports teams come back to taxpayers and ask for more money for renovations or a brand new stadium. One team is currently suing to get out of their lease and others have threatened to move the team to gain leverage.

I would love to see MLS come to St. Louis, but not at the expense of taxpayers. Adding a team here would be a definite plus for the city both in terms of civic pride and financially. I am not disputing that. However, if the city has to put up $80 million with no guarantee of success and no asset to fall back on if it doesn't work out like SC STL says it will, it's a terrible proposition any way you look at it.

Simply put, the city would put a lot of taxpayer money at risk in order to help the investors behind SC STL acquire the a potentially lucrative share in Major League Soccer. You can argue the merits of various tax incentives that have been given to many other businesses in St. Louis, but there's no denying that the proposal put forth by SC STL socializes the majority of the risk while privatizing any potential for a hefty profit in the future. That's not a partnership to make St. Louis great again; it's the definition of welfare for millionaires.

In the spirit of bad analogies (thanks Mr. Hochman!), I see this "deal" as asking St. Louis to score an own goal in order to spur growth. Imagine your soccer team is coming off a string of draws and losses, but they've been playing better recently and it's unclear at this point what the outcome of the season is going to be. The next match is about to start and their opponent is much more talented and has your team outmatched. The other team comes to your team before kickoff with a proposition: we'll let you score an own goal right from the kickoff.

It will put your team behind and definitely give the other team an immediate advantage, but being behind might spur your team to play really hard over the remaining 90 minutes which could help them have a chance of coming back to tie or even win the game. While winning after scoring an own goal right away is possible, it's unlikely. A tie is probably the best your team can hope for and it's almost certain that giving the other team an advantage will just end up helping them score more goals than they otherwise would have in the rest of the game. There's always a chance it could work in your favor though. Would you want your team to accept that proposal?