Financing of sport facilities come in three basic forms – public financing, private funding, and public–private partnerships. All three have had a signifi-cant effect on financing sport facilities throughout modern history. Public financing involves the collection of taxes from those who receive benefits from the provision of public goods by the government, and then uses those tax revenues to produce and distribute the public goods to the beneficiaries. Private financing is providing funding for capital investments by non-governmental individuals and/or businesses to provide products and services to the public under the management and operation of the private entity, and the public usually has to pay a fee to utilize the products and services. Public–private partnerships are agreements between government and the private sector regarding the provision of public services or infrastructure – the public municipality transfers the burden of capital expenditures and risks of cost overruns to the private entity, but maintains a partnership in the offering of products and services to the public.
Public sector funding
As with any type of governmental funding, the appropriations have to come from some type of taxation. Public funding of sport facilities comes from both hard taxes and soft taxes. Hard taxes are assessments that are applied to the entire population, where soft taxes are assessments applied to specific product users, or to non-residents of a municipality.
Examples of hard taxes include the following:
Real Estate Tax;
Property Tax;
Income Tax;
General Sales Tax;
Road Tax; and
Utility Tax.
Soft taxes include the following examples:
Tourist Development Tax;
Lodging or Hotel/Motel Tax;
Restaurant or Food Service Tax;
Automobile Rental and Taxi/Limousine/Livery Service Tax;
Sin Tax (Liquor, Tobacco);
Players Tax;
Team Tax;
Business License/Permit Tax; and
Lottery and Gaming Tax.
Bonds are interest-bearing certificates that are issued by either a jurisdiction or a business that is a binding promise to repay the initial investment of money (called the principal) and an agreed upon level of interest at a specified date in the future. Quality bonds are usually issued by businesses and/or jurisdictions with a good repayment history, and are bought by investors seeking the most favor-able interest rates or tax benefits. Bonds have similar characteristics of long-term loans, as they are effectively contracts where a borrower makes payments on certain dates over a defined period of time in exchange from receiving repayment of the principal with interest at a date in the future. The advantages of investing in bonds include that they are relatively inexpensive – especially for those organizations that have a long history and a good credit rating, the bond market is fairly strong and established, and interest on bonds is tax deductable.
Disadvantages of bonds are many which include the fixed interest that must always be paid – regardless of earning revenue/making a profit, and the principal that was borrowed must be paid on the maturity date – again regardless of earning revenue/making a profit. In addition, if a bond is secured with collateral, a jurisdiction or company cannot sell the collateral asset without bondholders’
approval, and bondholders have the upper hand in collecting their principal and interest if a jurisdiction or corporation goes into bankruptcy.
There are various types of bonds, but most fall under two categories – taxable bonds and municipal bonds. Taxable bonds are usually issued by corporations, and do not offer the same tax exempt benefits of a municipal bond. These types of bonds are rarely used in the financing of sport facilities. The two types of taxable bonds most often used to finance sport facilities are private placement bonds and asset-backed securitizations. Private-placement bonds are long-term, fixed-interest certificates issued by a non-municipal organization developing a sport facility to venture capitalists and other private lenders of funds. These bonds are secured by the total revenues generated by the sport facility. Asset-backed securitizations are similar to private-placement bonds, however only the most financially viable revenue streams are bundled into the bond offering (example – naming right sponsorships, luxury suite, and PSL’s be a part of the asset-backed security, concessions and parking revenues still to the facility).
On the other hand, municipal bonds are widely used to finance sport facilities.
Municipal bonds are issued by a governmental agency, and the interest is tax exempt. There are a variety of bond options available under this category, either guaranteed or non-guaranteed. The most often used guaranteed bonds (also known as full-faith or credit obligations) utilized in financing sport facilities are general obligation bonds and certificate of obligation. General obligation bonds are bonds that are repaid with a portion of the general property tax – also known as an ad valorem tax, and is backed by the full faith and credit of the issuing body (in most cases the jurisdiction). Certificates of obligation are bonds that are secured by unlimited claims on tax revenues. These types of bonds usually have a low interest rate, and are easily obtained through governmental sources because the issuance does not require approval by vote of the population.
A variety of non-guaranteed bonds are utilized for the financing of sport facilities including revenue bonds, certificates of participation, tax increment financing, special authority bonds, straight governmental appropriations, and public grants. Revenue bonds are backed exclusively from the revenue that accrues from the sport facility or associated revenue sources. Certificates of participation (COP) involves a jurisdiction purchasing the sport facility and leasing parts of the facility back to the general public or associated agencies. The revenues from those lease payments are then utilized to pay off the capital expenses for the sport facility. Tax-increment financing (TIF) is utilized when there is an area identified as needing some type of renewal or redevelopment.
The jurisdiction freezes the tax base in that area until the development or renewal takes place, and then taxes are raised to pay off the TIF. Special authority bonds finance through public organizations that have jurisdictional power outside the normal constraints of the government. This is most often used when there are public challenges to finance sport facilities, but the jurisdiction want the sport facility. So the jurisdiction uses these agencies, including power authorities, turnpike/roadway authorities, water works authorities, and other public works departments, to fund sport facilities through raised fees. Straight governmental appropriations is setting aside public funding from a municipal-ity’s budget for a specific purpose – such as financing a sport facility. Public
grants to finance sport facilities are awards of financial assistance from a municipality to carry out a project of support or stimulation for the good of the public. This financing does not have to be repaid since it is technically not categorized as governmental assistance or individual loans.
In addition to these public finding options, there are other types of public sector contributions including the purchase of donated land; the funding of site improvements, parking garages, or surrounding infrastructure; direct equity investments; and the construction of related facilities. Regardless of the source of funding, there are always questions as to whether pubic financing is appropriate for the use of sport facilities. These questions center on uncertainty by the public about whether available alternative sources of private financing should supersede the use of public financing, and the contention that the economic returns accruing from public investments do not necessarily equate to the initial investment in the sport facility. However, there are alternate sources of spillover benefits that justify these public subsidies as documented in the chart below:
Increased community visibility A professional sport facility often results in
a significant increase in the amount of media coverage for the municipality in which it is located. It also keeps the community’s name in front of regional, national, and sometimes even international/global audiences.
Enhanced community image Many municipalities engage in place marketing, which strives to sell the image of a place so as to make it more attractive to businesses, tourists, and inhabitants. The omnipresent popularity of sport in the media has persuaded many municipalities to realize that sport facilities may be useful vehicles to enhance their image.
Making a ‘major league city’ There is a lot of public interest in the belief that a municipality cannot be considered a ‘major league city’ or ‘first-tier city’ without a ‘major league’ sports team. As such, it is near impossible to have a ‘major league’ sports team without a quality sport facility. In many municipalities, the facility is seen as being indicative of their character and as defining the external perceptions of the city.
Loss of a major sports team If a municipality loses a sports franchise, it may create the impression that local businesses and governmental officials are not supportive of the community, that the community is declining, and that its residents lack civic pride. Hence, if a municipality does not provide quality sport facilities, they may create a worse image for themselves than if they never had the teams or facilities at all.
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Private sources of revenue
A sport facility cannot be financed solely from public sources. Sport businesses need to create sources of revenue to enhance the financing efforts for a sport facility. When we look at the traditional forms of obtaining revenue in business, we typically look at donations of cash, gifts, in-kind contributions, bequests, endowments, trusts, and revenues from fundraising efforts. In sport facilities, there are numerous additional sources of revenue that play a crucial role as economic generators for a sport facility. The chart below depicts these various revenue sources:
Stimulation of other developments
Municipalities believe that the investment in sport facilities will stimulate additional development and hence contribute to expansion of a city’s tax base.
There are three types of development to be addressed when financing a sport facility:
Proximate development is utilized to stimulate economic development as part of an integrated redevelopment plan around the sport facility.
Complimentary development comes from the need to support the proximate development around the sport facility, either as a result of the municipality’s desire to host a hallmark or mega event, or to upgrade the level of service near the sport facility (restaurants, bars, retail stores, etc.).
General development goes beyond proximate and complimentary development into the increased availability of public services including roadways and public transportation.
Psychic income Psychic income is the emotional and psychological benefit residents of a municipality perceive they receive, even though they do not physically attend events at the facility, and are not involved in organizing them. Sport facilities are a medium through which cities and their residents express their personality, enhance their status, and promote their quality of life to a regional, national, and even international/global audience. This is often measured using the contingent valuation method (CVM), which places currency values on goods/services not exchanged in the marketplace.
Naming rights and sponsorships The entitlement to name a sport facility (or a part thereof) in exchange for financial considerations.
Lease agreements/building rentals The amount of money earned by the facility for its use by tenants (usually sport teams but may include outside vendors who can fill spaces not used by the sport facility for sports), outside travelling events (examples include concerts, WWE, and monster truck shows), and local events (municipal gatherings, graduations, corporate gathering etc.).
Advertising rights The percentage of revenue earned by the facility for signage and other advertisements within the sport facility.
Luxury suites and corporate/private boxes
Yearly leases of specialized seating typically located near the middle section of the sport facility that allows the best view of events. Usually has glass paneling that can open to the playing area; included amenities such as a bar, TV’s, internet, private seats, and a bathroom; catered food service; and private parking and entrances to the facility.
Preferred/premium/club seating A level below luxury boxes, but offers special amenities above and beyond general admission seating, including private restaurants, lounge areas, and merchandise stands. The main difference is that the seating is not enclosed as with the luxury box – it is open-air similar to general admissions – hence this specialty seating provides the elements of both.
Permanent/personal seat licenses (PSLs) PSLs (known as debentures in Europe) is a fee paid to buy tickets for a specific seat within a specific sport facility. PSLs are usually limited to those buying season tickets.
Ticket sales The percentage a sport facility gets back for every ticket sold for events within the facility. A higher percentage comes back for tickets sold through the box office.
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Public–private partnerships
Many times, to effectively finance sport facilities, there is a need for a better relationship between municipalities and private entrepreneurs. The public sector has the authority to implement project funding through the governing process, while the private sector has the ability to contribute financing and management expertise in the area of sport facilities. While there are advantages in combining the funding and revenue resources as discussed in the previous two sections, there are two major challenges to facilitating a successful public–private partnership.
The first challenge is for public and private entities to understand, respect, and acknowledge the differences between each other, especially as related to value systems and customer expectations. Public sector organizations exist to meet the need and wants of their target population as related to social benefits and outcomes. Private business look to maximize financial return and/or return on investments (i.e. be able to pay off their investors), and hence target their efforts to those who can provide the greatest opportunity to earn revenue and make a profit. There is a need within these types of partnerships to ensure that social and financial considerations are included in the decision making process related to financing for a sport facility.
The second challenge is the concern that each elements only looks out for themselves – hence unfairly competing against each other through the partner-ship. It is usually the public agency that must address this issue, as many private entities serve to help the public sector satisfy the needs of their constituents in areas they cannot provide service for.
Concessionaire exclusivity/restaurant rights Organizations purchase the sole rights for all concessions within a sport facility.
Concessions revenue The percentage of revenue that comes back to the sport facility for all food service and merchandising sold within the facility.
Parking fees The amount a sport facility makes for
allowing parking at the facility, whether it is the full parking price minus expenses when management is kept in-house, or the percentage of the fee when parking management is outsourced.
Ancillary entertainment revenue Revenue earned from extras within the stadium such as amusement parks, halls of fame, museums, and facility tours.
There are numerous models that have been created to articulate the various public–private partnerships evident in sport facility financing. The most often utilized modelsare documented below: