Why Community Ownership Makes More Sense
The simple reality is that sports are a community thing…not a private thing. So, having privately held ownership groups of franchises is strange. In our opinion, the ownership of universities makes way more sense. They are affiliated with something bigger than themselves. They are tied directly to the community – alumnae, students, etc. This blog is about illustrating some weird stuff about the “community” ownership of teams.
COMMUNITY OWNERSHIP
On Sporting Kansas City’s ownership page (https://www.sportingkc.com/club/ownership), it states: “The ownership group is unique to Kansas City sports, as Sporting is the only professional sports organization with local ownership.” The ownership group is made up of five very wealthy individuals – Neal Patterson, Cliff Illig, Greg Maday, Pat Curran, and Robb Heineman. These are people that have built a lasting organization in Kansas City – and in some instances, multiple ones. For example, Neal Patterson is the founder of Cerner, a Kansas City institution.
However, the ownership of a sports franchise by individuals is just weird when you step back and consider it. Why don’t the fans own the team and have more direct ties to the success? Some possible answers:
It is really expensive to run a team
It is really expensive to build a stadium
It is really expensive to pay the franchise fee
It is really hard to do this well
There are other reasons – but let’s take these four as the primary reasons.
COSTS
Using data from a variety of public sources including Forbes and the MLS player union, Chapman and Company cobbled together a poor forecast. The goal was to be rightish and give perspective – not actually be correct.
So, understand that these are intentionally stating an average and the two extremes. Using that data, the total expense to run an MLS franchise is on average $32.2 million. On the extremes franchises operate with expenses of $19mm (Colorado Rapids) and $72mm (LA Galaxy plus a loss - assuming a $9 million loss and the largest budget). The net return ranges from $9 million gain to $9 million loss. In other words, these are expensive organizations to run – sort of. If you are an individual, taking a $9 million loss is a significant net hit. But, if you are a publicly traded company $9 million is not as extreme. So again perspective on this is important.
STADIA
The ownership group rarely pays for the stadium where the team is the primary tenant. There is often an upfront portion of payment. But usually, the ownership is held by either a public entity or there is debt backed by taxes through a public entity. For example, Nashville approved a $225 million financing plan for a new soccer stadium in November. (https://www.tennessean.com/story/news/2017/11/07/nashville-metro-council-approves-financing-275-m-nashville-mls-stadium/835596001/). This financing was approved by the Metro Council. In this instance, the team will be required to pay cost over-runs and about $9mm in debt per year for the thirty years of the financing. There was an upfront payment from the ownership group. So overall, this is a favorable stadium deal compared to the many others out there. And yet, the community is still carrying a significant tax burden and a limit on other debt that could be potentially raised for schools, roads, or other community needs.
The fundamental arguments for the stadium are three-fold. One, the actual stadium will help redevelopment and increase the foot traffic to an underperforming area of a city. Two, the team will not (re)locate here without this as part of the plan. Three, external branding of the city will benefit from having another major league franchise. All three of these are community-based arguments – they really have nothing to do with the ownership of the structure. In addition, we will examine 1) and 2) as separate blog posts.
On its face, stadia are built under a premise that they are good for the community. So, why doesn’t the community own the primary tenant and the revenue making opportunity? Instead, in the case of MLS, the private ownership group receives:
70% of ticket sales
Parking & stadium revenue
Local Broadcast rights
Local sponsorship (advertising at the stadium)
Stadium naming rights
Stadium merchandising sales
This seems out of whack for three reasons: 1) the ownership receives a financial protection from default – the city is the guarantor, not the owners (usually), 2) the financial success of the franchise boosts the owners pockets – not the city’s revenues, 3) additional features (such as on-area development) of the stadium usually boost the private owners efforts in a way non-replicable for non-sports owners. For example, the Nashville stadium sets aside 10 acres for development by the same ownership group on land currently owned by the public. Thus, this provides an avenue for rich owners to get richer without bearing the same risks as a regular person in the same situation.
FRANCHISE FEE
MLS is currently asking for $150 million for additional franchises as an “expansion fee”. This expansion fee is put into the MLS, LLC coffers to bolster the league. It is used by the league to increase player quality (through targeted expenditures for all of the teams) and is generally split across ownership groups as part of MLS profits in any give year.
$150 million is a significant asking price for an individual or group of owners. And this is a significant increase from the $10 million that was requested by MLS to Toronto less than a decade ago.
MANAGEMENT OF THE TEAM
The owners of the team are generally not the managers of the team. Moreover, because of the interesting structures in place – MLS has strong restrictions on how a team can be managed. For example, the salary structure is relatively rigid compared to the English Premier League or even other US based sports leagues. And because of the way that revenue is split at the MLS league level – the incentives are to build a strong league – not just singular teams. Thus, the owners of a team have many restrictions and expectations that limit the impact of an individual ownership group’s impact on the overall quality of either management or even the quality of the team on the field. Thus, while they may be setting strategy, the power of the organization resides in the ability to manage budgets and build relatively inexpensive success on the field through good scouting and development – not simply spending your way to success.
This means that the financial backing of the owners is not as important as it may be in a place where cash is a key determinant of success.
CONCLUSION
The MLS has created a unique ownership structure that makes it likely that teams will be owned by a private person or small group. Specifically, the structure of paying an expansion fee is particularly challenging for a community to build around. The other costs – appear to be more manageable across a wider community ownership pool.
So our conclusion is that the structure of ownership creates a place for private ownership, but it does not have to. Instead, MLS is ripe to transform sports ownership from the NFL model
to community ownership. Check out the next blog in our series to see how.