Disadvantages of Leasing Out Stadiums

In the previous article, we have already taken a look at why sporting franchises prefer to lease out stadiums instead of building them from scratch.

We are now aware of the various benefits that accrue to franchises if they lease out stadiums instead of building them. However, it would not be appropriate to look only at the benefits of leasing and not look at some of the disadvantages and missed opportunities that are commonly associated with leasing.

In this article, we will have a closer look at the disadvantages associated with leasing stadiums over long periods of time.

1. Expensive in the Long Run: Leasing stadiums is cheaper and more convenient in the short run. However, most of the lease contracts have escalation clauses built into them.

   Sometimes these clauses can have variable escalation rates linked to indexation. This means that there is a fixed percentage by which the leasing costs increase every year. Leasing contracts are very long-term in nature.

   It is not common for leasing contracts to be drawn out for a period of thirty years. Hence, over a period of time, the money paid out in the form of lease rentals can add up to a lot.

2. Loss of Tax Breaks and Subsidies: If a sporting franchise has to build its own stadium, then it will generally have to take on a lot of debt. The end result is that they will have to pay out a significant amount of money in the form of interest. However, there is a silver lining to this story. This significant interest expense can be used to reduce the taxable income of the franchise. As a result, the amount of taxes paid can also be drastically reduced.

   Thus, owning a stadium provides the franchise with a tax shield which is more valuable than the one obtained by renting. Also, there are many local municipal governments that provide financial help to the franchise in the form of subsidies. The overall cost of ownership is drastically reduced when these factors are taken into account.

3. Loss of Sponsorships: When a sporting franchise owns its own venue, it can generate an additional source of income from the same. This can be done by selling the naming rights to the venue.

   There are many corporations who are willing to pay significant sums of money to the franchise in exchange for the naming rights. This additional revenue can also help reduce the overall cost of ownership. However, when a franchise decides to lease out its stadium, it loses out on the revenue generated via sponsorships, naming rights, and renting out the venue for other events.

4. Possible Relocation: Generally, sporting franchises are able to continue operating in the same stadium for decades. This is because they are able to renew the lease contract with the local government and continue. However, this situation may change due to circumstances that are beyond the control of the franchise.

   For instance, it is possible that the local municipal government may go bankrupt and as a result may have to auction its assets. The stadium may be one such asset that gets auctioned and may be bought out by another party who is not willing to continue with the contract.

   The problem is that there are not many stadiums in a particular city. A new stadium requires many years to build and hence if a stadium lease ends abruptly, then the sporting franchise is left in disarray. They are compelled to relocate to a different city. This can be catastrophic for the franchise since their fan base is heavily concentrated in their base locations and their revenue model is dependent upon their fan base.

5. Payments for Damage: Sporting stadiums are large arenas that host thousands of people at the same time. It is not possible for the host to control the crowds and monitor their behavior, no matter how well the event is managed. There are instances wherein fans end up causing some damage to the property if they get upset as a result of poor performance by their team.

   If the stadium is leased out, the owner will consider the lessee to be responsible for this damage and will try to recover the amount from them. It is true that the lessee can reimbursements from their insurance company if they have taken out insurance. However, the probability of receiving a significant reimbursement is quite low.

6. Inability to Make Improvements: Last but not least, in most cases, lessees do not have the right to make improvements to the stadium. Also, it does not make financial sense for the lessee to invest capital in the stadium since they do not own the property. This makes them dependent upon the lessor if they want to make some capital improvements and enhance their fan experience or satisfy the conditions of the franchisor i.e. the league.

   Most of the time franchises are able to work out an arrangement with the franchisor. However, their inability to do so can have significant consequences.

The fact of the matter is that leasing out a stadium can be a prudent financial decision. However, it does come with some disadvantages.

The downside needs to be carefully weighed before a decision is taken regarding leasing a stadium.

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