Why do Sporting Franchises Lease Out Stadiums?

Almost every sporting franchise needs a stadium or a venue in order to play professionally. This is because the team needs to train in a certain stadium and also needs a home ground in order to invite other teams and host matches for the franchise. To a certain extent, this helps in raising funds for the franchise as well.

Ideally, since sporting franchises extensively use sporting stadiums, most of these teams must own their own stadiums. However, this is not the case. In fact, a significant number of sporting franchises across the world tend to lease out stadiums.

The decision whether to build a stadium or whether to lease it out is simply a rent vs buy decision. However, there are different factors that need to be considered in the context of the sporting industry.

In this article, we will have a closer look at the advantages and disadvantages related to leasing out a stadium.

Advantages of Leasing Out Stadiums

1. Cash Flow Issues: It is important to understand that many sporting franchises in the world are not cash-rich. In fact, it is estimated that there are about 35% of sporting franchises across the world which are not breaking even.

   The owners of these franchises continue to operate them because of non-financial reasons. Now, if a significant number of sporting teams are facing cash flow issues, it is only logical that they will select the option that will help them conserve cash. As a result, leasing out stadiums is preferred more. It needs to be understood that there are geographical influences on this decision as well.

   A larger number of American sports franchises rent out stadiums as compared to European clubs. This may be because renting is more acceptable in the American culture as opposed to the European culture.

2. Cost Effective: Another important reason why sporting franchises across the world continue to rent out stadiums instead of building them is because of the fact that it is cheaper to do so. This is because the demand-supply equilibrium is in the favour of the tenant.

   There are generally more than one stadium in a city. However, there is generally only one team that plays a major sport representing a city. In such cases, the lessee has more options as compared to the lessor. This is the reason why there is competition amongst the lessors in order to attract lessees. As a result, the rent of stadiums is quite low.

   In fact, as far as sporting franchises are considered, the costs associated with renting a stadium can be as low as the salary of any one superstar player. As a result, the rental yield ends up being quite low and it makes perfect financial sense in order to rent a stadium.

3. Better Use of Capital: We already know that most sporting franchises across the world are privately held. This means that such franchises do not have the option to access public markets in order to raise more funds. Hence, the funds available to such organizations are generally limited. As a result, it is the duty of the franchise management to ensure that the scarce funds are utilized in a manner that can be considered to be appropriate.

   Locking up a large percentage of owned and borrowed funds in a fixed asset that can be rented out easily at a fraction of the cost cannot be considered to be prudent. Hence, most franchises prefer to invest their funds to enhance the core competencies of their franchise while trying to outsource other funds.

4. Owning Requires a Different Skillset: The maintenance of a stadium is not a part-time activity. It required a certain skill set to ensure that the stadium was maintained as per the standards prescribed by the league.

   Also, conducting matches, selling tickets, and managing crowds can be quite complex. Sporting franchises generally do not have this expertise and they should not even try to build it. This is because it will end up diluting their focus.

   Hence, even if a sporting franchise were to lock up a large amount of capital in a stadium, it would still have to outsource almost all the services required in the stadium. As a result, it makes more sense to lease out the stadium along with the management personnel instead of spending time trying to build the team from scratch.

5. Option to Terminate: Most stadium rental agreements have a fixed lock-in period. Once this period is over, both parties have the option to terminate the contract by giving some notice to the other party. This is called the option to terminate the contract.

   Under normal circumstances, this option does not have much value for the sporting franchise. However, it provides an option to reduce costs and manage profitability during a financial crisis.

   For instance, during the coronavirus pandemic, many sporting franchises were able to lower their costs by negotiating with their lessors.

6. Land Acquisition and Approvals: Last but not least, building a stadium is not an easy or quick activity. It is important to realize that building a stadium requires several steps such as the acquisition of land as well as approvals. This can be quite tedious as well as expensive.

   The franchise may have to engage the services of a contractor and wait several years before gaining access to a solution. Renting provides a plug-and-play option which is considered to be beneficial by many franchises.

Hence, it can be said that renting is a financially as well as operationally more convenient way of operating a stadium.