When professional sports teams and the public sector partner to develop or redevelop a sports stadium, it is increasingly common for the development plans to address ancillary development as well as the stadium itself. “Ancillary development” is a general term for taking land surrounding or adjacent to a stadium and creating a project on that land that includes commercial, residential or mixed-use development.
It’s no mystery why ancillary development is coveted. Successful ancillary developments can provide the team with additional opportunities to enhance the fan experience (and generate additional revenue, even if the fan never attends an event at the stadium). At the same time, it can provide the public sector with a new, stable job-creation and tax-revenue source. Additionally, ancillary development enhances one of the public sector’s primary reasons for involving itself in stadium development: the expectation of urban revitalization. There are a number of examples where a new stadium and ancillary development have revitalized previously depressed areas: the Inner Harbor (Baltimore), China Basin (San Francisco), L.A. Live (Los Angeles) and the LoDo District (Denver).
Initially, the public sector controlled ancillary development, as seen in Baltimore’s Inner Harbor or Denver’s LoDo District, and it preferred being primarily responsible for controlling the type and pace of development surrounding a stadium. The development was used by the public sector to offset its stadium development risk (of which it was also responsible). This responsibility included acquiring the land surrounding or adjacent to the stadium, and refashioning that land into property attractive for development purposes. This included entitling the ancillary land (for example, granting certain tax status to the ancillary land for the team’s benefit), or “upzoning” it (changing the land’s current zoning to allow for greater density or commercial uses). The team’s responsibility and risk exposure was limited to securing land-use restrictions to protect the fan experience and team revenue.
This paradigm is changing. The availability of public funds for stadium development projects is shrinking. The public’s appetite to finance stadiums and ancillary development risk (especially over the past few years) is much less than it was 10 to 15 years ago. Paradoxically, the public’s appetite for renovated stadiums continues to increase, as does its appreciation for what ancillary development can do to revitalize blighted urban areas.
The public sector has increasingly offered ancillary development opportunities where the team takes on the risk and upside to offset an increased investment in the stadium. Although recent changes in redevelopment laws in California have created new challenges, California has seen this approach successfully applied in San Diego for the Padres and more recently for the Sacramento Kings. This provides the public sector with:
■ An additional tool with which to finance stadium development;
■ A reduction in its operational and financial risk in ancillary development;
■ A reduction in political exposure; and
■ Incentives for the team to maximize development opportunities to create the new tax base and jobs quickly (which in turn maximizes potential revenue more quickly and justifies a more significant direct team investment in the stadium).
The primary public sector risk still represents an additional expenditure that will need to be funded (at least in part) by public funds. Additionally, the public sector will need to convince taxpayers that shifting responsibility is not just a case of giving the team additional “free” corporate incentives but rather a way to mitigate public risk exposure for a beneficial public cause.
 |
The St. Louis Cardinals went with a third-party developer for Ballpark Village next to Busch Stadium.
Photo by: TAKA YANAGIMOTO / ST. LOUIS CARDINALS
|
From the team perspective, accepting development obligations has its benefits. Greater control over the ancillary development process can mean greater control over the revenue generated from the land and greater control over the fan experience. However, the obligation shift is also a risk shift, and the team may not be comfortable taking on construction/management/fiscal responsibilities. By taking on the development, the team becomes primarily responsible for its success. If the development fails to take off, the team could end up with a significant long-term expense that could be difficult to unload and create an underwater stadium deal that defeats the purpose of a new or renovated facility.
To mitigate some of this risk, the team could request more land entitlements than a typical real estate developer could expect to receive, in hopes of making up for the team’s additional capital outlay. As seen with the St. Louis Cardinals and the Cordish Co., the team also could mitigate its risk exposure by teaming up with a third-party developer. This developer could provide the team with a partner experienced in constructing and operating commercial/residential development and possibly a partner who can serve as a source of additional funds to finance the development. Of course, by partnering, the team will be challenged to cede some of the control that it received from the public sector in the first place.
In the case of the Cardinals, although the development was delayed due to a variety of factors tied to the recession, the $100 million phase one of the Ballpark Village is underway. This includes the Cardinals Hall of Fame and Museum and Cardinals Nation Restaurant, the Ballpark Village Live! Restaurant, the Budweiser Brew House, and PBR St. Louis. Along with Cordish, the team appears intricately involved in the planning, and both have made additional financial commitments to the project and expect to benefit from the improved fan experience by the 2014 season. As a result, the public sector is satisfied with the project improving the tax base, creating temporary construction jobs and providing permanent operational jobs.
Negotiating financial and operational obligations in a public-private partnership for ancillary development can be challenging, and to do so each party needs to be able to assess risk and reward in both the short view and the long view. Before negiotiating, each party should determine:
■ Their view for what the ancillary development will include;
■ Their respective financial “comfort zones” (i.e., how much financial responsibility the party is willing to assume in connection with the development);
■ Their respective management/operational comfort zones; and
■ Their desired timing for completion.
While striking the appropriate balance of risk and responsibility for each side involved can be challenging, the potential financial and civic benefits are lucrative enough that we expect the public sector and teams to continue to explore such undertakings.
Irwin Raij (iraij@foley.com) is a partner at Foley & Lardner LLP and co-chair of its sports industry team, and Erick Harris is a former associate at Foley & Lardner.
