Pred Herring 

A fishy deal-in-progress threatens to throw good money after bad

What do you get when you cross professional sports and local government? As the current matter of the NHL Predators and their future in Nashville acutely demonstrates, you get a flight from rationality and clearheaded judgment.
What do you get when you cross professional sports and local government? As the current matter of the NHL Predators and their future in Nashville acutely demonstrates, you get a flight from rationality and clearheaded judgment. Take sensible public officials and civic leaders who care about the city, toss in pro sports and public money, stir until blended, and then stand back and watch emotional fantasy and wishful thinking crowd out facts, objective analysis and thoughtful public policy.

The latest pro sports taxpayer shakedown boils down to this: a group of businessmen buying a hockey team that already has one of the sweetest of sweetheart arena deals in pro sports but still cannot come close to turning an operating profit wants Nashville’s taxpayers to ratchet up the fructose. Specific details have been changing day to day, but the buyers’ have asked that the city let the team hold onto $4 million in sales taxes and seat fees it currently forks over. They have also suggested that taxpayers put several million dollars into capital improvements at the arena and, for good measure, grant parking concessions at a new downtown convention center (when and if that comes to be). If a deal with the city can be completed, the group, led by David Freeman of 36 Venture Capital, will consummate a $193 million deal to buy the Predators from Craig Leipold, who has owned the team since it entered the NHL as an expansion franchise in 1998.

The “save the Preds” rhetoric from ticket holders, newspaper editorialists and the Chamber of Commerce crowd is all too familiar and predictable to those who follow the world of pro sports urban extortion: without the team, downtown will deteriorate. A bad deal with a costly arena tenant is better than no deal with no tenant. Disappearing entertainment dollars will cost us in jobs, incomes and tax collections. Businesses will be less apt to relocate to Nashville, and we’ll be sending those already here the wrong message. Our trajectory into the ranks of world-class cities will be thwarted. The city’s economy will suffer a devastating blow. Losing the Predators, a City Paper editorial concluded last Friday, “would be crushing for Nashville.”

All of this might be compelling if there were much in the way of evidence to support it. Consider a few of the most commonly heard arguments for prying open the city’s coffers to keep pro hockey in Nashville:

A pro team stimulates not just economic activity at the arena but also large amounts of off-site spending. An analysis prepared last month for the buyers’ group by MZ Sports, a New Jersey-based consultant, points to a “study” by the Nashville Area Chamber of Commerce showing that “the Predators have generated cumulative local direct spending of $493 million since their inception,” which includes $369 million at the arena and $124 million elsewhere around the city. These impact numbers have been widely reported, but they turn out to be suspect. Chamber research director Garrett Harper says the estimate he developed and passed on to MZ Sports totals $369 million—the $124 million is part of it, not apart from it—so the consultants’ estimate of direct impact is off by $124 million.

But even the correct figure lacks credibility and objectivity. The chamber number is a statistical extrapolation of an old estimate of economic impact the Predators themselves peddled during their first year of operation, Harper tells the Scene. There has been no new, unbiased “study” of economic impact. Harper characterizes the new estimate of impact as “ ‘analytical’ in a very sparing use of the word.” Even MZ Sports president Mitchell Zeits says, “We couldn’t vouch for that number.” It’s no wonder that a 2002 paper in The Sport Journal titled “Upon Further Review: An Examination of Sporting Event Economic Impact Studies” concluded that cities should view “with extreme caution any economic impact estimates provided by sports franchises.”

Pro sports teams such as the Predators make a meaningful contribution to a city’s economic growth and development. American cities have invested tens of billions of dollars in pro sports during the last couple of decades despite a lack of persuasive evidence for their benefits. Summarizing research on the economics of pro sports in a 2000 article in the Journal of Economic Perspectives, economists John Siegfried (of Vanderbilt) and Andrew Zimbalist noted the absence of any “significant positive correlation between sports facility construction and economic development.” They add that few areas of empirical economic research offer the “virtual unanimity of findings” encountered on this subject. They also point to evidence that sports teams and facilities in some cities can actually reduce per-capita income in host communities.

The Predators are a vibrant franchise that just needs some help from the city to thrive in the long run. A more credible prediction is that the Preds will continue to hover near the bottom of the NHL in attendance. In nine years, the team has become competitive on the ice, has invested $50 million in sales and marketing efforts, and has enjoyed a healthy high-growth, low-unemployment local economy. Even so, average attendance still fell short of 14,000 last season, and according to the team’s front office, the Predators’ operating red ink totals $27 million over the last two seasons (despite receiving more money in revenue sharing from the league than any other team) and $60 million over the last five years. Meanwhile, corporate support is dismal and dropping: corporate buyers last year accounted for just 35 percent of season ticket sales, compared to an average of 60 percent in other markets. Roughly 4,000 businesses owned season tickets during the team’s first couple of years; that number has since dropped by more than half. Among the 14 NHL games played last Saturday, the Predators—smack in the middle of local controversy that could mean the team stays or goes—filled a smaller percentage of seats in their arena than any other home team. New money from the city’s taxpayers will make the Predators’ operating bottom line look a little better, but it’s hard to see the result as anything but a franchise still on life support.

The team can’t be a viable business enterprise without significant public subsidies. This is perhaps the biggest canard of all. Yes, given the team’s financial performance to date, Nashville’s limited taste for pricey hockey tickets, and the business community’s lukewarm interest in propping up the team with corporate support, the route to an operating profit for NHL hockey in Nashville is difficult to fathom. But the business model underlying pro sports team ownership is less about operating profits than about asset appreciation. As University of Chicago economist Austan Goolsbee recently wrote, “Owners’ complaints about losses leave out the basic fact that capital gains are profits.”

In a letter to fans last May announcing his plans to sell the team, Leipold wrote, “Success on the ice has not translated to success for me as business owner.” It’s hard to imagine a more disingenuous assessment. Thanks to the generosity of Nashville’s taxpayers, who coughed up a big chunk of the NHL’s original $80 million expansion fee, Leipold got in the game for around $55 million, and Predators spokesman Gerry Helper says losses for the franchise since inception total $70 million. By these numbers, the $193 million sale price will burden Leipold with the humiliation of a roughly $68 million capital gain. His annualized return of between 6 and 10 percent (depending on assumptions about the distribution of losses) over nine years of ownership might not seem extravagant, but it sure smells like a handsome profit, one that outpaces the overall performance of the S&P 500 during the same period. Not too shabby for a substantially risk-free capital investment. Have you noticed that team owners who insist on public subsidies never seem inclined to pay the taxpayers back when the capital gains come rolling in?

The arena will cost the taxpayers more money without the Predators. In the short run, it probably will cost more, but how much more is unclear because there has been no independent analysis of the arena’s revenue potential without a hockey team. City officials appear to be basing strategy and decision-making on the far-from-objective analysis of a consultant retained by the prospective team buyers. Let’s not forget that the arena opened its doors in 1996 without a pro sports tenant, and more or less broke even in the two years before the Predators started play. Throwing more money at a losing enterprise that may well just pick up and leave the city anyway after a few more years is a dubious way to do public policy when officials don’t even have an unbiased estimate of the cost of the alternative.

This needs to happen by the end of the month or the Predators will bolt. City officials are letting the team’s buyers corner them with a meaningless deadline—the need to act before Oct. 31 because that’s how long current owner Leipold gave the buyers to close the deal. In late summer, the buyers tried to obfuscate the terms they wanted until after the recent city election, knowing all along (unless they are idiots, which they aren’t) that the calendar would inevitably put pressure on the city to make concessions after a new Metro Council was seated. But the Oct. 31 “deadline” is really just an arbitrary date embedded in a private deal between profiteering private parties. Now the group seeking to buy the Predators—those civic-minded heroes out selflessly to save our local team—is using that deadline to compel hasty, uninformed and potentially very costly decision-making on the taxpayers’ behalf.

There’s every chance the Predators eventually will blow out of Nashville for greener pastures whether or not there’s a new arena lease deal with the city. A major stake in the buyers group belongs to Silicon Valley venture capitalist William “Boots” Del Biaggio, who reportedly has a vested interest in seeing a team land in Kansas City’s currently vacant arena. Last week the buyers group asked for the right to move the team if ticket sales falter and losses mount, both of which seem far from remote.

The bottom line here is that a group of well-heeled private individuals are spending $193 million on an asset that was first purchased a decade ago for $55 million, was valued by Forbes last year at $134 million, and has little to no chance of ever finding long-term operating success as a local franchise. The buying and selling of sports teams is a shell game in which excitement-hungry investors overpay for assets, extract fiscal welfare from municipal governments, and then later take profits when new overeager investors step in to overvalue the asset even further. One of these days an up-and-coming city with a lucid grip on reality and an optimistic future is going to pass on the Kool-Aid and simply refuse to play.

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