Dirty, Filthy Money Why the Chargers are not meeting revenue goals – Bolts From The Blue

Yesterday served as a bit of a bombshell for the Chargers’ franchise, as word began to spread that the NFL was officially discussing the viability of the Chargers’ franchise in LA. That, in and of itself, is not a terrible surprise, but it did mark a very distinct change in tone with how the NFL is handling the situation. This was the first time since before the move that the various team leaders openly discussed whether or not a franchise (or two or three) could truly survive in LA. Like the obligatory remarks of a post-game press box, the NFL has preached its “Great things lie ahead! We knew we would have to fight for this territory, and we’re seeing great progress!” mantra. Even after the meetings, Roger Goodell reverted to the predictable when speaking with ESPN:

Wednesday also marked the release of the Chargers’ full slate of SSL prices.

It’s important to understand what SSLs (Stadium Seat Licenses) are used for. An SSL or PSL (Personal Seat License) is a contract between you and a franchise to purchase an annual slate of home game seats (8 home games + 2 preseason games = 10 tickets annually). This contract costs money to hold, plus the cost of each ticket it obligates the holder to buy. The NFL first entered the seating-for-construction market in 1969 to finance The Dallas Cowboys’ Texas Stadium through construction bonds that gave folks the first shot at season tickets. The idea of specific seating licenses was first used 1986 at Stanford University. SSLs are now commonly used as a primary source of matching funds when financing large stadiums, though Inglewood is the first stadium in the LA area to use this tactic. It is very common in the NFL, and was no surprise for the Rams/Chargers joint venture.

Why would anyone buy an SSL? Well, basically, it guarantees a fan that they will be able to acquire season tickets. For a stadium as palatial as Holllywood Park promises to be, the majority of seats are expected to be sold through licenses. In effect, teams are burdening their most fervent fans with financing these stadiums, as season tickets without SSL fees are increasingly rare. It’s not all gloom-and-doom, though. The SSL fee is only paid once, and season tickets can still be a good investment for about 22 of the 32 NFL teams. It gets even better: The Inglewood Stadium SSLs are the first in the NFL (and possibly the first ever, that I could find) that are completely refundable. This means that the money spent is very much like a bond, just without interest. In the year 2068, license holders will receive their deposits back. This is an interesting development, as it means that taxes would be avoided by both parties as no one is profiting. It also indicates that either the SSL market is not as good as it used to be or/and both teams expect to have to ‘sweeten the pot’ to meet their quota. Sometimes season tickets can be a good investment for the family… sometimes it’s a larger investment than you expect. Money. Pt. 2

The Inglewood stadium was originally going to be about $2.3 billion to build, over a billion more than “ JerryWorld.” Then the figure ballooned to $3 billion in 2017. Then the figure exploded into over $4.25 billion in 2018 (most financial experts now expect it to be closer to 5 with the construction of the NFL Media HQ). Stan Kroenke is a rich guy, and he originally served as the bridge between the financed portions of the costs and the raw income from naming rights and SSLs. He still serves as this bridge. We know that bank loans on the construction are around $2.25 billion ( JP Morgan is financing $300m, and the lowest bank is at $50m. There are 9 banks in all), and we know that the NFL is offering $400m in loans. Rams/Chargers Stadium cost sources Amount Source

Kroenke is not borrowing the $2.25B right away (as that would cost him $50M annual interest), and that figure might be more of a goal than a sure thing (judging by the known banks and amounts, I think he’s about $500M-$1B short). However, these loans require pledges of revenue of 1.75 times the loan amount ($3.93B). This is where SSLs come in to play. The seat licenses are immediate deposits AND presumed guarantees of income for 3 years, even though those ticket costs are not due yet. That qualifies as a pledge. Naming rights to the stadium also qualify as a pledge, and the Rams have already indicated that they are seeking $30M a year for 10 years ($300 million). Tenants to the complex would also qualify, but there have been no details on that front. The only announced tenants are the LA Chargers and the NFL Media HQ. For the purposes of qualifying pledges, the Chargers are basically rent-free ($1.00 annually), as they are being burdened with raising partial construction costs. No numbers have been released about NFL Media HQ’s rent, but we’ll assume it’s $300M over 10 years so that we can throw Kroenke a bone.

How can the Chargers have missed the boat by so much? Well, after they released their incredibly reasonable SSL and expected ticket pricing on Wednesday, it starts to make more sense. I can not and will not chastise the Chargers for, pardon the pun, charging what they will in 2020, even if it looks like they won’t be meeting their revenue goals. They are, for the first time in recent history, adapting to the market. They have found through their StubHub experiment that they don’t have the diehard fans that will pay through the nose for guaranteed seating. They had mis-identified LA as a place where businesses and hotshots would spend on a luxury product just because it is a luxury product. “If you build it, they will come,” they had told themselves. The Chargers’ franchise still believes this, and it might even be true. But early returns are not promising. Instead of having legions of paying customers knocking down their door, they’ve realized that they have to start from scratch and build, build, build over a very long time.

The NFL discussion this week was not a surprise to the team- it was simple math. They had to release their SSL prices or they would fail their side of the bargain. They reluctantly realized that pricing their seats equal to even what the Rams are asking would just mean leaving pledged money behind. They have sobered up, set their expectations low enough to be what they hope is feasible, and are hoping for a Super Bowl run to increase revenue.

There are 44 stands that are not included in this latest round of SSL pricing— those would be the VIP and Club seats that began to sell in March. These ‘gray’ seats in the chart below are the crazy ones, where licenses are $10,000 – $25,000. There were about 13,000 of those seats made available, and absolutely no information as to how many, if any, were sold. 500 of those were $50,000 VIP seats, which compares to $80,000 for the Rams. Again, no information on what was sold. How we know that the SSLs will not be enough: This chart shows the expected income from the ‘economy’ season tickets

Keep in mind, the SSL prices were lowered so that the team can expect to sell out. This is where the revised estimate of $150M is coming from. If the team sells out of all lower-level SSLs, they would raise $58,344,000. Each additional year would bring $27,608,000 in season ticket sales. In a three-year period, 2020-2022, the Chargers can expect to bring in $113.54M in season ticket sales. The remaining 40 million would be those who did purchase some of those VIP seats.

The new stadium is going to cost in excess of 4.25 Billion dollars. Stan Kroenke is personally footing the bill for every dime that he can not get financed. The Rams agreed (or were otherwise forced by the NFL) to allow the Chargers to move to the stadium if they agreed to share the construction burden. The Chargers and Rams bear that burden primarily through the sale of SSLs, as those are a form of pledged revenue. We do not know how much each team was expected to bring in, but we must assume that the original estimate of $400M for the Chargers was enough to make ends meet. The Chargers did not sell well enough in their VIP seats, nor have they sold well enough at StubHub, to price their remaining SSLs as aggressively as they had hoped. With that in mind, they reduced prices to a level that they felt would sell ($600 for season tickets.. not bad!), but that has the ripple effect of lowering their projected stadium contribution to $150M. Let’s not forget that the Chargers also have a $64.5M relocation fee kicking in in 2019 for ten years and currently only pull in $48M more than they spend.

It’s one thing to not make much money. That’s an unfortunate reality of business, and I’m sure that all of the other NFL owners felt bad that the Spanos family was in such a position. It’s an entirely different scenario when a team’s lack of revenue directly affects the finances of others, as it is now doing with Stan Kroenke. You had better believe that he is not thrilled by not only having to bear another $250M in construction costs, but by having all of his crucial bank loans put in jeopardy because the required 1.75x projected revenue is in danger. This also puts doubt in loaners’ minds that the Rams will raise what they project. This further puts doubt that the Raiders will raise what they project (~$300M).

Think about it this way: The Rams are currently worth 3.2B as a franchise, but that’s not money in the bank. Before the move, they were rated at 1.4B, and the inflation is directly tied to the allure of LA being a better market. Stan Kroenke is personally footing $1.6B toward the stadi—- sorry, with the Chargers missing their mark, he’s on the line for $1.85B. He is putting an inordinate amount of clout and risk on this endeavor, and his own tenant is driving down the value of an LA franchise. The Chargers and any other parties are not on the hook for the facility’s additional costs, just Stan Kroenke’s Stadco L.A., LLC. With the Super Bowl, the Olympics, and so much more on the line, this stadium will catapult Kroenke’s business stature or destroy it.

The NFL is discussing the Chargers right now because they have single-handedly destroyed the concept that a franchise could up-and-move to a better media market and enjoy the fruits there. Either they can act now and limit the bloodletting, or they can ride it out and hope for the best. Make no mistake, they will almost definitely do nothing. Acting is riskier than not acting. Forcing a sale puts every other owner on notice (would you raise the temperature of your own seat? That you paid for??), forcing a move is unprecedented and you are definitely going to eat a slice from someone else’s pie (sorry, Khan’s London. Sorry, Jones’ San Antonio. Sorry…San Diego?), and there’s really not another option but to chin-up and stay the course.