Building a Bennigan’s restaurant in Gary, Ind., would seem to have nothing to do with high-caliber investing. But this is not how the entrepreneurs of Victory Sports Group see it. The leaders of Victory Sports, the sports management and development company behind the Gary project, see this venture as anything but a kitschy franchise diner—home of the O’Cajun salmon—set in a rundown, rust-belt city. This particular Bennigan’s is attached to a thriving downtown baseball stadium, and together the two properties serve as an exemplar of the trends and opportunities found in the nation’s ongoing construction boom in sports stadiums and arenas.

VICTORY SPORTS' new baseball stadium is home to the Gary (Ind.) SouthShore RailCats. Along with adjacent properties, the project cost the city more than $45 million—a high price tag for a minor league venue—but it is expected to revitalize the downtown.

“Many communities are no longer willing to build expensive stadiums just for a team,” says Michael Tatoian, CEO of Victory Sports. “There’s got to be something value-added that’s bigger than just sports.” Over the past decade, Tatoian has launched seven successful professional baseball and hockey teams, and has won numerous awards as a sports executive. Victory Group’s chairman, George Huber, runs one of the nation’s largest private retail real estate investment trusts, Equity Investment Group.

The city of Gary invested $45 million in the 6,000-seat minor league ballpark with a handsome brick facade, forest-green seats, wrought-iron details and 18 luxury skybox suites. The price tag for the park, completed in 2002, is high by minor league standards, particularly for a nonmajor league-affiliated team such as the Gary SouthShore RailCats, who play in the independent Northern League. But the city, in tandem with Victory Sports, believes the stadium project will lay a foundation for much-needed economic growth.

Victory Sports agreed to purchase a baseball team and move it to Gary for the 2003 season. It signed a long-term lease with the city and agreed to operate the team. Potentially far more lucrative than the baseball operation, however, is Victory’s vision for real estate investment. The firm secured development rights to a tantalizingly valuable chunk of Gary—the roughly 20-acre footprint surrounding the downtown ballpark.

To date, the firm’s partners have each added more than several million dollars to the Gary project’s initial outlay, including $2 million for the Bennigan’s restaurant that sits along the ballpark’s first-base line. The 14,000-square-foot restaurant is open year-round and includes a 7,000-square-foot banquet facility. It is one of the few outside investments made in downtown Gary in roughly three decades. Victory Sports is working with city officials to develop other projects on the stadium site.

TOP VIEW Since the early 1990s, nearly 60 new Major League Baseball parks, NFL stadiums and NBA or NHL arenas have been built in the United States, along with dozens of minor league venues. For sports-minded investors, these facilities represent opportunities that combine the thrill of competition with intricate property deals. For real estate speculators, stadiums and the land surrounding them offer potentially lucrative opportunities for hotels, retail and residential development.

City officials and the Victory Sports partners are betting that this multipurpose venue, located off Interstate 90, will give residents of the northwest Indiana metropolitan area a reason to visit Gary, which will spark further economic development. “Let’s be clear: Gary is a challenged site,” says Timothy Haffner, a Victory Sports principal and attorney in Fort Wayne, Ind., where he is also president of the chamber of commerce. He and his partners believe the Gary site is an investment worth gambling on because of the city’s economic commitment to the project.

Victory Sports aims to develop more sports venue-related real estate projects, but the partners admit that finding the right situation has been difficult. They have examined, and walked away from, other minor league-level opportunities because the cities have been disorganized and ineffective in their approach. “Not to sound mean, but a city has to have its act together,” Haffner says. “It’s very difficult to make professional sports deals work unless the city endorses your ideas and is supportive and committed to the project.”

Victory Sports is a three-pronged company whose partners combine expertise in owning and operating minor league baseball and hockey teams, sports venue financing and real estate investment. For them, focusing on sports-centered transactions blends business pragmatism and a passion for sports. “You have to look at sports investments from the standpoint of fundamentals and their risk-and-reward profile,” Huber says. He notes that while returns of 15 percent are the customary goal for commercial real estate projects, he believes that sports investments should return 20 percent because they present higher risks. They are usually illiquid and more difficult to finance, and the revenue and income streams are harder to predict. For Huber, sports investments help diversify his portfolio by adding a component of high risk and high reward to the mix. In Gary, the potential upside of Victory Sports’ real estate arrangements attracted him to the project.

So far, the Gary SouthShore RailCats team and the Bennigan’s restaurant are profitable for Victory Sports, but Huber expects it to take five years to recoup the initial outlays.

RUSH TO DEVELOPMENT
Oriole Park at Camden Yards changed the sports landscape when it opened to great fanfare in Baltimore in 1992. Its single-sport design and architectural flourishes called to mind ballparks of yore, launching baseball’s retro stadium craze that rendered concrete-bowl, multipurpose facilities obsolete. Many urban planners saw its downtown location as a model for sports venues to spark revitalization. And with its ample number of revenue-producing amenities, such as luxury suites, club boxes and roomy concourses with expanded retail opportunities, Camden Yards became the prototype that launched the nation’s sports-facilities building boom—one that continues to entice investors today.

All told, nearly 60 new Major League Baseball parks, National Football League stadiums and National Basketball Association or National Hockey League arenas have been constructed in the United States since the early 1990s. This does not include existing facilities that were modernized and expanded, or even new minor league venues like the one in Gary. Most of these stadium projects were funded through public-private partnerships that offered investors an opportunity quite appealing in the eyes of any real estate developer: a public-private deal that leaves investors to collect most of the facility’s revenue.

Professional sports is an alluring business, but few investors want to pony up nearly nine figures for an outright purchase of a major league franchise (the most valuable NFL teams are approaching $1 billion). Instead, some smart investors are leveraging the revenue-generating capacity of sports venues as an alternative way to secure equity in the multibillion dollar sports industry. “These deals are happening now, and that means there are opportunities for substantial returns,” says Steven Stern, managing director at ScheerGame Sports Development, a Milwaukee-based company that develops sports and entertainment facilities. “How much so depends on the market and the combination of public incentives and available private opportunities.”

Although the market has cooled somewhat in major league cities—and in many top-tier minor league cities—after a decade of frenzied activity, a number of large projects are either in the early build-out stages or hitting the drawing board. In New York, city and state officials, along with the New York Jets, have proposed a $1.4 billion dollar Manhattan stadium and convention center that might also serve as a showpiece for the 2012 Olympics (New York is among five finalists competing for the Summer Games). In nearby Brooklyn, developer Bruce Ratner is planning a $2.5 billion, 19,000-seat arena designed by superstar architect Frank Gehry, along with an area of mixed-use development, for the slated-to-be- relocated New Jersey Nets. In St. Louis, a $646 million downtown development project involving the St. Louis Cardinals’ new ballpark and an adjacent planned urban neighborhood is in the works.

But industry insiders and investors alike admit that getting into the game is not easy, and many experts confess that pure-play investments in sports venues basically do not exist—at least for the average investor—because the sports franchise is typically the private party in a public-private partnership, and sharing stadium revenue with outside interests is usually anathema to team owners. Nonetheless, there are proven strategies for tapping these opportunities, and they range from limited  partnership stakes in a team (with accompanying rights to revenue streams and venue-related tax benefits) to investing in surrounding real estate projects that are increasingly a valuable adjunct to many new sports venue projects. “The question you have to ask is, ‘Are you trying to invest in sports or are you trying to be a real estate developer?’” says Steven Edelson, managing director at International Facilities Group, a sports development company in Northbrook, Ill. “You have to answer that question before you decide what to do with your money.”

Either way, prospective investors are likely to find a tightly controlled market with towering barriers to entry. Deals are usually struck through networking and relationship building; most introductions are made via a handful of sports development and consulting outfits, law firms with a sports practice and a select group of financiers with contacts and expertise in this niche field. While Huber hopes for 20 percent returns, many would-be investors find that tracking profits becomes murky because teams are loath to divulge financial information; the sports business makes hedge funds look downright transparent by comparison. But profits and losses can vary widely depending on a team’s market size, the league it plays in and many other factors. Ironically, the variable that might have the greatest bearing on the success or failure of a new stadium investment, at least in the short term, is the one that an outside investor is least able to influence: a team’s success on the field, court or ice rink. Lousy teams with poor attendance can suffer rapid erosion of revenues and value.

THE AMERICAN Airlines Center, home of the NBA’s Mavericks and NHL’s Stars, is surrounded by relatively unused real estate in downtown Dallas. The city plans to take advantage of the land by creating a mixed-use urban center around the stadium to promote economic activity year-round.

In the early 1990s, three years, $140 million and Nashville Mayor Phil Bredesen’s reputation went into building the Nashville Arena, which opened in 1996. Two years later, the Nashville Predators launched the team’s first NHL season there to great fanfare. By the second season, the team was averaging more than 16,000 fans per game, and Gaylord Entertainment, which owns the Opryland Hotel, paid $80 million for naming rights to the arena. Since then, crowds have dipped sharply. In the 2003-2004 season, the Predators averaged just 13,000 fans a game, despite making the playoffs for the first time. This season, of course, NHL owners have locked out players in an acrimonious labor dispute. The Gaylord Entertainment Center continues to host other events—college basketball, concerts and such—but its primary revenue stream is on ice for now.

“I think these investments can be just as risky as the stock market because there are items out of your control, like with any stock,” offers Bill Rhoda, a principal with CSL International, a Dallas-based business plan developer for sports venues.

GOOD NEIGHBOR POLICY
Property that sits adjacent to sports facilities offers indirect access to investing in the sports venue construction boom. “The real estate around these buildings is often the most valuable part of these venues,” says Jim Grinstead, publisher of the Milwaukee-based trade publication Revenue From Sports Venues. Sports facilities draw crowds, and nearby restaurants, bars, hotels and other entertainment-oriented businesses can benefit from game-day masses going to and from the stadium. “The best part of it is that someone else is spending the money to drive that crowd to your neighborhood,” Grinstead says.

Denver offers a case study of this halo effect. Coors Field, home to baseball’s Colorado Rockies, opened in 1995 and helped spark a revival that turned the formerly moribund lower downtown area into the lively LoDo entertainment district. Commercial vacancy rates in the neighborhood plunged dramatically, roughly 1,500 housing units went up within a mile of the ballpark, and the impact of Coors Field and accompanying redevelopment helped boost area property values eightfold. Coors Field is often cited by developers and team boosters as an example of how a sports venue can help revive an existing urban area.

Recent sports-based urban development projects, however, are taking on more grandiose aspirations. In Dallas, the sparkling brick and glass American Airlines Center looks like a brightly wrapped box marooned on a strip of asphalt desert. Fans of the NBA’s Mavericks and NHL’s Stars love being able to find easy parking when the teams are playing, but developers lament this waste of valuable downtown real estate. The arena opened in 2001 with the promise of turning a 72-acre tract into a mixed-use urban complex called Victory. After several delays, the project’s second phase is finally getting ready to take shape. W Hotels has broken ground on a combined hotel and residential campus next to the American Airlines Center, and planners are designing or constructing buildings to house several high-end retailers, nightclubs and restaurants.

THE VICTORY mixed-use urban complex in Dallas is a three-stage plan to transform the existing American Airlines Center into the heart of a shopping, business, residential and tourism community. The center will be a prototype for a community that complements the sporting venue, but is not dependent upon it.

Developers elsewhere are trumpeting equally bold visions for mixed-use developments comprised of hotel, retail, entertainment, residential and office space surrounding existing sports venues. In Los Angeles, Anschutz Entertainment Group is working on a long-planned, oft-delayed $1 billion project on mostly vacant land next to its highly successful Staples Center, home to the NBA’s Lakers and Clippers and the NHL’s Kings. In the Phoenix suburb of Glendale, Steve Ellman, a developer and majority owner of the NHL’s Phoenix Coyotes, is, after a year’s delay, finally moving dirt on Westgate City Center, an $850 million development planned around the Coyote’s new home, the Glendale Arena.

Depending on the project, investment plays in these types of developments can vary from simple appreciation of real estate purchases to coming in as a prime commercial tenant. “We’re open to joint ventures, and we even have a couple of outright land sales,” says Kenneth Reese, senior vice president of Hillwood Capital, the Dallas-based majority owner and developer of the Victory project. Hillwood is headed by former Dallas Mavericks owner Ross Perot Jr.

Victory involves a three-stage development that will eventually comprise 10 million square feet of office, residential and entertainment space. The $425 million first phase included infrastructure work and the American Airlines Center, which was built through a public-private partnership; more than one-third of the money came from hotel and car rental taxes. Funding squabbles with the city of Dallas delayed the second phase, which is scheduled to open next spring.

Reese says that 90 percent of the W Hotel’s residential units are presold, with units ranging from $250,000 to $4 million. Other residential buildings will break ground in coming months. Land prices near Victory have escalated as the project has progressed, and he anticipates that Victory’s residential properties will appreciate as well. “I think it’s fair to say people can ride that wave as development starts to come,” says Reese, who adds that other investors have sought to leverage the project by joining an investment group putting up $50,000 to $100,000 each to back some of Victory’s planned restaurants. Ultimately, Victory is intended to be a thriving urban center that complements—but is not dependent on—the American Airlines Center.

Limited Exposure
Limited partnerships offer another way to invest in stadiums or arenas, especially for speculators who view sports as more of a passion than a portfolio mainstay. Partnership investments can start as low as 0.5 percent of a team’s franchise value, particularly when teams aim to be inclusive and offer local owners equity ranging up to 49 percent. Besides providing seats for the games and bragging rights to friends, limited partnerships enable investors to realize tax benefits by writing off some stadium or arena costs. They also enable investors to reap the cash flow generated by the venue, including luxury suites and club seats, general ticket sales, parking and concessions. These revenue streams can amount to millions of dollars, the amount varying widely depending on the team’s location and market demographics, its financing and lease arrangements (whether or not the venue is owned by the city, for example) and by the sport and league in which it competes. “The bigger money makers are arenas that have both basketball and hockey teams, and that also have a lot of concerts and family shows that produce a lot of revenue,” says Edelson of International Facilities Group.

Modern-day professional sports facilities can easily cost a half-billion dollars, and cities contributing to these costs increasingly want more for their money—and more tax revenue streams—than just a palace for sports teams. “The real estate development opportunities have become a very significant part of every project we’ve become a part of in the NFL,” says Robert Dunn, president of Hammes Company Sports Development, a sports facility developer in Madison, Wisc., that has worked on NFL stadium projects, such as the renovation of Green Bay’s Lambeau Field and the construction of Detroit’s Ford Field. “Sports projects increasingly are being fostered as urban economic catalysts.”

But teams often lose money on an operating basis. Investors in these situations, even the smallest limited partners, are left with the choice to either put up a capital call to help support operations or risk seeing their ownership stake reduced through dilution if other partners pay their pro rata share. Even so, most sports teams—even money-losing ones—have traditionally appreciated in value over time. As a result, the exit strategy of simply liquidating one’s stake can produce a substantial profit in addition to whatever cash-flow gains might be realized over time. According to CSL Consulting’s Rhoda, professional sports teams (and, thus, limited partnership units) appreciate, on average, from 6 percent to the mid-teens annually, with NFL teams exceeding those averages. Rick Horrow, a Miami-based sports consultant who has worked on nearly 100 sports and other urban-related development projects, claims that in the best circumstances, limited partnership units zoomed 200 to 300 percent cumulatively during the past decade.

Depending on the amount of investment and how partnerships are structured, the investor often does not have much, if any, say in the team’s decision-making or stadium-building processes. “These days it’s difficult to find people willing to put up substantial money without having any say in the club,” says Mitchell Ziets, president and CEO of MZ Sports, a financial advisory firm in Mount Laurel, N.J., that caters to the sports industry.

According to Horrow, investors looking to leverage sports venue-related opportunities need to keep their eyes open for ongoing or developing projects, do their homework on venue trends and be patient; these are not quick-hit deals. “These investments aren’t right for everybody because you have to understand you’re entering the public arena.”
 
Jeff Schlegel writes about business and travel from Yardley, Pa. jwschlegel@yahoo.com

Additional Information
 Not In My Backyard