Tuesday, May 22, 2012

Does It Pencil Out?

When you hear Golden State Warriors co-owner Joe Lacob confidently declare that a half-billion dollar arena will be built on the San Francisco waterfront, you may be forgiven if you respond with a bit of an eye-roll.  We've heard all this before, right?

The obstacles seem pretty obvious. Let's begin with the whole idea of building a gleaming sports palace atop a crumbling bunch of pier pilings (we're talking about Piers 30/32 south of the Bay Bridge, a site now used to park cars for Giants game--and only on the parts that haven't started falling into the Bay). The estimates say it might cost $100 million just to stabilize everything so they can start building on top of it.

Then you have the whole murky morass that is San Francisco politics. Sure, Mayor Ed Lee says he wants this to be his "legacy project" and the whole Board of Supervisors signed a letter inviting the Warriors to make the move. But nothing ever proceeds in a straight line in San Francisco and I'd be shocked if somebody didn't try to block this deal. It's just the way things work in The City.

But the thing that really grabs your attention is the price tag. $500 million, all from the private sector. It's not that the deep-pocketed owners don't have that kind of coin. You just wonder if a half-billion dollar basketball barn represents a good use of their capital.

And then you enter the parallel universe of sports economics. It's the universe in which some experts think the buyers of the Los Angeles Dodgers got a bargain at $2 billion.

Here's the deal on an arena: it's not just for basketball games. In fact, Warriors games would make up only a fraction of the revenue for this waterfront complex.  You're talking rock concerts, circus dates, ice skating spectaculars, conventions and so on and so on, more than 200 dates a year. Add in the cash from the possible restaurant/retail component. And don't forget one of the basic truths of any stadium or arena: even with the escalating prices of the "cheap" seats, the real cash comes from the luxury suites.

In fact, sports management expert Robert Boland of New York University says luxury suite revenue equals that from all the other seats in the building. Boland calls a project like the Warriors arena basically a massive "catering operation" in which the cash flow from concessions, restaurants, retail and the like builds into a big river of money that makes the whole thing profitable and maybe very profitable.

Some people wondered if Lacob and Warriors co-owner Peter Guber were a little crazy when they bought the team and started talking about building the underperforming team into an international brand. The jury's still out on that, but if you're going to go long, you need to take some risks. While $500 million seems like a big roll of the dice, the potential payback makes it the obvious play--and the odds aren't as long as they might seem.

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