Goldman Goes Global
Interview with Dutch Newspaper, Algemeen Dagblad (AD Netherlands)
Below is the Feyenoord Stadium deal as best I can gather from the internet compared to the most recent NFL stadium deal in Las Vegas for the Oakland Raiders. Goldman Sachs was also the original lead bank on the Raiders deal but pulled out probably due to internal NFL politics as well as external Republican politics (Casino mogul Sheldon Adelson also pulled out). They could also have been avoiding risk that they detected in the deal. Bank of America immediately took the loan for probably the opposite reasons.
The important difference between the deals is of course the much larger role and risk passed on the public sector in the NFL (US) deals. The $750 million (EUR 600) assumed by the State of Nevada (stadium authority) is the largest amount ever taken on by the public sector in a stadium deal in any league. Still it is a rather modest (by US standards) 40 percent of the total costs of EURO 1.5 . The project is about 3 times as expensive as the Feyenoord stadium and slightly higher than the Feyenoord City project. (as far as I can tell from here)
The problem in this deal is that the returns to Bank of America and the Raiders are relatively certain while most if not all of the risk has been concentrated on the Las Vegas Stadium Authority. Also notice the modest share assumed by the rest of the NFL in the form of a G-4 loan which is basically a grant. The Raiders can easily pay their share with personal seat licenses (PSLs) which are upfront on-time down payments on season tickets by season ticket holders.
In the Feyenoord City deal the role of Rotterdam is relatively small (by US standards) 9 percent of the EURO 422 stadium cost. This is very close to the appropriate amount set aside for infrastructure payments for the overall EURO 1.4 billion Feyenoord City project. Most of the stadium risk appears to be concentrated on the club Feyenoord, and I suspect that Goldman is receiving a high margin healthy rate of return on investment that is almost fully guaranteed stone cold cash.
Because most of the cost and risk burden is born by the public stadium authority and because the luxury venue cash flow is almost certain, the value of an NFL team increases by a cool 25 percent to 30 percent on average just by moving into a new cash cow stadium. After the extortion deal was cut for the Raiders (who were also negotiating with Oakland) the value of the Raiders franchise (club) jumped by almost 50 percent from
EUR 1.14B to EUR 1.9B currently and they won’t move into the new stadium until 2020. This is prima facie proof of the monopoly power of US sports leagues and the burden is constantly shifted to the tax paying public while the clubs (franchises) and banks skate away for a new day.
-One of the big questions in Rotterdam is how profitable a new stadium for Feyenoord will be in the long run. The plan for the new stadium includes very optimistic estimates on matchday visitors (up 50 percent), catering revenues (up 400 percent) and museum visits (up 300 percent). Also, critics fear that a 63.000 seat stadium is too big for a city with only 600.000 inhabitants (and several competing clubs in the region). My question: does Goldman Sachs look at these estimates with a critical view? Is a profitable exploitation on the long run in their interest, or are they mainly focussed on the short-term?
There are at least two sets of economic impact estimates: best case and worst case. The best case scenarios are released to the public as overly optimistic self-promotions designed to justify the involvement of the public sector. The classic argument is that the sports stadiums have major external economic impact that goes beyond the stadium and the ability of the club to internalize those gains. In these cases it should be up to the local municipality to equalize social cost and social benefit though a public subsidy equal to the external economy of the venue.
The major problem with this externality argument is that the new generation of luxury sports venues are designed to hermetically capture all of the economic gains within the venue, or at least in this case within Feyenoord City. There is nothing left for municipal Rotterdam but congestion and the bill. In the US the basic rule of thumb is to move the best-case self-promotion estimates one decimal place to the left, or just divide the best case impact exaggerations by ten.
Increasing the Feyenoord stadium capacity to 63K from 51K in De Kuip may actually be a problem because it increases the variability or riskiness of the match-day cash flow. In stadium finance the certainty of the cash flow is almost as important as the amount. This is why the new generation of NA luxury stdiums are all downsized to smaller more intimate venues. The clubs are trading the maybe for the sure thing, by eliminating marginal seats and charging more for the prime seats. It is classic monopoly behavior to charge more affluent fans twice as much for half as many match day tickets and concessions.
Almost all financial decisions in venue finance are based on the worst-case, but almost certain scenarios. Regardless of best case pie-in-the-sky impact projections, Goldman Sachs always works from the worst case math and it will be sheltered from all risk in any stadium deal before the other members of the consortium, the club and certainly the City of Rotterdam (in that order). Goldman is currently playing a short term game with Tottenham, Feyenoord and Roma but it is also looking at the lucrative long term luxury stadium revolution that is now spreading throughout Europe.
-I understand Goldman Sachs has been involved in the construction of about 20 new stadiums in recent years. Could you say if all these projects have proven to be profitable for the clubs involved, or have there been situations in which the revenues were far lower than expected?
The major difference in the venue finance models between NA and Europe is the highly leveraged involvement of public subsidy in the US. The NFL has now come full circle in a 25 year luxury stadium revolution where almost all team maximized public subsidies with extortion threats of franchise (club) relocation. In the 1990s the public sector subsidies for rambling footloose NFL clubs were about 75 percent of total stadium costs. Since 2000 the average public sector stadium subsidy has “dropped” to 50 percent. (see attachment).
The major difference between the US and European sports league membership is the closed franchise league system in the US compared to open promotion-relegation pyramid league system in European football. This opens the American markets to threats of stadium extortion with threats of franchise relocation. (Recurring European Super League breakaway threats are symptoms of the monopoly power of closed leagues).
The end result is that the stadium deals in the US always cover the risk of Goldman, other banks and the clubs (franchises) right off the top and pass almost all of the financial risk in a concentrated form to the respective home market governments. Goldman excels in the US by twisting and turning the public tax loopholes for the advantage of privately funded venues and shifting the burden to the local public sector.
-The fact alone that an American bank (with a damaged reputation) is involved, has gained a lot of criticism here. Can you explain why Goldman Sachs is a logical partner for Feyenoord and Feyenoord City, and why they have put so much energy in stadium development in recent years, both in the US and now also in Europe?
After the recession of 2008 Goldman Sachs was described by Rolling Stone magazine as “a great vampire squid wrapped around the face of humanity.” This is a harsh description even for 2009, but Goldman in 2018 is simply following the luxury venue money revolution to Europe. Stadium deals promise Goldman Sachs a high-margin low-risk return right of the top. Goldman is attractive to Feyenoord club because they are experienced (on a larger scale in the US) and have deep pockets.
The problem is of course that Goldman’s welfare depends on the worst-case almost certain outcome, while Feyenoord (City) and municipal Rotterdam depend on a less likely, best-case scenario on or off the pitch. In the end Goldman Sachs’ job as middleman is to use if not abuse, every available public funding tax shelter and loophole to protect themselves (off the top) and their club as client while passing the financial and risk burden on to the local taxpayers.