Saturday, August 19, 2000

Bengals lease 'pretty sweet deal'


One of the most generous in the NFL

By John J. Byczkowski
The Cincinnati Enquirer

        The Cincinnati Bengals begin play in their new stadium tonight with one of the most generous leases in the league, an Enquirer analysis shows.

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        Although the Bengals play in one of the NFL's smallest markets, the lease will push the team to the top third of the league in revenues, analysts say.

        The team got everything most other NFL teams have been getting in recent stadium leases — and more. With few exceptions, most leases awarded since 1994 give the teams 100 percent of net revenues from tickets, advertising, concessions, club seats and suites, and nearby game-day parking.

        Unlike most of those leases, however, the Bengals will not pay the multimillion dollar expense of year-round maintenance of the facility; the county will. The Bengals will manage the facility and will pay some game-day expenses, but Hamilton County will pay the rest — an expense the county estimates will top $200 million over the next 25 years.

        And while the team will pay $11.7 million in rent the first nine years of the lease, the county may end up paying the team $29.4 million over the last nine years when it picks up the cost of game-day operations.

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        The Bengals also have one of the more generous packages regarding future enhancements to the stadium, with Hamilton County paying all the costs of certain improvements. And the lease goes one step further than most, allowing the Bengals to limit development around the stadium.

        All told, Hamilton County estimates that by 2027, a year after the current lease ends, it will have spent more than $800 million to keep the Bengals in Cincinnati. That doesn't include the $70 million paid to private landowners for the site (the Bengals had argued to build the stadium on county-owned land) and site preparations; the final tally of construction overruns, currently at $46 million; or the cost of future enhancements to the stadium, for which the county may be obligated to pay.

        “They've got a pretty sweet deal,” said Terri Lynn Ritenour, sports business analyst for market research firm Paul Kagan Associates in Carmel, Calif., which tracks NFL revenues. She said she believes the team lost money in 1999, and estimates the new stadium and lease will lift the Bengals from near the bottom of the league in revenues into the top third.

        “Definitely, it's a good lease” from the team's standpoint, she said.

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        The Bengals' aim in stadium negotiations in 1997 was clear. “On a conceptual level, the thing we tried to do was ... make sure that we had access to the new revenue streams. It did no good to build a new stadium and not get the revenue,” said Troy Blackburn, the Bengals' director of business development.

        Said Hamilton County Commissioner Bob Bedinghaus: “Their concern is, "We will always be operating in a smaller market than many of the other football teams in the NFL.'”

INFOGRAPHIC
How Bengals' lease compares with other teams' (112K)
        The Bengals signed their lease at a historical apex in the NFL. In the mid-1990s, teams were relocating and the league was expanding. Municipalities were chasing teams with new stadiums and lucrative leases. By some estimates, St. Louis will have spent $1 billion to move the Rams from Los Angeles, when all the debt from building the Trans World Dome is paid off.

        The Bengals signed their lease in 1997. The next year, a new, richer NFL network television contract was signed. Cities tightened up, expecting teams to pay more of their largess for the cost of stadium construction.

        For instance, to help build Paul Brown Stadium, the Bengals will contribute about $11.7 million in rent and $25 million from sales of seat licenses. Upriver, the Pittsburgh Steelers will pay $113.1 million to build their new $244 million stadium, according to a lease and financing agreement reached in 1998. In later years, the Steelers will give back a share of club-seat revenue to the Pittsburgh Stadium & Exhibition Authority. The Bengals will share no stadium revenue with Hamilton County.

        “I think Cincinnati is in the last group of stadiums, with Baltimore and Tampa Bay, Nashville and St. Louis, that are heavily government oriented,” said John Moag, managing director at the investment firm Legg Mason Wood Walker in Baltimore and former chairman of the Maryland Stadium Authority.

        “Those days are coming to an end,” as the public demands teams pay more of stadium costs, he said. Two more recent leases, in Denver and Detroit, obligate the teams to pay more stadium costs than the Bengals will.

        The Bengals' lease in some departments surpasses some of its contemporaries — Baltimore and Cleveland, for instance. The Ravens pay no rent, and the Browns pay $250,000 annually, while the Bengals will pay $11.7 million over nine years.

        But both the Ravens and the Browns will pay for year-round maintenance of their stadiums, currently about $5 million a year. The Bengals will pay costs only on the 30-or-so days the team actually uses the stadium, about $1.1 million this season. In 2017, Hamilton County will begin to reimburse the team for those expenses.

        Mr. Blackburn, son-in-law of Bengals president Mike Brown, patriarch of the family that owns the team, said the owners believe it “was not our obligation to pay for the year-round maintenance of the building.”

        Said Mr. Bedinghaus of the Bengals: “They're an organization that's run by lawyers, and they look for every penny around every corner. ... It's going to be a difficult relationship going forward for the next 30 years.”

        To see how the Bengals' lease stacks up, the Enquirer compared it to leases from NFL teams in Baltimore, Cleveland, Denver, Detroit, Jacksonville, Nashville, Pittsburgh, St. Louis and Tampa. All have been signed since 1994, and several involve stadiums that are currently under construction.

        Here's a look at how it compares:

        • Stadium revenues: The Bengals control net revenues from all ticket sales, club seats, suite rentals, nearby game-day parking, advertising and concessions. With small exceptions, this was the standard in leases reviewed.

        While many NFL teams get the right to sell naming rights to their stadiums, the Bengals chose not to do so. Instead, the Bengals agreed to $5 million in concessions as reimbursement for the county's lost share of a naming-rights deal, said County Administrator David Krings. He said he couldn't remember what those concessions were.

        The Bengals drew revenues of about $26 million annually from Cinergy Field, and the new lease could add $30 million to that, if they can draw fans, said Kagan's Ms. Ritenour. At Cinergy, the team paid rent, shared advertising and concession revenues with the Cincinnati Reds, got little parking revenue and ranked dead last in the NFL in luxury suite revenue.

        • Rent, operations and maintenance: “We thought that the rent that Cleveland and Baltimore and St. Louis and the others were paying was just great rent: zero,” Mr. Blackburn said. But the county, mindful it would be paying for construction of two stadiums, wanted the team to pay rent, at least early in the lease.

        No-rent or low-rent leases aren't unusual in the NFL. But few teams are excused from paying stadium expenses.

        The reason for low-rent leases begins with tax laws. Municipalities can issue tax-exempt bonds to finance big projects because that allows them to pay below-market interest rates on the bonds and lowering the cost of financing. The federal Tax Reform Act of 1986, however, said that if the rent charged for such facilities was more than 10 percent of the cost of paying off the bonds, those bonds could not be tax exempt.

        The way around that is to charge a team low rent (or no rent) but have the team pay the operations and maintenance costs.

        That's the case in Baltimore and Cleveland, and for new stadiums being built in Detroit and Pittsburgh.

        The Bengals lease says the team will pay rent of $1.7 million this year. The amount decreases by $100,000 a year until it reaches $900,000 in 2008, a total of $11.7 million. Starting in 2009, the Bengals pay no rent.

        Hamilton County will pay for year-round maintenance of the stadium, although the Bengals will manage the facility. That's estimated to cost the county more than $4 million this year, growing to $7.8 million in 2010.

        The Bengals will pay for game-day operations of the stadium — hiring security, maintenance and subcontractors, as well as game-day field maintenance — until the last nine years of the lease. The county pays for game-day insurance and utilities. Game-day use includes the two days prior to the game, to allow for preparation and practice on the stadium field.

        The Bengals will also pay year-round costs for maintaining their executive offices, locker rooms and other team areas at Paul Brown Stadium.

        The county, during the last nine years of the lease, will reimburse the team for game-day expenses. The total amount is capped at $29.4 million.

        “We were looking to avoid having to pay for year-round operations costs. That was a critical issue for us,” Mr. Blackburn said. “If we were having to pay that, it ... was the same as reducing the amount of revenue we were going to get. We ultimately concluded ... we would pay for the building when we were running the show there, but otherwise it was not our obligation.”

        Of the leases examined, three other teams don't pay year-round maintenance for their stadiums. In all three cases, the stadiums are run by a public organization and the facilities are shared with a convention center (St. Louis), college football (Tampa and Jacksonville) and soccer (Tampa). While the Bengals' lease gives the team a 10-year exclusive right to put major-league soccer into Paul Brown Stadium, the Bengals currently share the team with no one.

        In Denver, the Broncos will pay rent, annual maintenance and all future enhancements to the stadium. “You can't ask the public to pay for the building and then ask the public to maintain it,” said Kelly Leid, director of operations for the Metropolitan Football Stadium District in Denver. When it came to paying those expenses, “quite frankly the team was willing to do that,” he said.

        • Capital improvements: All leases examined make provisions for keeping the stadiums up to date — building in new opportunities for revenue, updating scoreboards and the like. It's common to establish funds to cover the cost of improvements and there's typically some sharing of those costs between the team and the stadium owner.

        With the Bengals, it's complicated: The team can make any improvements to the stadium that they're willing to pay for. The county is responsible for picking up the cost of certain new features, such as new types of premium seating or next-generation video screens, if they show up in 14 other NFL stadiums. The county also pays the full cost if that feature shows up in seven other stadiums where half the cost has been paid with public funds.

        Each year, the county will pay $1 million into a capital fund, a piggy bank for improvements. The cost of improvements, however, isn't limited to the size of the fund, so the county might be obligated to pay for improvements beyond that.

        This provision is generous to the Bengals, more so than those in other leases. More typical: Public contributions to stadium improvements are limited to the size of the funds set aside for those purposes, and the teams pay the excess.

        In Baltimore, for example, the fund is capped at $600,000 a year. If the Ravens need an improvement more expensive than that, they pay the excess. In Pittsburgh, the team pays for all improvements during the first 10 years of the lease and will have access to a capital fund after that. In Detroit, the team will pay into a capital fund, but no public money will be used.

        Mr. Bedinghaus admits this is an open-ended exposure for the county. “There's no way to quantify what those dollar amounts are right now,” he said. “Are those enhancements an important aspect of the lease agreement? I think they are.” Regularly improving the stadium will extend its life, he said.

        • Revenue from non-football events: The Bengals and the county split 50-50 the net revenues (after payment of all expenses), a middle-of-the-road settlement compared to other leases.

        How lucrative this will be remains to be seen. Look at Tampa: The Buccaneers get the first $2 million in net revenue from non-football events at Raymond James Stadium, and half of anything beyond that.

        In Tampa, the stadium can be used year-round and last year held 30 events besides professional football: 20 soccer games, six college football games, the football Outback Bowl, two tractor pulls, a concert and an equestrian event.

        Despite that many events, payments to the Buccaneers didn't reach $2 million, said Henry Saavedra, executive director of Tampa Sports Authority.

        • Development rights: In three leases besides the Bengals', teams were given authority over potential development around the stadium. With much of the land around Adelphia Coliseum in Nashville devoted to parking, the city must come up with other parking spaces for the Tennessee Titans if any land is taken by the city for development.

        The Pittsburgh Steelers have the right to jointly develop, with the baseball Pirates, land between their new stadiums in the city's North Shore area. They are required to buy the land at market prices and hire professionals to design and manage any mixed-use project.

        The Tampa Bay Buccaneers also control development rights for the 65-acre site where the new stadium sits, but it pays the Tampa Sports Authority $500,000 annually for those rights.

        Hamilton County's lease with the Bengals gives the team development rights, for football purposes, over the practice fields to the west of the stadium, and also incorporates height restrictions on what can be built on five blocks east of the stadium, between Third Street and the river.

        Why give the team veto power over development on land they don't own? The goal was to protect against “somebody coming in later, saying, "Why don't we put a 10-story parking garage right outside your club lounge?'” Mr. Blackburn said.

        Bengals attorney W. Stuart Dornette said the city easily agreed to the restrictions. “Were they happy to do it? Yeah. It wasn't as if their interests were any different than our interests,” he said.

        City Manager John Shirey said original versions of the lease “in effect, gave control over (riverfront land) to the Bengals. We just couldn't believe it. ... It was never our vision that the Bengals were going to control development on the riverfront.”

        The city did eventually agree to height restrictions on five blocks directly east of the stadium, and those are incorporated into the lease. “I don't want to make it sound like everything was unreasonable because it wasn't,” Mr. Shirey said. “There were things we were certainly willing to work with them on.”

        But of the current restrictions in the lease, “it is a limitation. ... we probably would've liked more freedom, but it was a compromise, one of the compromises that was made.”

Fair to taxpayers?
        The Bengals call the lease a fair deal for taxpayers because it carries few of the more onerous conditions of leases in other cities — the promises of sold-out games in Oakland, which has led to lawsuits, or St. Louis' high price tag.

        “When you shake it all out, and I know it's not popular to say it,” the Bengals' Mr. Blackburn said, “but this is a pretty fair deal here in Cincinnati for the taxpayers ... and it's a deal that doesn't make us rich but it allows us to run an NFL team here and compete.”

        He contends much of the sales tax revenue that will go to repay the $335 million in stadium bonds (plus $354 million interest) will come from people besides Hamilton County residents. In addition, no property tax revenues will be spent, and some sales taxes revenues pay for an annual rollback of property taxes.

        “For Hamilton County residents who own a home ... they haven't paid for it. The design of the financing was such that it lightened the burden on people in this county,” Mr. Blackburn said.

        In generating revenue, the Bengals have nowhere to go but up. In 1999, they had the second-lowest attendance in the league. In 1998, Paul Kagan Associates estimated the Bengals were 25th out of 30 NFL teams in revenues.

        The new stadium is 10,000 seats larger than Cinergy Field, with club seats and luxury boxes. “This deal, it gives us the ability to compete in the average of the NFL,” said Mr. Blackburn. “And if we're about the average of the NFL, that's fine. That's good enough. We're not going to do much better than that in Cincinnati.”

        By the estimates of Kagan analyst Terri Ritenour, the new stadium will lift the Bengals to the top third of the NFL's 31 teams, in terms of revenues. She estimates the team had 1999 revenues of $95 million, but expenses of $101 million. The Bengals do not release financial information.

        “Definitely their gate revenue is going to be higher,” she said. “It's going to put them up in the top third, if people come. ... The key is whether the team can attract the people to the facility.”

        Nothing draws fans like a winning team, and the new revenues may translate to victories, said Legg Mason's John Moag.

        “It'll have a distinctly positive impact on the bottom line, and that will translate into a distinctly better product on the field,” Mr. Moag said.

        How much of the new revenue goes into the team remains to be seen. The 2000 payroll for the Bengals is roughly at the NFL's salary cap, which is $62.3 million. The Bengals had the second-lowest payroll in the 1990s, a decade in which they lost more games than any other NFL team.

        “We owe something back to the people of Cincinnati and Hamilton County with the opportunity they've given us with the new stadium,” team president Mike Brown said at a press luncheon last month. “We know the best way to say thank you is to put a winning team out there.”

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