Over the past few years, several new professional sports facilities have been built across the country, and with each new project, the bar seems to be pushed higher with regard to the amount of money that is spent to build these facilities. For example, the New York Yankees and the New York Mets recently completed new ballparks that cost roughly $1.3 billion and $600 million, respectively, to build. The New York Jets and the New York Giants are in the final stages of completing work on a new shared stadium in the Meadowlands, which is estimated to cost roughly $1.6 billion. The San Francisco 49ers are planning a new stadium in Santa Clara, which is projected to cost roughly $950 million. And, the Oakland A’s are planning a new ballpark in nearby Fremont, California, that is estimated to cost between $400 million to $500 million, excluding the land. Although the cost of these projects continues to escalate as team owners strive to create the perfect mix of entertainment and revenue-generating features that will keep fans coming back game after game, one thing is certain: the cost of these stadiums does not equal their value. This article discusses the unique characteristics of professional sports facilities that often result in significant over-assessments for purposes of property taxation if the value is not properly analyzed.

Traditionally, investments in professional sports facilities have been shared by the local community and the team’s ownership – with the majority of the costs being borne by the public. The reasons that the public and private sectors collaborate on these projects can vary from location to location, but the unique financing structure primarily results from the fact that new state-of-the-art facilities do not generate enough additional revenue for the team owners to justify investing all of the construction costs. In other words, the cost to build a new stadium generally has not been worth the investment to the team owners. 

In addition, the public and private sectors often collaborate on these projects because there is a perception that there are public benefits from the development associated with a professional sports facility within its community. Although there is debate among those who study the economics of stadium development about whether the economic benefits to a community are as great as those touted by stadium supporters,[2] the public – rightly or wrongly – perceives that the public benefits justify at least some public investment in these projects. For example, communities are often motivated to provide public financing in anticipation of values generated by the new facility that do not flow from the team itself, but which are perceived to benefit the community at large. These perceived benefits include: increased tax revenues from enhanced property values in the surrounding area; increased economic activity in the area (as well as from the new stadium), which may produce increased sales and employment taxes; and urban renewal and gentrification in the areas surrounding the new facility. Moreover, cities expect to receive non-economic benefits, such as community pride, cohesion, entertainment, and a heightened city profile (e.g., as a “major league city”). For these reasons, of the 18 Major League ballparks built between 1991 and 2004, the local community, on average, subsidized the ballparks by an amount equal to roughly 70 percent of the projects’ total costs.

Notwithstanding the division of construction costs between the public and private sectors, because most professional sports facilities are built on land owned by the local community, for purposes of taxation, the value of the property is typically determined by the team’s assessable possessory interest in the facility – i.e., the value of the private benefit obtained by the team – and not the complete set of ownership rights normally ascribed to the fee interest.[3] 

Although one may argue that the cost to construct these facilities provides a reliable indication of the value that can be attributed to the teams’ taxable possessory interest when adjusted for the public’s reversionary interest, because these special-purpose properties cost far more than they are worth to any individual investor and also tend to rapidly depreciate in value, when analyzing the impact such projects may have on the local tax rolls, appraisers must take into account the market realities and make appropriate adjustments for such factors as over-improvement, investment value, and obsolescence when utilizing the construction costs as a measure of value. 

In defining a property’s fair market value, appraisers seek to determine the price that the subject property could be sold for in an arm’s-length open market transaction. In order to determine that value for a given property, three approaches to value are typically analyzed – the market approach, the income approach, and the cost approach. Unfortunately, as explained below, when performing these analyses for a professional sports facility, each of these approaches is complicated by factors that are unique to the sports and entertainment industry. 

When reliable market data is available, the preferred method of valuation generally is by reference to the sales prices of comparable properties. Using this approach, the appraiser determines the subject property’s value by comparing that property with similar properties that have sold recently – i.e., comparable sales. This approach (called the market approach or comparative sales approach) is based on the principle of substitution and presumes that the fair market value of a given property will be roughly equivalent to the sales prices of competitive substitutes.

With regard to professional sports facilities, however, the sales transactions (for both the subject and the comparable properties) typically are complicated by inclusion of the team’s franchise in the transfer. Thus, when a professional sports facility changes ownership, the purchase price often must be allocated between the intangible value attributed to the team (which typically is not subject to taxation) and the possessory interest that the team holds in the facility (which typically is subject to taxation).

Despite these complications, however, market data does exist to allow an analysis based on comparable sales. And that data shows that professional sports facilities rapidly drop in value shortly after being built. For example, the Toronto SkyDome, which was constructed in 1989 at a cost of approximately $476 million USD (including the cost of an attached hotel, health club, and surrounding infrastructure), sold in 1994 – just five years after construction for a price of just $109 million USD. At the time of that sale, the SkyDome was widely regarded as a state-of-the-art ballpark, drawing over four million fans per season in 1991, 1992, and 1993, and projected to do the same in 1994.[4]

In 1999, the SkyDome was sold a second time, for an amount of just $74.7 million USD. Although this sale was out of a bankruptcy proceeding, the property was marketed for a sufficiently long period of time to encourage vigorous competition between the bidders in order to receive the maximum value possible. (The 1999 acquisition included the hotel, which was subsequently sold separately for roughly $23 million USD.) 

Then, in 2004, the SkyDome was sold a third time. This time, the sale was a traditional arm’s-length transaction, but for an amount of just $23.3 million USD. In other words, when adjusted for the value of the hotel, the SkyDome sold in 2004 for an amount that is roughly ten percent of its construction costs just 15 years earlier. 

Although taxing authorities often presume that the market value of real property will steadily increase over time, the three sales of the SkyDome (which was sold independent of the team) demonstrates that the opposite is true with regard to professional sports facilities.

Of course, relying on the sale of the SkyDome in Toronto as a comparable sale to a ballpark in another city requires a number of adjustments for location, size, and other market variables, but the analysis can be done by an experienced appraiser. Unfortunately, most local assessors lack the in-house expertise to competently perform such analysis. Consequently, the market approach is often disregarded from the analysis performed for the purpose of determining a professional sports facility’s taxable value.

When using an income approach to determine a given property’s value, appraisers convert the income stream produced by the property into a present value estimate (i.e., an indicator of the property’s current fair market value). In the case of professional sports facilities, income is primarily a function of attendance. In particular, although economists and industry experts have found that a new stadium will stimulate attendance for the first two to five years that the facility is in operation (the so-called “honeymoon effect”),[5] to a great degree, attendance is driven by the team’s performance – not the stadium. And, because the taxable value of real property must be based on the property itself, any income analysis of a professional sports facility performed for the purpose of assessment must segregate the revenue attributable to the intangible value of the team from that associated with the real property. 

An approach commonly used in the industry is to analyze the team’s costs to occupy a given facility as a measure equivalent to what the public landlord would receive under a full-service gross rent analysis. In other words, the total amount that the team owner pays in terms of rent, ticket sales and parking taxes, revenue sharing, operating expenses, and up-front investment is analogous to the income that a landlord would receive from a tenant under a typical full-service gross lease of an office building. Thus, the value of the sports facility itself can be estimated by an analysis of the occupancy costs attributed to the subject property with reasonable attendance projections. 

Assessors, however, resist utilizing this approach because market data on the occupancy costs associated with professional sports facilities is not readily available without engagement of an industry expert. Consequently, as with the market approach discussed above, assessors will often disregard this approach simply because it is too difficult to employ with the assessor’s limited resources. 

Given the aforementioned difficulties in utilizing the market and income approaches to value, taxing authorities often fall back on the methodology perceived to be the easiest – the cost approach. Although it is a fundamental truism in the field of appraisal that “cost” does not necessarily equal “value,” the burden of proving that distinction often falls on the taxpayer.

As explained above, the three sales of the SkyDome illustrate a dramatic difference between a stadium’s market value and its initial cost of construction. A similar illustration occurred with regard to AT&T Park, which was completed in 2000 for a cost reported by the assessor to be roughly $324 million for the land and improvements. Although the assessor originally assessed the ballpark for a total amount of $331 million in 2001, $337.7 million in 2002, and $344 million in 2003, the team challenged those assessed values by appealing to the local board of equalization. After a lengthy hearing involving several appraisers, sports consultants, and economists, the board determined that the fair market value of AT&T Park was actually just $230 million in 2001, $240 million in 2002, and $236 million in 2003 – i.e., roughly $100 million below the assessor’s initial estimates based solely on cost. Although the assessor challenged the board’s determination in court, the parties ultimately agreed to resolve the dispute in a manner that valued the ballpark between $250 million and $240 million for the three respective tax years, and recognized an ongoing depreciation for the succeeding years. In other words, even after a contested debate over value of a newly constructed ballpark, all parties agreed that the market value was significantly below the initial construction costs and that the value of AT&T Park would continue to decrease over time.[6]

Although a steep decline in value may seem contrary to the traditional notion that real property generally appreciates in value, it is not uncommon for the market value of professional sports facilities to depreciate over time. Historical transactions involving controlling ownership interests of both a franchise and its home stadium demonstrate across the leagues that construction costs tend to overstate the fair market value of a facility because franchises that have obtained new ballparks do not increase in value by an amount equal to the total costs incurred to build the stadium. For example, the prior owner of the Milwaukee Brewers teamed up with the local community to construct the Brewers’ new ballpark, Miller Park, which was completed in 2001. The total construction cost of that ballpark was roughly $394 million. Four years later, however, the franchise, including its rights to Miller Park, was sold to the current owner for just over $220 million – i.e., $174 million less than it cost to build the stadium alone. Obviously, the costs incurred to build Miller Park cannot be relied on as an indication of that property’s market value without a significant adjustment for depreciation. Thus, the issue that appraisers struggle with when employing the cost approach to determine the value of a professional sports facility is how to quantify the appropriate amount of depreciation. 

Although there are three generally recognized sources of depreciation – physical deterioration, functional obsolescence, and external obsolescence – in the case of newly constructed sports facilities, there likely will be very little physical depreciation resulting from visible wear and tear. Similarly, because these facilities are typically built to the current state of the art, they also suffer from little or no functional obsolescence (which is the loss of value caused by the design of the property itself, and is often attributed to changes of taste in the marketplace, changes in building construction techniques, or poor initial design). Rather, the majority of depreciation affecting professional sports facilities comes from external obsolescence (sometimes called economic obsolescence).

External obsolescence is a loss in value caused by negative influences outside of the subject property, which generally are beyond the control of the property’s owner or tenant.  Unlike physical deterioration and functional obsolescence, which are inherent to the property, external obsolescence is caused by forces outside of the property, such as erosion of a community’s economic base, an undesirable change in the way surrounding property is used, or a change in the law that limits future construction.  The presence and extent of external obsolescence, however, can only be identified by examining the overall market conditions of a property, and estimation of this depreciation can be a relatively complicated undertaking.

Nevertheless, as indicated above, the SkyDome, AT&T Park, and Miller Park all demonstrate that an assessment of a professional sports facility for purposes of taxation cannot be based simply on the cost of construction without an appropriate adjustment to account for the facility’s rapid loss in value. Without this adjustment, the property may be significantly overassessed. Unfortunately, many local assessors’ offices lack the resources to accomplish this analysis properly. And, as such, the properties are frequently assessed at values much greater than the true fair market value.

Although the costs of major league sports facilities has increased significantly in recent years, the public’s share in these investments has not kept pace. As mentioned above, historically, the public’s share of the construction costs in Major League ballparks has averaged roughly 70 percent of the total costs. Yet, the public’s investment in the Mets’ new ballpark was just 27 percent, and the public’s investment in the new Yankee Stadium was only 17 percent. 

The public’s reluctance to maintain its historically high prorata investment in these projects may be from either a reduced perception of the value received by the community from such projects (or perhaps a perception that the value has remained static), or a recognition by the team owners that their investment is of a greater value. In either case, however, the market evidence still generally supports a decrease in overall value from year to year.

As explained above, professional sports facilities have a significant rate of depreciation. Although this may be offset somewhat by the honeymoon effect for the first few years, the depreciation is incurred almost entirely by the private entity, because the public entity retains the infrastructure, redevelopment, civic pride, and other intangibles associated with having a professional sports team located in the community, regardless of how well the team fills the seats at its stadium. On the other hand, the private possessory interest is disproportionately affected by the trailing-off of the honeymoon effect, as the team will eventually experience just average performance on the field, with a corresponding impact on the revenues attributed to the real property. Consequently, although the public investment in professional sports facilities has decreased while the construction costs have increased, the result of this phenomenon does not signal an increase in the property’s assessable value. Indeed, team owners that have not undertaken the work to assure that their facilities are being properly assessed are likely to be paying property taxes based on values that were erroneously set too high by the local assessor.

 

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