Debt Financing

Public Debt Financing of Sport FacilitiesPublic Debt Financing of Sport Facilities

Sport FinanceSport Finance

Debt FinancingDebt Financing

– Most public agencies finance major capital projects in the same Most public agencies finance major capital projects in the same way people buy homes: Loans from financial institutions.way people buy homes: Loans from financial institutions.

– Loan is referred to as a Government Issued Bond.Loan is referred to as a Government Issued Bond.

– The loan is re-paid through various funding sources such as The loan is re-paid through various funding sources such as hardhard or or softsoft taxes. taxes.

– Interest costs for this type of financing are relatively high.Interest costs for this type of financing are relatively high.

Public Sector FundingPublic Sector Funding

Average Amount of Public Contribution to Average Amount of Public Contribution to Stadium and Arena Financing = 78%Stadium and Arena Financing = 78%

Public Funding SourcesPublic Funding Sources

TaxesTaxes Bonds Bonds

• Much attention given to government issued bonds used Much attention given to government issued bonds used for stadiums.for stadiums.

• More bond dollars used for other investments:More bond dollars used for other investments:

– ParksParks

– Golf CoursesGolf Courses

– Convention CentersConvention Centers

– SchoolsSchools

– HighwaysHighways



– Bonds: “A promise by the borrower to pay back the Bonds: “A promise by the borrower to pay back the lender a specified amount of money plus interest within lender a specified amount of money plus interest within a specified period of time”.a specified period of time”.

– Using taxes to re-pay bond debt is preferredUsing taxes to re-pay bond debt is preferred::

• Less visible impact of taxpayer burden;Less visible impact of taxpayer burden;

• Elected officials appear to be successful in creating a facility (and its Elected officials appear to be successful in creating a facility (and its impact);impact);

• Equity for population.Equity for population.

Fundamental Rule: Fundamental Rule:

Do not issue bonds for a maturity longer than the life Do not issue bonds for a maturity longer than the life of the facility.of the facility.

The length of maturity should be the length of the lease agreement.The length of maturity should be the length of the lease agreement.



The 1986 Tax Reform ActThe 1986 Tax Reform Act

Government Issued bonds not exempt from Federal taxes if:Government Issued bonds not exempt from Federal taxes if:

a.a. More than 10% of the stadium’s useful service consumed by private More than 10% of the stadium’s useful service consumed by private business (unless it is a “qualified private activity”).business (unless it is a “qualified private activity”).

b.b. More than 10% of the bond payment comes from sport franchise More than 10% of the bond payment comes from sport franchise revenues.revenues.

• Use of other revenues for bond payment.Use of other revenues for bond payment.

• Owners are prohibited from providing revenue.Owners are prohibited from providing revenue.


The 1986 Tax Reform ActThe 1986 Tax Reform Act

d.d. Changed the financing structure of sports facility construction.Changed the financing structure of sports facility construction.

e.e. This change was designed to discourage local governments from This change was designed to discourage local governments from investing large amounts of public money in sports facilities. investing large amounts of public money in sports facilities.

f.f. Instead, it prompted the creation of a whole new set of incentives Instead, it prompted the creation of a whole new set of incentives (or subsidies). (or subsidies).


General Obligation BondsGeneral Obligation Bonds

– Government makes an unconditional promise to re-pay the Government makes an unconditional promise to re-pay the loan.loan.

– Usually secured by property taxes (local) or sales/income taxes Usually secured by property taxes (local) or sales/income taxes (state).(state).

– Borrowing costs (interest rates) are lowerBorrowing costs (interest rates) are lower

– 1-2% less than non-guaranteed bonds1-2% less than non-guaranteed bonds


General Obligation BondsGeneral Obligation Bonds

• Usually requires voter approval (taxation);Usually requires voter approval (taxation);

• Voters are less willing to approve this bond;Voters are less willing to approve this bond;

• Many teams and cities are using funding alternatives.Many teams and cities are using funding alternatives.


Non-guaranteed BondsNon-guaranteed Bonds

• Not backed by the Not backed by the full faith and creditfull faith and credit of the government. of the government.

• Repayment based on other sources of revenue.Repayment based on other sources of revenue.

• Many sources of revenue to use:Many sources of revenue to use:

1.1. Revenue bondsRevenue bonds

2.2. Tax increment bonds Tax increment bonds

3.3. Certificates of participationCertificates of participation

Non-guaranteed BondsNon-guaranteed Bonds

1.1. Does not require voter approval;Does not require voter approval;

2.2. Does not count against the government’s debt ceiling;Does not count against the government’s debt ceiling;

3.3. Generally, if revenue is used to pay debt, the debt is being Generally, if revenue is used to pay debt, the debt is being

paid by those using the facilitypaid by those using the facility..


Revenue BondsRevenue Bonds

• Repaid from income produced by the facility. Including:Repaid from income produced by the facility. Including:

• Ticket salesTicket sales• ParkingParking• AdvertisingAdvertising

• Lease Revenue BondsLease Revenue Bonds

• Bond agreement includes specific revenues used for repayment.Bond agreement includes specific revenues used for repayment.

• Contractually Obligated Income (COI) from:Contractually Obligated Income (COI) from:

• Luxury suitesLuxury suites• PSL’sPSL’s• Concessions contractsConcessions contracts• Sponsorship agreementsSponsorship agreements


Revenue BondsRevenue Bonds

• Advantages:Advantages:

1.1. Reflects a Reflects a user payuser pay philosophy philosophy

2.2. Voter approval not neededVoter approval not needed

3.3. Does not count against the debt ceilingDoes not count against the debt ceiling

• DisadvantagesDisadvantages

1.1. Higher interest ratesHigher interest rates

2.2. Restricted to profit-making abilityRestricted to profit-making ability

3.3. May restrict participation because of higher user feesMay restrict participation because of higher user fees


Private Placement BondsPrivate Placement Bonds

• Sold privately by the team, its owner, or a development Sold privately by the team, its owner, or a development corporation.corporation.

• Secured by a lien on future facility revenue, especially from Secured by a lien on future facility revenue, especially from contractually obligated income.contractually obligated income.

• Income to bond holders is fully taxable.Income to bond holders is fully taxable.

• Relieves the municipality of some of the debt.Relieves the municipality of some of the debt.

Asset-Backed Securitization BondsAsset-Backed Securitization Bonds

• Another way to direct debt to the team.Another way to direct debt to the team.

• Also taxable to holder, and sold privately by the team, its Also taxable to holder, and sold privately by the team, its owner, or a development corporation.owner, or a development corporation.

• These bonds have less stringent collateral requirements than These bonds have less stringent collateral requirements than private placement bonds.private placement bonds.

• The revenues of selected income streams are bundled into a The revenues of selected income streams are bundled into a financial security and sold initially to a “bankruptcy-proof” financial security and sold initially to a “bankruptcy-proof” trust, which sells them to private investors.trust, which sells them to private investors.

Repayment SourcesRepayment Sources

• Generated by local governmentsGenerated by local governments

• Hard taxesHard taxes

• Soft taxesSoft taxes

• Tax AbatementsTax Abatements

• AppropriationsAppropriations

Hard TaxesHard Taxes

• Hard taxes include:Hard taxes include:

– Real estate / Property taxesReal estate / Property taxes

– General salesGeneral sales

– Local income taxLocal income tax

• Financial burden falls on the general public. Financial burden falls on the general public.

• Local citizens absorb costs, may not derive the benefits.Local citizens absorb costs, may not derive the benefits.

• Hard taxes usually require voter approvalHard taxes usually require voter approval


Property Taxes:Property Taxes:

– Tax baseTax base: The aggregate value of all assessed : The aggregate value of all assessed property within a jurisdictionproperty within a jurisdiction

– Tax RateTax Rate: Then, once the tax base is determined, the : Then, once the tax base is determined, the local government sets a tax rate to meet its revenue local government sets a tax rate to meet its revenue needsneeds..

Local budget + extra projects costs- anticipated income from other sourcesLocal budget + extra projects costs- anticipated income from other sources


Sales Tax:Sales Tax:

– 2nd largest source of tax revenue. Usually 2nd largest source of tax revenue. Usually ranges between 3-10%.ranges between 3-10%.

– Services usually exempt from sales tax.Services usually exempt from sales tax.

Soft TaxesSoft Taxes

• Soft taxes are borne by a select and relatively smaller portion Soft taxes are borne by a select and relatively smaller portion of taxpayers.of taxpayers.

• Often, the costs are placed upon non-residents.Often, the costs are placed upon non-residents.

• Easier to levy.Easier to levy.

• Soft taxes include:Soft taxes include:– car rentalcar rental– hotel-motelhotel-motel– playerplayer– restaurantrestaurant– sinsin– taxitaxi

Sin TaxesSin Taxes

• AlcoholAlcohol

• TobaccoTobacco

• GamblingGambling

• Prostitution (Nevada only)Prostitution (Nevada only)

Player TaxPlayer Tax

• Tax imposed on income earned by visiting players.Tax imposed on income earned by visiting players.

• 43 states have imposed player taxes43 states have imposed player taxes

• Based on the right for states to tax non-residents on Based on the right for states to tax non-residents on income received for services performed within their income received for services performed within their boundaries.boundaries.

Tax AbatementsTax Abatements

• Abatement exist in approximately 2/3 of the states.Abatement exist in approximately 2/3 of the states.

• Often part of a government agency’s incentive package for a Often part of a government agency’s incentive package for a facility.facility.

• Exempts an organization’s assets from property taxation for a Exempts an organization’s assets from property taxation for a given period of time.given period of time.

AppropriationsAppropriations

• Funds set aside for specific purposes.Funds set aside for specific purposes.

• Usually used as a supplement to the debt financing (bonds).Usually used as a supplement to the debt financing (bonds).

Certificates of ParticipationCertificates of Participation

• Third-party transactionsThird-party transactions

• Involves a non-profit public benefit organizationInvolves a non-profit public benefit organization

• Borrows funds from a lending institutionBorrows funds from a lending institution

• Agency leases facility to public or private operatorAgency leases facility to public or private operator

• Operator in turn makes lease payments to retire certificatesOperator in turn makes lease payments to retire certificates



FacilityFacilityBuilderBuilder

FinancialFinancialInstitutionInstitution

IntermediaryIntermediaryOrganizationOrganization

FacilityFacilityOperatorOperator

22

11

7733 44

55

66


• Despite not being a general obligation bond, typically the Despite not being a general obligation bond, typically the municipality pays off the debt if revenues from the facility fall municipality pays off the debt if revenues from the facility fall short.short.

• COPs have higher interest rates and lower bond ratings.COPs have higher interest rates and lower bond ratings.


Tax-Increment Bonds (TIF)Tax-Increment Bonds (TIF)

• A mechanism allowing local government to capture the increased A mechanism allowing local government to capture the increased tax revenues generated by real estate development.tax revenues generated by real estate development.

• The key test for its use is that ‘but for’ the TIF assistance, The key test for its use is that ‘but for’ the TIF assistance, development would not occur.development would not occur.

• TIF can enhance the development of other businesses that will TIF can enhance the development of other businesses that will increase tax revenues.increase tax revenues.


Tax-Increment Bonds (TIF)Tax-Increment Bonds (TIF)

The steps involved in TIF are as follows:The steps involved in TIF are as follows:

1.1. A redevelopment district is defined and a base tax value is A redevelopment district is defined and a base tax value is established;established;

2.2. Development occurs and a new tax value is realized; Development occurs and a new tax value is realized;

3.3. The taxes collected on the incremental increase in tax value are The taxes collected on the incremental increase in tax value are captured to pay for public costs (e.g. infrastructure). captured to pay for public costs (e.g. infrastructure).


Bond RatingsBond Ratings

• Estimates the level of risk investors incur when making a loan.Estimates the level of risk investors incur when making a loan.

• Rating level depends upon the ability of the tax base or Rating level depends upon the ability of the tax base or revenue source to generate the required money to make bond revenue source to generate the required money to make bond payments while continuing to fund existing operations.payments while continuing to fund existing operations.

• Lenders use the ratings to determine cost of loan.Lenders use the ratings to determine cost of loan.


Bond Ratings FactorsBond Ratings Factors

• Existing revenue streamsExisting revenue streams

• Historical (financial) performance of the communityHistorical (financial) performance of the community

• Risks associated with the projectRisks associated with the project

• Political volatilityPolitical volatility

• Whether the project is economically viableWhether the project is economically viable


What issues must be addressed when financing a stadium?What issues must be addressed when financing a stadium?

In addition to developing a financing plan:In addition to developing a financing plan:

1.1. Is the Is the sitesite appropriate for the stadium? appropriate for the stadium?

2.2. Does it have Does it have environmental or geotechnical issuesenvironmental or geotechnical issues??

3.3. Is the Is the landland available for acquisition? available for acquisition?

4.4. Are there existing residents/businesses that must be relocated?Are there existing residents/businesses that must be relocated?

5.5. Does related infrastructure already exist or does it need to be built?Does related infrastructure already exist or does it need to be built?

6.6. What opportunities exist for ancillary development?What opportunities exist for ancillary development?


Debt Financing

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