When they struck their deal last year, developers of the Staples Center sports arena said the terms set by Los Angeles officials left so tight a margin for error that it would take a “home run” to ensure the project penciled out. There was even some brief speculation that they would bail out.
Seven months later, and just weeks after breaking ground, developers Philip Anschutz and Ed Roski Jr. already appear on their way to earning an enormous profit on the project.
The developers, who are putting up $305 million for the downtown facility, now have a franchise that so far stands to generate more than $400 million in actual or estimated revenue, according to a Business Journal tally of the deals completed to date.
That includes a $100 million deal with Staples Inc. for naming rights and an estimated $122 million from Rupert Murdoch’s Fox Group for a 40 percent ownership stake.
The $400 million-plus figure is expected to go significantly higher as the developers sign new agreements for sponsorships and concessions.
“Out of the starting gate, this is the most lucrative sports arena deal ever put together,” said David Carter, a sports management consultant who teaches sports finance at the USC Graduate School of Business. “There is no longer any question about whether the arena owners will make a profit. The only question now is how much. That’s why you have guys like Murdoch trying to get in on the action.”
In addition to the $222 million from Murdoch and Staples, the developers can expect to pocket:
* $50 million to $60 million from Pacific Bell and United Airlines in sponsorship rights.
* $92 million to $120 million in estimated lease agreements from the L.A. Lakers and L.A. Clippers.
* $40 million in anticipated luxury suite sales.
That adds up to $404 million to $444 million, and does not include additional revenues from concerts, parking, concessions, special events or new sponsorships, which can easily run into the tens of millions of dollars. It also does not include the lease agreement with the L.A. Kings, of which Roski and Anschutz are majority owners.
These wide revenue streams stand in sharp contrast to the arena developers’ warnings last year that the project was moving forward on a razor-thin margin.
After months of negotiations, the City Council last October agreed to advance the developers $70.5 million through bonds and redevelopment funds to purchase some of the surrounding land and to relocate existing tenants in preparation for future retail development and a hotel.
At the time, Tim Leiweke, president of the Kings and executive vice president of L.A. Arena Co., owned by Roski and Anschutz, said he was “thrilled with the agreement” but added a caveat:
“When I say ‘thrilled,’ let me not mislead anybody,” Leiweke said. “It’s a much tighter deal. It eliminates the opportunity for people like me to make mistakes now. We need to go out now and almost hit a home run on every turn of the plate, or have a hat trick as the case may be in hockey. The margin for error has shrunk considerably. So this is a very difficult deal.”
Last week, Leiweke and Arena Co. officials declined to comment on the Business Journal’s estimate of more than $400 million in revenue agreements to date. Instead, Michael Roth, director of communications for Staples Center, released the following statement: “Based on the figures that we’re seeing in our initial sponsorship agreements, our revenue continues to be on target, but we also must remain focused on the fact that our construction and operating costs remain very tight.”
Leiweke did say that the $300 million price tag for the facility is probably too low.
“I’m sure it’ll end up being a little more expensive at the end of the day, because we want it to be the best ever built,” he said.
In approving the deal last year, some City Council members expressed concern that without strong incentives the developers would build the new arena in another city such as Inglewood, where the Lakers and Kings now play.
City Councilman Joel Wachs opposed the deal, saying it was subsidizing wealthy developers who could afford to pay for the entire project themselves. After months of negotiations, Anschutz agreed to personally guarantee the city’s $70.5 million funding package, taking the city off the hook if revenues did not meet projections. The developers also agreed to lease the site for $4.8 million and dropped the provision that allowed it to use its tax payments to cover the city’s debt cost.
Wachs said last week that he always discounted the developers’ threats to go elsewhere.
“Of course this arena is a gold mine. I knew at the time that it was too good of a deal for them to walk away from,” Wachs said. “Everyone I talked to said it was going to be a big, big moneymaker for the developers.”
Both Wachs and Carter, the USC sports expert, suspect that the developers were aware of Murdoch’s interest at the time the deal was struck.
“These discussions clearly took place long before the deal with the city,” Carter said. “It takes time to iron these things out.”
Officials with both the Arena Co. and Fox refuse to say whether they had been involved in discussions before the deal was approved.
Carter said the arena deal is especially rich because the L.A. market is so huge only Chicago and New York are in the same league. That means developers can charge a premium for sponsorship rights.
At the new Denver arena, for example, PepsiCo. recently paid an estimated $70 million for naming rights over a 30-year period or roughly $2 million annually.
Staples, by contrast, is paying $5 million annually for naming rights in L.A.
Moreover, the Staples Center is the only arena in the country that will have three professional sports teams calling it home.
“Look, they were trying to cut the best deal they could. I do not fault them for that,” Wachs said. “I do fault the city, though, for not going out and getting the best advice possible.
“If I could do it for gratis, the city could certainly have gone out and gotten some paid expert advice,” he added. “I was particularly surprised that the downtown business community was pushing for the initial deal without going out for advice. I’m sure none of them would have done that in their own corporate affairs.”
Because officials with the L.A. Arena Co. declined to fully detail their anticipated revenues for the Staples Center, the Business Journal used a variety of sources and previously disclosed agreements to come up with its estimate of $404 million to $444 million.
The $100 million from Staples Inc. was publicly disclosed by both parties when the deal was announced last year.
The $122 million figure from the Fox Group is based on Murdoch’s agreement to purchase a 40 percent stake in the arena. Leiweke said that in return for the stake, Murdoch is paying 40 percent of the arena construction costs, which would amount to $122 million.
The sponsorship deals from Pacific Bell and United Airlines each valued at $25 million to $30 million were disclosed by Leiweke during the groundbreaking ceremonies this spring. The agreements allow the companies to advertise in the arena. City finance specialist Gerry Miller said he expects the developers to obtain one more major sponsorship deal.
The $40 million in estimated revenue from the luxury suites is based on the sale of 160 suites at an average price of $250,000. So far, the developers have sold between 70 and 75 suites, Leiweke said.
“We had anticipated that we would be selling suites through the end of the calendar year,” he said, adding that he now expects to sell the remaining 85 to 90 suites by the end of summer. “We’re obviously impressed with the demand.”
The biggest unknowns are the leases for the Lakers and Clippers, which have not been disclosed. To get estimates, the Business Journal used data from Financial World magazine.
National Basketball Association and National Hockey League teams typically set aside 15 percent to 20 percent of all non-player costs for rent to sports arena owners.
In the 1995-96 fiscal year, the Lakers had $26.4 million in non-player operating expenses, meaning that their rent would run $4 million to $5.3 million a year. Extended out over 20 years the term that the team owners have agreed to remain in the arena that comes to $80 million to $105 million.
In the 1995-96 year, the Clippers had $14.2 million in non-player operating expenses, putting their rent at roughly $2.1 million to $2.8 million a year. Over the six years the Clippers have agreed to play in the arena, that would be $12 million to $17 million.
Roth, the communications director for the new arena, said those estimated lease rates are “very high,” but would not provide actual figures.
The Business Journal did not include an estimate for the lease by the Kings. While the Kings had a virtually identical financial profile to the Clippers in 1995-96, their lease arrangement with the arena owners may be substantially different because of common ownership.
In the final analysis, the Kings’ lease arrangement might not matter, since the arena developers in essence would be paying themselves