The second type of license fee is for acces to certain types of seats : luxury boxes, premium seating, and the like. Typically, financing plans use revenues from these sources to pay for the stadium. An especially interesting source of revenue is the personal seat license, whereby a customer pays a fixed fee to obtain the right to buy season tickets. PSLs can be perpetual, as they are for the new San Francisco Giants ballpark, but more commonly they cover a fixed period, such as the ten-year life of a PSL for tickets to the Oakland Raiders games. Likewise, the rights inhering in a PSL usually can be sold, but sometimes a change in ownership requires a payment to the team.
PSLs were first used by the Dallas Cowboys in 1968 to help finance Texas Stadium. Called « seat options », they were priced at $300 to $1,000 and had a life of forty years. The next use did not occur until 1986, when a variant of the PSL, called « charter seat rights », was used to collect advance ticket revenues of sufficient magnitude to persuade the NBA to expand to Charlotte, which it did by creating the Hornets. These revenues were converted to a down payment on the first years’s season tickets.
The contempory model for PSLs was implemented in1993 by the owners of the NFL expansion team in Charlotte, the Carolina Panthers. The team raised $150 million through the sale of PSLs, of which $50 million went for taxes and $100 million was used to help pay for a new stadium. PSL prices ranged from $600 to $5,400. In 1995 St. Louis followed suit to attract an NFL team by selling PSLs for between $250 and $4,500. The sale raised $70 million, which eventually paid for, among other things, the relocation fees to the Rams and the NFL. Later that year, the Oakland Coliseum launched a PSL plan, charging $250 to $4,000 for ten-year PSLs, with a target revenue of nearly $100 million. PSLs subsequently have been adopted as part of the financing plan of new baseball parks in Cincinnati, Milwaukee, and San Francisco, and new football stadiums in Baltimore, Boston, Cincinnati, Nashville, and the Maryland suburbs of Washington, DC.
PSLs and similar seating licences have obvious attrations as a means of financing a stadium. First, they reduce the financial exposure of teams and governments for a new stadium. Second, in comparison with taxes, they place the financing burden on sports fans, who derive the benefits of a new stadium. Moreover, whereas sales and property taxes tend to be regressive, seat licenses tend to be progressive. Thus the movement toward financing stadiums partly by selling seat licenses has many desirable effects.
The economics of PSLs is deceptively complicated. At one level, they should have the same basic relationship with ticket prices that up-front commercial rights fees have with subsequent royalties. From the demand side, a fan has a maximum willingness to pay for season tickets to a sports team for each of the next ten years. Ignoring possible variablility in team quality, the fan is willing to pay either a sequence of payments each year, the discounted present value of that sequence of payment today, or any combination of fixed payments and annual ticket purchases that has the same discounted present value. Thus the immediate effect of a PSL system should be to reduce the price of season tickets by a corresponding amount.
The main problem with the preceding analysis is that one cannot assume the sale of PSLs will have no impact on team quality. As with commercial rights, PSLs affect the incentives of both teams and fans. If PSLs lower long term season ticket prices, they reduce the incentive of the team to field good teams. Moreover, this effect is amplified by the incentive that the system gives fans to continue to buy season tickets. First, a PSL expires if the ticket is not purchased, so a fan must either buy tickets or sell the license to avoid losing all of its value. Second, if PSLs lower season ticket prices to PSL holders, the minimum quality of team that must be fielded in order to keep the fan buying tickets will be lower. Of course, if fans recognize that a PSL system has poor incentive properties for the team, they will not pay as much for a PSL, and the introduction of a PSL system will lower the sum of the revenues a team will receive from PSLs and subsequent ticket sales.
Whether teams somehow do charge lower season ticket prices over the duration of the license is not at all clear. Most agreements do not specify future pricing rules. The one that does, the Oakland Raiders’ PSL, states that ticket prices will remain below $50 through 1997 and will increase by no more than 5 percent a year thereafter; howerver, $50 is already at the top of NFL ticket prices, the team is not selling out its games, and in any case the 1997 prices average $51, so it is not clear that this price cap has any effect or value.
The actual nature of the rights conferred by a PSL are obscure. If good season tickets are in excess demand, as is the case in some cities, a PSL might be interpreted as guaranteeing the holders that they will not be excluded. In reality, teams typically allow season ticket holders automatically renew their tickets each year, and one’s position in the season ticket queue is lost only if season tickets are not renewed. Hence ensuring acces under excess demand does not seem to be the motivation for buying PSLs.
If a PSL can be sold, this might appear to ensure a certain value to one’s season tickets; as a pratical matter, however, season ticket renewal rights can be sold in any case simply by not changing the name associated with the tickets. A sports team has no way of knowing whether a ticket is used by the person who bought it, and whether a change of address entails a change of residence of the identity of the purchaser. Hence it is simply not obvious that a PSL confers any rights beyond those held by a normal season ticket holder.
The implication of the preceding discussion is that as a purely economic matter PSLs appear to be a very bad idea for everyone concerned – teams, fans, and stadium authorities – because they confer no extra benefits, generate no extra sources of revenues, and tend to reduce team quality and thereby team revenues. Why, then, do they exist?
The first possible reason is that PSLs are induced by a perversity in the institutional arrangements of baseball and football. In these sports, ticket revenues are shared between the home and visiting team. In baseball, ticket license revenues and premium seating fees are not shared, and in football theses revenues are not necessarily shared if they are used to pay for a stadium. The baseball and football rules create a strong financial incentive to pay for stadiums through PSLs rather than through stadium rents on ticket sales. If a team sells a PSL and in return credibly commits to charge lower ticket prices, the effect is to cause other teams in the league to pay part of the cost of its stadium. (By contrast, concession revenues are not shared, whether they are collected as up-front fees or royalties.)
Suppose that the relevant discount rate is 10 percent. In the NFL, if a ten-year PSL costs $700, the equivalent reduction in season ticket prices is $100 a year for ten years. If this reduction occurs, visiting teams lose 40 percent of the cut in ticket sales ($40 a year), which has a present value of $280. If the present value of the team’s share of stadium costs is really $700, the visiting teams are actually paying $280 of this cost by forgoing the share of revenues that they would have received had ticket prices been higher but no PSL had been sold.
The second explanation for the existence of PSLs is that they also are encouraged by a perversity in the federal tax system. The Tax Reform Act of 1986 withdrew the right to use tax-exempt bonds to finance sports facilities if more than 10 percent of interest and amortization was accounted for by revenues from stadium. Tax exemption is important, because it reduces the city’s interest cost of indebtedness by as much as 30 percent, as explained in chapter 4.
The rule about tax exemption was written in such a way that PSL sales did not count in the 10 percent limitation, but rental payments do. If a city is collecting money from ticket sales to pay for stadium, it can do so in two ways. It can charge rent and tax ticket sales, or it can sell PSLs. The former count toward the 10 percent limit, but the latter do not; hence the city prefers to use PSLs in order to preserve its tax exemption. Likewise, the city would rather have the team sell PSLs and pay lower rent and taxes than finance the stadium itself from higher rents and taxes.
The same incentive is present for using up-front commercial licensing fees to pay for a stadium. If the trade-off is between, say, higher rents and taxes on concessions versus an up-front rights fee, federal tax rules count the former toward the 10 percent limit but not the latter. Hence the team and stadium authority will prefer up-front fees if doing so enables them to retain the tax exemption for the bonds that finance part of the stadium.
The preceding analysis leads to a rather sobering conclusion that one often encounters in analyzing federal tax policy. The recent boom in seat licenses, stadium naming rights, and other up-front licensing fees may have been artificially induced by yet another loophole in the tax code. Cities, teams, and their tax consultants may have done nothing more than invent a legal evasion of the 1986 tax reform. And the 1986 attempt to reduce the use of state and local debt to subsidize private businesses may have succeeded only in creating yet another distortion, in this case leading to practices that reduce the incentive to field high-quality teams.
A third possible reason for the existence of PSLs is that they may increase total revenues from the stadium. The argument that PSLs increase total revenues is that the act of purchasing a PSL confers a special benefit : a sense of participation in bringing in a new team or keeping an old one, and a sense of personal ownership in the new stadium. In essence, a PSL is a kind of private good for achieving a public purpose, something akin to voluntary contributions to a charity.
Charitable contributions generally are subject to the problem of free riding. Because a single person has little effect on whether the charitable goal is achieved, each potential donor has little instrumental incentive to make a contribution. Hence one would expect total donations to be substantially less than the value of the civic purpose to which the funds are put. Nevertheless, this argument alone does not support the conclusion that PSLs must have no charitable component. The key point is that even if people are prone to contribute less to a civic purpose than the value of that purpose to them, they still might contribute a significant amount. If so, some nontrivial portion of PSL revenue may be a net increment to the revenue stream of teams and stadiums.
If this motivation explains part of the revenue from PSL sales, PSLs make a real contribution to stadium financing, and the various distortions discussed above are less important than they otherwise would be. Moreover, the argument would apply with equal force to long-term sales of other premium seats, such as luxury boxes, if these revenues also are used to help finance a stadium. One implication of this account, of course, is that part of PSL charges for stadium construction should not lead to a comparable reduction in season ticket sales over the life of the PSL. Likewise, higher premium seating charges for stadium finance should be feasible if they are used to pay for a stadium. And, finally, if the thrill of participating in attracting a new team to a city is part of the motive, this component of the value of a PSL should evaporate when the team begins to play, so that the price of subsequent resale of PSLs should fall more rapidly than the remaining life in the first few years after they are issued.
Unfortunately, too few teams and stadiums authorities have used PSLs and other premium seating revenues to finance stadiums to permit an empirical test of these propositions. Nevertheless, one interesting fact has emerged : the success of PSLs has been quite variable. The most successful PSL can be found in Charlotte, where sales achieved expectations, but others have fallen short. The worst experience is in Oakland.
Oakland sold PSLs through a local government entity, the Oakland Football Marketing Association, whose proceeds net of selling costs went to the city and county to offset their investment in renovating the Coliseum to accommodate the Raiders. In the original financial plan, PSL revenues (including fees special clubs for PSL holders) were expected to produce 99.1 million. After one year, the actual revenues were $58.9 million, a shortfall in excess of $40 million.
Also, the Oakland financial plan expected renovation to cost $100 million, but the actual cost was $130 million because the plan failed to include several important items : notably, a scoreboard, improved seat covers, and field drainage to accommodate rain (which occurs only in the football season). Instead of breaking more or less even (with an expected loss of less than $1 million), the stadium renovation was $70 million in through PSL sales in subsequent years, it would be optimistic to believe that most of the cost of the stadium renovation will not be paid out of increased taxes and reduced public services.
The extent to which PSLs distort the decisions of teams and stadium authorities, and reflect additional distortions created by federal taxes and league revenue-sharing arrangements, remains quantitatively uncertain. Nevertheless, the distortions arising from revenue sharing and taxation are likely to be an important part of the attractiveness of PSLs to both teams and stadium authorities. Regardless of altruistic motives behind the sale of PSLs and other seating rights, an extremely attractive feature of these revenue sources is that they are not paid by the team, the fans, or local government. Instead, these financing arrangements pass part of the cost of stadium construction on to teams in other cities and to federal taxpayers through the tax-exempt status of local bonds.
PSLs were first used by the Dallas Cowboys in 1968 to help finance Texas Stadium. Called « seat options », they were priced at $300 to $1,000 and had a life of forty years. The next use did not occur until 1986, when a variant of the PSL, called « charter seat rights », was used to collect advance ticket revenues of sufficient magnitude to persuade the NBA to expand to Charlotte, which it did by creating the Hornets. These revenues were converted to a down payment on the first years’s season tickets.
The contempory model for PSLs was implemented in1993 by the owners of the NFL expansion team in Charlotte, the Carolina Panthers. The team raised $150 million through the sale of PSLs, of which $50 million went for taxes and $100 million was used to help pay for a new stadium. PSL prices ranged from $600 to $5,400. In 1995 St. Louis followed suit to attract an NFL team by selling PSLs for between $250 and $4,500. The sale raised $70 million, which eventually paid for, among other things, the relocation fees to the Rams and the NFL. Later that year, the Oakland Coliseum launched a PSL plan, charging $250 to $4,000 for ten-year PSLs, with a target revenue of nearly $100 million. PSLs subsequently have been adopted as part of the financing plan of new baseball parks in Cincinnati, Milwaukee, and San Francisco, and new football stadiums in Baltimore, Boston, Cincinnati, Nashville, and the Maryland suburbs of Washington, DC.
PSLs and similar seating licences have obvious attrations as a means of financing a stadium. First, they reduce the financial exposure of teams and governments for a new stadium. Second, in comparison with taxes, they place the financing burden on sports fans, who derive the benefits of a new stadium. Moreover, whereas sales and property taxes tend to be regressive, seat licenses tend to be progressive. Thus the movement toward financing stadiums partly by selling seat licenses has many desirable effects.
The economics of PSLs is deceptively complicated. At one level, they should have the same basic relationship with ticket prices that up-front commercial rights fees have with subsequent royalties. From the demand side, a fan has a maximum willingness to pay for season tickets to a sports team for each of the next ten years. Ignoring possible variablility in team quality, the fan is willing to pay either a sequence of payments each year, the discounted present value of that sequence of payment today, or any combination of fixed payments and annual ticket purchases that has the same discounted present value. Thus the immediate effect of a PSL system should be to reduce the price of season tickets by a corresponding amount.
The main problem with the preceding analysis is that one cannot assume the sale of PSLs will have no impact on team quality. As with commercial rights, PSLs affect the incentives of both teams and fans. If PSLs lower long term season ticket prices, they reduce the incentive of the team to field good teams. Moreover, this effect is amplified by the incentive that the system gives fans to continue to buy season tickets. First, a PSL expires if the ticket is not purchased, so a fan must either buy tickets or sell the license to avoid losing all of its value. Second, if PSLs lower season ticket prices to PSL holders, the minimum quality of team that must be fielded in order to keep the fan buying tickets will be lower. Of course, if fans recognize that a PSL system has poor incentive properties for the team, they will not pay as much for a PSL, and the introduction of a PSL system will lower the sum of the revenues a team will receive from PSLs and subsequent ticket sales.
Whether teams somehow do charge lower season ticket prices over the duration of the license is not at all clear. Most agreements do not specify future pricing rules. The one that does, the Oakland Raiders’ PSL, states that ticket prices will remain below $50 through 1997 and will increase by no more than 5 percent a year thereafter; howerver, $50 is already at the top of NFL ticket prices, the team is not selling out its games, and in any case the 1997 prices average $51, so it is not clear that this price cap has any effect or value.
The actual nature of the rights conferred by a PSL are obscure. If good season tickets are in excess demand, as is the case in some cities, a PSL might be interpreted as guaranteeing the holders that they will not be excluded. In reality, teams typically allow season ticket holders automatically renew their tickets each year, and one’s position in the season ticket queue is lost only if season tickets are not renewed. Hence ensuring acces under excess demand does not seem to be the motivation for buying PSLs.
If a PSL can be sold, this might appear to ensure a certain value to one’s season tickets; as a pratical matter, however, season ticket renewal rights can be sold in any case simply by not changing the name associated with the tickets. A sports team has no way of knowing whether a ticket is used by the person who bought it, and whether a change of address entails a change of residence of the identity of the purchaser. Hence it is simply not obvious that a PSL confers any rights beyond those held by a normal season ticket holder.
The implication of the preceding discussion is that as a purely economic matter PSLs appear to be a very bad idea for everyone concerned – teams, fans, and stadium authorities – because they confer no extra benefits, generate no extra sources of revenues, and tend to reduce team quality and thereby team revenues. Why, then, do they exist?
The first possible reason is that PSLs are induced by a perversity in the institutional arrangements of baseball and football. In these sports, ticket revenues are shared between the home and visiting team. In baseball, ticket license revenues and premium seating fees are not shared, and in football theses revenues are not necessarily shared if they are used to pay for a stadium. The baseball and football rules create a strong financial incentive to pay for stadiums through PSLs rather than through stadium rents on ticket sales. If a team sells a PSL and in return credibly commits to charge lower ticket prices, the effect is to cause other teams in the league to pay part of the cost of its stadium. (By contrast, concession revenues are not shared, whether they are collected as up-front fees or royalties.)
Suppose that the relevant discount rate is 10 percent. In the NFL, if a ten-year PSL costs $700, the equivalent reduction in season ticket prices is $100 a year for ten years. If this reduction occurs, visiting teams lose 40 percent of the cut in ticket sales ($40 a year), which has a present value of $280. If the present value of the team’s share of stadium costs is really $700, the visiting teams are actually paying $280 of this cost by forgoing the share of revenues that they would have received had ticket prices been higher but no PSL had been sold.
The second explanation for the existence of PSLs is that they also are encouraged by a perversity in the federal tax system. The Tax Reform Act of 1986 withdrew the right to use tax-exempt bonds to finance sports facilities if more than 10 percent of interest and amortization was accounted for by revenues from stadium. Tax exemption is important, because it reduces the city’s interest cost of indebtedness by as much as 30 percent, as explained in chapter 4.
The rule about tax exemption was written in such a way that PSL sales did not count in the 10 percent limitation, but rental payments do. If a city is collecting money from ticket sales to pay for stadium, it can do so in two ways. It can charge rent and tax ticket sales, or it can sell PSLs. The former count toward the 10 percent limit, but the latter do not; hence the city prefers to use PSLs in order to preserve its tax exemption. Likewise, the city would rather have the team sell PSLs and pay lower rent and taxes than finance the stadium itself from higher rents and taxes.
The same incentive is present for using up-front commercial licensing fees to pay for a stadium. If the trade-off is between, say, higher rents and taxes on concessions versus an up-front rights fee, federal tax rules count the former toward the 10 percent limit but not the latter. Hence the team and stadium authority will prefer up-front fees if doing so enables them to retain the tax exemption for the bonds that finance part of the stadium.
The preceding analysis leads to a rather sobering conclusion that one often encounters in analyzing federal tax policy. The recent boom in seat licenses, stadium naming rights, and other up-front licensing fees may have been artificially induced by yet another loophole in the tax code. Cities, teams, and their tax consultants may have done nothing more than invent a legal evasion of the 1986 tax reform. And the 1986 attempt to reduce the use of state and local debt to subsidize private businesses may have succeeded only in creating yet another distortion, in this case leading to practices that reduce the incentive to field high-quality teams.
A third possible reason for the existence of PSLs is that they may increase total revenues from the stadium. The argument that PSLs increase total revenues is that the act of purchasing a PSL confers a special benefit : a sense of participation in bringing in a new team or keeping an old one, and a sense of personal ownership in the new stadium. In essence, a PSL is a kind of private good for achieving a public purpose, something akin to voluntary contributions to a charity.
Charitable contributions generally are subject to the problem of free riding. Because a single person has little effect on whether the charitable goal is achieved, each potential donor has little instrumental incentive to make a contribution. Hence one would expect total donations to be substantially less than the value of the civic purpose to which the funds are put. Nevertheless, this argument alone does not support the conclusion that PSLs must have no charitable component. The key point is that even if people are prone to contribute less to a civic purpose than the value of that purpose to them, they still might contribute a significant amount. If so, some nontrivial portion of PSL revenue may be a net increment to the revenue stream of teams and stadiums.
If this motivation explains part of the revenue from PSL sales, PSLs make a real contribution to stadium financing, and the various distortions discussed above are less important than they otherwise would be. Moreover, the argument would apply with equal force to long-term sales of other premium seats, such as luxury boxes, if these revenues also are used to help finance a stadium. One implication of this account, of course, is that part of PSL charges for stadium construction should not lead to a comparable reduction in season ticket sales over the life of the PSL. Likewise, higher premium seating charges for stadium finance should be feasible if they are used to pay for a stadium. And, finally, if the thrill of participating in attracting a new team to a city is part of the motive, this component of the value of a PSL should evaporate when the team begins to play, so that the price of subsequent resale of PSLs should fall more rapidly than the remaining life in the first few years after they are issued.
Unfortunately, too few teams and stadiums authorities have used PSLs and other premium seating revenues to finance stadiums to permit an empirical test of these propositions. Nevertheless, one interesting fact has emerged : the success of PSLs has been quite variable. The most successful PSL can be found in Charlotte, where sales achieved expectations, but others have fallen short. The worst experience is in Oakland.
Oakland sold PSLs through a local government entity, the Oakland Football Marketing Association, whose proceeds net of selling costs went to the city and county to offset their investment in renovating the Coliseum to accommodate the Raiders. In the original financial plan, PSL revenues (including fees special clubs for PSL holders) were expected to produce 99.1 million. After one year, the actual revenues were $58.9 million, a shortfall in excess of $40 million.
Also, the Oakland financial plan expected renovation to cost $100 million, but the actual cost was $130 million because the plan failed to include several important items : notably, a scoreboard, improved seat covers, and field drainage to accommodate rain (which occurs only in the football season). Instead of breaking more or less even (with an expected loss of less than $1 million), the stadium renovation was $70 million in through PSL sales in subsequent years, it would be optimistic to believe that most of the cost of the stadium renovation will not be paid out of increased taxes and reduced public services.
The extent to which PSLs distort the decisions of teams and stadium authorities, and reflect additional distortions created by federal taxes and league revenue-sharing arrangements, remains quantitatively uncertain. Nevertheless, the distortions arising from revenue sharing and taxation are likely to be an important part of the attractiveness of PSLs to both teams and stadium authorities. Regardless of altruistic motives behind the sale of PSLs and other seating rights, an extremely attractive feature of these revenue sources is that they are not paid by the team, the fans, or local government. Instead, these financing arrangements pass part of the cost of stadium construction on to teams in other cities and to federal taxpayers through the tax-exempt status of local bonds.
Source: Sports, Jobs and Taxes
Par: Roger G. Noll et Andrew Zimbalist
ISBN: 0-8157-6111-2
