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January 30, 2006

Financing A New Yankee Stadium

The Devil Is in The Details

by Andrew Zimbalist

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In his Baseball Prospectus piece from last week, Neil DeMause made a reference to my op-ed piece in The New York Times on the financing for a new Yankee Stadium. DeMause wrote: "The actual figure, after accounting for all the hidden lease subsidies, [is] 58 percent public, 42 percent private." Referring to my estimate, he gratuitously adds: "If PECOTA had an error rate like that, Nate Silver would be out of a job. Let's hope saberconomists can figure out a better way of evaluating and explaining the true winners and losers in stadium deals."

DeMause's sarcasm is unjustified, as are his estimates. Let me try to set the record straight. In my January 22 op-ed, I argued that after accounting for a $44 million tax break, the Yankees would be covering $756 million out of a total expense of $1.01 billion for the project. The balance of the project would be spent on infrastructure and covered by the public sector (city and state). Overall, the Yankees would be paying 75 percent of the total project costs.

In fact, because the state's contribution of $70 million for parking garages would be repaid from the parking receipts (or indirectly via a subcontracting deal), the public outlay would be lower. Furthermore, the city will be able to sell off memorabilia from the present Yankee Stadium, which will lower its net costs.

Since the average amount of public funding for new stadiums over the last 15 years hovers around 70 percent, the Yankees' plan to pay 75 percent themselves is prima facie fair. Moreover, if one compares the present plan to the deals offered by former mayor Rudy Giuliani in 1996 (for 100 percent public funding) or 2002 (for 50 percent public funding) for a new stadium, the Yankees seem to have taken a major step forward.

Though one can always nitpick at the edges, I believe the above is an accurate representation of the reality behind the financing plan for the new Yankee Stadium. DeMause does not. How does he compute his estimate of 58 percent public subsidies? Here's a chart:


  $800 million      -- cost of stadium
- $312 million      -- savings from MLB's revenue sharing system
- $103 million      -- present value of future rent payments
-  $15 million      -- present rent
-  $44 million      -- present value of property tax exemption

= $326 million
Before I explain each of these line items, let's consider the result. DeMause deducts each of these "hidden subsidies" from the $800 million and concludes that the Yankees are spending just $326 million. Therefore, the Yankees' share is 326/800 and the public share is 474/800. If so, the public share would actually be 59 percent, not the 58 percent reported by DeMause (and for some reason DeMause is leaving infrastructural spending out of this equation.)

Consider the first deduction. Under MLB's revenue sharing system, the contribution made by each team is based upon its net local revenues. To arrive at net local revenues a team is allowed to subtract stadium expenses. If the team owns the stadium, it is permitted to amortize its investment in the stadium over ten years. If it does not own the stadium, there is some dispute whether the investment should be amortized over ten years or over the period of the lease (40 years), where the investment is treated as a form of prepaid rent. In all likelihood, the Yankees lease will be considered an operating, not a capital, lease, and the team will amortize its investment over 40 years. DeMause's estimate assumes the Yankees will use a 10-year amortization period.

DeMause then takes my estimate from May the Best Team Win of the marginal tax rate faced by the Yankees under MLB's revenue sharing system, approximately 39 percent. That is, for every extra dollar of local revenue earned by the team, it gives up approximately 39 cents to the central fund. Hence, if the Yanks amortize an $800 million investment over 10 years, then each year for 10 years the team will be able to deduct $80 million from its local revenue. This $80 million annual deduction will then save the team ($80 million) X (.39) = $31.2 million a year in revenue sharing contributions.

DeMause then takes this $31.2 million per year and multiplies it by 10, to arrive at the $312 million savings for the team. What's wrong here? First, MLB might require the Yankees to base their deduction on the post-tax-break $756 million, not the $800 million. Second, the Yankees will probably amortize their investment over 40 years, lowering the annual deduction from $80 million to $20 million. Third, while the new stadium will allow the Yankees a revenue sharing deduction, it will also engender a substantial increase in earned revenues so that, at the end of the day, the Yanks' revenue sharing contributions will actually increase as a result of the new stadium.

Fourth, DeMause forgets a major step in his calculation. Even if the Yanks get to amortize $800 million over 10 years and we ignore revenue increases, it is necessary to put the $31.2 million savings per year in present value terms. Using a seven percent discount rate, the present value of this stream of annual savings is $219.1 million, almost $100 million below DeMause's figure. Again, the Yankees are likely to deduct only $20 million per year from local revenue and, therefore, save only $7.8 million. The present value of $7.8 million per year over 40 years (at 7 percent) is $104 million, or $208 million less than DeMause's number.

But we still haven't come to DeMause's largest false leap. Whether the stadium subsidy from MLB is $312 million or $104 million or some other number, it is a subsidy from the other MLB teams, i.e., it is private financing. The Yankees have had to contribute similar subsidies to other MLB teams when they invest in new facilities. It is decidedly not a public subsidy. Yet DeMause counts it as public spending to arrive at his 58 percent figure.

DeMause's next deduction is $103 million, which represents his estimate of the present value of the Yankees' future rent payments to the city if they stayed in the current stadium. He notes that since the team will pay no rent explicitly in the new stadium, the city will lose this revenue.

DeMause seems to base this estimate on a statement from the Parks Department that the team's rent in recent years has been around $7.5 million. While this last figure is reasonable, the deduction DeMause makes is not.

The Yankees' lease stipulates that the team can deduct from rent payments its expenses for the maintenance and operation of the ballpark. These expenses have been growing by leaps and bounds and will continue to do so if the Yanks stay in the current facility. Indeed, the amount of the team's rental payments has dropped markedly in the last four years due to these expenses. If the Yankees stayed put, the team's rent five years from now would more likely be zero than remain in the $7.5 million range.

But still more important is that the Yankees' lease also stipulates that the city is responsible for all major capital expenses on the stadium. Thus, when a piece of the stadium roof fell a few years ago due to a loose bolt, the city had to spend millions of dollars to repair it. Mayor Bloomberg has estimated that if the Yankees were to continue in the ballpark, it would cost the city more than $100 million in capital expenses. In other words, the city won't lose rent with a new stadium, it will save money on capital obligations. DeMause's deduction here is unwarranted.

His next deduction is $15 million in "present rent." It is not clear what he is referring to here. If it is to Mayor Bloomberg's two-year extension of the $5 million annually for five years from Mayor Giuliani, then the figure should be $10 million, not $15 million. This money is to be spent on planning for the new stadium.

The last figure of $44 million in present value of property tax breaks comes directly from my The New York Times op-ed. Needless to say, I agree with it. It lowers the Yankees' net investment from $800 million to approximately $756 million, and it is the basis for my 75 percent estimate.

In the final analysis, if we add $10 million in public subsidies from the two-year Bloomberg extension, but deduct the $70 million that will come back to the state from its parking garage investment and the additional millions the city will earn from selling stadium memorabilia, I feel comfortable that my 75 percent private funding estimate is on the low side.

There may be other worthy objections to the plan and in a perfect world the financing may be different. I am not arguing those points. I am only observing that in the current world, given the recent experience of stadium financing plans, the Yankees have made a fair proposal to New York City and New York State.

Andrew Zimbalist is the Robert A. Woods Professor of Economics at Smith College in Northampton, Ma. His next book, In the Best Interests of Baseball? The Revolutionary Reign of Bud Selig, will be published by Wiley on March 1. He can be reached here.

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