Guy Hobbs on The Third “Final Draft” Term Sheet

Not only do I represent two former Nevada governors in Ward Two, longtime government finance wiz Guy Hobbs lives in Ward Two as well. I asked him if he would take a look at the third “final draft” of the pro-forma income statement for the stadium, and here are his comments:

As is clear from comparing the most recent final draft version of the stadium pro forma to prior iterations of the report, this version makes substantive changes to the assumptions that underlie the pro forma.  Following are some observations.

Before getting into the specific details of the third pro forma, it is worth noting that the approach being used by AECOM, whereby a single pro forma is being produced, limits the usefulness of the projections.  Similar reports that we have either prepared or reviewed in the past generally use an approach of creating a reasonable base case scenario – that is, a pro forma that is based neither upon optimistic goals nor upon overly conservative assumptions.  From the base case estimates, it would then be possible to “stress-test” the numbers to see what might occur if the baseline estimates were either over or under-achieved.  Had they used this approach of having base, conservative and optimistic scenarios as opposed to a single version, they may have been able to avoid the focus upon a single set of assumptions and estimates.  However, given that they have only produced a single set of revenue and expenditure assumptions for review, focus is necessarily upon those values.  All parties should bear in mind that should this project proceed to the point of approaching the credit markets, the only set of assumptions and estimates that will be of interest are those on the more conservative and achievable end of the spectrum.

The revenue side of the pro forma is dominated by revenue categories that are a function of the number of assumed events and the turnstile attendance at each event.  Consequently, focus is upon the reasonableness of the event and attendance assumptions used to drive the rest of the multipliers that produce the estimates for each revenue source.  Included in this would be all revenue categories, with the exception of the amount the team is suggesting it will pay to the stadium for its share of operating expenses and, to a degree, the revenue from advertising and sponsorships.  In the latter case, the value of the ad placements in the venue is a function of total expected impressions which is, in turn a function of expected turnstile (although not as directly as the other revenue categories).

Viewing the expected attendance numbers, it is clear that the assumptions used with regard to number of events and expected attendance are more optimistic than they are “base case” estimates.  Examples of assumed event content that would be more “hopeful” than base case would be the inclusion of the NWSL and MLL franchises and events currently served by Sam Boyd Stadium.  In addition, one must question the assumed MLS attendance assumption that has been used in any of the pro forma versions thus far.  It is certainly the case that increasing the assumed attendance from 18,000 to 20,000 per game is more optimistic than base case.  Anyone considering bringing any form of new entertainment choices into Las Vegas must recognize that, in addition to comparing demographic information to other MLS markets, one must consider the market itself.  By this I mean that Las Vegas is an atypical market in that there are more alternative entertainment choices competing for a customer’s discretionary dollar than in any other MLS market.  While this may not affect the hardcore soccer fan’s decisions on a given night, it does have an impact upon the more casual fan and other potential attendees.  Certainly this, coupled with the past performance of professional sports initiatives in Las Vegas, would cause one to hedge the assumed attendance numbers to a lower level than what has been assumed in the pro forma.

Overall, if the goal is to produce a pro forma with assumptions that would be considered more conservative and, thus, achievable, the attendance assumptions should be reduced by 25 – 35 percent.  At a 25 percent reduction, it is assumed that MLS would be returned to an estimated 18,000 per game, with the NWSL, MLL and “Other ticketed events” categories being set to zero.  Lowering the estimated attendance for MLS to a more conservative 15,000 per game and reducing the other pro/college category to a more conservative level would suggest a 35 percent reduction in the assumed attendance estimates.

Making the adjustments to produce a more conservative event pro forma would reduce revenues by roughly $1 million to $1.4 million versus those shown in the pro forma.

The seeming portability of certain revenue and expense items between the stadium and yet to be seen team pro formas is concerning.  In the end, the distribution of advertising and sponsorship dollars (and other revenue items), as well as any team contributions for operating expenses (in addition to the lease expense) would be spoken to in the lease between the venue owner and the team.  Since those terms are not known, the meaningfulness of these numbers is questionable.  No specific conclusions can be drawn, other than a willingness the team may have expressed to the feasibility consultant to contribute these amounts.  It is cautioned, though, that these numbers will be subject to negotiation.

Once again, concern is expressed regarding the level of reserves that are accommodated in the pro forma.  Consideration is given to the fact that the consultant has included an expense for repairs and maintenance.  However, the level of capital repairs and rehab that are included is, at best, light.  Consider two local examples; the Thomas & Mack and Cashman Field.  Cashman Field had an original construction cost of $26 million (1983; including the exhibition halls and theater), and Thomas & Mack had a cost of $30 million (also in 1983).  Thomas & Mack is set to undergo refurbishment and upgrades costing nearly $60 million in the very near future.  Thomas & Mack was previously renovated in 1999.  Estimates are that repairs and upgrades to Cashman Field, in the event it is to continue service as a baseball venue, could top $25 million.  The point here is that the capital requirements to maintain these venues in both a competitive and safe manner is very expensive.  In both the cases of Cashman Field and Thomas & Mack, the capital expenditures needed to maintain the functionality of those facilities 30 years after they went into service nearly match the inflation adjusted cost to originally construct these venues.

The pro forma has suggested that a capital reserve of $400,000 per year would be adequate.  Over a 30-year term, this would produce $12 million (in 2014 dollars).  Even when combined with the expected annual spending for repairs and maintenance, this would only provide roughly 1/8 of the value of the building in terms of funding available for renovation and upgrade.  The absence of any form of operating reserve also remains a concern.

Finally, it would be important for the City to see the pro formas for both the stadium and the team, side by side, to form opinions about the reasonableness of the assumed management fees, expense reimbursements, sharing of ad/sponsorship revenue, and other revenue and expense categories.  The team pro forma is likely considered to be proprietary.  However, it seems reasonable that the City, as the public partner, would want to assure itself that the team/stadium operator, is making a fair rate of return in consideration of the public subsidy.



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