Article - Sports Teams and Sports-anchored Real Estate Development ...

Sports Teams and Sports-Anchored Real Estate Development

Pavan Surapaneni and Rich Le Page

INTRODUCTION

In recent years, a growing number of professional sports teams have taken a leading role in mixed-use development projects anchored by their home arenas, stadiums and ballparks. The Atlanta Braves, Atlanta Hawks, Columbus Crew, Jacksonville Jaguars, Los Angeles Rams, Milwaukee Bucks, Minnesota United, Orlando Magic, San Diego Padres, San Francisco Giants and St. Louis Cardinals, to name just a few, have reportedly proposed, commenced or completed major mixed-use development projects around their facilities within the last five years.

In some cases, the projects are launched concurrently with new sports facilities. The Battery Atlanta is a new 1.5 million square foot project developed by the Atlanta Braves alongside the team's new home ballpark, Truist Park. However, in other cases, teams develop land around a long-existing facility. For example, the San Francisco Giants and real estate developer Tishman Speyer are in the middle of developing Mission Rock, a 28-acre, 1.4 million square foot mixed-use project near Oracle Park, the Giants' home ballpark since 2000.

PRIMARY MOTIVATIONS

Teams have many motivations for pursuing major development projects around their facilities. Economically, the relatively predictable and stable cash flows from real estate complement professional sports teams' seasonal (and, occasionally, unpredictable) revenue streams. When structured correctly, these returns can accrue 100% to ownership's bottom line without being subject to league revenue sharing. For all teams, but especially those that are otherwise cash negative or neutral, these effects lift valuations (in addition to providing current returns in an industry that is often viewed as a growth-play).

These developments have taken several forms over the years. While sports districts are not a new phenomenon, early projects often focused on further monetizing game-day engagement by fans. The

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construction of restaurants, retail establishments, movie theatres and concert venues encouraged fans to leave their living room and experience the event live, while simultaneously incentivizing fans to arrive earlier and leave later, generating more profit per game and per ticket. However, these developments (especially when not located in prime urban areas) suffered from the same seasonality constraints as teams and their home facilities ? during the offseason, foot traffic would greatly reduce.

Newer iterations of these developments have attempted to build a more sustainable, 365-day a year offering. Key to this model is the inclusion of commercial-office, hotel and residential products (frequently also including medical facilities and event spaces), as well as of various public facilities ? such as parks and multi-modal transportation infrastructure. These place-making efforts are centered around a single, oftrepeated idea: "live, work, play".

The success of these developments results from a symbiotic relationship among all their components. Businesses located in these neighborhoods have an easier time recruiting and retaining talent by touting a positive workplace environment that is, in part, fostered by the various food and entertainment options conveniently located nearby. Local retail establishments, such as stores and restaurants, benefit from yearround patronage and a built-in customer base. The availability of jobs and these amenities drive demand for housing, which in turn provides additional workers and customers. Parking facilities are more efficiently used, as usage by daytime workers and nighttime fans complements the other and creates higher utilization rates. For teams, these factors encourage additional foot traffic, sponsorship opportunities and game-day ticket sales, enhance brand and unlock new revenue sources that may be less strongly correlated with the team's performance or seasonality.

In addition to the economic considerations, mixed-use sports developments can allow a team to positively contribute to the communities of which they are a part. These "arena districts" can have a revitalizing effect on surrounding neighborhoods. The Detroit District is a notable example. Olympia Development (owned by the Illitch family) has made a profound impact on downtown Detroit with a large, multi-neighborhood development around the city's four centrally-located major sports team.

Finally, by playing an active role in development, teams can control their fans' experiences outside the stands and ensure that their new neighbors complement the facility and the team's entertainment, parking, public space and aesthetic preferences (rather than standing by as small, individual projects are inevitably pursued by third parties in a potentially incongruous manner). Similarly, by master planning a neighborhood, a team can accelerate nearby development by presenting an attractive, unified vision to residents, community organizations and approval authorities. Most importantly, these efforts, when cooperatively coordinated with these constituencies, can protect or even bolster a team's brand and reputation, as well as its local political and community relationships.

The synergies of sports-facility development are clear, and several sports industry observers have pointed to recent development projects as significant new sources of value for their anchoring teams. To ensure

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that third parties do not freeride on the team's value in that relationship, teams should be aggressive firstmovers in developing a vision for and ultimately pursuing these opportunities. In this regard, teams have several competitive advantages. Their local relationships, brand and goodwill can be the key to unlocking development potential. In addition, teams may hold important real estate rights (such as long-term parking leases, options or easements) over potentially developable land that give them an important seat at the table.

PARTNERING WITH A DEVELOPER

While some teams lead developments on their own, these projects can be daunting endeavors. Masterplanning and ultimately developing a new large-scale neighborhood first requires, among other things, site assemblage, entitlement procurement, environmental diligence and remediation, zoning compliance, development impact mitigation, design, public financing and incentives, and private debt and equity capital ? all of which require interaction, negotiation and coordination with numerous constituencies. These requirements may be beyond a team's core competencies and, even if not, can consume the time and attention of team's management and staff that could otherwise be spent focusing on team operations. Though engaging the right trusted advisors and experts ? such as real estate consultants, brokers, architects and legal counsel ? can alleviate some of these demands, many teams also choose to partner with a real estate development firm. In doing so, teams bring to bear the developer's expertise, resources and capital relationships, which can expedite project timelines, ease project pressures and improve returns.

For these reasons, selecting a development partner may be the single most important decision a team makes in the development process. Development ventures often last for a decade or longer and their success will depend heavily on the strength of the team-developer relationship. Moreover, with the team's brand and key community relationships on the line, it is crucial that teams select a reputable developer that they can trust and shares the team's vision for the project.

In many sports development projects, the team and the developer partner share control over master planning, overall design, development product mix and other high-level strategic decisions for the project. The two partners also often share responsibility for raising outside debt and equity capital for the venture, with the developer approaching existing institutional relationships and the team seeking investment from owners of the team and local community and business leaders.

The developer will usually take the lead on core real estate development activities, including: assessing market need and capacity for product-type, obtaining permits and entitlements, engaging, coordinating and overseeing architects, engineers, contractors and construction consultants to investigate the development site and develop and implement project plans and designs, preparing detailed project schedules, performing budgeting, modeling, financial reporting and other cost management and finance functions and providing other asset management, property management, leasing and development services.

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The team will often play a key role in strengthening relationships between the development venture and

community, local government and business leaders. In many cases, the team will leverage its brand to help

market and promote the project. The team may also take the lead on programming for the new

development, including events-production.

KEY CONSIDERATIONS FOR TEAMS

Alongside defining its relationship with the development partner, teams should consider several key matters

when pursuing a new development opportunity:

League Rules ? While leagues are often encouraging of team-led development projects, they will want to ensure that the project complies with applicable league rules. For instance, league debt limitations and revenue-sharing rules will often necessitate that team owners invest in the development venture through an investment vehicle that is separate from the team (and any holding company) to avoid commingling the liabilities and income of the development project with those of the team. In addition, league rules may restrict the acceptance of investments from, or otherwise partnering or contracting with, players and agents, as well as certain development venture activities (e.g., building a casino).

Parking ? Teams will want to ensure that adequate parking facilities are available for their fans and employees. By the same token, the real estate venture will have a vested interest in ensuring that office and residential tenants have access to nearby parking options to maximize the project's desirability. These competing considerations will require thoughtful attention in the joint venture documents and could be a key source of disagreement between the parties.

Topics for negotiation often can include (1) the number of permanent spots reserved for team staff and project tenant usage (respectively), (2) rules delineating how game-day usage will be reconciled with ongoing transient and semi-permanent usage, (3) control over design (e.g., surface, underground or structured parking, access to the sports facility, relocation or restriping of spots, signage and traffic flow) and operation (including the selection of any parking operator), (4) the process by which parking rates are set, (5) profit splits, (6) security arrangements, (7) governmental traffic impact mitigation requirements, (8) the survival of the team's rights following its divestment of interests in the project, (9) recognition rights from mortgagees, (10) rights of first offer/refusal regarding parking disposition and (11) the application of applicable league revenue sharing rules and other regulations governing facility operation.

Cost Reimbursement, Fees and Promotes ? Team personnel may need to dedicate significant time and resources to the project. The team should consider what arrangements with the development venture are appropriate to reflect this value creation (such as cost allocation or management fees), including mechanisms by which team overhead and other G&A are allocated to the venture. Similarly, the team should identify early on if it believes it should share in fees and promote earned by the venture from third-party equity providers to reflect the special and active role the team plays in the project and align incentives with the development partner.

Venture Governance ? The joint venture documents between the team and the developer must clearly allocate to each of the partners their respective responsibilities with respect to the development, as well as the scope of oversight, communication and approvals afforded to the other partner relating to the performance of those obligations.

The parties will need to consider how control of the development venture will be shared among the team, the developer and any other investors. In some cases, the team and the developer may agree to share control of all decisions (such as project sale, budgeting, incurrence of indebtedness, leasing, selection of key construction parties, settling of litigation, etc.), subject to various deadlock resolution mechanisms if the partners cannot agree. In other cases, the team and the developer agree to allocate decision-making authority based on their relative areas of expertise.

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If the team and the developer bring in outside investors, they should carefully consider the scope of any operational approval rights granted to those investors to avoid potential deadlock or delay, which could grind the project to a halt and cause defaults under various property-level agreements.

Debt and Equity Capital ? Teams should assess the level of debt financing with which they would be comfortable for both the construction and post-stabilization phases of the project. Lenders may require "bad-boy", completion and other customary real estate guarantees from creditworthy persons, which the team itself may not be able to provide due to applicable league debt rules. Given the likely make-up of investors on the team-side, teams may face difficulty in identifying an appropriate guarantor for their share of construction-related obligations unless they are creative. Once identified, various protections could be needed to reduce risk to that guarantor.

In addressing equity capital matters, teams must consider how their ultimate investors will be assembled and fund project cash needs during the development period. Depending on how this is accomplished, various regulatory and tax issues could be implicated (such as securities and investment company laws). In addition, the team's partners in the venture will want to know that the team will be able to show up with its share of equity as and when needed to ensure the timely completion of the project and compliance with construction loan requirements. There may be several unique considerations for a sports team and its owners when evaluating the timelines for funding and remedies for failing to do so that are proposed by their joint venture partners.

Transfer, Liquidity and Exit Rights ? Both the team and the developer may want the right to force the development venture to sell the project or transfer their interests in the future so that they can exit and redeploy capital. Developers often are especially sensitive to exit rights, as many are not long-term holders of assets and instead look to realize value creation upon completion of construction.

If and when the developer has a right to force an exit (either by transferring its interest or forcing a sale of the property), the team will benefit from having negotiated for various rights to ensure that it can maintain control of the property (for the reasons described earlier) and that any successor to the developer is the right partner for the team and its objectives for the neighborhood.

While it is customary in real estate projects to restrict transfers of equity interests in some fashion, the team should consider the impact these provisions might have on a sale of the team (and vice versa).

Brand Management ? If the team licenses its brand to the development venture, it should carefully consider how the scope, term and termination rights in that license interact with the team's involvement with the project. For example, if the team sells its interests in the project or otherwise ceases to be involved, it may be appropriate for the license to terminate or change in important ways. Similarly, given the importance to a team of brand protection, appropriate protections with respect to the manner in which those license rights can be exploited should be included in any license agreement.

Similarly, the team may also want to identify and restrict certain uses of (and providers of capital to) the project that could have a negative impact on the team's reputation.

Competitive Activities ? If the developer and/or team are involved (or may become involved) with other nearby real estate projects, the parties will want to consider how to manage that potential competition. For instance, if the developer could be actively leasing available space at the development simultaneously with other competitive nearby projects, the team may want to explore various measures designed to mitigate the potential conflicts of interest.

In addition, the developer and the team should work together to ensure that the planned amenities will not cannibalize the team's existing revenue sources (but, rather, complement and enhance them).

Dispute Resolution ? Given the press that litigation involving a team may generate, the team should consider whether disputes relating to the development project should be resolved through private arbitration.

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