If you build it, will they come?

From TSN.ca today is a story out of Quebec City that the city is going ahead with the construction of a new arena in the hopes of luring an NHL team to the city.

When the idea of building an NHL arena in Quebec City arose, the city as well as the province initially sought out funding from the National government as well as the private sector. The National government initially stated that they would be willing to help fund the arena but retracted that statement later.

Currently, the arena is being built without any help from the private sector. The article states that the city will fund 50% of the project and the provincial government will pay the other 50%. As of right now, no NHL will move into that building when it is completed. This is similar to Kansas City, Missouri, which built a new arena with the hopes of luring the Penguins to town. The Penguins stayed and the KC arena does not have a professional sport anchor tenant for the arena.

The question is who gains from QC building the arena. The NHL certainly looks like the big winner. As the article states, “[Gary] Bettman [NHL commissioner] has declared that, even with a new arena, there’s no guarantee that Quebec City will get its Nordiques back.” But with an arena ready, it certainly provides existing franchises leverage to negotiate arena deals with current cities knowing that potentially a move to Quebec City (or Kansas City for that matter) could take place pending a league vote.

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2 Responses to If you build it, will they come?

  1. Dan says:

    From our textbook (Financial Management in the Sport Industry).

    Kansas City . . . sidebar
    BBQ, Jazz, and Basketball?
    A Statistical Approach to Feasibility
    One limitation of the use of information like that given in Exhibits
    11.3 through 11.6 is that we do not know the relative importance
    of each piece of information. The composite indices in
    these exhibits are straight averages of the data for each factor.
    This implies, for instance, that the age of a population is
    exactly equally important to the population number. What if the
    local market has a relatively high population but a relatively low
    income or age? Does that bode well for the market, or not? A
    recent research article tries to answer this question by analyzing
    markets for their visibility as hosts for an NBA team (Rascher
    & Rascher, 2004). By using regression analysis, the researchers
    created weights for some of the variables discussed thus
    far, along with many more. The measures of success used in
    the study were attendance, ticket revenues, and total team
    revenues. In other words, markets with high revenues were
    deemed to be successful, and the statistical analysis combined
    the variables into a single estimate of what attendance or revenues
    could be expected if a team were to move into a market
    that did not already have an NBA team.
    Exhibit 11.7 shows the study’s results. The cities are ranked
    by estimated gate receipts. Those cities in boldface did not have
    NBA teams during the period of the study, 1997–99.
    This type of research is another method of measuring the
    feasibility of bringing a team to a particular city. It incorporates
    the information given in Exhibits 11.3 through 11.6 into a single
    financial estimate of team success. The researchers predicted
    that a team in Memphis would fare well in terms of gate receipts
    but only passable in terms of total revenues (as it has), and that
    a team in New Orleans would struggle financially—as it has. The
    estimate in attendance for Sacramento is 17,138, close to the
    Kings’ historical average.
    As another example of using this research to determine the
    feasibility of a facility project, consider the events in Kansas City
    surrounding the construction of the Spring Center. In July 2004,
    the city was in the midst of a debate about the feasibility of
    building a new downtown sport arena. A referendum was placed
    on the ballot for a special election in August 2004. Without the
    benefit of results of a feasibility study, and without a major tenant
    in place, the public was being asked to vote to spend about $143
    million in public money to build the arena. The hope seemed to
    be that “if you build it, they will come.” However, we can conduct
    a quick assessment of the market by utilizing results from Rascher
    and Rascher (2004).
    Kansas City is lower down the list than 11
    other markets that do not have an NBA franchise.
    Expansions and relocations in the NBA are rare, but if an owner
    were to move or the league were to expand, there are many other
    markets that would likely be chosen instead of Kansas City.* Also,
    a simple measure of the inability of hosting a new team—population
    divided by the current number of major professional sport
    teams—puts Kansas City second to last, just ahead of Milwaukee,
    out of 48 cities. It already has an NFL and an MLB team—getting
    an NBA team would spread its population and corporate support
    thin. Support of the Kansas City Chiefs is slightly above the NFL
    average in terms of locally generated revenues (according to the
    most recent publicly available data, 1999–2000). Support of the
    Kansas City Royals is substantially below average for MLB. In fact,
    the Royals are estimated to be fourth from the bottom in terms of
    gate receipts and sixth from the bottom in terms of attendance.
    When a city is trying to lure a team to town, projected facility
    costs rise, because the team has the leverage of competition
    among multiple cities. Moreover, if the team is not included
    in the construction design process, then once an owner does
    decide to move into the arena, millions of dollars’ worth of
    upgrades and changes will have to be made and paid for by the
    public. For example, in 1990 the Suncoast Dome was opened in
    St. Petersburg at a cost of $138 million, with the hopes of luring
    an MLB team. In 1998 the Tampa Bay Devil Rays finally began
    play in the facility. The upgrades required cost $70 million, 50%
    of the arena’s original cost. Not only were there significant public
    costs above and beyond the original construction costs, but also
    the public paid many years for a facility that did not have a major
    tenant. We can find similar recent examples in New Orleans and
    San Antonio, where the NBA owner required publicly financed
    upgrades of approximately 20% of the arena’s original cost.
    In summary, an assessment of Kansas City as a viable
    market for a third major sport franchise shows that the franchise
    would likely struggle.
    *When the NBA’s Grizzlies left Vancouver, British Columbia, for
    Memphis, the league shopped around and seriously considered moving
    the team to San Diego, Las Vegas, St. Louis, Louisville, Memphis, and
    New Orleans, but not Kansas City. When the Charlotte Hornets moved
    in 2002, Louisville, Norfolk, and New Orleans were considered before
    the league finally settled on New Orleans. When the NHL expanded in
    1998–2000, the four expansion cities were chosen from a pared-down
    list of six cities. Oklahoma City and Houston were the final cities eliminated
    prior to the league’s choosing Nashville, Atlanta, Minneapolis–St.
    Paul, and Columbus. Again, Kansas City was not even considered.

  2. Brad says:

    Yeah, but they are going to build the arena in Quebec out of wood!

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