The past ten years have given rise to an almost unprecedented building boom involving new stadiums and arenas for professional sports teams. By the year 2002 at least 60 percent of the 121 major sports franchises will be playing their home games in a facility built or remodeled since 1991. With construction costs in…
Benefit or Blackmail?
Mark Rosentraub & Sheila Kennedy
The past ten years have given rise to an almost unprecedented building boom involving new stadiums and arenas for professional sports teams. By the year 2002 at least 60 percent of the 121 major sports franchises will be playing their home games in a facility built or remodeled since 1991. With construction costs in excess of $175 million for arenas and $300 million for stadiums, the news that new facilities are being built should be received with great anticipation. Construction projects of this magnitude can increase the demand for labor and many of the newer facilities have been built in aging downtown areas to attract visitors to the core areas of central cities. Building a new stadium or arena also can enhance the quality of life and bring national attention to a community through the presence of a team.
Unfortunately the jubilation surrounding the announcement that a new sports facility will be constructed often is diluted by two factors. First, negotiations between a city or state and the team that will use the new facility frequently are punctuated by threats of a move to another community if an owner’s demands are not met. The inevitable anxiety created by this tactic underscores the relative emphasis on profitability versus a team’s commitment to a community and its fans (Lipsyte, 1995). Second, to meet team demands most communities must increase state or local taxes or divert existing tax revenue from a general fund to pay for the arena or stadium. Although a relatively small group of team owners have paid for the stadiums and arenas their clubs use, the vast majority of facilities built since 1991 have required public/private partnerships and subsidies. In these partnerships it is quite common for the public sector to be responsible for more than half of the construction costs while the teams retain the preponderance of revenues from ticket sales, luxury seating fees, concessions, advertising, parking, etc. In a few instances, the public sector actually has assumed responsibility for 100 percent of the cost of a new stadium or arena while allowing teams to retain virtually all of the revenues generated by the new facility (Rosentraub, 1997; Noll and Zimbalist, 1997).
Why do governments make these extraordinary investments? Communities that build a facility to attract or retain a team seek to accomplish two goals. First, teams produce a substantial level of intangible benefits. There is little debate over the extensive civic pride and community spirit generated by successful teams. Attracting or retaining a team also has been found to increase citizens’ perceptions of the quality of life in their community and the value they place on living in their city (Swindell and Rosentraub, 1998). Many elected officials conclude that if a team’s presence enhances residents’ perceptions of the quality of life and the identity of a city, then the investment of tax dollars is indeed appropriate (Rosentraub, 1997; Morgan, 1997). Second, the public sector also hopes either to stimulate or redirect economic development and regional recreational patterns through the building of a new facility and a team’s presence. Even if teams and the facilities they use do not generate new economic development (Baade, 1996), the redirection of economic activity to a downtown area can help meet several important public policy objectives including the repositioning of service-sector jobs in areas closer to disadvantaged populations.
These benefits and attendant risks, together with the enormous commitment of public dollars to secure or retain team, have focused the attention of public officials on the mechanisms available to protect the public’s investment. If the public sector devotes tax revenues to generate intangible benefits and increase business activity in certain locations, taxpayers are entitled to adequate safeguards to protect their investment. These concerns have been heightened as communities with substantial investments of tax dollars in facilities have seen their teams leave for other areas.
The importance of protecting the public sector’s interest in sports facilities is underscored by the observation that the teams have more than achieved their principal goals. Virtually every owner who has entered into a public/private partnership for a new facility has been able to use the extra revenues to substantially enhance the talent on their team through the payment of higher salaries to the best players. In addition, when owners who have benefited from a public/private partnership for a facility sell their team, they find that the value of the franchise has substantially increased (Rosentraub, 1998; Mullen, 1998; Zimbalist, 1998). The purpose of this paper is to identify the best tools available to the public sector to protect the long-term interests of taxpayers and governments that invest in facilities used by professional sports teams.
The Control Over The Supply of Teams and
The Impact of Scarcity on Cities and States
?Any procedure to protect taxpayers’ investments in sports facilities must respond to the environment in which teams, states, and cities exist. This environment is not characterized by a "level playing field." Two basic factors provide teams with far more leverage to demand subsidies while retaining most (or all) revenues collected at stadiums and arenas.
Cartel Control Of The Supply of Teams
Each league controls the supply of franchises. Despite the extraordinary interest people have in sports and the importance of sports in American life (Michener, 1976; Wilson, 1994), the public sector has no role in determining how many teams will exist. There also is no free market that establishes the number of franchises relative to the demand of sports fans for teams. The number of teams that exist is determined by the groups of owners who have joined together to form the four major professional sports leagues. Each of these sports leagues is a private organization and all have received special protection from market forces from the U.S. Congress and federal courts. Thomas A. Piraino, Jr. summarized this situation noting (1996: 1677-1678):
Professional sports are one of the last refuges of unchallenged monopoly power in America. Most monopolies have been forbidden by regulation or judicial decree from abusing their market power. However, Major League Baseball (MLB), the National Football League (NFL), the National Basketball Association (NBA), and the National Hockey League (NHL) each have been able to acquire, maintain, and exercise their monopoly power with little judicial or regulatory oversight. Although the courts have allowed antitrust challenges to certain aspects of league behavior (such as restrictions on the free movement of players or franchises), they have not directly challenged the means by which the owners of professional sports teams achieve their monopoly profits. The owners have successfully conspired to keep the number of franchises substantially below that which would exist in a free market…. Neither the courts nor Congress has yet developed an effective remedy against their abuse of monopoly power.
At a time when deregulation and open markets have become the accepted path for economic development, the four leagues and their respective franchise owners are still permitted to function as cartels. The cartels, as one would expect, control the supply of franchises to maximize their profits and advantage. Each league seeks to insure that there is at least one region, and perhaps two or three, that does not have a team. These regions become the "chasers," pursuing existing teams with extremely generous incentive packages. They also chase the leagues themselves describing the large incentive packages they will provide if they are granted an expansion franchise. Team owners and league officials share the contents of these offers with cities that currently host teams in an effort to generate counter-offers and increases in the size of existing incentive packages.
When some cities have refused to match the subsidies promised by communities without a team, owners have moved their teams. This lesson has not been lost on local officials. In 1984 the Colts moved to Indianapolis and received a very generous lease. A scant dozen years later the lease arrangements were far less favorable than those given to other teams and Indianapolis feared losing the team to Houston, Los Angeles, or Cleveland. The team’s owner and the NFL’s commissioner both outlined what the city needed to do to keep the Colts. In 1997, Indianapolis modified the Colts’ lease to permit the team to retain more of the revenue generated at the RCA Dome. The public sector also agreed to build 4,400 new clubs seats.
Cartel Control of Markets
The leagues also control the number of teams that will play in any market area and this leads to the "small-market problem." Three of the four major sports leagues permit but two teams in the largest markets. Only the NHL has three teams in the very large New York metropolitan region (New Jersey Devils, New York Islanders, and the New York Rangers). The Yankees and Mets (MLB), the Jets and the Giants (NFL), and the Knicks and Nets (NBA) divide the lucrative New York metropolitan region market. Franchises in Cincinnati (MLB, NFL), Indianapolis (NBA, NFL), Pittsburgh (NHL, MLB, NFL), and Buffalo (NHL, NFL) must try to earn a sufficient amount of money to pay star players what they could earn if they played for a large-market team. Teams in these small-market regions serve approximately two million people. The two football and basketball teams in New York sell luxury seating in a market of more than 14 million people and more than 1,000 large firms (at least 500 employees). In contrast, the Indianapolis Colts and Indiana Pacers sell their luxury seating in a market with 80 percent fewer people and 85 percent fewer large firms.
To enhance profitability, team owners in smaller markets frequently demand subsidies. Even in the NFL where 80 percent of all league revenues are shared and a salary cap protects against wealthier owners and teams spending more money to monopolize the best players, smaller markets frequently are less profitable unless large subsidies are provided. In MLB, the NBA, and the NHL, where a far smaller proportion of league revenues are shared, team owners in small markets may even lose money if they attempt to field squads that can challenge for championships. The existing revenue sharing and labor situation has created some extraordinary revenue gaps among teams. In the NBA, the NHL, and MLB, the gross revenue differentials between some teams exceeds 100 percent. In 1996, the Yankees earned at least twice as much as 50 percent of the teams in baseball and the New York Knicks earned more than twice the amount earned by 13 NBA teams. For 1998 it is likely that the Yankees will have gross revenues $100 million more than at least six MLB teams. Communities that elect not to provide sufficient financial support for their team often find themselves with non-competitive teams and owners willing to accept the subsidies cities without teams are all too eager to offer. In this environment some smaller-market communities have been more than willing to provide extraordinary subsidies to attract teams from larger communities. Most recently, Hartford and Connecticut agreed to build a $375 million stadium for the New England Patriots and to guarantee the team $8.5 million in non-shared revenues to entice a move from Massachusetts.
The cartel’s control over the supply of teams also insures that teams have the ability to demand new subsidies during the term of an existing lease agreement. Five years after developing a set of fiscal lures to attract the Raiders back from Los Angeles, Oakland, California, found that the team again was willing to consider relocating in search of a still more robust set of incentives. When new demands are not met, teams readily move to areas that are more pliant. Indeed, in several instances, communities without teams have been more than willing to pay the costs associated with the breaking of a lease if that would entice a team to move.
During the last two decades more than one-quarter of all teams threatened a move, and eight franchises actually did leave one community for another. (The Sacramento Kings also moved, but in Kansas City there was declining fan interest; as such, demand for a new arena was not at the heart of their relocation in 1985.) With the exception of the Minnesota Twins whose long-term situation is still unresolved, every team that threatened to move and then decided to stay received a substantial subsidy to remain in its existing community. The franchises that either threatened to move or moved, and all expansion teams, are identified in Table 1 together with the subsidies they received.
Protecting the Public’s Investment and Interests
The principal tool used by the public sector to protect its financial investment in sports facilities and the anticipated intangible benefits is the lease or contract that is negotiated when a stadium or arena is built or renovated. In the bargaining that leads to a signed contract the public sector and the team each try to achieve their main objectives. Teams attempt to maximize their control over all revenues collected at a stadium or arena while minimizing their responsibilities for capital construction and maintenance. The public sector seeks to (1) minimize the amount of any subsidy, (2) insure that there are adequate revenue sources generated by the team to repay any debt or operating expenses related to a facility, and (3) permanently anchor the intangible benefits from a team in the community. The signed contract or lease should represent a compromise between the two sets of competing interests and include adequate protections to insure that teams and their public sector partners can accomplish their desired objectives.
Liquidated Damages or Penalties for Failing to Fulfill A Lease
One option that numerous communities have used in an effort to protect their financial investment in a sports facility is the specification of damages to be paid if a team fails to complete the term of a lease. If a community established a sufficient level of liquidated damages to offset the remaining balances on any bonds issued to finance a stadium or arena, the financial commitment would seem to be protected. There are, however, important limitations on the adequacy of liquidated damages as a protection for the public sector’s investment.
The Status of MLB, NBA, and NFL Teams Seeking New Facilities in the 1980s and 1990s
|Major League Baseball
||New Stadium Part of Expansion Bid
||$238 Million Subsidy from County (sales tax)
||Sought New Stadium
||Moved Into Remodeled Olympic Stadium
||Demanded New Stadium
||Camden Yards, $200+ Million Subsidy, 1992
|Chicago White Sox
||Threatened Move to Florida
||New Stadium, 1991, 100% Public Subsidy
||Threatened to Move
||New Stadium Approved, 1996; $250 Million Subsidy
||Threatened Move Out of Region
||New Stadium, 1994 Public Subsidy In Excess of $150 Million
||New Stadium Part of Expansion Bid
||$215 Million Subsidy (sales tax)
||Threatened Move to Suburbs
||New Stadium Approved, 1997; Public Subsidy $240 Million
||Threatened to Leave the Region
||New Stadium Approved, 1997;$180 Million Public Subsidy
||Threatened to Leave the Region
||New Stadium Approved, 1997; $232 Million Public Subsidy
||Threatened to Move to North Carolina
||Plan for New Stadium Rejected in North Carolina; Unresolved
||Threatening To Move
||New Ballpark Is Unlikely in Montreal
|New York Mets
||Requesting New Ballpark
|New York Yankees
||Threatening to Leave New York City
||Requesting New Stadium
||Threatening to Leave the Region
||New Stadium Plan Approved
|San Diego Padres
||Seeking New Ballpark
||Approved, November 1998
|San Francisco Giants
||Threatened a Move to Florida
||New Private Stadium Underway
||Demanded New Stadium
||$360 Million Public Subsidy For New Stadium
|Tampa Bay Devil Rays
||Stadium Part of Bid
||City Paid for Stadium in 1990 and renovations in 1997-98
||Threatened to Leave Arlington
||New Stadium, 1994 Public Subsidy $135 Million
|Toronto Blue Jays
||New Stadium Opened In 1989
||Public Subsidy In Excess of $262 Million (Canadian)
|National Basketball Association
||Demanded New Arena
||$62 Million In Infrastructure From Public Sector
||New Arena in 1995
||New Arena for Expansion Bid, 1988
||100 Percent Public Financing ($52 Million)
||Wanted New Arena
||City Paid for Infrastructure and Provided Tax Abatement
||New Arena To Bring Team Downtown
||Public Subsidy In Excess of $100 Million
||Threatened to Move to Arlington, Texas
||Public Subsidy of $125 Million Approved, 1998
||New Arena in 1999
||Public Subsidy Potentially Less Than $20 Million
||New Arena in 1988
|Golden State Warriors
||Substantially Remodeling in 1997
||Public Subsidy of Approximately $20 Million
||Demanded New Arena
||New Facility Approved, 1997
||New Arena Approved in 1996
||$107 Million Public Subsidy
|Los Angeles Clippers
||Will Play in Staples Arena
||See Los Angeles Lakes
|Los Angeles Lakers
||Will Move To New Downtown Arena
||Privately Financed; Public Sector Return Is Insured by Team
||New Arena Approved in 1996
||Public Pays $6.5 million per year and $34.7 Million for Land
||New Arena in 1988
||Public Paid For A Substantial Portion of $90 Million Arena
||New Arena Part of Expansion Bid
||Public Sector Now Responsible For Majority of $100 Million
|New Jersey Nets
||Arena Drew Team To New Jersey
||Public Paid for $85 Million Arena; Team Pays Rent
|New York Knicks
||Renovation to Garden in 1991
||New Arena For Expansion Bid in 1989
||Publicly Financed $98 Million Arena
||New Arena In 1996
||Private Arena; Public Sector Provided Infrastructure
|National Basketball Association (continued)
||New Arena in 1992
||Public Subsidy Exceeds 50 Percent of $90 Million Costs
||New Arena in 1995
||Private Arena; Public Sector Provided Infrastructure
||Remodeled Arena in 1997/98
||Public Loan of $70 Million
|San Antonio Spurs
||Threatening to Move to New Orleans
||Remodeled Arena 1995
||Arena Revenues For Public Sector’s $110 Million Investment
||New Arena in 1999/2000
||New Arena in 1991
||City Paid For Land, Infrastructure
||New Arena in 1995
||New Arena in 1997
||Privately Financed; $60 million from Public for Infrastructure
|National Football League
||Seeking New Stadium
||New Stadium in 1992
||State Provided Land; Public Authority and Falcons Share Costs
||Moved to Indianapolis
||Received Excellent Lease in 1984; Revised 1998
||Received New Stadium To Relocate
||Public Subsidy In Excess of $200 Million
||Threatened To Move
||Public Subsidy, $180 Million for Renovations; Operating Subsidy
||City provided land; county provided $10 Million; Balance Private
||Threatened A Move to Indiana, Suburbs
||New Stadium for 1999 Season
||Public Subsidies Exceed $200 Million
||Threatened a Move
||New Stadium Approved with $400 Million Public Subsidy
||Threatened a Move
||New Stadium Approved, 1998; Public Subsidy of $260 Million
||New Stadium Approved in 1996
||$240 Million in Public Subsidies
||Moved to Nashville
||New Stadium in 1999; $292 Million Packager to Move
||Moved from Baltimore in 1984
||New Lease With Expanded Subsidies in 1998
||Renovated Stadium for Expansion Bid
||$121 Million Public Subsidy
|Los Angles Raiders
||Moved to Oakland
||New Stadium Lease, Remodeled Stadium; $100 Million Subsidy
|Los Angles Rams
||Moved to St. Louis
||New Stadium in St., Louis; $280 Million+ Public Subsidy
||New Stadium in 1987
||Want New Stadium
|New England Patriots
||Moving to Hartford, Connecticut
||Public Subsidy In Excess of $300 Million
||Seeking New Stadium
||Seeking New Stadium
|San Diego Chargers
||Renovated Stadium, 1997
||$60 Million Public Subsidy Plus Ticket Guarantee from City
|San Francisco 49ers
||New Stadium Approved 1997
||$100 Million Subsidy
||Threatened a Move
||New Stadium Approved, 1997, $325 Million Public Subsidy
|Tampa Bay Buccaneers
||Threatened a Move
||New Stadium in 1998, $300 Million+ Subsidy
||Wanted New Stadium
||Privately Financed; $71 Million from State for Infrastructure
First, specification of the damages involves negotiations between the team and the public sector. As already noted these discussions do not involve partners with equal bargaining power and this insures that the liquidated damages will not be particularly onerous. Indeed, teams have an incentive to include liquidated damages in a contract. If liquidated damages are established, a team avoids both the expense of a lawsuit and any uncertainty as to their financial obligations and responsibilities if they wish to move.
Specification of damage levels creates another advantage for team owners. If a team knows in advance what its liabilities will be if it leaves a community it can demand a set of incentives from a "chaser" community to meet these costs. The owners of the St. Louis Rams and Baltimore Ravens were able to conclude that their fiscal responsibilities to Anaheim and Cleveland could be absorbed given the lucrative leases provided by their "chaser" communities.
Nashville’s efforts to protect its financial investment provide another example of the limitations of liquidated damage provisions. For years Nashville was a "chaser" community seeking an NFL franchise. Several years ago it was able to convince the Oilers to leave Houston. Nashville’s lease with the NFL’s Oilers required payment of $117 million if the team left during the initial 12 years of their lease and $87 million if the team were to move in years 13 through 22. While such amounts are indeed large, the cost to another city of assuming this obligation would amount to approximately $7.3 to $8.1 million per year (30-year note for $117 million with interest rates of from 5 to 6 percent). Put another way, if another city could enhance the revenue position of an owner to the point that the team could afford an additional $8 million in annual expenses, an amount equal to the annual salary of one top level player, a $117 million penalty could be supported. A penalty of $87 million would require between $5.7 and $6.3 million in annual new revenues. Damage levels that are specified during a negotiation process between partners with very different levels of power and abilities to influence outcomes never will be sufficient to deter a team’s relocation.
Second, liquidated damages provide no compensation for the loss of intangible benefits. The City of Milwaukee and the Milwaukee Brewers both recognized this point. In a memorandum of understanding signed by the team and the city it was agreed that the community would be "irreparably harmed" if the franchise left. The team also acknowledged that there was no adequate remedy at-law that would compensate Milwaukee for the loss of the team. Liquidated damages may offer some protection against financial losses from bonds that must be retired, but the damages frequently discussed in leases do not offset the loss of intangible benefits and these are some of the most important benefits for many taxpayers and public officials.
If liquidated damages do not adequately protect a community’s financial investment and interests in professional sports, what other potential tools exist? A community could attempt to establish a "clawback." Clawbacks require the beneficiaries of public-sector incentives to repay a portion or all of the benefits received if they fail to satisfy specific performance requirements. For example, many communities require firms to repay tax abatements if the corporation fails to achieve a set of established targets involving the number of jobs created and the individuals hired.
The specific point of performance for a team involves its presence at a ballpark or arena for a set number of years and the generation of certain tangible and intangible benefits. If the public sector invested $200 million with the expectation that the team would use the facility for no less than 20 years, a clawback provision could be established requiring the team to repay $10 million for each year that it failed to play in a facility. If a team left after ten years it would owe the community half of the community’s investment. If the team left after fifteen years, it would be responsible for 25 percent of the $200 million investment. A clawback of this nature, if accepted by a team, would protect a community’s tangible investment and taxpayers would be guaranteed $10 million of specific performance each year. The team assumes responsibility for these benefits and if is not present to play the games over the term of the lease, then it agrees to compensate the city for that loss.
Teams are reluctant to accept clawback provisions. Given their power to resist leases or contracts with unacceptable terms, if a clawback is accepted it will be similar to specified damages and be set at a level that can be easily met by a team if it elects to move. A clawback could offer substantial protection to taxpayers and a community if its value was set a sufficient level of offset both the tangible and intangible losses from a team’s absence. No team has ever been willing to accept these responsibilities, and a franchise’s power relative to the public sector in the negotiation process strongly suggests that no team will ever accept these terms.
Contracts, such as Indianapolis’s with the Indiana Pacers for the Conseco Fieldhouse can incorporate elements of a clawback. In Indianapolis, if the team leaves before the term of the lease expires, the team is responsible for a substantial portion of the remaining debt. The Pacers, however, accept no responsibility for any of the intangible benefits the team produces and the losses resulting if these benefits are not realized.
If a clawback becomes nothing more than an acceptable level of liquidated damages, then teams will be able to move and leave communities with unused sports facilities. Anaheim, Houston, and Cleveland encountered this problem when their teams left for St. Louis, Nashville, and Baltimore. The "chaser" communities in each of these moves provided incentives that permitted owners to absorb more than $30 million in clawbacks and other relocation costs and left the abandoned communities with underutilized facilities and unrealized intangible benefits.
Liquidated damages, clawbacks, or any other assurance made by a team in exchange for the public sector’s investments in a sports facility, can be mitigated by "escape clauses" that frequently are inserted into leases. Two different provisions have been used to relieve teams of their responsibility to fulfill the terms of a lease. The most common "escape clause" involves a stipulation requiring the public sector to maintain the facility as "first-class" or "state-of-the-art." What this means is that the facility must continue to offer a team the ability to earn a level of revenues similar to that generated for other teams by newer facilities. The Indianapolis Colts’ complaint in 1997 with the RCA Dome was that it was no longer "first class" because it lacked club seats and other revenue-generating options that had become standard for teams occupying new stadiums in the 1990s. If a local government decides not to make the necessary capital improvements to maintain the facility as "first class" or "state of the art," a team might be able to move without any fiscal liabilities. Recently the New York Islanders tried a version of this tactic arguing the Nassau Coliseum was unsafe and unfit for use.
The second escape clause occasionally used is a provision in the lease that permits teams to move if attendance at games drops below a certain level. If attendance declines below an agreed proportion of the average of all teams in the league, the trigger level is reached and a team can move. Some leases include a provision that the team must fail to sell the agreed proportion of tickets in two or three consecutive seasons before the trigger is invoked. While it is certainly reasonable for a team to expect and even demand a certain level of fan support in exchange for the franchise’s commitment to stay in an area, escape clauses tied to attendance levels can create a perverse incentive. If an owner wishes to relocate he or she simply can decide to spend less on player salaries so that the team will lose. As attendance levels are associated with performance, a team that consistently loses frequently will have the attendance levels an owner needs to relocate without incurring a penalty.
Finally, the contractual penalties incurred as a result of a move expire at the end of a lease’s term. A disappearing or diminishing financial penalty fails to recognize the long-term commitment fans make to teams and the long-term nature of the intangible benefits and business patterns that are related to a team’s presence. In addition, if a team vacates a stadium or arena, a community may be left with a sports facility that is unfit for any other economic activity and which requires the expenditure of tax dollars to meet maintenance and operating expenses. As a result, if a team moves after a lease expires a community still suffers substantial financial and intangible losses, but none of these are compensated through the provisions of an expired lease or the specification of damages to meet the cost of building a facility. In this regard, then, leases also fail to protect a community from the loss of intangible benefits and being left with a under utilized sports facility.
The Practical Problems of Using Leases
To Protect Taxpayers and Sports Fans: Selected Cases
A brief review of three situations involving teams that did not want to fulfill the terms of their leases illustrates the inability of leases to protect the public sector. The Cleveland Browns had the highest average attendance levels in the NFL for more than a decade despite having failed to win a championship or appear in the Super Bowl for 30 years. The Browns were not satisfied with the pace of their negotiations for a new stadium in Cleveland and subsequently decided to accept a large set of financial incentives to move to Baltimore despite having three years remaining on their lease.
How much of a penalty was the owner of the original Cleveland Browns prepared to pay to move his team? The team paid $12 million to Cleveland as reparations for breaking the lease, $29 million to the NFL to receive permission to move, and then forfeited approximately $15 million in expansion fee income when the new Cleveland Browns entered the league (1998). The total cost of the move was $56 million. This provides a measure of the penalties NFL team owners will pay when determined to move to another area.
When the owner of the Los Angeles Rams moved her franchise to St. Louis, the City of Anaheim received $26 million from the team in recognition of the damages incurred. The team also paid the NFL $29 million to permit the relocation. This owner had an immediate cost of $55 million and agreed to waive her rights to any expansion income from a new team in the Los Angeles market. The cost of moving the Rams may have been $70 million, but the team’s owner was willing to absorb these costs because of the enormous incentives provided by the public sector in St. Louis.
In 1984 when the Colts moved to Indianapolis, a 20-year lease was signed that provided the team with 50 percent of the luxury suite income; in 1984 this represented a particularly generous lease for an NFL team even while the public sector received all advertising and parking income. In 1998 this lease was changed to permit the team to retain all luxury seating income, advertising income, and the revenue from 4,400 club seats built by the public sector after the first year. If these terms were not agreed to there was the very real possibility that the team would have tried to move to Houston, Los Angeles, or Cleveland.
These three examples illustrate the important but inevitably limited protection offered by a lease or a clawback or any other fiscal penalty intended to protect the investment of tax dollars in a facility used by a professional team. A lease that appears generous or sufficient to meet economic conditions in one decade often is obsolete in a short five or ten years. While the teams that seek to leave cities often must pay for the privilege under the terms of their existing leases, the sums of money required frequently can be secured from other communities. Leases can be broken and challenged, and even those that assess penalties as high as $70 million may be insufficient to protect the investments made by taxpayers. Even more importantly, while the money received by a city may offset some of its fiscal investment, those revenues never are sufficient to compensate a team’s fans for their emotional losses or make whole those businesses whose success is tied to a facility and a team’s presence.
While some communities might conclude that they cannot afford to keep a team, the far more common response when a team leaves is to seek another franchise. When Milwaukee, one of MLB’s smallest markets, lost the Braves to Atlanta, Bud Selig, now commissioner of MLB, labored for years to return baseball to his hometown. St. Louis’s leadership began the efforts to attract another NFL team within months of the Cardinals flight to Phoenix. Baltimore’s mayors and Maryland’s governors entered into a 14-year quest to return NFL football to the city after the Colts left. Cleveland was prepared to sue the NFL and did receive a new franchise within months of the announcement that the Browns were moving to Baltimore. Minnesota’s public leadership also has served notice that it is not prepared to lose either the Vikings (NFL) or Twins (MLB) despite the fact that stadium issues still must be resolved. And that region worked for years to secure another hockey team after the North Stars moved to Dallas.
In each of these instances community officials understood that, while the direct fiscal value of the teams was small, the emotional and psychological benefits were substantial. Each of these communities made a substantial investment of public funds, but then lost a team because they failed to protect their investments, taxpayers, and fans. In some instances leases were broken; in others, the leases simply expired and the teams left before a new lease could be negotiated. One could argue that a team owner has the right to move a team after a lease expires. In a truly free market that argument is compelling. However, given the leagues’ control over the supply of teams, the fans and taxpayers who support a team for decades need more protection than a simple acknowledgement that an owner has the right to move his or her team. The leagues have shown an extraordinary reluctance to expand, and frequently do so only when communities, states, or the Congress threaten legal action. In the absence of a system that would permit any city that wants a team to have one, the officials in those communities with teams must find another tool to protect the public’s investments.
Eminent Domain as a Tool to Protect Taxpayers
And Their Investments in Sports Facilities
If contracts and leases cannot protect the investments made by the public sector what tool remains? For more than two centuries, the legal principle of eminent domain has allowed governments in the United States to lawfully take privately owned property for public purposes. The concept was not new when it was included in the United States Constitution; in fact, it has existed since biblical times, when King Ahab of Samaria offered Naboth compensation for his vineyard. In 1789, France recognized a property owner’s right to compensation for appropriated property in the Declaration of the Rights of Man and of the Citizen (West, 1997). The Fifth Amendment to the U.S. Constitution provides for the taking of private property upon payment of just compensation. As Michael Alan Wolfe has noted, "From the first decades after the American Revolution there was an understanding that individuals could not stand in the way of the greater good" (as quoted in Anthony, 1998: 1). Case law clearly has established that a valid public purpose will justify taking private property; indeed there is no fundamental right to retain private property. What does exist is a right to be compensated if private property is taken by government (Anthony, 1998).
While some states employ language restricting the use of eminent domain to real property and its incidents (Bond, 1998), there is no fixed meaning of "property" in this context. Personal as well as real property can be subject to eminent domain (Eagle, 1995). Private property subject to governmental taking has been held to include fixtures, leases, options, stocks, and even the rifle that killed President John F. Kennedy (West, 1997). In essence, for purposes of eminent domain, property refers not simply to the underlying estate but to all of the uses that may be made of that estate. The only limitations on the state are the requirements that a public purpose exist and that just compensation be paid. As Pilon has noted (1995: 5):
The Takings Clause was a brilliant stroke. When they wrote it, the Framers realized that there would be times when the public would have to achieve public ends by taking property from private parties. That ‘despotic power’ of eminent domain had to be accompanied, however, by just compensation, for only if the victim was made whole would the power have any semblance of justification. To do otherwise would be to make the individual bear the full burden of the public’s appetite.
While individual property rights are strongly protected by both federal and state constitutions, beginning in the early nineteenth century, the definition of what constitutes a public purpose sufficient to justify a taking has been steadily expanded (Hegyi, 1979; Anthony, 1998). The needs of the railroads gave impetus to this movement as early as the late 1800s. There was, predictably, great public outcry over the acquisition by government of railroad rights-of-way, particularly since the railroads were privately owned, for-profit enterprises. State and federal governments regarded railroad expansion as public transport for the public’s good, and the courts agreed (Anthony, 1998; Smith v. Cleveland CC & LR, 81 NE 501, 1907). Another major expansion of the use of eminent domain occurred during the 1950s in the context of efforts to redevelop declining areas of America’s cities (Anthony, 1998). In 1954 (Berman v. Parker, 348 U.S. 26), the United States Supreme Court ruled that slums could be cleared using eminent domain. The Court also held that it was within legislative power to determine whether property might be condemned solely to beautify a community (Berman v. Parker, op. cit.; West, 1997). These cases confirmed that the central issue in determining the propriety of a taking by eminent domain is the adequacy of the public purpose at the time of the forced sale. That public purpose can be served by subsequent conveyance of the property to a private party, as in the railroad and shopping center examples, or by retention of ownership by an agency of government, as in condemnation for a highway extension. Many urban redevelopment projects involve takings with a subsequent conveyance to a private-sector redeveloper. In 1984, the U.S. Supreme Court held that courts should defer to legislative declarations of specific public purposes (Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 1984).
There also is general agreement that eminent domain is not limited to tangible property. In Baltimore’s unsuccessful effort to acquire the Colts before their move to Indianapolis the U.S. District Court for Maryland held, "that it is now beyond dispute that intangible property is properly the subject of condemnation proceedings" (Indianapolis Colts v. Mayor and City Council of Baltimore, 624 F.Supp. 278, D.Md., 1985). Eminent domain has even become an instrument to protect public investment for economic development. Recently, some states have granted cities the right to use the power of eminent domain to gain "public ownership of an industrial plant or other enterprise attempting to close or move its operations (Eisinger, 1988; Hornack and Lynd, 1987; Weinberg, 1984). As a result several local governments have begun to make efforts to employ eminent domain …to gain public ownership of a variety of businesses" (Imbroscio, 1998: 238).
Eminent Domain in Indiana
To review how eminent domain could be used to protect sports fans, the application of this law in one state is reviewed. In Indiana, as in virtually all jurisdictions, courts long have upheld the taking of property for a public purpose (Hegyi, 1979). The earliest cases dealing with eminent domain confirmed the right of the state to enact legislation subordinating private property rights to "the public good," by acquiring private property with or without the owner’s consent. Eminent domain was judicially declared to be "an attribute of sovereignty [that] inures in every independent state, is superior to all property rights, and extends to all property within the state" (State v. Flammer, 26 NE 2nd 917-919, 1940).
?Like the constitutions of many states, Indiana’s constitution gives the state authority to acquire property at a fair market price to further the public interest. Article 1, Section 21 of Indiana’s constitution provides that "No man’s property shall be taken by law without just compensation; nor, except in case of the State, without such compensation first assessed and tendered." Governments in Indiana are prohibited from taking private property for public use without just compensation, but the taking itself is permitted so long as the public’s interest is being served. Indiana’s state legislature has passed laws authorizing use of eminent domain for gas storage facilities (Indiana Code, 32-11-4), flour mills (Indiana Code, 32-11-5), parks and recreation facilities (Indiana Code, 17-2-26-1), airports (Indiana Code, 19-6-1-11), and the elimination of blight" (Indiana Code, 36-7-14-12.2).
Indiana courts, sustaining the logic of the arguments in the Berman case and in concert with the opinions of courts of other states, have authorized an expansive definition of "public purpose." The courts have held that "a presumption exists in favor of the public character of a use declared by the legislature" (Sexauer v. Star Milling Company, 90 NE 474, 1910; Westport Storm Company v. Thomas, 94 NE 406, 1911).
Early Efforts To Apply The Power of Eminent Domain
To Prevent Teams From Leaving An Area
?Use of the power of eminent domain to retain a team has been attempted in at least two instances. In 1980, Oakland (California) tried to prevent the Raiders of the NFL from moving to Los Angeles. Initially an appellate court ruled that California eminent domain laws were limited to actions involving real estate. The California Supreme Court reversed the decision concluding that the only limits on the city’s power are those imposed by the federal constitution. Since intangible property can be valued in the same way as physical property, both were held to be subject to condemnation. The case was then remanded for trial, but the City of Oakland failed to prove its claim that the condemnation was necessary for public use. Oakland’s case had focused on keeping the Raiders to promote public recreation, social welfare, and related economic benefits. The trial court ruled that retention of these benefits was not sufficient to justify interference with interstate commerce (City of Oakland v. Oakland Raiders, 123 Cal. App. 3d, 442, 1981; City of Oakland v. Oakland Raiders, 174 Cal. App. 414 1986).
It is necessary that any governmental entity seeking to use its powers of eminent domain prove that the injury to the public’s welfare outweighs any incidental burden upon interstate commerce. Oakland’s failure to demonstrate the magnitude of the intangible benefits of the team to the community and for the public’s welfare may have represented a critical error. The trial court concluded that the proposed use of eminent domain was not appropriate for three reasons. First, the City of Oakland had failed to establish the public purpose for its action. Second, the City of Oakland’s claim was illegal under federal anti-trust law. Third, Oakland’s action interfered with interstate commerce and the local interests being protected were insufficient to justify the burden on interstate commerce.
Fearing the loss of the Colts, Maryland legislators introduced a bill authorizing Baltimore to condemn professional sports teams under the state’s eminent domain procedures. However, before the bill could be enacted and eminent domain used, the Colts’ owner moved the physical assets of the team to Indianapolis. The measure was passed and Baltimore went forward with its claim of eminent domain, but a state trial court ruled that the law could apply only to businesses located in the state. Since by the time the court action was filed the team’s physical assets no longer were in Maryland, the City of Baltimore could not exercise its power of eminent domain (City Council of Baltimore v. Baltimore Football Club, Inc., 624 F. Supp. 278, 1985).
The Use of Eminent Domain to Protect Taxpayers
If contractual arrangements cannot secure the tangible and intangible benefits taxpayers and public officials seek when they invest funds to attract and retain a team, an appropriate eminent domain process for insuring a team’s presence must be developed. What steps need to be followed?
First, the enabling legislation that is passed must identify the public purpose that is served by the presence of a professional sports team. In the absence of an adequately articulated and defined public purpose a taking cannot be justified. Furthermore, some challenges to eminent domain laws have raised the issue of interference with interstate commerce; the public purpose served by a team’s presence must be sufficient to outweigh any incidental burden on interstate commerce (Pike v. Bruce Church, 397,U.S.137; NCAA v. Miller 10 F3d 633, 1993). The legislation developed must clearly specify the tangible and intangible benefits anticipated from the team’s presence and the investment of public funds in a sports facility or for an incentive package that attracts or retains a franchise.
In terms of the tangible benefits from teams and the facilities they use, very little economic activity is added to a region or city’s economy (Baade, 1996; Rosentraub, 1997). However, teams can and do redirect recreational spending and the movement of recreational spending between cities or to inner city areas can meet important public policy goals. As a result, a team’s presence can have a major impact on the public’s welfare relative to the goals established by the legislature or a city council. With regard to intangible benefits, surveys clearly illustrate how much teams mean to community residents (Swindell and Rosentraub, 1998), and many writers and scholars have discussed the importance of sports for all societies across more than 4,000 years of human history (Michener, 1976; Wilson, 1994; Rosentraub, 1997). As such, insuring that a team remains in a community can be considered fulfilling an important public purpose.
Second, an eminent domain law developed for the purpose of insuring that a team remains in an area must be capable of application to intangible or personal property. Existing eminent domain laws in some states may limit seizures to real property. As a result, a change in a state’s laws may be required.
Third, states may need to pass an enabling law making it possible to condemn a team. In Indiana, for example, extension of eminent domain laws to specific activities has required specific statutory language. In most states specific authority is necessary to empower a municipality to take a sports franchise.
Fourth, to avoid the problem that Baltimore encountered when it attempted to secure the Colts, the legislation permitting condemnation of a team should be enacted at the same time that a public subsidy is approved. In addition, the legislation should require that any team seeking to leave the state or city must provide six-months notice of its intent to leave. Such a provision would allow a state or city sufficient time to explore its options should it choose to use its power of eminent domain. Baltimore’s effort to secure the Colts was thwarted by the failure of the Maryland to have an appropriate law in-place before the team could move its assets out of the state. If an owner must provide six months notice of his or her intent to move a franchise and the law to condemn a sports team exists, then a community will have the time required to evaluate all of its options.
The fifth matter that must be considered is a way to evaluate and determine what is the fair or just compensation that should be offered for a professional sports team? Frequently the value of a team is greater in a larger market or in a community that will provide the largest subsidy. If eminent domain is used to insure that a team remains in a state, the value of the team should be established by its value in the other markets that want the franchise. In this manner the state or city that condemns a teams can insure that the financial interests of a team owner are completely protected while the interests of the public sector are served.
Eminent domain is not the only tool available to protect taxpayers and sports fans. Cities and states could be permitted to purchase teams if owners wanted to leave an area. At the current time, however, the four major sports leagues do not permit a city or state to own a team. That can be changed. A community could be given the right to establish a franchise if it had an investor who met a league’s requirements. Implementing either of these provisions would create a "level the playing field" between teams and cities in their negotiations. However, at the current time, no league has expressed any interest in accepting either of these limitations on their power, and the U.S. Congress has been similarly reluctant to require any changes in league operations.
If these changes are not made, then state and local governments have no option but to rely upon their power of eminent domain to protect taxpayers’ investments in the facilities that produce substantial profits for teams and income for players. With increasing and alarming regularity, state and local governments have been asked to improve the revenue potential of virtually every team. If a community refuses to provide a sufficient level of subsidies for a new facility, teams invariably move to other locations. Furthermore, the U.S. Congress has refused to require the four professional sports leagues to protect taxpayers’ investments despite providing the leagues with important protections from market forces.
The playing field for the negotiations between teams and communities can be leveled only if the community has the right to claim the team for taxpayers and sports fans under its powers of eminent domain. If team owners and the four professional sports leagues understood that the failure to bargain in good faith relative to income potential and market size could lead to the forced sale of the team (for just compensation), negotiations would proceed in a far more even-handed manner.
Having the right to use eminent domain and using it should be options open to any community. To be sure, there will be instances in which a community will not be interested in keeping a team. Market conditions in professional sports, including the low levels of revenue sharing, might convince a particular community to let a team leave. In addition, if there was no potential for finding a private owner for a team after acquiring a team through eminent domain, a community also might decide to let a team leave. However, given the very real and substantial nature of the intangible benefits created by teams, and the escalating costs borne by taxpayers for those teams, these are decisions that each community should be empowered to make.
When taxpayers are asked to subsidize a privately owned enterprise, government officials must consider the costs to be incurred and the benefits to be reaped. A decision to proceed, and to invest public dollars, is made in reliance upon the representations made and expectations created by the private entity. Government officials making a decision to spend tax dollars on sports venues have a fiduciary obligation to protect that investment, just as the franchise owners have an obligation to fulfill the obligations they assume in return for public money. The relationship between the public sector and the franchise owners is essentially contractual; in a contract, both parties are entitled to receive the benefits of their bargain.
For the public sector, most of the benefits received from a team are intangible. As a result, the payment of dollars is inadequate to make the public sector whole in the event a team leaves. For owners, the benefits are primarily financial, although many owners may derive intangible benefits as well. Owners of sports teams can be "made whole" by the payment of money, in the same manner as the owner of the family farm can be made whole. Certainly, the price to be paid should be calculated to insure that the owner receives fair value for the property in return for being divested of it. The intent is not to deprive a business person of the benefits of ownership, but to insure that the public sector gets what it has paid for.
Anthony, Ted, 1998, "Eminent Domain Under the Republic: Individuals Not Allowed to Stand in the Way of Progress" Los Angeles Times, February 1, p. 1
Austrian, Ziona and Mark S. Rosentraub, 1997, "Cleveland’s Gateway To The Future," in Roger G. Noll and Andrew Zimbalist’s Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, Washington, D. C.: The Brookings Institution, pp. 355-384.
Baade, Robert, 1996, "Professional Sports As Catalysts for Metropolitan Economic Development," Journal of Urban Affairs, 18: 1, pp. 1-18.
Bond, Joshua, 1998. "Eminent Domain in Georgia."
Butler, Henry N., 1993 "Regulatory Takings After Lucas," Regulation, the Review
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Eisenger, Peter, 1988, The Rise of the Entrepreneurial State, Madison: University of Wisconsin Press.
Hegyi, Louis J, 1979, "Eminent Domain in Indiana: 1816-1865," 54 Indiana Law Journal, p. 427.
Hornack, J. S. and Lynd S., 1987, The Steel Valley Authority, Review of Law and Social Change, 15, pp. 113-125.
Imbroscio, David L., 1998, "Reformulating Urban Regime Theory: The Division of Labor Between State and Market Reconsidered," Journal of Urban Affairs, 20: 3, pp. 233-248.
Indiana Code Provisions Authorizing Eminent Domain:
a)?I.C.32-11-4, (Gas storage).
b)?I.C.32-11-5, (Flour mills).
c)?I.C.17-2-26-1, (Parks, Recreation).
e)?I.C.36-7-14-12.2, (Elimination of Blight).
Indiana Code procedure on eminent domain, I.C.32-11-1-1, et.seq.
Indiana Code, Professional Sports Development Areas, 36-7-31.3-1. et. seq.
Indiana Constitution, Article 1, Section 21.
Lipsyte, Robert, 1995, "Why Sports Doesn’t Matter Any More," New York Times Magazine, April 2, pp. 51-57.
Minnesota Twins Partnership v. State of Minnesota, 1998, C9-98-890, Respondent’s Brief and Appendix, Supreme Court State of Minnesota.
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Mullen, Liz, 1998, "NFL’s Next New Team May Pay Lower Entry Fee," Street and Smith’s Sports Business Journal, 1: 20, September 7-13, p. 7.
Noll, Roger and Andrew Zimbalist, editors, 1997, Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, Washington, D. C: Brookings Institution.
Pilon, Roger, 1995. Testimony before the Subcommittee on Constitution,
Committee on Judiciary, United States House of Representatives
Piraino, Jr., Thomas A., "The Antitrust Rationale for the Expansion of Professional Sports Leagues, Ohio State Law Journal, 57: 5, pp. 1677-1729, 1996.
Rosentraub, Mark S., 1997, Major League Losers: The Real Costs of Sports and Who’s Paying for It, New York: Basic Books.
Rosentraub, Mark S., 1998, "Why Baseball Needs New York To Just Say No," The Nation, 267: 5, August 10/17, pp. 20-26.
Swindell, David and Mark S. Rosentraub, 1998, "Who Benefits from the Presence of Professional Sports Teams? The Implications for Public Funding of Stadiums and Arenas," Public Administration Review, 58: 1, pp. 11-20.
Tucker, William Michael, "The Original Understanding of the Takings Clause, " 95 Columbia Law Review 782 (1995)
Weinberg, R., 1984, "The Use of Eminent Domain To Prevent An Industrial Plant Shutdown", Albany Law Review, 49, pp. 95-130.
West’s Legal Directory, 1997. Eminent Domain.
Wilson, John, 1994, Playing By The Rules: Sport, Society, and the State, Detroit: Wayne State University Press.
Zimbalist, Andrew, 1998, "A Scary Thought: Jones May Be Right About Browns," Street and Smith’s Sports Business Journal, 1: 20, September 7-13, p. 7.