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Dodgers Costing $2.15 Billion Hinges on Property Return

The new owners of the Los Angeles Dodgers will need more than great play on the field to justify the record $2.15 billion they paid for the baseball team. They may need to transform the real estate surrounding Dodger Stadium into a money maker, succeeding where their predecessors failed.

Exploiting the property’s value will take years, more capital and lengthy government review, said David Carter, sports business professor at the University of Southern California’s Marshall School of Business. Television rights alone won’t be enough, said Lee Ohanian, an economics professor at the University of California, Los Angeles.

“The most likely source could be development of that land,” Ohanian said in a telephone interview.

New owners led by Guggenheim Partners LLC Chief Executive Officer Mark R. Walter, sports executive Stan Kasten and former Los Angeles Laker Earvin “Magic” Johnson haven’t outlined plans for the 250 acres (101 hectares) near downtown. Past owners including Frank McCourt, who agreed to sell on March 28, unsuccessfully proposed everything from a team museum to a football stadium, leaving the area little changed since 1962.

“It’s a vital piece,” Carter said in a telephone interview. “It’s a longer slog to get there -- they will get there -- as opposed to licensing and media rights, which take a year or so.”

Anniversary Celebration

The Dodgers will celebrate their 50th season at the stadium in Chavez Ravine, less than 2 miles (3.2 kilometers) north of Los Angeles City Hall, at an April 10 home opener against the Pittsburgh Pirates. As part of the purchase, parking lots and undeveloped land surrounding the stadium were sold for $150 million to a joint venture of McCourt and affiliates of Guggenheim Baseball Management LLC.

The new owners will need to generate about $50 million in additional earnings a year, beyond baseball operations and TV rights, to produce an annual return of about 8 percent on their investment before taxes, Ohanian said. That’s because they paid $650 million more than the $1.5 billion he estimates the team to be worth.

“I was surprised by the $2.15 billion,” Ohanian said. “It didn’t seem to make sense.”

The Dodgers reported earnings of $11.3 million before interest and amortization in the 12 months ended March 2011, according to court documents. Ticket sales accounted for $102.9 million of the $286.5 million in revenue, followed by $49.9 million for broadcast rights.

Record Price

McCourt had been seeking at least $1.5 billion for the team, people familiar with the bidding who asked not to be named because the process was confidential, said in February.

The $2.15 billion price tops the $1.1 billion Stephen Ross paid for the National Football League’s Miami Dolphins, a record for a professional sports franchise. The previous record for a Major League Baseball team was the $845 million that Joe Ricketts, founder of TD Ameritrade Holding Corp. (AMTD), paid Tribune Co. in 2009 for the Chicago Cubs and Wrigley Field.

Media rights have provided the biggest source of new revenue for major-league teams, said Michael Rapkoch, president of Sports Value Consulting LLC, who has provided studies for about 80 baseball, football, basketball and hockey franchises.

The Texas Rangers signed a 20-year, $3 billion TV contract with News Corp.’s Fox Sports in 2010 and reached the World Series the last two seasons. Last year, the Los Angeles Angels of Anaheim signed a similar contract with Fox, allowing them to acquire free agents Albert Pujols and C.J. Wilson.

Chapter 11 Bankruptcy

McCourt has until April 6 to make public details of the sale as part of a plan to leave bankruptcy. He put the Dodgers into Chapter 11 last June, after Baseball Commissioner Bud Selig rejected a new TV contract with Fox Sports, which holds the rights through the 2013 season. The sale must be completed by April 30, according a divorce settlement with his ex-wife Jamie McCourt, who is owed $131 million.

McCourt may collect more than $1 billion from the sale before taxes after paying off creditors and his ex-wife, according to Carter.

The Dodgers’ controlling partner will be Walter, who oversees $125 billion in assets at Guggenheim, which has headquarters in Chicago and New York. Michelle Lee, a spokeswoman for the partnership, declined to comment on plans for the real estate or stadium.

Magic Johnson

Others in the partnership include Kasten, a former president of the Atlanta Braves and Washington Nationals, and Johnson, the hall-of-fame Lakers guard whose post-basketball career has included real estate investing and development.

The new owners may have to spend as much as $400 million to renovate the stadium and improve the team, said Kenneth Lombard, president of Johnson’s development company from 1992 to 2004.

“Over the years, it has been thought of for mixed-use and housing or as the place for a football stadium,” said Lombard, now a partner of Capri Capital Partners, a Chicago-based real estate investment firm with $3.6 billion in property and financial investments. “I think we’re probably looking at a three-to-five-year horizon during which you could make something happen if you’re focused.”

While the Los Angeles commercial real estate market hasn’t recovered from the recession, Chavez Ravine’s potential value comes from its proximity to downtown, “almost within walking distance of 300,000 jobs,” said Carl Muhlstein, an executive vice president at the downtown Los Angeles office of Cushman & Wakefield Inc.

Stadium Safety

The owners will also have to improve traffic and safety at the stadium to win support of the neighbors and the city before new development is approved, said City Councilman Ed Reyes, who represents the area and chairs the council’s planning and land-use management committee.

“I’d be more than happy to work with them,” Reyes said in a telephone interview. “But this is not the old rancho days when I just give you a piece of land because I like you.”

On opening day last year, a San Francisco Giants fan suffered severe brain injuries when he was beaten in the Dodger Stadium parking lot. The Dodgers finished the season 82-79, or 13th out of the 30 Major League teams.

McCourt, who made his fortune as a parking-lot developer in Boston, bought the team for $430 million in 2004 and sold it after Major League Baseball accused him in bankruptcy court of being “unable to properly distinguish between his personal interests and those of the club.”

Football-Stadium Proposal

McCourt’s price broke down to $330 million for the team and $100 million for the real estate, including the stadium. Under the terms of his sale to the Guggenheim group, the property without the stadium has a $300 million value.

A football-stadium proposal for Chavez Ravine would face competition from two other investment groups trying to lure an NFL franchise to the Los Angeles area, which hasn’t hosted a home team since 1994, before the Rams moved to St. Louis and the Raiders returned to Oakland.

Philip Anschutz, owner of Los Angeles-based AEG Worldwide, plans to release a 10,000-page environmental impact report for a $1 billion, 60,000-seat stadium in downtown Los Angeles as soon as tomorrow, said Michael Roth, a company spokesman. Edward P. Roski Jr., chairman of Majestic Realty Co., has been trying to lure an NFL team to a site in the City of Industry, 20 miles east of downtown.

‘Behind the Scenes’

A Chavez Ravine football stadium is “something I’m sure behind the scenes gets a bit of whisper activity right now because the land is entitled” for use for sporting events, said Lombard, Johnson’s former partner. “Having said that, looking at mixed-use options is probably the buyers’ primary focus.”

The owners of the NFL’s New England Patriots developed a 1.3 million-square-foot (121,000-square-meter) complex adjacent to Gillette Stadium. Patriot Place’s shopping center, movie theaters, hotel and medical center attract visitors on non-game days. AEG built an entertainment-and-hotel complex called L.A. Live in downtown Los Angeles, across the street from Staples Center, home of the Lakers.

The San Francisco Giants baseball team today announced plans for a $1.6 billion office, housing and retail project for its stadium parking lot.

Losing Bids

The winning group for the Dodgers was chosen by McCourt over offers from billionaire Steve Cohen, who runs hedge fund manager SAC Capital Advisors LP, and Stan Kroenke, who owns the National Football League’s St. Louis Rams and Arsenal of English soccer’s Premier League. Cohen and Kroenke didn’t respond to requests for comment.

Rick Caruso, a Los Angeles-based developer, dropped out of the bidding after McCourt insisted on keeping a share of the land and parking rights, he said in a Feb. 27 interview with Bloomberg Television.

Chavez Ravine was home to a community of predominantly Mexican-American immigrants who were driven out under a plan to build public housing. When the Dodgers left Brooklyn for Los Angeles in 1958, the land was an incentive for owner Walter O’Malley to move west.

Few teams control real estate with the potential value of Chavez Ravine, said Roger Noll, professor emeritus of economics at Stanford University. Unlike fans in other cities, most Dodger lovers are a captive audience with limited access to public transit and few options for dining nearby. The new owners may boost revenue by adding amenities to the property.

“I don’t know a stadium where there’s so much land associated with a sports team,” Noll said in a telephone interview. “At the time it was built, it was state of the art. But obviously it’s out of date now.”

To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net; Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

To contact the editor responsible for this story: Daniel Taub at dtaub@bloomberg.net

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