The NFL'S Stadium Binge

The league is loaded down with debt from building venues filled with luxury skyboxes. With tickets to games still unsold, owners are pushing for a new labor deal with players.

By Aaron Kuriloff
Bloomberg Markets, November 2009

Anthony Noto, the National Football League’s chief financial officer hired from Goldman Sachs Group Inc. last year, dons a hard hat for a tour of what will be the most expensive U.S. sports stadium ever built. On this sunny day in mid-2008 in East Rutherford, New Jersey, workers pour concrete and weld steel girders for the unnamed $1.6 billion venue where both the New York Giants and the New York Jets will play their home games next year.

Noto peppers Thad Sheely, a Jets vice president, with questions about the costs and likely revenue from about 200 luxury skyboxes, each to feature flat-screen televisions and a wet bar, as well as the Coaches Club. The club includes a 20,000-square-foot (1,860-square-meter) field-level bar designed by Nobu restaurant architect David Rockwell and an outdoor patio only 5 yards (4.6 meters) behind the bench where the Giants and Jets sit.

The stadium epitomizes the NFL’s costly building spree during the past 15 years. Many owners used cheap credit to build and renovate 24 of the league’s 31 venues, more than quadrupling debt held by teams and the league to about $9 billion this year from 1996. With debt service headed for a 45 percent jump in 2009 from three years earlier and revenue growth slowing during the recession, owners’ profits are falling. So now they’re pushing for a new labor agreement with the NFL Players Association that may take stadium and other costs into account, reducing the total amount of money going to players at least in the short term, says Michael Cramer, a former president of baseball’s Texas Rangers who teaches sports management at New York University.

First Shot

“The problem is, you had all this money floating around, making it easy for owners to build stadiums,” says Brian Billick, the Baltimore Ravens head coach when they won the Super Bowl in 2001 and author of More Than a Game: The Glorious Present and Uncertain Future of the NFL (Scribner, 2009). “A lot of things like stadium debt conspired to draw down that money, and owners said, ‘We got a problem; the good life is about to end.’ That’s when they fired the first shot, opting out of the labor deal.”

In May 2008, with Noto’s encouragement, the 32 owners voted to exercise their right to end the labor contract, which was set to expire in 2013, two years early. The agreement awards salaries that devour about 60 percent of the league’s revenue. The move was decried by the union, which said last year it can’t convince players to make less so owners can make more, and set the stage for a possible lockout or strike that could derail the 2011 season.

West Point Linebacker

Noto, who’s helped the league refinance about $2 billion of its debt and develop a five-year growth strategy, gained battle experience on the gridiron and Wall Street. The 6-foot-2-inch (188-centimeter) CFO was a star linebacker at West Point military academy, leading the team in tackles with 129 in 1990 before enduring one of the military’s harshest tests: training to be a member of the Army Rangers, a special forces unit. Later, as a Goldman analyst, Noto withstood media attacks -- CNBC reporter David Faber called him “Anthony No Dough, Anthony Don’t Know” -- for hyping Internet stocks before they began crashing in 2000.

Now he’s helping NFL team owners take on the 1,800-strong players association. Noto says the current union deal impedes the league’s ability to invest in projects such as international expansion and that’ll hurt both owners and players.

“The issue is that the labor agreement and the increased cost of running a team are meaningfully reducing our ability to invest and reach more fans,” Noto, 41, says. “This is not good for the league, which in turn is not good for the players.”

War of Words

Jeff Pash, the NFL’s chief negotiator, says a new agreement that recognizes the economic realities owners face will spur growth and generate bigger salaries and benefits to players.

The labor dispute has quickly escalated into a war of words. DeMaurice Smith, executive director of the union, told players in August to prepare for a lockout by owners.

“We find ourselves in one of the most difficult positions as players in the history of the NFL,” Smith said at the Giants camp in Albany, New York, according to Newsday.

NFL Commissioner Roger Goodell shot back in September, saying owners are seeking an agreement through negotiations, not a lockout.

“The idea that owners are looking for a lockout is foolish,” Goodell told reporters. “That’s really not a practical outcome for them in terms of being beneficial to the league.”

Brady, Sanchez

As owners and players bicker about money, fans have been riveted to the quarterback dramas of the 2009 season. Tom Brady, the New England Patriots’ two-time Super Bowl Most Valuable Player, returned after knee surgery sidelined him last season and won the opening game against the Buffalo Bills with two touchdown passes in the final two minutes.

The following week, Jets rookie quarterback Mark Sanchez outplayed Brady in the second half to beat the Patriots, snapping an eight-game losing streak at home against New England. Sanchez is the first rookie quarterback to start a season with a 3-0 record since the NFL merged with the American Football League in 1970. And Brett Favre, the 39-year-old owner of almost every quarterback record, came out of retirement for the second time to play for the Minnesota Vikings, a hated rival of his former Green Bay Packers team. The two teams square off Monday night Oct. 5.

Off the field, owners are watching their revenue take a hit. Last year, the NFL brought in almost $8 billion -- the most of any sports league in the world. Football topped Major League Baseball by $1.5 billion and posted more than twice the revenue of England’s Premier League, the world’s biggest soccer league by sales.

Tickets for Sale

With the average price of a premium football ticket at about $226, fans filled NFL stadiums to about 96 percent capacity during the 16-week regular season. The last Super Bowl, which ended with the Pittsburgh Steelers scoring on a pass to the edge of the end zone for a 27-23 victory over the Arizona Cardinals, drew 98.7 million viewers -- a U.S. broadcasting record.

This year, owners have been scrambling to sell tickets and find corporate sponsors amid a recession that’s dragged on for at least six quarters. Jerry Jones, owner of the Dallas Cowboys, is still searching for a company to buy the rights to have its name put on his stadium, which opened in June. The Giants had 400 tickets left unsold as of mid-September for the new stadium’s Coaches Club, each requiring a $20,000 license fee and costing $700 a game.

Twenty-four owners didn’t raise ticket prices for 2009 out of concern that their cash-strapped fans wouldn’t pay more. As of mid-September, 12 teams had unsold seats, making television blackouts likely. Games aren’t broadcast locally if tickets are available 72 hours before kickoff.

Costs Jump

“There are tickets available, and our clubs are working extremely hard to address those issues,” Goodell, who took a pay cut of at least 20 percent from about $11 million for 2008, said in September. “Some people are having a difficult time, whether they’ve lost their job or they’re not willing to make that expenditure going forward.”

As fans stay home, the NFL’s revenue is growing at a slower pace than its expenses. Costs excluding players’ salaries have jumped 12 percent from 2006 through mid-September, says NFL spokesman Greg Aiello.

“When you take on stadiums, you take on huge expenses, you take on huge risks,” says Jones, 66, who borrowed and then refinanced about $435 million in variable-rate bonds in 2008 for his Cowboys Stadium. “That’s changed the dynamics of the financial aspect of the NFL.”

Cowboys Stadium

The $1.15 billion Cowboys Stadium boasts two 120-foot-tall retractable glass walls, luxury suites with granite bars costing as much as $500,000 a season and a high-definition video screen spanning 60 yards directly over the gridiron.

The owners’ balance sheets are governed by a fundamental rule of football finance: revenue sharing. In 1961, owners began dividing money from national broadcasting, product licensing and nonpremium tickets -- equaling a total of 80 percent of revenue today -- to put teams on an equal footing and make them competitive. Decades later, the 1987 players’ strike led to a new labor agreement in 1993.

In the deal, players won free agency, allowing them to switch teams when their contracts expired. Owners got a limit on players’ salaries: Total payroll would equal about 55 percent to about 60 percent of some of the league’s annual revenue. The cap, which started at $34.6 million per team in 1994, has increased to about $128 million in 2009.

‘Double Whammy’

To pay their star players big bonuses and sign top free agents, owners began building amenity-filled stadiums. The motive: Money from premium seating, restaurants and retail stores isn’t shared among teams. The strategy grew costly as construction expenses jumped 12 percent compounded annually starting in 1995 and the public’s desire to pay for stadiums dried up. With governments struggling to fund schools and police, public stadium financing plunged to an average of 30 percent per stadium in 2007, less than half the amount from a decade earlier.

“It’s a double whammy,” Noto says.

As profits fall -- the Packers’ net income plunged 80 percent to $4 million in the year ended in March 2009 -- owners are now pressing the union for a better deal. The players association says owners haven’t made a convincing case that they are struggling financially and need a new agreement. A 2009 union study by two University of Chicago economists showed that the average value of teams soared 360 percent from 1998 to 2008, to $1.04 billion, a growth rate that exceeds the rise in debt.

Manning’s Pay

Players’ pay has almost quadrupled since the 1993 labor agreement. Giants quarterback Eli Manning, who led his team to a 17-14 victory against the Patriots in Super Bowl XLII, became the league’s top-paid player in August with a six-year deal, earning about $15.3 million annually.

“The ownership doesn’t want us to gain any more,” says Cardinals quarterback Kurt Warner, 38, a two-time MVP who threw for an NFL record 414 yards in the 2000 Super Bowl. “And players don’t want to lose anything that they’ve already gained. So it’s a tough situation.”

Noto, who tore ligaments in both knees when he was hit during an Army exhibition game in his sophomore year, appreciates how hard NFL players work and how quickly injuries can end their careers. The stepson of a manufacturing line worker at International Business Machines Corp., Noto grew up north of New York City in Poughkeepsie and played quarterback in high school. He enrolled at nearby West Point in 1987, lured by its reputation for producing leaders, and barely made the football team.

‘Very, Very Aggressive’

Noto’s big break came when then-Army assistant coach Bob Sutton converted him from a fullback into a linebacker, a position where he excelled because of his ability to read various offensive sets.

“He was very, very aggressive and very, very smart,” says Sutton, now the linebackers coach for the Jets.

The 1990 Army-Navy game marked the end of Noto’s football career. During Navy’s first possession, he hit quarterback Alton Grizzard hard, knocking him to the ground. As Noto helped Grizzard up, they had a brief conversation that the former linebacker recounted in a 2008 article in Sporting News.

“Anthony, is it going to be like this all day?” Grizzard asked. “Alton, it’s going to be like this the rest of our lives,” Noto said. Grizzard was killed three years later in a shooting at a naval base in California.

Hired by Goldman Sachs

After graduating in the top five percent of his class of more than 900 students with a degree in mechanical engineering, Noto volunteered to train to become a Ranger. For 63 days, he ran and hiked for miles in mountains and swamps carrying as much as 80 pounds (36 kilograms) of gear, existing on about one packaged meal and three hours of sleep a day. Noto lost 40 pounds off his 225-pound frame.

He served four years as a signal officer in an infantry division, mostly at Fort Stewart in Georgia, with brief stints in Kuwait and Egypt after the end of the Persian Gulf War. In 1995, Captain Noto was discharged after finishing his Army commission.

Noto earned a Master of Business Administration from the University of Pennsylvania’s Wharton School in 1999 and was hired by Goldman Sachs in the midst of the dot-com boom. As an analyst covering Internet companies, he added to Wall Street’s hype of stocks such as EToys.com, an online retailer later bought by Toys “R” Us Inc. Goldman Sachs managed the initial public offering of Webvan Group Inc., an online grocery delivery service, in November 1999. For the next 13 months, Noto maintained a buy on the stock. During that time, it fell from $24.69 to 50 cents.

Makes Partner

Noto, anguished over his bad calls, learned to admit his mistakes, even going so far as calling clients after he made them.

“The most important thing to understand about how Anthony survived the bubble bursting was that he always worked his butt off,” says Heather Leonard, then a research associate at Goldman on Noto’s team.

She says Noto sent e-mails to her as late as 2 a.m. “He leveraged all the lessons learned from the mistakes of the bubble -- which models worked and which didn’t. He was able to be more scrutinizing,” Leonard says.

The analyst soon redeemed himself. In 2004, his stock recommendations rose an average of 30 percent, outpacing the 9 percent gain of the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. That same year, Goldman CEO Henry Paulson, who would later become U.S. Treasury secretary, called Noto to tell the 36-year-old analyst that he had made partner, a title awarded once every two years that’s a vestige of the firm’s days as a partnership before it went public in 1999.

NFL Asset

Heading communications, media and entertainment research, Noto made another good call in 2007. He concluded that rising debt costs and stricter credit terms would cause consumers and companies to restrict spending, damping economic growth. In a Sept. 4, 2007, report, six months before the collapse of Bear Stearns Cos., Noto downgraded the entire entertainment sector to “cautious” from “neutral.”

Days later, Noto got a call from an NFL executive, who asked if he was interested in applying for the league’s vacant CFO post. Football honchos knew Noto from following his coverage of News Corp., whose Fox Sports broadcasts Sunday afternoon football games, and their other partners.

Noto, who had worked at Goldman for almost a decade, was ready for a change. Commissioner Goodell announced his hiring of Noto four months later in January 2008, saying in a statement that his “strategic capabilities” made him a significant asset to the NFL.

Pete Rozelle

After helping inflate the dot-com bubble, Noto has been assisting the NFL deal with the fallout from another one. The CFO has an office near Goodell’s on the 17th floor at NFL headquarters on Park Avenue in midtown Manhattan. Noto and other league executives dine in the building in their own restaurant, called Huddle Cafe.

In May and June 2008, at Noto’s request, he met with the 32 owners individually in the Rozelle conference room, named after the pioneering commissioner Pete Rozelle, who served from 1960 to 1989 and created the Super Bowl. The Giants’ John Mara, one of the owners who got caught in the credit crisis, says he spoke with Noto about dealing with his team’s debt burden.

In 2007, the Giants sold $650 million in auction rate bonds -- securities with interest rates that reset at weekly or monthly auctions -- underwritten by Lehman Brothers Holdings Inc. and Goldman Sachs. Banks promoted the securities, with yields of about 5.5 percent in August 2007, as lower-cost alternatives to longer-term fixed-rated bonds.

Auction Rate Bonds

The following February, the subprime mortgage crisis crept into the auction rate market. Rating companies downgraded bond insurers with exposure to the bad debt, including Financial Guaranty Insurance Co., the backer of the Giants’ bonds. As the $330 billion market for the bonds collapsed, banks ended their practice of stepping in to support the auctions as buyers of last resort, leaving issuers paying penalty rates to investors stuck holding the securities.

For five months in 2008 and 2009, rates on some Giants bonds spiked to between 14 percent and 22 percent. When asked what he learned from the experience with stadium financing, Mara, 54, was terse.

“Don’t borrow so much money,” said Mara, whose team redeemed $100 million of the securities in 2008 and repurchased another $361 million this year, according to data compiled by Bloomberg.

Cardinals

While the Giants and Jets didn’t get public money directly for the stadium, the Cardinals caught a break: The city of Phoenix and the state of Arizona pitched in about $300 million for the team’s new $446 million venue. Cardinals owner Bill Bidwill borrowed about $75 million in a revolving loan from Bank of America Corp.

Opened in 2006, the team’s new home was named University of Phoenix Stadium. The school, founded in 1976 and owned by educational service provider Apollo Group Inc., offers classes online and at more than 200 U.S. locations. It’s paying $154.5 million over 20 years to put its name on the building and market its brand.

The retractable-roof stadium is the first in the U.S. to have a field that slides on rollers from the middle of the arena to an outdoor location so the sun can shine on the natural grass. Bidwill increased the number of skyboxes to about 100 from about 50 and more than doubled their $35,000 to $50,000 price.

NFL Network

“We’ve got a naming rights deal that is one of the most significant in the league,” says Mike Bidwill, 44, the owner’s son and team president. “We’ve got all sorts of other sponsors. Our stadium seats are full.”

The team also has the cash flow to extend contracts of top young players before they become free agents. In 2008, the Cardinals signed their Pro Bowl receiver Larry Fitzgerald to a four-year, $40 million deal, helping the team reach the Super Bowl in February. Fitzgerald set post-season receiving records with 546 yards in 30 receptions, 7 of them touchdowns.

As the Steelers attempt to win a third Super Bowl since 2006, Noto says the NFL must invest to draw even more fans to the game. The league says it wants to expand its six-year-old NFL Network, which televises eight games a season, to increase the number of viewers and provide other football programming. Owners have also proposed expanding the number of games played in a season by 2 to 18 and adding more matches in the U.K. and other locations.

“We need to play offense,” Noto says. “So we developed a strategy that will go after sports fans.”

Investment Incentives

During negotiations with the union, the league may push to create incentives for investment, says Mark Ganis, president of the Chicago-based Sportscorp Ltd., an industry consulting group. Owners may want the total cost of stadium construction and operation deducted from revenue before it’s shared with the players, he says. That could reduce the amount paid to players by a few percentage points in the short term, Ganis says.

“The league suggests that by having incentives to invest in growth opportunities that the players will likely receive more money down the road.”

The owners hadn’t made any specific proposals as of mid- September. Jeff Kessler, the union’s outside counsel and a negotiator, says the league has refused a request to provide documentation of its financial woes. Since March, the NFL has signed extensions of its broadcast contracts with CBS Corp., General Electric Co.’s NBC, DirecTV Group Inc. and Fox. By 2011, the league will be earning a record $4.1 billion a year in television money, up from $3.7 billion in 2008.

‘Tougher on Players’

“Given that the recent broadcast agreements by the NFL all show increases, the players cannot simply accept the owners’ word that there is an economic need to change the deal,” Kessler says.

Goodell says the league will share appropriate information with the union to try to reach an agreement.

“They know our revenue to the penny,” Goodell said in May. “They clearly know our player costs. And they know a lot of our stadium costs.”

The owners are bargaining from a position of strength, NYU’s Cramer says. Teams would be able to pay debt service for 18 months without playing football, according to a May report from Standard & Poor’s.

“It’ll be tougher on the players,” Cramer says. “The only thing that will stop these two sides from making a deal is an inflated view of their positions or greed.”

Owners built stadiums with high-priced amenities to boost profits and help them pay top players to create championship teams. For a while, it worked: Of the 10 teams in the past five Super Bowls, 8 played in new or refurbished arenas. Now that owners are struggling with debt, they’re telling players it’s in their best interests to take one for the team.

Aaron Kuriloff reports on the NFL for Bloomberg News in New York. akuriloff@bloomberg.net

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