AEG and the NFL want to bring a team—probably either the Vikings or Jaguars—to L.A. But it’s not that simple.
Billion-dollar projects are rarely simple, but the Los Angeles football stadium proposal involves a special kind of complexity. AEG Worldwide, the largest entertainment group in the world, wants to buy the publicly-owned convention center in downtown Los Angeles and some of the surrounding land in order to renovate the center and build a football stadium. Usually, stadium deals are simply negotiations between a team and politicians. Los Angeles features no team, a private entertainment group, a league (which may not even want a team in Los Angeles), and politicians.
Despite the complications, AEG recently came to non-binding terms with the city on a stadium deal. However, the agreement is contingent on an NFL team being moved to Los Angeles, because without a team AEG would have a low revenue ceiling. If a team isn’t awarded to Los Angeles, the convention center likely won’t be renovated as thoroughly and any benefits to the local economy will be marginalized. Politicians are feeling the pressure to complete the deal in its entirety, which leaves the city even more subject to the whims of two vastly successful enterprises that thrive on leverage differentials.
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Founded 16 years ago to finance a downtown Los Angeles arena, AEG has refocused on its home turf. Before AEG, many stadiums and arenas were owned by municipalities or local governments with private operators. It was the operator’s job to schedule events, and they had little incentive to fill a venue’s calendar 365 days a year.
In an era where virtually every sports stadium was being funded with vats of public money, AEG was formed specifically to finance the construction of the Staples Center in downtown Los Angeles. Most owners giggled behind AEG’s back because AEG was offering to privately finance the entire arena when, with a lot of whining and a little persistence, they likely could have extracted significant public funding.
AEG saw dead weight in venues. There was a lot of money left on the table with empty days on the event calendar, and AEG planned to turn those vacancies into major events. They started by acquiring several small promoters in the LA area and using their contacts to recruit events to the Staples Center. The arena quickly became one of the busiest in the world.
As successful as the Staples Center is, AEG’s ultimate triumph was not a construction project, but a renovation. In London, the Millennium Dome was a punch line to a bankrupt joke, sending politicians and locals into fits of passive aggressive mockery over the entire Millennium Project. When the city of London wanted to dump the Dome off on an overly optimistic investor, AEG put their pens to the paper. Now the unpopular dome is the O2 Arena, and it’s the busiest music venue in the world.
AEG’s successes have circulated the globe, and now they are back to Los Angeles, hoping to bring football with them.
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AEG’s business model involves building a stadium and simultaneously acquiring ownership rights to a team that will play in it. When asking (demanding?) a city to help fund a new stadium, an owner needs leverage. The easiest way to gain leverage is to threaten to move, even if the owner has no intention of doing so. In the NFL, the hypothetical destination is invariably Los Angeles. The vacancy of the second largest TV market gives a tremendous amount of leverage to NFL owners.
Since professional football left Los Angeles in 1994, 20 new football stadiums have sprung up across the country, most involving the threat of relocation to sunny LA at some point in the negotiation process. Teams scorned Los Angeles to stay in cities like Cleveland, Cincinnati, and Indianapolis. All told, about $9.8 billion worth of stadiums have been built since the last pass was thrown in Los Angeles, roughly half of which was paid for by the public. Meanwhile, television contracts have been increasing by the billions per renewal. If the NFL is suffering any ill effects from not having a team in Los Angeles, they are buried deep in the league offices on Park Avenue.
But Los Angeles might have reached its peak as a leverage generator. There are only a handful of teams still looking for new stadiums: Minnesota, San Diego, San Francisco and Oakland (most reports have them seeking a joint stadium in Santa Clara), and perhaps Jacksonville (although they are a lower priority due to its market size).
The new Collective Bargaining Agreement with the players provides some limited insight into how the future might unfold. Rumors are that the league has allocated 1.5 percent of league revenue for a new stadium fund, but there will be a cap of three stadiums funded. This cap is likely the result of its predecessor, the G-3 loan program, being prematurely sucked dry. Three may seem like an arbitrary number, but it might be the result of a miscalculation. The NFL may have been too presumptuous when considering the Vikings stadium negotiations, since the city and state governments have proven less willing to cover a majority of the costs than previously believed.
Nevertheless, with only three possible stadiums receiving league credits, the NFL must choose carefully. Expansion is not an option—the NFL has stated dozens of times that they like the 32 team balance and will not upset it—so if a team is to come to LA, it will be at the expense of another city. In an ironic scenario, the NFL might be left with new stadiums for every team and no franchise in Los Angeles because of a lack of leverage. In order to have any leverage remaining when it’s time to allocate a franchise to Los Angeles, the timing must be perfect.
A joint Raiders-Niners stadium in Santa Clara makes too much sense for all parties involved. Now that both ownership groups seem to acknowledge the necessity of a joint stadium, a Santa Clara project seems more of a “when” than an “if”. San Diego has an attendance guarantee that will be risky to abandon; if the Chargers don’t sell out any home game, the city makes up the difference in revenue. Likewise, the state government will put pressure to bring a team from out of the state, since moving within California simply shuffles money around in the state legislature without generating any real revenue.
This leaves the Jaguars and Vikings. It’s too early to know how the Vikings situation will develop, but with the state in astounding fiscal trouble, it’s hard to imagine too much money will be allocated to downtown Minneapolis for a new football stadium. Unless the Vikings get a Godfather offer from Minnesota, they seem like the perfect answer to the NFL’s timing issue.
The NFL needs two teams available for leverage. The Jaguars and the Vikings are ideal candidates. The league needs impeccable timing, and the clock may indeed be ticking.
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If the clock is ticking in the distance for the NFL, there’s a doomsday alarm in California. Facing 11.5 percent unemployment and plenty of fiscal troubles, they’re in the catch-22 of needing to invest in job creation and having no money to do so. (The need to invest in job creation isn’t factually accurate, but politicians are slaves to voters’ misconceptions.)
AEG plans to renovate the convention center and put the football stadium where the current West Hall is located. Economists agree that sports stadiums generate little economic activity; it just shifts money from other forms of entertainment, creating few permanent jobs in the process relative to the size of the investment.
Conversely, convention centers are much wiser investments. They result in more out-of-state visitors who stay longer and spend more money while in town. This directly leads to more hotels, car rentals, restaurants, bars, and other forms of entertainment that are year-round businesses, which in turn generates more jobs. Add a like-new facility and Los Angeles would be a premier destination for any convention.
This arrangement is the result of a rare orchestration of timing and leverage. AEG stands to make downtown Los Angeles its personal revenue stream (where they also own a live music venue, hotels, bars, and restaurants), the NFL’s window to move a team to LA is narrowing, and politicians are being pressured to do something to ease hardships in the local economy.
This is not to say the deal is done. A lot still stands in the way. Even when there is just a team and a city, stadium deals are notoriously unstable, so the Los Angeles scenario is even more subject to complications. The balancing act of incentives is delicate, and any minor shift could make a deal collapse. To many voters, the city ought to be the dealmakers and assure the sparkling convention center and stadium become icons of the downtown area. Anything less would be a collapse of competence.
If the deal makes sense for AEG, the NFL, and politicians, the variable is ultimately the taxpayers. How much will it end up costing the city in subsidies and tax breaks? With politicians under pressure to simply get the deal done, Los Angeles could have the NFL again, but at what price?
—Photo Al Pavangkanan/Flickr