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Volume 16, No. 2 © 2008 The Metropolitan Corporate Counsel, Inc. February 2008 Stadia Mania: The Business, Civic And Legal Issues Of New Stadium Construction – Part I

John R. Middleton, Jr., buildings that Ð with Scott L. Walker their modern fan amenities, licensing and Matthew Savare and sponsorship opportunities, and LOWENSTEIN SANDLER PC luxury suites and other premium seat- The New Economics of Sports And ing Ð provide sub- The Boom Of New Sports Facilities John R. Scott L. Matthew stantial additional When the National Hockey League’s Middleton, Jr. Walker Savare revenue streams fre- quently absent from (“NHL’s”) New Jersey Devils took the particularly evident in the New York met- older facilities. Owners claim that these ice in their state-of-the-art $365 million ropolitan area, where in addition to the revenue sources are necessary for them to Prudential Center in downtown Newark, Prudential Center, major league fran- compete and survive economically in New Jersey in October 2007, they chises have recently undertaken no fewer today’s sports business environment. Fur- became the sixty-fifth and most recent than five significant development pro- thermore, while some observers remain franchise in the United States’ four jects: next April both the Yankees and dubious, owners and other supporters of “major” professional sports (i.e., football, Mets are scheduled to begin play in ultra- these projects have in many cases suc- baseball, basketball, and hockey) to open modern, yet classically-inspired new sta- cessfully convinced government officials, a new or substantially renovated facility dia; in 2010 the soon-to-be Brooklyn potential investors, and key community since 1996. At least thirteen other teams Nets plan to open their Frank Gehry- leaders that new stadia Ð particularly have begun construction on or announced designed Barclays Center, the anchor of those built in urban centers Ð generate plans to build their own new facilities that the $3.5 billion Atlantic Yards develop- additional economic activity, create new are scheduled to open by 2012. While ment project; the Red Bulls of Major jobs, and encourage commercial and resi- new stadia have been and continue to be League Soccer (“MLS”) have broken dential development in the surrounding introduced in markets throughout the ground on a 25,000 seat soccer-specific area.1 Owners have also skillfully lever- United States, this “stadium boom” is stadium in Harrison, New Jersey; and the aged many cities’ desire to have profes- NFL’s Jets and Giants have jointly begun sional sports teams Ð and to enjoy the work on a new $1.3 billion New Jersey perceived related prestige, prominence, John R. Middleton, Jr. practices intel- stadium that will feature as its center- and enhanced reputation Ð to obtain lectual property and complex commercial piece a 40 x 400 feet video “frieze” of “sweetheart” stadia deals by threatening litigation, Scott L. Walker practices panels visible through an eight-level lou- to relocate, or, in some cases, in fact antitrust, intellectual property, and com- vered exterior. departing one market for another city plex commercial litigation and Matthew Several key factors have driven the offering a better stadium arrangement. Savare practices intellectual property, recent spate of professional sports facility The process of securing approval and media, and entertainment law with construction. Most importantly, player funding for these stadium projects, as Lowenstein Sandler PC. Part II will salaries and other costs continue to rise well as the acquisition of the necessary appear in the March issue of The Metro- exponentially. This economic reality has land, management of the construction politan Corporate Counsel. fueled franchise owners’ pursuit of new itself, and maximization of revenue from Please email the authors at [email protected], [email protected] or [email protected] with questions about this article. Volume 16, No. 2 © 2008 The Metropolitan Corporate Counsel, Inc. February 2008

the new facilities raise myriad economic, city, state, and Metropolitan Transporta- occurred in 1957 when the City of Los political, and legal issues. In part one of tion Authority sales taxes on purchases of Angeles condemned 300 acres of prime this article, we will briefly discuss two of construction material, fixtures, and real estate in Chavez Ravine in order to the most prominent of these: (1) public equipment. lure the Brooklyn Dodgers out of New financing of new stadia and (2) the use of (6) The city will forgo a portion of the York. The most recent example of the use eminent domain to acquire all or part of stadium’s parking revenue. of eminent domain to benefit a New York the proposed stadium site at a lower price (7) The Mets will receive increased metropolitan sports team11 involves the than might otherwise be paid in a free- rent credits. New Jersey Nets, who are currently market transaction. Part two of this arti- (8) The city and the state will both embroiled in a bitter contest with Brook- cle, to be published in the next issue of make direct “capital replacement” pay- lyn residents related to the team’s efforts The Metropolitan Corporate Counsel, ments into a reserve fund for the stadium. to build the Barclays Center. The Nets will address two strategies available to (9) The city has granted the Mets a case provides a good example of how franchise owners seeking to capitalize on mortgage-recording tax exemption. courts analyze Ð or at least should analyze the financial opportunities that new stadia (10) Finally, the Mets will pay no Ð a government taking related to the con- offer: the sale of naming rights to new rent for the use of the new stadium, struction of a sports arena. facilities and the introduction of suites although the team will pay for its mainte- Although there are multiple litigations and other high-end seating targeted to nance. Given the dilapidated status of the that relate to the Nets’ project, it is the new and existing corporate clientele. current stadium and the obligation of the case now on appeal to the United States Facility Financing: A Public-Private city to pay for its upkeep, the city projects Court of Appeals for the Second Circuit Partnership that it will save $31 million under this that most squarely addresses the govern- new arrangement. 6 ment’s eminent domain power.12 In the Notwithstanding the significant In total, the direct subsidies, exemp- expansion in the number of major league trial court, United States District Judge tions, and bond financing will save the Nicholas G. Garaufis dismissed the chal- sports franchises over the past two Mets approximately $276 million, while decades, demand for professional teams lenge brought by plaintiffs Ð all of whom costing New York City $155 million in own or rent land in the area condemned in metropolitan areas continues to exceed lost revenue and the State of New York 2 by the government Ð finding that the pro- the supply. Due to this relative scarcity, a $89 million.7 The Yankees received a fierce bidding war continuously rages ject met the public use requirement. In very similar financial package from the reaching his decision, Judge Garaufis among cities to secure or retain a profes- city and the state, with the team receiving sional franchise.3 Frequently, teams are noted that, under the relevant precedent, $276 million in benefits over a thirty-year “a taking fails the public use requirement enticed to move or remain in a particular period, at a cost to the city and state of city through large public subsidies, such if and only if the uses offered to justify it $170 million and $85 million, respec- are ‘palpably without reasonable founda- as extravagant new stadia built at the tax- tively.8 payers’ expense and leased at low or no tion,”. . . such as if (1) the ‘sole purpose’ rent; tax holidays; and generous conces- This Land is My Land; This Land of the taking is to transfer property to a 13 sion, parking, and luxury box rights.4 Was Your Land: Eminent Domain private party.” Applying that standard to Indeed, as a final inducement, many In addition to the various incentives the proposed Atlantic Yards development, cities pay huge “signing bonuses” to the noted above, the government’s power of the court found that plaintiffs’ challenge teams in the form of direct payments. “eminent domain” is a tool often used by failed because their complaints “when For example, the proposed financing the public-private partnerships formed to examined carefully, concern[] only the plan for the Mets’ new stadium included develop new stadia and arenas. That measure of a public benefit Ð as opposed the following terms, many of which are power Ð if successfully exercised Ð usu- to its existence.”14 And on this point, the common in new stadium and arena deals: ally involves a government condemna- judge stressed Ð relative to the Nets and (1) The project will be subsidized by tion of privately owned land in order to the Barclays Center in particular Ð that granting the Mets access to tax exempt allow that land to be developed for a plaintiffs failed to “allege that having a bond financing, which will save the team “public use,” so long as the private owner professional team in Brooklyn is not in approximately $105 million over the next receives “just compensation” from the itself a benefit to the public.”15 Finally, the forty years.5 government.9 At a minimum, the exercise Court rejected plaintiffs’ notion that the (2) New York City will invest $105 of the power of eminent domain allows government’s offered public uses are million for infrastructure and capital stadium construction to occur on pri- “mere pretexts” for a desire to “bestow a improvements, including site preparation, vately-owned land that would otherwise private benefit” on the development cor- demolition of Shea Stadium, and the likely be unavailable for development for poration, noting that plaintiffs’ allega- paving of parking lots. Like most public such a project. Moreover, eminent tions were implausible given their projects, the city will raise this money by domain can significantly reduce the pro- concession that the “[p]roject will create issuing bonds and paying the principal ject costs borne by the team by allowing large quantities of housing and office and interest with general city revenues. developers to secure necessary land at a space, as well as a sports arena, in an area (3) The State of New York will con- lower price than might otherwise be paid that is mostly blighted.”16 In sum, the tribute $70 million for infrastructure. on the open market.10 Court dismissed plaintiffs’ challenge (4) The new stadium will be exempt Perhaps the most famous example of a because of the project’s acknowledged from the city’s property tax. government’s successfully exercising this benefits to the public. Other public-pri- (5) The stadium will be exempt from power for the benefit of a sports franchise vate partnerships contemplating develop- Volume 16, No. 2 © 2008 The Metropolitan Corporate Counsel, Inc. February 2008

ment of a new stadium should take heed the leagues abuse their inherent monopoly power by land Raiders I, 32 Cal.3d 60. But on remand, a lower unnecessarily and unfairly keeping the number of Court rejected the proposed taking on the grounds of the benefits discussed in Judge Garau- franchises low, thus increasing the competition among that such action would impermissibly burden interstate fis’s decision as they plan their projects. cities for sports teams. commerce. City of Oakland v. Oakland Raiders, II, 174 Cal. App. 3d 414 (Ct. App. 1st Dist. 1985). The current wave of stadium construc- 3 As noted above, some of the reasons cited to justify tion shows little sign of waning. The public expenditures for new stadia include job cre- 10 For instance, a municipality can condemn land and ation, increased tax revenue, enhanced economic then lease the land to the team, thereby eliminating financial bonanza that new facilities activity, and quality of life benefits. Jordan Rappaport the need for the team to buy-off the land owners. This promise and the inevitable rise in player and Chad Wilerson, What are the Benefits of Hosting is what Springfield, Massachusetts recently tried to do salaries and other costs ensure that own- a Major League Sports Franchise? Federal Reserve for a minor league baseball team Ð albeit unsuccess- Bank of Kansas City Economic Review (First Quarter fully in that case. See Citizens of Springfield v. Drei- ers of sports franchises will continue to 2001). son Invs., Inc., 2000 Mass. Super LEXIS 131 (Mass. pursue more modern and more lucrative 4 Super Ct., Feb. 25 2000). Paul C. Weiler and Gary R. Roberts, SPORTS AND THE new stadia. And the limited number of LAW 530, 542 (West Group 1998). 11 New Jersey’s most prominent sports facility was the product of a quasi-eminent domain action in which the major league teams in the United States 5 Because the interest income from tax exempt bonds state passed a statute that enabled the development is not subject to state or federal income tax, investors strongly suggests that there will almost of the Meadowlands sports complex. See New Jersey are willing to accept a lower rate of interest, which in Sports & Exposition Auth. v. McCrane, 292 A.2d 580 always be some city whose government turn lowers the project financing costs for the team. (NJ Superior Ct. 1971), aff’d in pertinent part, 292 and civic officials are prepared to subsi- However, in granting this subsidy, the state and fed- A.2d 545 (NJ 1972). dize new stadium development projects eral government lose tax revenue. George Sweeting, Financing Plan for the Proposed Stadium for the Mets 12 In addition to the case in federal court, there have at substantial public cost in order to retain (Revised), The City of New York Independent Budget been several other legal challenges to the Nets pro- an existing team or lure a new one. In part Office (April 21, 2006). ject. See Nicholas Confessore, Judge Rejects Main Argument of Effort to Stop Atlantic Yards Project in two of this article, we will briefly exam- 6 Id. Brooklyn, The New York Times, June 7, 2007 (detail- ine two important ways that the franchise 7 Id. ing decision in Federal court and making reference to several other court challenges to the project), avail- owners who most directly profit from 8 Testimony of Ronnie Lowenstein Before the City able at http://www.nytimes.com/2007/06/07/nyre- new stadium projects reap the economic Council Finance Committee on Financing Plans for gion/07yards.html?scp=3&sq=nets+arena+environme the New Yankee Stadium (April 10, 2006). benefits made possible by the current sta- ntal+impact+Brooklyn (last visited January 9, 2008). dia mania. 9 See, e.g., City of Oakland v. Oakland Raiders I, 32 Most notable among those other cases is the litigation Cal.3d 60 (1982) (citing the requirement that an emi- challenging the environmental impact statement that nent domain condemnation be for a “public use” with relates to the project. On January 11, 2008 the New

1 “just compensation.”). These requirements are York State court hearing the matter dismissed plain- Notably, however, many observers who have ana- embodied in the constitutions of most states and in tiffs’ challenge, thereby further clearing the way for the lyzed the issue are highly skeptical of this argument. the takings clause of the Fifth Amendment to the project to move forward. See Judge Dismisses See, e.g., Neil DeMause and Joanna Cagan, Field of United States Constitution, which provides that “pri- Brooklyn Arena Foes’ Petition, Associated Press, Jan. Schemes: How the Great Stadium Swindle Turns vate property [shall not] be taken for public use, with- 11, 2008, available at http://www.nydailynews.com/ Public Money Into Private Profit (Revised and out justcompensation.” Typically, of course, ny_local/brooklyn/2008/01/11/2008-01-11_judge_dis- Expanded) (University of Nebraska Press, 2008); governments use their power of eminent domain in misses_brooklyn_arena_foes_peti.html (last visited Andrew Zimbalist and Roger G. Noll, Sports, Jobs, relation to real property and for the purpose of trying January 11, 2008) and Taxes: Are New Stadiums Worth the Cost? The to retain or attract sports franchises. But there have Brookings Institute, Summer 1997 available at 13 Goldstein v. Pataki, Docket No. 06-cv-5827, at 56 been attempts to use it to condemn property other http://www.brookings.edu/articles/1997/summer_taxe (E.D.N.Y. June 6, 2007) (citations omitted), available than real estate in order to prevent a team from mov- s_noll.aspx?p=1 (last visited January 9, 2008). at http://www.dddb.net/documents/legal/eminentdo- ing. For example, the City of Oakland attempted Ð main/motiontodismiss/court/GaraufisOrder12b6.pdf 2 An examination of the antitrust issues raised by the albeit unsuccessfully Ð to condemn and operate the (last visited January 12, 2008). conduct of these sports leagues Ð whether under Sec- Raiders football franchise to prevent the team from tion 2 of the Sherman Act, Section 7 of the Clayton leaving town. Note, however, that the California 14 Id. at 57. Act, or various other relevant federal and state Supreme Court initially found that neither the state nor 15 Id. at 59. statutes Ð is beyond the scope of this article. It is federal constitutions precluded the City of Oakland worth noting, however, that many critics charge that from condemning and operating the team. See Oak- 16 Id. at 64.