TATIANA & NEHA

          When people desire new homes or want to renovate their existing establishments they use their own savings and also seek loans from banks or utilize lending services. When colleges need money to enhance their current structures and revamp their campuses they raise the money from alumni and donors or seek grants from the state. Like families and colleges, sports organizations also have to finance the renovations of their own “homes”. The National Football League uses various methods to finance their teams and stadiums, but the league is also under criticism because of the use of tax-payer dollars.

 

          There are many ways to finance the construction or remodeling of NFL stadiums. Public funding is procured by state, county and city governments. It comes in the form of funds, property transfers, and tax abatements (Sabo 2014). Usually cities and  counties provide the most money. They raise money by issuing municipal bonds and repay the bonds by charging certain fees or taxes. These can include city sales taxes, car rental taxes, ticket admission taxes, income taxes and more. Private funding is also used to finance NFL stadiums and includes money that is not taken from public tax earnings. This funding can include owner capital and secured loans, stadium seat licenses, and the NFL’s G-4 loan program. 

 

 

          In 1999, the National Football League designed the NFL Resolution G-3 program to help its teams build their stadiums. Each team could receive up to $150 million of financing. The program did well in its early years and was extended in 2003. After about ten years, though, the money was depleted and the NFL needed a way to revamp the program. In early 2011, the NFL experienced a lockout that lasted 5-6 months. The lockout happened because players and owners could not come to terms for their new Collective Bargaining Agreement or CBA. The agreement itself gives a framework for how the league will function and is the rulebook for players, their agents, team owners and other league officials. Thankfully in July, an agreement was made. “After months of public nastiness and private negotiations, of court filings and rulings, of players and owners squabbling over more than $9 billion a year... Football is back” (ESPN 2011). With the new agreement came provisions for new stadium funding. The CBA states that the stadium credits can only amount to 1.5% of total league revenue. Towards the end of 2011, the NFL created the guidelines for the new stadium funding program: the NFL Resolution G-4. 

 

 

1. Up to $200 million for new stadium construction;

 

 

2. Up to $250 million for stadium renovation;

 

 

3. Repayment of G4 financing by the team over 15 years through revenues related to premium seating;

 

 

4. G4 loans to teams will be determined on a case-by-case basis by the NFL;

 

 

5. G4 loans are available to only public-private stadium projects. (Jackson 2011)

         

 

          In order to be eligible for funding, teams have to be able to match the loan amount. It is also important to note that teams cannot use G-4 funding for stadium relocations. Although the NFL Resolution G-4 is a great source of funding for the league’s teams, it does come with flaws. The first issue is that there is a limit to how much money the league can provide. “The G-4 program has a set limit of 1.5% of annual revenue to fund various projects. In the first year of the current CBA, that amounted to $135 million. The loans are for as little as 15 years, so the annual payments can be quite high. For a $200 million loan at 7-9%, that’s up to $25 million per year” (Layer 2013). This example shows exactly how the program works. In the case above the league would be able to provide funding for 4 teams needing new stadiums, each receiving $25 million a year. The other $35 million per year would go towards helping teams that only wanted to renovate their current homes. In order to provide more funds, the league would have to find ways to increase revenue. A few years ago this may have been a hard task, however with the economy and buyer power on the rise the NFL may be able to help finance more stadiums with G-4 money sooner than it previously believed. Another issue with G-4 funding is that the league expect teams to repay the G-4 loans through earnings from Personal Seat Licenses or PSLs. These licenses allow fans to buy season tickets and are extremely costly (Alexander 2012). PSLs are basically shares of ownership for fans. They are released as IPOs and later sold on secondary markets. In recent years, team owners have driven up the price of personal seat licenses. This has caused premium seat license owners to lose money on their investments. Some have lost up to thousands of dollars. Most fans buying these licenses, though, are using their seats to cheer on their favorite teams and not for resell. These fans buy cheaper PSLs instead of premium seats. An article on Forbes.com states, “Teams tend to sell PSLs for seats in the lower bowl corners at below-market prices... so those seats are most likely to jump in value over time—even in stadiums where most PSLs stumble” (Alexander 2012). Team owners value these seats at below market prices in hopes that fans will place a higher value on the PSLs and buy them at a premium. This is usually the case. Because of this Premium Seat Licenses are still seen as the best way to productively fund new stadiums (Jackson 2011).

 

          So while there are flaws in the G-4 program, the NFL has been able to effectively combat them.It is no question that the National Football League is one of the most highly profitable organizations in the world. Because of this many question why the league is exempted from paying taxes under the IRS 501 (c) 6 code. Irs.gov states that this section “provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.” For many individuals it is hard to see how the league can be considered a non-profit organization. NFL teams generate millions of dollars through sale of apparel, licensing and ticket sales. The teams are usually owned by millionaires and billionaires, but they rarely have to put their own money into renovating and building stadiums. Taxpayers end up having to pay higher taxes and fronting more than half of the bill. Even in debt-ridden cities like Chicago, millions of civilian dollars are poured into these projects. Some teams even receive more funding than they actually need. In 1966, along with the IRS inclusion code, the NFL was also granted exclusive rights to the broadcasting of their games. The deal is know as Public Law 89-800 and was dealt in exchange for the promise that the league would not schedule games on Friday or Saturday nights in respect for high school football games (Khan 2014). When the law passed there was no opposition because TV contracts were not lucrative. Exclusive sports channels were nonexistent. Today, these TV contracts bring in billions of dollars every year. To the public eye, it would seem that the National Football League is a gold mine. Copious amounts of money are put into the organization and it thrives due to the fact that it never has to give any money back.

 

 

          Even under the scrutiny, the NFL has found ways to defend its tax-exempt status. “The misconception that the NFL by virtue of this status pays no taxes is simply not true. All monies that are redistributed to each team and the salaries of all of its employees are subject to taxation” (Sabo 2014). The NFL’s first defense is to point out to its critics that each team and its employees pay taxes. Even the CEO, Roger Goodell pays taxes because his salary does not come from the earnings of the organization. The league also makes it known that all income derived from ticket sales, TV rights fees, merchandise sales and more are subject to federal taxes (Steele 2013). Although the NFL may not be paying taxes exactly how outsiders believes it should, its different entities are still paying federal taxes. 

 

 

          To make the public and critics happy, Congress would have to make the National Football League a for-profit organization and prohibit it from monopolizing broadcasting rights. There is a possibility, though, that it would have a negative effects. Lance Sabo believes that losing its non-profit status would lead to the league not being able to effectively negotiate contracts. Instead each individual team would take on these responsibilities and the costs associated with them (2014). Teams would have to drive up prices for ticket and apparel sales in order to increase revenue. Although taxes would decrease, the public would still pay for these high costs for simply wanting to support their favorite teams. Without the exclusive rights to broadcasting, the NFL would not be able to showcase the same amount of free televised games. This would not sit well for the millions of fans that can not afford to see their favorite teams live. In the end, the public would not be satisfied.

 

 

          Who knew the financing of the National Football League was such a complex topic. Even with all its criticisms, the organization has managed to stay on top thanks to all the different forms of public and private funding. Revenue within the NFL continues to increase every year which in turn allows the to be able to help themselves. At some point, it will be beneficial for the league to find ways to decrease the amount of tax payer dollars going into their organization.

 

At this point, the contractual terms of the G-4 loans are unclear. It would be interesting to see if teams pay the same interest rate for the loan or if each time is assigned a different rate. If the rates are different, that would mean the NFL sees different teams as riskier than other teams. Some possible future issues are whether or not the program fund will run out like its predecessor and whether or not will teams default on their loans. Hopefully, the new and improved loan program will at least outlast the G-3 program. In regards to defaulting, teams get 15 years to repay their G-4 loans. The program as been around for about 3 years, and to our knowledge there has not been any defaults. It is doubtful that any NFL team with the means to acquire the loan would end up defaulting later on, especially since the NFL remains the top growing sports organization in the country. Only time will tell as far as both these issues go.