Royal Farms Arena Case Study
Introduction
With recent growth in professional basketball, the city of Baltimore has caught the NBA’s eye. The last time Baltimore had a professional basketball team was back in the early 1960s. The Chicago Zephyrs moved to Baltimore and were known as the Baltimore Bullets. The name originated from Baltimore’s American National League basketball team (Albero, 2016). The Bullets played at the Baltimore Civic Center, which is now the Royal Farms Arena. With the possible expansion of professional basketball, I believe that the team should play in Royal Farms Arena.
Background on Royal Farms Arena
Royal Farms Arena took over the naming rights of the stadium in 2014 with a 1.25 million dollar deal. The contract included that the store agreed to …show more content…
pay $250,000 per year for five years. The owner of the arena is under a management company called SMG Holdings but the city of Baltimore owns the arena all together (Albero, 2016).
With the contract they received $200,000, with a $50,000 for “finders fee” which is a fee paid by a business to a organization for bring them potential new employees, investors or buyers (I, 2016). The Royal Farms general fund, which manages the buildings operations, comes to $592,713. The management fee and the net fee are tied together and are broken into three parts. “$0-$750,000, 100% of profit is returned to the city of Baltimore (Young, 2015)”. $750,000-$1 million of the net profit, about 80 percent of that goes to the operator while the city of Baltimore receives 20 percent. If the net profit is a $1 million and above, the percentages are reversed, and the city of Baltimore receives the 80 percent while the operate only receives 20 percent. In 2014, the net income increased to a $1,233,217 (Young, 2015).
Why Royal Farms Arena?
Royal Farms Arena is located about a mile from both Camden Yards and M&T Bank Stadium, putting it right in Downtown Baltimore. It is also accessible from 3 of Baltimore’s major highways, the light rail, and numerous bus lines (KPMG, 2007) The stadium has hosted numerous college basketball games (Wizards, 2013), including the University of Maryland vs. University of North Carolina Men’s Basketball games, later this month (Arena, 2016). Adding the team to the existing stadium, is cost effective for the city and they have already proved that they have the resources to host basketball games.
Some people may question the movement to the arena because of its size. It fits about 14,000 people making it the smallest NBA stadium behind the Sacramento Kings with 17,500 (KPMG, 2007). The average stadium seats about 20,000 fans, but since the city of Baltimore has not had an NBA team since 1963, so you cannot predict if they would fill up a full 20,000 stadium. Also, with the smaller capacity, there are more opportunities for sold out games. Sold out games contribute to a positive image for the team, which will persuade more people to come. If the team becomes successful and begins to generate enough revenue, then they could revisit the idea of creating a new stadium with more seating and box seats. The 850 parking lot also could be a red flag, but being only a mile away from M&T Bank stadium, there are 4 additional parking garages with “more than 30,000 spaces available” (Ravens,
2016).
Payment Through Leasing
The arena is owned by the city of Baltimore, and the new team would be in a similar situation as the Baltimore Orioles and Baltimore Ravens. Both the Orioles and the Baltimore Ravens have leasing agreements to their stadiums. (KPMG, 2007). The Orioles have a thirty year lease with Camden Yards, and the rent for the park comes to about 7 percent of the net admissions revenue. According to the Philip Merrill College of Journalism, there is an additional $5,000 added for each special game whether thats, postseason, All-Star or exhibition games (Killer 2012). From 1992 to 2009, “the Orioles paid an average rent of $4.5 million dollars (Killer 2012)”. Leasing deals are common in the NBA also. The two contracts I looked at were between the Oklahoma City Thunder and the City of Oklahoma, and The Charlotte Hornets and the City of Charlotte.
The first deal I am going to mention is The Charlotte Hornets and the City of Charolette. The facility was paid for with 2 bonds backed by revenue from the city and tourist taxes (Marquette, 2015). The term of the agreement states the the Hornets and the City agreed to play their Home Games in the Arena for a period of 25 years, with the option for the Hornets to extend the lease five years (Marquette, 2015). The rent for the arena is a maximum of $23.2 million and is paid by the team.
The second deal is between The Oklahoma City Thunder and the City of Oklahoma. Since the team was moving from Seattle, the Thunder had an initial lease term of fifteen relating to “Seattle Agreement and enactment by the State of Oklahoma regarding financial incentives upon the relocation (Marquette, 2015)”. The deal states that the Thunder would pay $1,640,000 in annual rent which comes to about $40,000 per game.
The leasing deal for the Baltimore team should be similar to the Thunder’s deal. Baltimore’s team would be moving into an existing arena like the Thunder, opposed to the Hornets who built the stadium at the same time as the creation of the team. Since this is an upcoming team for the area, the renters fee should come to around 1,145,000 dollars. This is because they are playing an arena that has not be renovated since 2003, and seats 6,000 less the the average NBA stadium. The contract should be about 10 years long with the options to expand and after the first 3 years, get the team would get the option for possible renovations.
The funds from Baltimore’s agreement will come from five sources, tickets, concessions, advertising, premium seating, and merchandise. The first source of funding comes from ticket sales. The team would receive the home game revenues of the net revenues from ticket sales. For concession, they would receive 35 percent of the first $2 million, 37.5 percent of 2 million to 4 million and 40 percent of sales exceeding 4 million. For advertising, the deal would be similar to the Thunder where they would receive games day revenues attributable to home games of net revenues from adverting (Marquette, 2015).
The fourth way to fund the stadium is in premium seating. The Wall Street Journal notes that premium seating and club suites can easily represent 50 percent of a teams’s profit, “making the luxury suite market a critical source of income (Titlebaum, 2012).” The first five rows from the floor of the arena would be know as “Club Baltimore”. These seats would include waitress service and some small promotions of certain game days, whether its a t-shirt or something else. The team would receive 25 percent of the sales for the first million. 28 percent of 1.25 million to 1.5 million and 30 percent of sales exceeding 1.5 million.
How This Will Benefit Baltimore
The expansion to Baltimore will bring many opportunities to the people of Baltimore and the businesses. Like I mentioned before, the stadium will be about a mile away from both of the other professional team’s stadiums, giving them the opportunity to grab from both of their fanbases. Another point is that the playing in an already existing arena is also cost effective for the city of Baltimore, so the residents will be on board. The cities large and small businesses will benefit because with new professional teams, there is an increase in tourism. So by having the away teams fans or fans from different areas of Baltimore come, will increase sales in hotels, restaurants, stores, etc. The expansion will also help Royal Farms Arena, by one giving them more revenue, possibility for more employment because of games days, and introducing them to new business partners. The premium seating will help boost business opportunities because most owners want to conduct new business deals while watching them game at the same time (Titlebaum, 2012). In conclusion, the expansion of the NBA, will introduce a new fan base to a city known for Football. It will allow for new opportunities in business with both small and large businesses, and increase tourism to the city of Baltimore.
With recent growth in professional basketball, the city of Baltimore has caught the NBA’s eye. The last time Baltimore had a professional basketball team was back in the early 1960s. The Chicago Zephyrs moved to Baltimore and were known as the Baltimore Bullets. The name originated from Baltimore’s American National League basketball team (Albero, 2016). The Bullets played at the Baltimore Civic Center, which is now the Royal Farms Arena. With the possible expansion of professional basketball, I believe that the team should play in Royal Farms Arena.
Background on Royal Farms Arena
Royal Farms Arena took over the naming rights of the stadium in 2014 with a 1.25 million dollar deal. The contract included that the store agreed to …show more content…
pay $250,000 per year for five years. The owner of the arena is under a management company called SMG Holdings but the city of Baltimore owns the arena all together (Albero, 2016).
With the contract they received $200,000, with a $50,000 for “finders fee” which is a fee paid by a business to a organization for bring them potential new employees, investors or buyers (I, 2016). The Royal Farms general fund, which manages the buildings operations, comes to $592,713. The management fee and the net fee are tied together and are broken into three parts. “$0-$750,000, 100% of profit is returned to the city of Baltimore (Young, 2015)”. $750,000-$1 million of the net profit, about 80 percent of that goes to the operator while the city of Baltimore receives 20 percent. If the net profit is a $1 million and above, the percentages are reversed, and the city of Baltimore receives the 80 percent while the operate only receives 20 percent. In 2014, the net income increased to a $1,233,217 (Young, 2015).
Why Royal Farms Arena?
Royal Farms Arena is located about a mile from both Camden Yards and M&T Bank Stadium, putting it right in Downtown Baltimore. It is also accessible from 3 of Baltimore’s major highways, the light rail, and numerous bus lines (KPMG, 2007) The stadium has hosted numerous college basketball games (Wizards, 2013), including the University of Maryland vs. University of North Carolina Men’s Basketball games, later this month (Arena, 2016). Adding the team to the existing stadium, is cost effective for the city and they have already proved that they have the resources to host basketball games.
Some people may question the movement to the arena because of its size. It fits about 14,000 people making it the smallest NBA stadium behind the Sacramento Kings with 17,500 (KPMG, 2007). The average stadium seats about 20,000 fans, but since the city of Baltimore has not had an NBA team since 1963, so you cannot predict if they would fill up a full 20,000 stadium. Also, with the smaller capacity, there are more opportunities for sold out games. Sold out games contribute to a positive image for the team, which will persuade more people to come. If the team becomes successful and begins to generate enough revenue, then they could revisit the idea of creating a new stadium with more seating and box seats. The 850 parking lot also could be a red flag, but being only a mile away from M&T Bank stadium, there are 4 additional parking garages with “more than 30,000 spaces available” (Ravens,
2016).
Payment Through Leasing
The arena is owned by the city of Baltimore, and the new team would be in a similar situation as the Baltimore Orioles and Baltimore Ravens. Both the Orioles and the Baltimore Ravens have leasing agreements to their stadiums. (KPMG, 2007). The Orioles have a thirty year lease with Camden Yards, and the rent for the park comes to about 7 percent of the net admissions revenue. According to the Philip Merrill College of Journalism, there is an additional $5,000 added for each special game whether thats, postseason, All-Star or exhibition games (Killer 2012). From 1992 to 2009, “the Orioles paid an average rent of $4.5 million dollars (Killer 2012)”. Leasing deals are common in the NBA also. The two contracts I looked at were between the Oklahoma City Thunder and the City of Oklahoma, and The Charlotte Hornets and the City of Charlotte.
The first deal I am going to mention is The Charlotte Hornets and the City of Charolette. The facility was paid for with 2 bonds backed by revenue from the city and tourist taxes (Marquette, 2015). The term of the agreement states the the Hornets and the City agreed to play their Home Games in the Arena for a period of 25 years, with the option for the Hornets to extend the lease five years (Marquette, 2015). The rent for the arena is a maximum of $23.2 million and is paid by the team.
The second deal is between The Oklahoma City Thunder and the City of Oklahoma. Since the team was moving from Seattle, the Thunder had an initial lease term of fifteen relating to “Seattle Agreement and enactment by the State of Oklahoma regarding financial incentives upon the relocation (Marquette, 2015)”. The deal states that the Thunder would pay $1,640,000 in annual rent which comes to about $40,000 per game.
The leasing deal for the Baltimore team should be similar to the Thunder’s deal. Baltimore’s team would be moving into an existing arena like the Thunder, opposed to the Hornets who built the stadium at the same time as the creation of the team. Since this is an upcoming team for the area, the renters fee should come to around 1,145,000 dollars. This is because they are playing an arena that has not be renovated since 2003, and seats 6,000 less the the average NBA stadium. The contract should be about 10 years long with the options to expand and after the first 3 years, get the team would get the option for possible renovations.
The funds from Baltimore’s agreement will come from five sources, tickets, concessions, advertising, premium seating, and merchandise. The first source of funding comes from ticket sales. The team would receive the home game revenues of the net revenues from ticket sales. For concession, they would receive 35 percent of the first $2 million, 37.5 percent of 2 million to 4 million and 40 percent of sales exceeding 4 million. For advertising, the deal would be similar to the Thunder where they would receive games day revenues attributable to home games of net revenues from adverting (Marquette, 2015).
The fourth way to fund the stadium is in premium seating. The Wall Street Journal notes that premium seating and club suites can easily represent 50 percent of a teams’s profit, “making the luxury suite market a critical source of income (Titlebaum, 2012).” The first five rows from the floor of the arena would be know as “Club Baltimore”. These seats would include waitress service and some small promotions of certain game days, whether its a t-shirt or something else. The team would receive 25 percent of the sales for the first million. 28 percent of 1.25 million to 1.5 million and 30 percent of sales exceeding 1.5 million.
How This Will Benefit Baltimore
The expansion to Baltimore will bring many opportunities to the people of Baltimore and the businesses. Like I mentioned before, the stadium will be about a mile away from both of the other professional team’s stadiums, giving them the opportunity to grab from both of their fanbases. Another point is that the playing in an already existing arena is also cost effective for the city of Baltimore, so the residents will be on board. The cities large and small businesses will benefit because with new professional teams, there is an increase in tourism. So by having the away teams fans or fans from different areas of Baltimore come, will increase sales in hotels, restaurants, stores, etc. The expansion will also help Royal Farms Arena, by one giving them more revenue, possibility for more employment because of games days, and introducing them to new business partners. The premium seating will help boost business opportunities because most owners want to conduct new business deals while watching them game at the same time (Titlebaum, 2012). In conclusion, the expansion of the NBA, will introduce a new fan base to a city known for Football. It will allow for new opportunities in business with both small and large businesses, and increase tourism to the city of Baltimore.