Stadium financing and the Tokenization
and how the tokenization creates countless innovative opportunities for professional sport teams, leagues and athletes to interact with their Fandom
I love sports and I thank my dad for teaching me its precious values. I have done it all my life since I was 5 or 6 and still do it, everyday, well…almost. And to watch, there is nothing better than American sports. And this is not about the sport itself — for instance I love watching rugby which is not big in the US — but it is about the ability that Americans have to put up an outstanding show, a great entertainment. Nothing equals superb spectacles such as the Super Bowl, the NBA Playoffs or a big UFC bout.
Above all American sport has always been big business. Big money was involved well before it did anywhere else in the world. In that respect the tokenization — which can be used as an effective vehicle to raise finances — is a technological development which will impact heavily the future of fund raising also in the sport business. And I am sure we will soon see the first examples of tokenization in the Sport business. Maybe starting with the construction and financing of large venues and stadiums which — of all the sport ventures — is the biggest and the most complex.
How Stadiums are financed in the USA — The Personal Seat Licenses
So far, the construction of stadiums and large sportive venues, has been largely financed by a mix of public and private funding. The portion relating to the government funding has been historically quite large and effectively amounts to a tax-payer subsidy granted to privately owned team/franchises which rip the most economical benefits. This is usually done in the form of municipal bonds, tax exemptions or below market interest rate loans. But the claim that all of this is for the good of the local economy and its residents — which has been cleverly sold through dubious studies about the economic impact teams will have in their cities — is now more openly challenged thanks to a number of new studies. More on that issue here and here.
The consequence is that even if the share of public funding is not entirely gone, at least it is likely to be reduced and the owners will have to make up for the difference in some other ways. Therefore this requires more financial efforts on the part of the privately owned teams/franchises to complete their infrastructure projects.
One of the most important avenues which American franchise owners have pursued in the recent years to raise financings for such infrastructure projects — especially in the NFL league — are the so called Personal Seat Licenses. A PSL is substantially an option right granted by the franchise to the fan to buy match tickets for a specified seat location for a number of seasons.
A PSL varies in time duration, price, seat location and ancillary rights attached to it, such as access to hospitality services, VIP lounges, fan engagement activities, special events, etc. PSLs are substantially different from Season Tickets — which are commonly sold to fans by European football teams. PSLs in fact can be usually resold and a secondary market has developed for trading such “option rights”. Whether this amounts to a good investment can be disputed. A good account of PSLs history and their functioning you can find it here.
PSLs have been traditionally a very effective way for NFL teams to finance their stadium projects. The sums raised are quite impressive.
More recently, the new Mercedes-Benz sponsored Atlanta stadium, which is home to the Falcons, has cost US$ 1,5 billion of which US$ 1,1 billion has been privately financed by the franchise. This is 73% of the total cost. Of that portion, the Falcons were able to generate more than US$ 250 million with PSL sales. That´s an important 22% contribution towards all the private funding. If in the past the record price for a PSL license was paid by Dallas Cowboys fans at US$ 150.000, the new record will be set by the Los Angeles Rams which are expected to sell PSLs for up to US$ 225.000 to contribute towards the US$ 2,6 billion cost for the new SoFi stadium.
With a degree of prudence and having regard to demographics and other important local economic data, the strategy of selling PSLs to finance franchise ventures is increasingly experimented also by a growing number of teams in the NBA, MLB and NHL leagues or large venues such as the F1 and Moto GP Circuit of the Americas.
How stadiums are financed in Europe
In continental Europe instead there is generally less innovation. In Italy for instance, most football/soccer stadiums are still publicly owned by local councils and then concessions are granted to the teams to use them. Therefore, considering that local governments have generally tight budgets, issues always arise whenever restructuring works or entirely new construction projects are necessary. This is currently happening in the city of Milan where, the two local football clubs Internazionale F.C. and Milan A.C., are arguing with the local council about their respective contributions towards the construction of either a new stadium costing up to € 1,2 billion (€ 650 million for the stadium, plus the development of a “sport city” nearby costing additional € 550 million) or the renovation of the old “San Siro Meazza” costing approx € 550 million. While this is the norm for Italian football there are a few exceptions worth noting.
Juventus Torino is the owner of the Juventus Allianz Stadium which was built by the franchise in 2009 under a 99 year land leasehold granted by the local council. The same for a couple of smaller teams such as Udinese and Sassuolo.
In the UK instead the Tottenham Hotspur are leading the way taking the US model even a step further. It seems that their new stadium is almost entirely privately funded. The club has acquired the land worth GBP 340 million and it has assembled a syndicate of lenders (Goldman Sachs, Merrill Lynch, Rothschild & Co and HSBC) to lend the balance of the GBP 1 billion total cost for the project. However, without a mechanism such as the pre-sale of the PSLs, the Tottenham Hotspur owners are bearing the brunt of the risk.
Which advantages can bring the tokenization
Simply put, the tokenization is a tool that can be efficiently used within complex ecosystems in order to reduce points of friction and align incentives and interest of multiple stakeholders. As far as the financing of complex sportive infrastructure projects is concerned, we deal with multiple stakeholders such as the local government, the team, the sponsors, the media and large communities of citizens/fans. All of them have different interest and incentives. A crypto-token is therefore a great technological innovation which can help to both raise the finances needed to build a new stadium as well as to align the interest of all the above stakeholders by creating the right incentives and reduce frictions.
The term “tokenization” indicates the “creation of a crypto-token which is a digital representation of an asset, right, claim, data or monetary value which is stored and transferred using public-key cryptographic encryption on a DLT/blockchain infrastructure. This is done by deploying so called “smart contracts”, which consist in transposing the terms and conditions of the underlying agreement for such rights and assets into lines of computer code which will be automatically executed by the software upon certain pre-programmed conditions. The key here is automated trustless execution”.
In more simple terms, for those not familiar with topics such as blockchains and cryptoassets, this technology makes it possible to literally “pack” into a digital container/instrument (i.e. the token) the PSL contractual agreements, match tickets, rights to access special events and fan engagement options, and substantially any other contractual right. The token could be then stored in a digital “personal wallet” by its owner (in his mobile for instance) and could be easily exchanged with other persons directly (peer to peer) fast and securely. This technology makes also possible that some contractual terms and conditions — say for instance the fact that the PSL has some transfer restrictions — can be directly programmed (i.e. encoded) in the token and automatically enforced.
TPSLs are the natural evolution of PSLs
Therefore Tokenized Personal Seat Licenses (TPSLs) will be soon coming and they are the unavoidable and natural evolution of PSLs. They will have a number of key advantages:
· existing secondary markets will have to evolve and become more efficient. The liquidity will increase allowing peer to peer direct transfer of TPSLs and corresponding payment options with cryptocurrencies and stablecoins.
· transfer restrictions, which are today difficult for the teams to enforce, can be easily programmed into the tokens and automatically enforced (smart contract encoding). In particular objective criteria such as a cap on the sale price of the TPSL or on the underlying match ticket (to stop expensive resellers) can be easily enforced by monitoring the transaction on the blockchain.
· it will also address counterfeit issues.
· easy and straightforward automatic enforcement of any applicable transfer-fees which can be deducted as “gas-fees” from the transaction price.
· in case the buyer has financed the purchase of the PSL with a loan from the team, the very same loan could be packed into the token and, at the moment of the sale of the PSL, it could be transferred automatically to the wallet of the new owner without need of any paper shuffling between the team, the buyer and the seller. Moreover, any interest payments could be automatically deducted from the buyer wallet and any sum due could be also locked into a crypto-escrow to guarantee future interest payments to the team by the buyer.
Is there potential for TPSLs in Europe?
Top European football clubs certainly have the demographics, the spending capabilities, the wealth and income of their local communities to be able to successfully issue TPSLs. If not in the hundreds of thousands range like their NFL counterparts most certainly in the tens of thousands range. At least the numbers are there. Except for the Dallas Cowboys — which are the world´s top financial performer with US$ 420 million operating profits per year — the revenues and operating profits of all the other NFL franchises are more or less in the same league with the top European soccer/football clubs.
According to this 2019 Deloitte Football Money League Report Real Madrid beats the competitors with over € 750 million revenue. In order to compare this data with the above NFL team data we should find the operating incomes of European teams. Statistically the operating income is roughly 50% of the total revenue. Hence we can estimate that, comparing apples with apples, the operating income of European clubs, according to the chart below, ranges approximately between € 325 million for Real Madrid and € 98 million for West-Ham Utd. Ergo, as far revenues and operating income are concerned, the top 20 European soccer/football teams are more or less in the same league with their top 20 NFL American counterparts.
It would be useful also to compare the data regarding the season tickets annually sold by European clubs. Manchester United sold all of its 52.000 season tickets in 2019. Italian Serie A top teams like Internazionale, Milan and Juventus sold respectively 41.000, 30.000 and 29.300 season tickets in 2019. Thus, even in this respect, European top teams are likely to be successful in selling TPSLs and follow the American lead to finance their own projects.
Token-economy and Sport business
But tokenization can bring much more to this complex ecosystem than solely tokenised PSLs. Tokenization enables countless new opportunities for the franchises to interact and engage with investors, fans, sponsors and the media. This applies to both the whole sport ecosystem and generally, the entertainment business. More likely the stakeholder´s creativity will be the real limit:
· profit participation rights can be tokenized to let investors or lenders have more skin in the game and thereby allow franchise owners to share with them some of the venture risk. This can be done by issuing so called security tokens, which for all purposes are securities and are subject to applicable securities´ regulations for their issuance and transfer. Fans might also want to have some skin in the game and own more than a seat at the stadium. They might want to own a small piece of their beloved team. The team´s creativity is the limit as to what the content of such a token can be for its fandom.
· local governments might also benefit from more skin in the game. Take for instance the above mentioned Tottenham Hotspur land purchase from local city council for GBP 340 million. The club owner could have instead offered the local council say GBP 240 million and a number of newly issued security tokens representing a profit participation to the venture. The team owner would have lowered its risk exposure to the venture and the local council could have shared in the venture´s economical potential upside.
· tokens can offer unlimited opportunities to engage fans with special events, access to hospitalities and VIP areas, merchandising and sport-star memorabilia, fantasy games, participation to decisions/voting on team issues such as adopting a new jersey, uniform, etc.
· team could sell exclusive media content directly to its fans which can be paid in tokens thereby avoiding traditional media broadcasts or its own expensive and now obsolete TV channel.
· tokens can enable in-time micro-sponsorships during a match or an event. Imagine if a sponsor could target directly the fan-token-owner few seconds after a score with something like: “Congrats buddy we´ve SCORED!!! you´ve just won a free drink!! Come celebrate with us”. Blip, the fans personal wallet has just been credited with a token to get the free drink from the stadium drink stand. Or a discount for team merchandise or just anything else. Again, creativity is the only limit here.
TPSLs are the natural evolution of PLSs and we will likely see the first examples very soon. But because of the mentioned benefits that will accrue to the whole professional sport ecosystem the tokenization is bound to become the mainstream solution to create incentives and align the interest of multiple stakeholders such as teams, sponsors, fans, investors, media and the leagues. We will see a lot of creativity and new ideas being implemented and not only in football/soccer but everywhere in the sport and entertainment businesses.
Some of the top European football clubs have been among the early adopters of fan-tokens on the Socios platform. Many more will follow and soon security tokens will be launched to raise finances and/or share profits in the ventures with both investors and fans. An entire new world of opportunities is opening up before our eyes to make the sport showbiz bigger and more entertaining. It will be even more fun to watch…
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