Financing football stadiums: Bread, circuses and leather balls | The Economist.

Oily millscale, an oatmeal-like byproduct of steel manufacturing, poses a disposal nightmare for steel manufacturing facilities, and is a direct impediment to the creation of additional steel manufacturing facilities throughout the United States. This, and other forms of solid waste disposal, from a variety of manufacturing processes, has become an investment banking focus of our firm, as we assist manufacturers develop and finance facilities and new technologies to create more efficient operations and help avoid, or at least mitigate, costly disposal expenses and potential EPA fines.

Below is our press release:

Prassas Capital, a boutique investment bank, has a specialty in financing projects and facilities that utilize all forms of solid waste as a feed stock. We offer turnkey assistance, from initial analysis to structuring and project funding.

Characteristics of our financing capabilities include:

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Once upon a time, sports stadiums and arenas were municipal projects, underwritten by the taxing authority of the resident city or county. The private sector was generally not willing to assume the liability of such an undertaking, and anyway saw no point in assuming a financial burden that the local municipality would willingly bear. Besides, no lender would approve a project entirely dependent on event-driven revenue like ticket sales and popcorn purchases. These projects required the deep pockets of the local community. The economics of all that changed with the advent of luxury skyboxes.

Team owners discovered that creditworthy corporations were willing to sign rather expensive long-term leases to watch an event in a private, luxurious setting, with real food and their own bathroom. Build enough of these skyboxes, and the aggregate lease revenue alone was enough to pay the debt service on a larger, modern facility. The team owners could build and own the facility, and keep that new source of revenue, rather than plead with the local community for a new venue. More importantly (from a banker’s perspective), the financing was no longer dependent on unreliable, event-driven revenue, but rather the stable income from credit-worthy lessees.

The financing was packaged and marketed to emphasize the skybox revenue as the foundation of the debt security. The Fuji Bank, then a AAA-rated commercial bank, came aboard to credit-enhance a five-year taxable bond, which priced at 10% (a terrific five-year interest rate at the time).

Perhaps a new concept is the notion of packaging and marketing a financing by differentiating, and segregating, assets and income streams. In its most basic form, it is fundamentally no different than a real estate owner who seeks financing by emphasizing his anchor tenant. If a financing is straightforward, easily understood, and if you have a smart banker, the packaging may not matter. However, every lender’s reaction to a financing with an unfamiliar structure, collateral or revenue stream; which might (or any reason) elicit the perception of heightened risk, is to require an additional cushion of safety: more collateral, more control, and a higher interest rate, if indeed they remain interested at all. Even for the most creditworthy projects, it is customary for a lender (unconstrained by competition or negotiation by an experienced client) to place a blanket lien on all revenue and every asset, and even require additional recourse to third-party guarantors. This obviously protects the lender’s interest, but at the direct expense of the borrower; as it limits the organization’s ability to secure future financings, at least not without replacing the original lender at potentially considerable expense. A skillfully packaged financing has one agenda: clearly illustrating mitigated risk to potential lenders, in such a way as require the encumberance of the fewest possible assets and revenue streams.

Skyboxes changed the math, and changed the game, launching a sports stadium and arena construction boom that lasted for decades. The Arco Arena financing gained some notoriety and received mention in The Wall Street Journal. Concurrently, the Palace of Auburn Hills (home of the Detroit Pistons) financing, achieved through the same skybox revenue emphasis, was completed in that same year. The concept took off. I subsequently spent several years traveling and meeting team owners throughout the country. I am not a spectator sports fan. In fact, I find professional sports to be unbearably boring. When the owners invited me to watch an event from the owners box, I would decline, on the premise that I had to maintain my objectivity. And I was complimented on my professionalism

Alas, the purely private concept did not endure. Team owners quickly realized that it never pays to let a patsy off the hook, and almost immediately used the skybox revenue and the new form of financing as leverage against the vanity of local politicians to demand greater public funding, in the form of public/private partnerships, to construct ever grander facilities. Al Davis was the emperor of the technique, bluffing four California cities into offering the Raiders extraordinary compensation packages without taking a penny of risk himself. Soon, it became very difficult to get momentum on any project, as every team owners’ vanity was suddenly at stake to become the next master of the universe. Every Wall Street firm poured into the new sports facility financing business, and every completed deal spawned a dozen new consultants who were now facilities experts.

The early deals, absurdly lopsided on behalf of the sports teams, could arguably be excused as a learning exercise for municipalities who were bolstered by an academic rationalization that such public projects were an essential catalyst for economic redevelopment. The City of Oakland and Alameda County, for example, ultimately spent hundreds of millions of dollars to attract and retain the Raiders, tax dollars that otherwise could not be spent for other local public services. Of course, in most cases, the redevelopment catalyst was illusory. There were no consequences to the careers of the political sponsors and advocates who squandered public funds. It was apparently not even a learning experience. Currently, Sacramento struggles with a new ownership group threatening to move the Kings (article here), while the Minnesota Vikings are demanding a new one billion dollar facility.

The couple intends to live in the house until they pass away, and then leave the house to their children. However, the couple is also concerned about their cash flow for the remainder of their retirement years. Included with their other assets, the house will generate an estate tax bill of about $5 million upon the couple’s death. The children will have nine months to settle the estate. If the estate tax is not paid within nine months, the IRS charges an excise tax penalty of 5% per month.

The balance of the couple’s assets does not include enough cash to pay the estate tax. Therefore the children will have to sell the house right away. A $9 million house does not sell quickly, even in California. It may take years to sell such a unique home. The children do not have years. They have nine months. And they face unknown economic conditions when their parents die. They may have to dump the house, sell to any bidder to pay the taxes. Their inheritance may be decimated. Not what the couple has in mind.

So the couple considered selling the house now, while the real estate market is still hot. As a married couple, they have a $500,000 principal residence exclusion. That is, the first $500,000 profit on the sale of their home is tax-free. However, this couple has an $8,950,000 profit. They’ll owe capital gains tax on $8,450,000 ($8,950,000 less the $500,000 exclusion). They will owe federal capital gains tax of 15%. Except when there is such a large capital gain. Then the alternative minimum tax (AMT) will probably apply, in which case the 15% capital gains rate is discarded and the federal tax rate is 28%. There is 9.3% California state income tax (no California state capital gains rate). And then, in the year of the sale, the couple will certainly lose all of their other deductions and exemptions due to that years’ enormous income. So the couple can easily expect an effective tax rate of almost 40% if they sell the house outright.

Quite an unbelievable tax problem for a couple that worked hard, invested wisely, and has all the best intentions.

What is the solutions to this couple’s tax dilema?

Planned gifts

The couple can fund a charitable remainder trust with their house. They can sell the house now, at the top of the real estate market cycle, while they can still receive top dollar. They will pay no taxes at all on the sale of the house. Receive an income for their rest of their lives. Receive a tax deduction today. After they pass on, the children can continue to receive an income for an additional twenty years. Or a lump sum tax-free insurance payment equal to or exceeding the inheritance their parents originally hoped to provide.

Application, then details

Once the donor understands the application of these tools, they will then want to learn more. A lot of technical information at the outset will simply overwhelm and alienate the donor. I have met many prospects who were not, initially, particularly charitably inclined. Once they understood that a charitable gift given after their death could avoid so many tax dollars today, their outlook changed considerably. They became greedy givers.

The coming tax crisis

The couple in Carmel is not an isolated example. Estate and capital gains taxes await many middle-class adults as they grow older and begin to redistribute their assets. Assets to be sold today may trigger capital gains tax, and suggest one type of charitable vehicle. Other assets will remain within the family, and will ultimately incur an estate tax. Another charitable tool can be helpful. Whatever the reason, these people will have tax problems that planned gifts can solve. Focus on the donor’s needs. The charitable intent will be there.

This piece was originally written four years ago, when the real estate market was hot and almost any property could be easily sold. In today’s market, some donors may attempt to contribute property that is illiquid or unreasonably priced under current conditions. Organizations should remember that cash, not property, is the objective, and that a well-defined gift policies and procedures will avoid a lot of potential problems.

In 2006, I met with two potential corporate clients. Coincidentally, they had about the same annual revenue, were in the same industry, and were located in the same broad metropolitan area. Each wanted to borrow about $10 million for capital (long-term) projects.

I’m not sure why the first prospect even requested the meeting. A dominating board member had already decided to borrow from a local commercial bank, for a five-year term. The bank, in addition to the usual collateral demands, also wanted personal recourse to several of the principals. A discussion of financing alternatives was met with an argument, or outright doubt that other viable alternatives even existed.

The chief financial officer of the second client considered the alternatives, and the associated trade-offs, and chose a thirty-year, fixed rate, non-recourse bond issue, privately placed with one mutual fund.

Then the credit crisis struck in 2008.

The businesses of both clients suffered in the aftermath. Interest rates spiked as all financing alternatives evaporated.

The first client’s business failed to sufficiently improve by the time the bank loan matured in year five. The bank would not renew the loan, at a time when even credit-worthy borrowers found it difficult to secure alternative financing. The client tried to negotiate, but the bank had no incentive to do so, since it had recourse to the principals. The bank ultimately foreclosed, and seized the collateral from both the company and the guarantors.

The second client was initially indifferent, since long-term fixed rate financing by definition sidesteps any refinancing risk. Then they realized that bonds, unlike bank loans, are marketable securities, and that bond prices fluctuate with changes in market interest rates. More specifically, the price of the bond issue they “sold” a few years ago had fallen precipitously as interest rates spiked. The client subsequently negotiated with the mutual fund and bought back their bond at a tremendous discount. The mutual fund was a willing participant, since they trade their portfolio and are accustomed to profits and losses in any given market. The client dramatically lowered their outstanding indebtedness, improving their cash-flow and competitive position for the coming years.

Granted, this example lacks the high drama of a merger or hostile takeover. But reality tends to be boring, and these types of capital raising assignments are the bread and butter of investment banking.

And unfortunately, the two clients in this example are not unique. My business practice often involves an endless round of educational meetings with clients and prospects who may not appreciate the nuances and “bets” inherent in their financing alternatives; or the fact that markets (and opportunities) change, and at times may even contradict their own past experiences. For example, it’s easy to dismiss the board member of the first client as a jerk who wouldn’t listen. In fact, he was a wealthy entrepreneur who had worked with this particular bank for many years to build his own business. The short-term bank loan carried a slightly lower interest rate than long-term bonds, which he valued for the immediate cash-flow savings. For the last thirty years, lenders have always lent and interest rates have always fallen. He knew what worked. And if it’s not broke…

The capital markets, of course, have always been far bigger than just the local commercial bank. But these days, the game has changed. Maybe not changed, but certainly shifted.

This series of posts will discuss capital raising in the post crash environment, from inside the sausage factory. I’ll spend more time on borrowing, because borrowing is far more prevalent than raising equity, and far more institutionalized. If you follow certain rules and meet certain criteria, you can always find money to borrow. Raising equity is different. We’ll discuss that in a separate series.

I will not spend much time on exotic or specialized forms of debt, other than perhaps to note their existence. Rather, this discussion will simply reflect the discussions I routinely have with current and prospective clients.

I like to think of lenders as single-cell organisms (and I’ll bet most lenders would agree with that description). They are simple creatures, and if you internalize some very basic concepts, it will make the process much less aggravating.

Three web designers later, a virus that no one could identify, and the loss of five years worth of content.  I got so desperate I’m learning how to code myself.

I should be done by mid-April.  I have a series of posts planned that will hopefully prove interesting.  Thanks for your patience.

Even the most modest donation prompts some thought and deliberation.  A planned gift is defined as one the donor plans to make at some point in the future.  Usually the gift is made upon the donor’s death, although sophisticated tax planning can creat a charitable gift after only a term of years.  The most common form of planned gift is a bequest, in which the donor leaves specified assets to a designated charity in their will.

Not so easy

Planned giving is the most frequent source of the largest charitable gifts, and is often the principle fundraising vehicle for building an endowment fund. As a not-for-profit organization becomes serious about growing an endowment fund, it becomes serious about implementing a planned giving program.  These organizations network with area professionals, join planned giving associations, and include articles in their newsletters.  Unfortunately, many are frustrated in their inability to attract a meaningful amount of planned gifts.

Planned giving is NOT like a capital campaign

Asking for a few hundred dollars in a capital campaign is far different than making a six or seven-figure planned giving solicitation.  Working with the planned giving donor has a different pace and must address specific donor needs and goals.  These goals are realized over a different time-frame, demand specific educational and marketing expertise, and make different resource demands on the organization.

Why planned giving?

There is a tremendous inter-generational transfer of wealth expected over the next thirty years, as baby boomers age and transfer their assets to family and favorite charities.  Many will prefer to contribute more to charity rather than pay capital gains and estate taxes.  In fact, most sophisticated estate planning involves the extensive use of planned giving techniques.  Many donors, now in their fifties and early sixties, will execute planned giving instructions today, in anticipation of tax law changes and in accordance with their ultimate estate disposition goals.  A persistent myth is that planned giving is only for the very wealthy.  In fact, the vast appreciation of real estate and stock market holdings in recent years has created a tax and estate problem for many middle-class Americans.  Organizations that target and educate these potential donors will capture the bulk of these assets.

Planned giving facts and observations

Marketing a planned giving program

Many organizations, and the planned giving community in general, approach the planned giving donor in a common fashion:

The failure of planned giving

Organizations are often disappointed in the amount and frequency of realized planned gifts.  This can be the result of one or several fatal mistakes:

A better approach

The successful fundraiser understands the complex decision-making process of a planned gift, as the donor contemplates their own financial situation, the inherent desire to provide for their family, and the maze of tax consequences triggered by a redistribution of personal assets.  Directly assisting the donor to accommodate those goals and financial priorities will result in more executed planned gifts.

I suggested that the recent rise in the stock and real estate market offered an excellent marketing opportunity for planned gifts. Charitable remainder trusts were but one of several charitable giving vehicles that the newly well-to-do could use to sell their appreciated assets and defer capital gains tax. One of the best kept secrets of charitable giving are the sophisticated tax strategies and incentives for the donor, available nowhere else in our tax code. The executive director nodded approvingly.

I also explained that marketing such a program would take some effort on the part of staff and the board of directors. We would have to prepare literature, sponsor lectures, develop gift guidelines, and in general create a fundraising infrastructure that could capitalize on the opportunity. The executive director’s eyes began to wander.

Finally she leaned over the table and said, in feigned jest, “Couldn’t you just write us another check?”

No, I could not. I never wrote another check again.

Introduction

I have worked with not-for-profit organizations peripherally as an investment banker for the past twenty-seven years, financing large projects through the issuance of tax-exempt bonds. In the late 1990’s, I worked for the investment banking division within a nationally-renowned municipal bond mutual fund. It was during the height of the dot.com boom, and there were a lot of people in California (well, everywhere) with sizable unrealized technology stock gains… and who could not cash out without triggering equally sizable income tax liabilities. An investment group at the fund asked me for an introduction to the foundation and endowment entities of my not-for-profit clients. They wanted to discuss a charitable giving program which would target those individuals with a stock market (and later a real estate) capital gains tax problem, in a campaign to attract new donors and assets.

It was an eye-opener. Here were financial and tax planning tools specifically designed to address a widely prevalent tax problem, and no one knew about them. Well, to be accurate, the tools were known to estate planning attorneys and bank trust departments, but were generally presented in a dry, clinical fashion to the very wealthy, for whom charitable giving was the primary objective. However, the application was far broader than that. There was now a sizable class of investor, who did not define themselves as wealthy (and who, in fact, did not define themselves as particularly philanthropic), who nonetheless had assets encumbered by some form of tax burden from which they wished to escape. It turns out there are a variety of charitable giving tools, each innately designed to address a specific donor tax problem, for a specific type of asset, in a specific market environment.

I discovered that our tax law is very clever. It inextricably grants a tax solution (sometimes the only solution) to many thorny problems conditionally upon an act of public benefit: a gift to a not-for-profit organization. Our mutual fund marketing approach recognized this connection and even gave a name to this base motivation of philanthropy: greedy giving.

The obstacle was (and continues to be) one of education, and frankly bad marketing. Most organizations tend to solicit donations entirely from a charitable (some would call it self-absorbed) perspective, which presumes that the donor is entirely motivated by charitable intent. A more effective approach is to discuss the topic from the donor’s perspective; illustrating, by examples and case studies, how dynamic and versatile these tools can be applied to a multitude of personal tax and investment goals and obstacles. I found it ironic that organizations who had a tremendous financial incentive to reach out to an almost captive, tax-shackled audience, too frequently lapsed into their own self-centered dialect, and ultimately attracted just a fraction of the potential dollars.

Anyway, the whole topic fascinated me, much more than just being a debt merchant. When I started my own firm in 2000, I spent several years working exclusively with not-for-profit organizations in the San Francisco bay area. Given my background, I felt I was in a unique position to “broker” the information gap between charities and their funding sources, be they donors or some form of lenders.

It was harder than I thought. In spite of fifteen years (at the time) of investment banking experience, I had big gaps in my knowledge of personal finance.  To remedy that, I became a Certified Financial Planner. I was new to fundraising, to not-for-profit governance. I found that a small subset of sophisticated organizations are masterful and innovative marketers and educators; and that the vast majority are not. I was surprised to find that professional fundraising organizations offered simplistic, charity-centric, and ultimately unhelpful fundraising advice (I attended one seminar entitled, “How to Help Your Donor Identify their Excess and Unwanted Real Estate”. Really). I met boards of directors who were individually intelligent and accomplished, but collectively, often insane. I have been baffled at the management decisions made, as fiduciaries, on behalf of a charitable institution, that no individual (or corporate entity) would ever make with their own personal resources. I have been a fundraising consultant, financial adviser, contract chief financial officer, and endowment fund investment manager. I have lectured extensively on behalf of some of the largest organizations in California and Hawaii. It may be worth noting that after two years of dedicated effort, I scaled back my not-for-profit work dramatically. And I now almost never give to charity.

As such, I believe I have assembled a body of knowledge and experience in my adventures that may be helpful to other not-for-profit organizations.  Strategic, integrated financial planning is the critical next step for organizations struggling to build capital improvement and program funding capacity. It is more than just a capital campaign, more than issuing tax-exempt bonds. It is evolving beyond a hand to mouth existence, beyond that worry at the beginning of the year when you are not sure you will make your budget. Again.

The goal of this site is to discuss the practical aspects of financial planning and to show why the components must be understood, and in fact only work efficiently, when considered as a whole. Many of the individual concepts may seem obvious or redundant. But it is this sum of points, executed together, that make the difference.

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If there are topics of immediate interest please do not hesitate to contact me.