The Browns stadium deal and the way things ought to be

Promo shot of FirstEnergy Stadium from ClevelandBrowns.com

Now that the stadium deal has been announced, it’s time to judge it. In order to do that, we really need to divide this up into two very different looks. We need to look at it first from the perspective of reality. Reality is the world where we live today where stadium leases are in place and heavily favor the NFL. After we finish that, we can look at it more from a larger philosophical standpoint where I find city funding of stadiums to be in really poor taste. But first, from a realistic point of view, I think the Browns were pretty humane to the city of Cleveland.

The city of Cleveland stands responsible for the lease they signed in 1999. In that lease, the city has to pony up money for stadium improvements. The Browns determined that they wanted to spend $120 million. The city had a responsibility to participate. Assuming you agree with all the things I said right there, the fact that the Browns are fronting all the money and spreading out the expense for the city over 15 years at $2 million per year is really helpful. As Joe Banner stated, this saves the city from having to issue bonds or raise money in some other way that might limit their abilities to do other things.

Basically, the idea is that the city can afford $2 million per year in an annual city budget that is over $1.1 billion per year, but would have a tough time chewing on a larger cash outlay today in all likelihood. According to the city’s own 31 megabyte PDF budget that I read, the Net City of Cleveland Operating Budget Revenue for 2013 was $1.157 billion dollars. Expenditures outpaced revenue at $1.189 billion for a $31.8 million shortfall. They have a cash balance right now, and I really can’t speak to its long-term health except to say it’s still more than about eight times bigger than the estimated 2013 shortfall.

So congratulations to Joe Banner, Jimmy Haslam and the rest of the Browns front office for realizing the state of things in the city and not making it hurt more than it had to. Now, for the philosophical talk about cities and stadiums and what reality might be or should be…

These deals stink for cities for a variety of reasons. First things first, Mayor Frank Jackson continually stated the fact that the city of Cleveland owns the stadium. While that is true, it is only true because it is more convenient for the Browns to not actually own the property. I don’t know with 100% certainty, but I think the Browns actually save money by not owning the stadium. What exactly does the city own anyway for the privilege of being landlord? They only get to charge $250,000 per year in rent. They’re on the hook for a share capital improvements to the stadium itself as we saw yesterday. If the tenant decides to leave it’s not like there is any other kind of tenant that could ever make use of the space, even for free.

Cities help businesses all the time with tax incentives and other kinds of economic enticement, so why’s it so different with an NFL team and their stadium? The city of Cleveland has made news with their film tax credit that has brought high profile movie productions to the city. There’s one key difference. The city gives a tax credit meaning that they discount their own tax revenue. They don’t reach into a bank account for cash reserves and hand it to movie producers I don’t believe. It’s true that in some economic stimulus efforts cities go and find grants in order to hand companies cash money, but even then it’s not coming directly out of city asset accounts.

So let’s talk about what life is like for normal landlords. I know a little bit about commercial leases and the bigger, richer and more specific a tenant is, the more likely it is that they would bear the brunt of their own “tenant improvements.” I know it’s very difficult to draw comparisons between an NFL franchise operating in a stadium and other businesses, so I won’t try to compare the Browns to Walmart or McDonalds or anything like that. In a case where a landlord does partake in massive tenant improvements, the offset is an ability to charge large rent over long periods of time. Stadium deals get it both ways. They pay very low rent and force landlords to partake in what I would consider tenant improvements.

When I look at the city of Cleveland as a landlord for the Cleveland Browns, I think it’s reasonable to say that the city must take care of infrastructure surrounding the stadium. Streets, sidewalks, municipal utilities and other things are clearly the city’s responsibility. When it comes to a scoreboard, seating configurations, field maintenance, those seem to me that they should be tenant responsibilities completely and totally. I know that according to the lease, they aren’t today, but remember, we’re now talking about what the new reality should look like.

So let’s look at the normal world of an office lease. The landlord’s job is to not get in the way of a tenant’s ability to make money. In a normal commercial building that means providing safe parking lots and roofs that don’t leak or crumble and things like that. But if a tenant thinks they can do something to enhance their revenue like build a fancy new board room with a state of the art video whiteboard for client meetings, that’s not the responsibility of a landlord. Now, if the tenant wants to do something in their office space that requires an upgrade to electrical or plumbing, that’s where you get into gray area and a deal must be struck. To me though, the Browns scoreboard clearly falls into the category of a tenant improvement if you were re-doing a lease.

Why do I draw a line at the scoreboard? That is clearly and obviously a benefit to the bottom line of the business of the Cleveland Browns. They are presumably doing it to give fans a better experience so they can charge advertisers (and probably ticket holders) more money. It’s an add-on though. While it wouldn’t be enjoyable to go to a game without a scoreboard, you could definitely have a game without one meaning that the city isn’t standing in the way of getting customers in the door or enabling games to be played on the field.

Lastly, I got into a few conversations over the last couple days where I would say things about the NFL and them being rich and not needing any help. Am I just punishing the NFL for being successful? “They can afford it!” isn’t a good excuse to go back on a legal contract in most cases. That’s what makes this such a strange deal. If you try to apply normal business logic to the NFL, they generally make life difficult on a municipality, threatening to move, etc. Meanwhile, they’re the only game in town in the country in terms of professional football.

They’re the perfect example of a unique business that has been through many different iterations of classification in the nation. They were given anti-trust exemptions when the NFL and AFL merged. Then in 2010 in a different case they were called “cartel” of 32 independent businesses. So, if nothing else, it bears discussion.