Question for Financial Gurus

[Millhouse]

The cost of building the dome in today's dollars is s bit less than $80 million. The state's gift would be about $40+ million. What is the true replacement cost of the dome if it were replicated today - a helluva lot more than 80 million. Due to inflation in post construction years, the state built the dome with cheap money and the nominal revenues were generated during much higher price levels. Because of this alone, there is little question that in nominal dollars the dome has been an enormous financial success.

The problem is that there is no guarantee that we won't have lower inflation or, God forbid, deflation over the course of the life of a new stadium, which would generate an entirely different experience. That said, the Net Present Value of the tax revenues over the next 30 years is probably in the $1 to $1.5 billion range with about a 5% discount rate. (The new Vikings stadium has a projection of $3.5 billion.)

When calculating success or failure for the state there are so many indirect financial benefits that are almost impossible to calculate (much less forecast) that it is an art form rather than a true financial analysis.

Syracuse University is the greatest asset Syracuse has and the sports programs are the largest CNY entertainment by far. These are the crown jewels and it only makes sense to do everything possible to ensure their continued success. As a matter of fact, the city, county and state should be out in front of the curve.

The cost of building the dome in today's dollars is s bit less than $80 million. The state's gift would be about $40+ million. What is the true replacement cost of the dome if it were replicated today - a helluva lot more than 80 million. Due to inflation in post construction years, the state built the dome with cheap money and the nominal revenues were generated during much higher price levels. Because of this alone, there is little question that in nominal dollars the dome has been an enormous financial success.

Just because it would be much more costly to rebuild the dome now (200M based on jackson state plans to clone the dome) does not mean it was an enormous financial success. It just means that it's better than building the dome now.

That said, the Net Present Value of the tax revenues over the next 30 years is probably in the $1 to $1.5 billion range with about a 5% discount rate.

How are you arriving at those numbers? Personally I think that discount rate is pretty low for a project of this scale with so many uncertainties (conventions, tourism, development around it)

 

[Millhouse]

Lucas Oil Stadium in Indianapolis has annual revenues of $150 million. This stadium would at best guess generate maybe 60% of those.

That said, you also have to factor in... the Dome is currently an on-campus arena and I don't believe the University has to pay income taxes on the net annual profits. That would change with an off campus facility the University is leasing as opposed to owning.

running with the 60% of lucas oil revenues.

with 20% margins, 10% discount rate, over 30 years = project would be worth about 180 Million.

which is about what it would cost to rebuild the dome, oddly enough (strictly going by jackson state's 200M number - who knows if that's right)

 

[Crusty]

Lucas Oil Stadium in Indianapolis has annual revenues of $150 million. This stadium would at best guess generate maybe 60% of those.

That said, you also have to factor in... the Dome is currently an on-campus arena and I don't believe the University has to pay income taxes on the net annual profits. That would change with an off campus facility the University is leasing as opposed to owning.

Correct but SU has to pay sales tax like everyone else.

 

[Orangepace]

Correct but SU has to pay sales tax like everyone else.

Agreed. And just thinking out loud... The 40% corporate income tax rate would likely not kick in until 20-30 years out because there are creative ways of accelerating depreciation on that type of asset. This the impact would be nominal at best when considering discount rates, etc.

 

[All4SU]

who wants to say they think of themselves as a guru? eek

but i'll just add this to make it easier to think about

3% inflation that's about 40 million in todays dollars.

that is ten times smaller than what will come from governments this time around. i don't think it made money for the state but i'm just guessing. if it was expected to be a money maker without soft benefits, someone probably would've put up that 15 million voluntarily.

i saw that jackson state is trying to build a replica of the carrier dome for 200 million. the artist renderings look like you're in the carrier dome, it's pretty funny. costs have gone up way more than inflation, i don't know what to make of it

Maybe we can just ship ours to them.

 

[Millhouse]

Maybe we can just ship ours to them.

keep inflating that roof and let some grumpy old widower go on a hot air balloon adventure to a strange far away land

 

[All4SU]

I remember when young Mr. Cuomo was in Washington, and had his pile of funds to spread around. One of the "investments" he made was giving $250 million of taxpayer money for projects around the Erie Canal. I'm sure it was just seed money for his eventual run for office in NYS. Not sure really where all of that cash went. I know that Seneca Falls built a statue. I always imagine there are a few T-shirt shops or something who used that money to shore up their businesses.

 

[Capt. Tuttle]

don't forget substitution

those extra people that got in the dome that couldn't get into manley didn't all of a sudden have more money to spend

people who didn't buy manley tickets might've bought something else

all this stuff just shifts who collects the sales tax. it's the biggest problem with evaluating this stuff. seen vs unseen. some big building with lots of people - easy to see how they're spending money. all those people instead scattering their spending around a thousand different places - much harder to see.

for the dome to be a good investment from a sales tax perspective, it has to make people richer or make them more likely to spend in the same sales tax area vs outside it

The presumption is that it is being spent, regardless of entertainment available. Some people might have only spent for certain types of entertainment (sports) . Some will spend on just any entertainment, so whatever was available. (Replacement) Very hard to determine.
I think the real spill off would be in the 1st 5 years, when it is new, as to how often it is used vs the dome/War Memorial/etc., and how many people will spend on secondary stuff (parking, drinks, dinner) that but for the stadium events, would have stayed at home.
I think that there is a potential group psychological benefit, for the area as a whole. If we could ever get multiple civic projects, with real business tax reform, airline cost constraints, and be viewed as a business incubation area with great tax policy, great entertainment venues, ease of access, year round seasonal recreation and 6 hour drive from Toronto, Montreal, Cleveland, Pittsburgh, Philly, D.C., NYC and Boston, this place could mount a comeback.

 

[Millhouse]

The presumption is that it is being spent, regardless of entertainment available. Some people might have only spent for certain types of entertainment (sports) . Some will spend on just any entertainment, so whatever was available. (Replacement) Very hard to determine.
I think the real spill off would be in the 1st 5 years, when it is new, as to how often it is used vs the dome/War Memorial/etc., and how many people will spend on secondary stuff (parking, drinks, dinner) that but for the stadium events, would have stayed at home.
I think that there is a potential group psychological benefit, for the area as a whole. If we could ever get multiple civic projects, with real business tax reform, airline cost constraints, and be viewed as a business incubation area with great tax policy, great entertainment venues, ease of access, year round seasonal recreation and 6 hour drive from Toronto, Montreal, Cleveland, Pittsburgh, Philly, D.C., NYC and Boston, this place could mount a comeback.

your last paragraph means the whole project should have pretty high discount rate. that's a lot of ifs

 

[xc84]

your last paragraph means the whole project should have pretty high discount rate. that's a lot of ifs

The discount rate should be exactly 6.942% ...no more, no less. Anything else will invalidate any resulting analysis.

 

[Millhouse]

The discount rate should be exactly 6.942% ...no more, no less. Anything else will invalidate any resulting analysis.

that's funny but here's what is nuts - if you go from 6.942% to 6.943%, you need an extra $4,000 of net benefit per year to break even

just goes to show how insanely expensive this all is. a rounding error that many decimals out amounts to what would be real money for any of us

500 million is such a big number no one even knows what it means. that's when people start visualizing dollar bills stretched end to end going all the way to uranus. (the planet, that is)

 

[cuseinchina]

that's all great. If it's so easy, answer tomcat's question

You need to do a lot more than run a dcf of sales tax driven directly by dome sales. Again anyone can do time-value of money math and come up with something. but that ignores the intangible asset created by building the dome. the huge significance that brand has for the university and what that means in terms of the school's success over time and thus it's investment in staff (income + sales tax), building expansion, student spending etc. That ignores the kind of people that SU brings into the community - people who are intelligent, educated and have an ability to impact positive change. Without big time sports SU would be far less valuable, without the Dome SU's brand would not be what it is today. Without valuing the increase in SU's intangible asset and the associated financial benefits that accrue to CITIZENS, you aren't correctly calculating the return on an investment of PUBLIC money. It is very difficult to do this with any accuracy, I don't have the time or the skills to do it - but to say the dome's financial success should be judged by ticket sales tax is some pretty darn limited thinking and just plain wrong - it's too simplistic.

 

[Millhouse]

You need to do a lot more than run a dcf of sales tax driven directly by dome sales. Again anyone can do time-value of money math and come up with something. but that ignores the intangible asset created by building the dome. the huge significance that brand has for the university and what that means in terms of the school's success over time and thus it's investment in staff (income + sales tax), building expansion, student spending etc. That ignores the kind of people that SU brings into the community - people who are intelligent, educated and have an ability to impact positive change. Without big time sports SU would be far less valuable, without the Dome SU's brand would not be what it is today. Without valuing the increase in SU's intangible asset and the associated financial benefits, you aren't correctly calculating the return on an investment of public money. It is very difficult to do this with any accuracy, I don't have the time or the skills to do it - but to say the dome's financial success should be judged by ticket sales tax is some pretty darn limited thinking and just plane wrong - it's too simplistic.

anyone can do it but you apparently.

no it ignores intangible stuff.

just because there are lots of other factors doesn't mean you can't answer a simplified question

 

[cuseinchina]

anyone can do it but you apparently.

no it ignores intangible stuff.

just because there are lots of other factors doesn't mean you can't answer a simplified question

I've built many hundreds of financial models...and yes anyone can be taught to do it because it's mechanical. But you can't value an investment accurately or say what it's return is without considering intangibles because they have very real economic value that would be realized if you could sell the asset in its entirety.

even if you just limit to what was the direct financial benefit in tax to the state you would need to include the return on investment in SU's brand to have anything approximating reality. Anything else is just to produce a negative talking point because it will inherently undervalue the investment which fits your narrative nicely.

cfo's make bad ceos - your thinking says a lot about why that is.

 

[RF2044]

anyone can do it but you apparently.

no it ignores intangible stuff.

just because there are lots of other factors doesn't mean you can't answer a simplified question

I've built many hundreds of financial models...and yes anyone can be taught to do it because it's mechanical. But you can't value an investment accurately or say what it's return is without considering intangibles because they have very real economic value that would be realized if you could sell the asset in its entirety.

even if you just limit to what was the direct financial benefit in tax to the state you would need to include the return on investment in SU's brand to have anything approximating reality. Anything else is just to produce a negative talking point because it will inherently undervalue the investment which fits your narrative nicely.

cfo's make bad ceos - your thinking says a lot about why that is.

Doing anything else

Guys--it might be time to take this pissing match off line and quit wasting board bandwidth.

 

[Millhouse]

Guys--it might be time to take this pissing match off line and quit wasting board bandwidth.

what fun is that?

 

[Millhouse]

I've built many hundreds of financial models...and yes anyone can be taught to do it because it's mechanical. But you can't value an investment accurately or say what it's return is without considering intangibles because they have very real economic value that would be realized if you could sell the asset in its entirety.

even if you just limit to what was the direct financial benefit in tax to the state you would need to include the return on investment in SU's brand to have anything approximating reality. Anything else is just to produce a negative talking point because it will inherently undervalue the investment which fits your narrative nicely.

cfo's make bad ceos - your thinking says a lot about why that is.

if you can't prove that a measly 40 million dollar investment had a tangible benefit, that means that the entire benefit of stadium is intangible. which might rightfully scare some people off

 

[cuseinchina]

Guys--it might be time to take this pissing match off line and quit wasting board bandwidth.

It's actually all pertinent to the question at hand and to the bigger question of whether a new stadium is a good idea or not. but I hear ya - I think we may be close to done. We seem to have these little mutual tantrums every few months and it dies down quickly.

 

[cuseinchina]

if you can't prove that a measly 40 million dollar investment had a tangible benefit, that means that the entire benefit of stadium is intangible. which might rightfully scare some people off

Read this and when you are done read the pertinent annual letters...maybe you'll get it then.

http://warrenbuffettoninvestment.com/tag/intangible-assets/

 

[MikeSU02]

I'm enjoying the back and forth about this topic.

I think spirited debate about this is great as long as it stays civil and not redundant or cyclical.

Once we get there we should do the "agree to disagree" post.

Kudos to cuseinchina and Millhouse

I think both are trying to answer the OP's question with good intentions.

 

[Millhouse]

I think both are trying to answer the OP's question with good intentions.

you're wrong too ha

and yesterday i said a digested ham sandwich was smarter than him. i still think that's correct but i'm open to the possibility that it wasn't exactly civil

 

[orangecuse]

I'm enjoying the back and forth about this topic.

I think spirited debate about this is great as long as it stays civil and not redundant or cyclical.

Once we get there we should do the "agree to disagree" post.

Kudos to cuseinchina and Millhouse

I think both are trying to answer the OP's question with good intentions.

Their different viewpoints are a carry over from the other stadium thread...which have been quite interesting. Agree with cuseinchina that CFO's do not make good CEO's due to their inside the box, rigid, actuarial dimension.

 

[GoSU96]

assumptions
500M price tag
10% discount rate
260 nights per year (i think that's crazy but i'll run with it)
30 year life.

that means the dome needs to average $204,000 profit for those 260 nights per year to break even. 53 million profit per year.

at 20% margins, that means someone is paying $1 million dollars to use the dome on average for those 260 nights. That means it would need to be a 265 Million dollar top line business per year.

I'm no finance guru like you, but I know something about PPP's and project finance and your numbers are nuts.

Break even is $265M in Gross Revenue?!, requires $53M in PROFIT?! What?

I think it's overstated, but $53M would be in the ball park on the high end as the cash flow needed for the project company's debt service to cover principle, interest and distributions to investors. That's not profit. That would also mean that the cost of operations, maintance, tax, insurance would be $212M per year. That's not close to realistic. Closer to $20M would be realistic.

You are overstating required gross revenues by at least 3X. And that assumes the job was fully financed, with no capital contribution from the state.

 

[xc84]

that's funny but here's what is nuts - if you go from 6.942% to 6.943%, you need an extra $4,000 of net benefit per year to break even

just goes to show how insanely expensive this all is. a rounding error that many decimals out amounts to what would be real money for any of us

500 million is such a big number no one even knows what it means. that's when people start visualizing dollar bills stretched end to end an going all the way to uranus. (the planet, that is)

I think what you are saying is it's easy to manipulate the outcome with slight changes to the discount rate you choose to use in an analysis like this. Goes to show you how useless it is to discuss various discount rates and which is the correct one to use in a discussion like this on a bulletin board.

 

[Millhouse]

I'm no finance guru like you, but I know something about PPP's and project finance and your numbers are nuts.

Break even is $265M in Gross Revenue?!, requires $53M in PROFIT?! What?

I think it's overstated, but $53M would be in the ball park on the high end as the cash flow needed for the project company's debt service to cover principle, interest and distributions to investors. That's not profit. That would also mean that the cost of operations, maintance, tax, insurance would be $212M per year. That's not close to realistic. Closer to $20M would be realistic.

You are overstating required gross revenues by at least 3X. And that assumes the job was fully financed, with no capital contribution from the state.

i tried to preemptively dismiss the guru stuff. no one is a finance guru anywhere, i'm convinced

i'm all ears for which of my assumptions are wrong. I isolate them to make it clear what I'm pulling out of my A. if the numbers don't work, it's because my assumptions are wrong.

pv=$500,000,000
r=10%
nper=30
pmt=$53,000,000

margin%=20%
solve for revenue=53M/.2=$265M
costs=$265-53=$212

I know thatt will never happen ever. no one in their right minds would voluntarily put up $500M expecting that kind of revenue for an arena in syracuse.

The whole point of the exercise was to solve for what would make this a break even investment for the assumptions I clearly laid out. these numbers are crazy because spending 500M is crazy

The reason this is a PPP is because the numbers are clearly ridiculous and the only way you can pay for this thing is to take the money away from people who rightly think "I want no part of this dogsh!t investment because it's ridiculous." If there are social benefits that justify this type of investment they still need to add up to the same 53M we backed into