Question

In: Finance

NBA San Francisco Warriors played in San Francisco for nine seasons before relocating to Oakland, CA...

NBA San Francisco Warriors played in San Francisco for nine seasons before relocating to Oakland, CA in 1971 and renaming themselves the Golden State Warriors. Their new home was the Oakland Alameda County Arena, a $24 million, 13,000-seat facility built in 1966. In 1997, a $121 million renovation expanded the facility to 20,000 seats and in 2007 it was renamed Oracle Arena. The Warriors won three NBA Championships in 1975, 2015, and 2017 in that facility. Despite playing in the oldest arena in the NBA, the Warriors’ success on the court led to a season ticket waiting list with about 40,000 fans.
Oracle Arena is owned by the joint city-county governmental agency called the Oakland Alameda County Coliseum Authority (OACCA). The city and county taxpayers covered the original arena construction cost and in 1996 issued $140 million in construction bonds for the renovation. That year the Warriors signed a 20-year lease that included paying $1.5 million for rent as well as the first $7.4 million of their premium seating revenue to the OACCA. The OACCA retained 5% of each ticket sold, a portion of the naming rights, parking revenue, and concession revenue. The OACCA share of annual ticket revenue tripled to $6.5 million in the period between 2011 and 2016 as the Warriors’ popularity grew. The OACCA also covered costs including maintenance and operation of the arena, some game day production and marketing expenses, and about $22 million for the principal and interest on the loan. In 2016, the OACCA required contributions of $11 million from both the city and county to balance their budget.
In 2012, the Warriors announced their intentions to leave Oracle Arena and build a new facility on the waterfront in San Francisco. After years of opposition and ballooning costs, the team altered their plans and in April 2014 paid a reported $250 million to purchase a different plot of land south of the San Francisco Giant’s AT&T Park. After several years of lawsuits from a local hospital concerned with arena crowds reducing patient and ambulance access, ground breaking took place in January 2017. The 11-acre development built and owned by the Warriors encompasses the 18,000 seat Chase Center arena, 100,000 square feet of retail space, and 580,000 square feet of office space. Half of the office space has already been rented out by ride-sharing firm Uber and JPMorgan Chase paid $300 million over 20 years for the naming rights.
Despite excitement about the new arena, the Warriors are responsible for the $1 billion cost. Arenas need to book events 200 or more days a year to break even. When the Chase Center opens in 2019, it will compete to fill those 200 dates with other local arenas including the newly abandoned Oracle Arena in Oakland, the 80-year-old Cow Palace south of San Francisco, and the SAP Center 45 miles away in San Jose. Notably, there are no other large, modern arenas within San Francisco leading some to suggest the Chase Center will have the upper hand in booking events. As evidence of the Warriors hopes for high profit potential, two years before opening they announced suites will range from $525,000 to $2.5 million in the Chase Center while they cost only $200,000 to $300,000 at Oracle Arena.
Back in Oakland, Oracle Arena will see their average of 110 annual events decrease by about 50 because of the loss of the Warriors. In addition, there will still be approximately $55 million remaining to be paid on the bonds they issued in 1996.
Please answer the following questions for discussion
1. From a finance perspective, why did the Warriors allocate $1 billion to build a new arena?
2. What new revenue streams might the Warriors generate that could cover the cost of the new arena?
3. What specific risks do the Warriors face in taking on the full cost of the project?
4. If the Warriors used bonds to finance a portion of their costs, what criteria would lenders use to evaluate their ability to repay the loan?









Solutions

Expert Solution

Answer 1: The new Arena of the Warriors which is the Chase Center will allocate $1 billion to get constructed because the permit cost was $780 million which was issued in April 2017. This is because the $780 million consisted of only the developmental costs. The final value, change in the orders, furnitures and equipments were not included in the amount and hence it was $1 billion estimated to construct the entire Chase arena.

Answer 2: The new streams of earnings the the Warriors would generate which will help to cover the arena cost was on the 11 acre land there would be 18000 seat capacity which will be booked for events for more than 200 days annually. There will be 100000 square feet of retail space whichi will be rented to various retail companies. 580000 square feet of office space was also constructed where half of the space was rented to Uber Cab company and the other hald was taken on lease for 20 years at $300 million by JP Morgan. Also, there will be suites which will cost $525000 to $2.5 million.

Answer 3: The risks that Warriors faces in taking full cost of the project is the ability to recover the cost. This is because Chase Arena have priced their suites cost at $525000 to $2.5 million. The prices were estimated extremely high compared to the prevailing market prices of the suites available in other arenas. The cost of the same suites in Oracle Arena was between $200000 to $300000. Also, Chase arena have targeted to conduct atleast 200 events annually while the avergae events held in other arenas were 110. This overestimation of events to be held in Chase arena annually was another risk.

Answer 4: The lenders will determine the ability of Warriors to repay the loan based on their performances in the NBA tournaments. The more tournaments Warriors wins, the more spectators will be attracted towards watching the tournaments and buy tickets. Secondly, the lenders will also look for the brand value of the companies who are renting the retail space in Chase arena. Thirdly, the lenders will evaluate whether the Warriors has the ability to conduct more than 200 events annually as per their projections. Fourthly, they will also check the capital structure of Chase arena. Finally, the lenders will majorly check the cash flows of Chase Arena. This will help to analyse whether cash flow are positive or negative and the ability of Warriors to make repayment on debt.


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