Tuesday, October 6, 2009

Back To Basics: Why is there a Lighthouse Project?

Westbound on Charles Lindberg Blvd towards Nas...Image via Wikipedia

The recent acrimony between the Lighthouse and the Town of Hempstead has renewed questions from some observers about why the Lighthouse Project is necessary in order to provide a new home for the New York Islanders. Some supporters speak about is as if Charles Wang and Scott Rechler dictated it by fiat, and many opponents try to duck the real issue by repeatedly saying they are in favor of a new Nassau Coliseum but not in favor of such a large-scale development. Therefore, I think it is time to update this post from March, with updated numbers and commentary.

Just the Coliseum in Numbers

We know that the Islanders are choked by the onerous lease with SMG, in which they do not have access to most of the revenue streams enjoyed by other teams (with the exception of luxury boxes), and they would still lose money if they sold out every game at Nassau Coliseum. This doesn't mean the Islanders can never be profitable, especially since all "profit" means is taking in more money than you give out. There is a big difference between making money and making enough money to justify the $320 million (updated number) that Mr. Wang and Mr. Rechler will spend to renovate Nassau Coliseum.

There is a simple calculation in the finance world called Net Present Value (NPV) that can help us understand this. Money does not have universal value; thanks to inflation, a dollar today is worth more than a dollar 10 years from now. NPV looks at the initial money spent and the money expected to come in to judge whether something is a good investment.

Forbes Business of Hockey 2008 was my guide for this calculation, which I did using this online calculator. According to Forbes, the average profitability for an NHL team in 2007-2008 was $4.7 million. According to their team page, the Vancouver Canucks had an operating income of $12.8 million in 2006-2007 playing in a privately-financed arena. I decided to use this number, guessing that a new arena and a better lease would help make the Islanders one of the more profitable teams in the NHL.

4% is the average rate of inflation, so I decided to use that as the discount rate.

Finally, as mentioned earlier, $320 million is the cost of the renovation.

With that little background, here we go:

Discount Rate: 4%
Life of Project: 30 years
Initial Investment: -$320 (in millions, of course)
Income, Years 1-10: $12.80 (using the Vancouver figure)

NPV: -$216.18

In other words, asking Charles Wang to privately finance his hockey arena would result in a net loss of over $200 million. I realize nobody is going to feel sorry for a man as rich as Mr. Wang, but none of us would take that deal.

Public Money

Things get far more interesting when you look at using public money for the facility. Sports economist Andrew Zimbalist, who was gracious enough to answer a few questions for this blog back in May, pointed out that the average public share of a stadium/arena is 65%. For fun, I took a look at what would happen if that same $320 million renovation was financed with the average public share:

Discount Rate: 4%
Life of Project: 30 years
Initial Investment: -$112 (35% of $320 million)
Income, Years 1-10: $12.80 (using the Vancouver figure)

NPV: -$8.18

It's still a net loss of $8 million. However, look at what happens when you use Prof. Zimbalist's previous study that said the average public share was 75%:

Discount Rate: 4%
Life of Project: 30 years
Initial Investment: -$80 (25% of $320 million)
Income, Years 1-10: $12.80 (using the Vancouver figure)

NPV: $23.82

Stand-alone arenas can be built for a situation such as the Islanders', in which the arena has one major tenant and competes for regional events with Madison Square Garden and the Prudential Center, only if taxpayers foot the bill.

Oh, and by the way....in both of those calculations, if you put in the public share, the taxpayers stand to lose over $100 million, and that assumes the County would make the same money as the team (the real figure is probably far less).

Scaling it Down?

The Lighthouse Project, like every proposal of its kind, is designed to make money for the developer - insert gasps and "duhs" here. However, and this might be surprising for some, the project is not designed to maximize potential profit. There are certain pieces of this, like the arena and the convention center, that are usually built by municipal government because they don't usually make money. Therefore, the other pieces that will make money (housing and commercial) are meant to support these investments - I talked about this previously with the Coliseum as loss leader.

Changing the project might have to be done; it looks almost inevitable if the Lighthouse wants to build in the Town of Hempstead. However, this might not be as simple as cutting a piece here and a piece there. How can we tell if the Lighthouse would even consider a scaled-down option? Well, I bet they would start by doing a calculation like I just did on whatever the new proposal is.

Bottom Line

The Islanders retired numbers at the ColiseumImage via Wikipedia

I am not trying to spin this as a purely altruistic gesture by Charles Wang, because it isn't. He is a businessman, just like I'm starting my own business right now, and businessmen are not necessarily saints. However, Charles Wang and Scott Rechler are not Santa Claus, either. Since the government is not willing (some would say not able) to provide funds toward refurbishing the Coliseum, the Lighthouse principals took another route. Rather than trying to force taxpayers to shoulder the full burden of an arena (with no path toward getting it back), the Lighthouse principals have proposed a visionary project that, if done right, will help provide the economic engine Long Island sorely needs and spur new investment and industries in a place in desperate need of both. To make things better, they want to invest money and generate tax revenue in an area that currently loses the taxpayers of Nassau County millions of dollars every year.

The Lighthouse is not one man's fantasy, and it is not a pipe dream. This doesn't mean people should not still judge the Lighthouse on its benefit to the community, it is just important to keep in mind why we're here in the first place.

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  1. I have been baffled by the fact that Wang and the developers are the ones willing to finance this but the ToH is putting a wrench in the system...Im also baffeled when the same poeple who can't grasp these simple truths you pointed out about why the LH development is necassary...You can expalin it 1000 times but these same people will still ask "but why cant Wang just build a new arena"???Insanity

  2. It's human nature...people want it both ways. I also suspect that given the large (and prominent) support, some people who don't want development are trying to look reasonable by adding in "...but I want a new Coliseum!" Unless the County digs into all our wallets, it doesn't work like that.

  3. Why can't they just build a new coliseum? Why do the need to build the other stuff?

    Just kidding. I think I am at the point where I have to make a joke to stay sane. The politics here are just unbelievable. I wish there were some way to get Kate Murray, D'Amato, Mondello, and whoever else is trying to kill this project to just take a step back, take a deep breath, and really take a look at the gift they are being offered and the good they could do for the people they are supposed to be working for.

    Contrast that with Queens, where they are reaching out and inviting this kind of development. It just boggles the mind.

  4. My question is, if this project does not go through in TOH, how is this going to effect the county as a whole, especially neighboring Townships. If this project is denied and the Islanders are forced to leave, I feel it would be not only a disaster to TOH but all of Nassau County. I am not to familiar with local politics, but I am surprised there is no pressure from other area's or support being given out. I could be completely off base with this comment but it has been on my mind nonetheless .

  5. reverieinny, its selfishness and I'm sure Mr. Murray has some other plans to do with the property instead...Maybe a campaign contributor, who knows???

  6. Reverie - welcome to the site, always great to have new commenters (and the regulars, of course).

    Your question hits on a pretty fundamental point in this whole debate - the Town of Hempstead has sole power to judge the zoning of a project with County and Island-wide implications. The labor unions have been stepping up their vocal support in a big way, and there have been times when other elected officials (like North Hempstead Supervisor Jon Kaiman...interestingly, his Town has no authority here, but parts of the Town of North Hempstead are closer to the Lighthouse site than my home, which is in the Town of Hempstead). There is a wide base of support for the project among other elected officials, but I think they want to avoid meddling in affairs they don't control.

    The unions have stepped up, and I think the only other group that can step up without causing a government-level conflict....is us.

  7. Nick, whats up with the news about Hempstead changing zoning laws and does it pertain to the LHP???

    Also in another article about an official mediating between the parties calls the LHP "CONTROVERSIAL"..

  8. islespassion21- i think what I read is that it is the Village of Hempstead, not the TOH that is changing zoning laws, and i believe it is for just a few offices and stores possibly.

    Nick- I agree, we do all need to step up in a big way, I am in Hicksville, about 7 minutes from the Coliseum. The fact that we don't have a say(voting wise) is a little absurd. I've rallied about 25 TOH residents at work to step up, and all seem interested as well to spread the word.

  9. reverieinny, thanks for pointing that out.

  10. Nick, things have ben very quiet on the Lighthouse fonr the past few days. Is this a good or bad sign? I would assume good. Probably means Wang and Murray are in negotiations and keeping everything away from the media. What do you think?

  11. Paul - I tend to agree with you. Neither side has even confirmed or denied a meeting took place, and that usually means something is going on. New post is coming today about John Cameron's offer to mediate this whole thing.

    Reverie - I couldn't have said it better myself, and I think it goes to a fundamental problem we have here on LI - too much government. You in Hicksville should have as much of a right to weigh in as I in Bellmore, but unfortunately our government is currently structured in a way that doesn't reward a common purpose.

    However, that having been said, let's not forget there is an election in less than a month. Everyone on Long Island can vote, and if your position on the Lighthouse will affect how you vote (that poll seems to suggest most people who come here will), then you can still do that outside the Town of Hempstead.

  12. Well being fromt he commack area all I can say is if the TOH is going to pass on this project then bring it right to the pilgrim state site which has access to the LIE, NSP, SSP and the Saktigos all major arteries. suffolk would be happy to keep th islanders a true LONG ISLAND team. charles Wang should not have to continually lose money because of the lease that prior owners executed. its time for it to be a truly level playing field. Hempstead step up or step aside