By DAVID MOON, Moon Capital Management
Each evening for several months I've passed a hive of
construction activity at the former coin laundry on my drive home. I stopped and
asked about the drywall and paint trucks and learned that a couple is about to
open a neighborhood diner.
They're doing all the construction
work themselves and haven't borrowed a nickel to do it. I congratulated them on
their business acumen and began thinking about ways to resist the temptation of
a neighborhood restaurant that delivers both pizza and ice cream.
Then I realized that these young
entrepreneurs are wasting their vision and talents on small ideas ' they are
perfectly suited to own a professional sports franchise.
These small will-be restaurant
operators realize that if they can minimize the construction cost of their
facilities, they lower their monthly overhead. They won't have a monthly note to
stroke. They won't have a rent payment.
These are two substantial fixed
costs that most businesses incur before generating any cash flow to pay salaries
or buy pizza dough, much less compensate the owners or generate any profit. It
is a fantastic model if you can successfully start your business with little
financial capital ' or better, get someone else to provide a significant amount
That's how the pro sports owners do
it. They combine political influence, business hubris and OPM (other people's
money) so you and I can subsidize the hundred-million-dollar salaries of
Washington, D.C. is spending $400
million to build a stadium for the new Washington Nationals Major League
baseball franchise. The new stadium and sports complex in Indianapolis will cost
taxpayers $900 million. Scores of examples abound.
Because these owners don't have to
bear the full cost building their 'restaurant,' it frees up their cash flow for
other uses, like signing megabucks player contracts. When the Washington
Nationals lease one of their 78 luxury suites, none of that revenue will be used
for rent. It can all be used for salaries or accumulated as owner
Team owners argue that public
financing is required to build these massive stadiums, and public money is
justified because of the huge economic payoff to the communities.
Wrong. Wrong. The Miami Dolphins and
Denver Nuggets recently built new stadiums with almost completely private money,
so it is possible. And if you've been to the Dolphins' Joe Robbie Stadium you
can attest that it is not poorly constructed or modestly designed. It's a great
place for football.
The local economic benefit argument
doesn't hold water, either. Most professional sports franchises attract local
fans who would otherwise spend their money in town somewhere. The sales tax
revenue would still be there.
Economist Allen Sanderson of the
University of Chicago argues that cities would create a greater economic impact
if they simply scattered the hundreds of millions of dollars from a helicopter
over the city. Instead, I would suggest a reduction in local taxes, but I'm not
a real economist; I just play one in print. I wonder what my neighborhood
restaurateurs would suggest?
In writing about the declining
popularity of the NBA last week, I misidentified Shaquille O'Neal as a Los
Angeles Laker, rather than a member of the Miami Heat. Apparently, I missed the
news of Shaq's trade in 2004.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).