West Ham’s Relegation Proof Rent

On March 22nd West Ham United FC announced that it had secured a deal to become the anchor tenant of the Olympic Stadium situated in Stratford, east London starting in 2016.  The deal for the stadium, designed by architectural and urban development firm Populous, became finalized after an agreement was reached regarding the conversion funding.

As it stands, the Olympic Stadium maintains a capacity of 80,000.  The conversion fund of £190 million covers the cost of reducing the capacity to 60,000 with a retractable system allowing for the venue to change between a football stadium and a general sports arena in a matter of days according to a BBC report.  In this deal West Ham have signed a 99 year lease of the venue for £2 million a year as well as a £15 million contribution to the overall conversion fund with the rest being divided between the British Treasury, Newham Council borrowings, the London Legacy Development Corporation (LLDC) and London mayor Boris Johnson’s annual Budget.

Since West Ham announced its intention to bid for the Olympic Stadium the debate has raged on whether this is a good move or not.  Without regard to the social and economic impact on Upton Park where their current 35,000 seat stadium sits, this move financially should be considered one of the shrewdest venue deals for two major reasons. The first being that athletic stadiums of this size are not cheap at all and the second is that their deal all but ensures the clubs ability to maintain rent despite a relegation from the Premier League which can be financially painful.

With regard to Stadium costs it should be noted that West Ham doesn’t own the Olympic Stadium as a result of this deal, nor does it intend to.  However they are moving to a stadium that cost £490 million to build.  By the time Arsenal finished building the Emirates Stadium, which went relatively smoothly, it cost nearly £400 million.  Arsenal are still in the process paying off their comparably 60,000 capacity stadium.  A further example of the risks involved in building a stadium from scratch can be found all the way back in 1957 with FC Barcelona.  Their home, the Camp Nou, is one of the most iconic stadiums in Europe and holds the record highest seating capacity in Europe at just over 99,000.  Iconic as it is now, at the time of its construction, its final costs were close to 340% more than the original estimate, leaving the club with incredible debt problems leading to multiple mortgage issues as stated by the club’s Official website.  Take into account that Chelsea FC’s Stamford Bridge  stadium holds 41,000 and Chairman Bruce Buck has cringed at costs upwards of £500 million to build a new stadium elsewhere when discussing the topic on Chelsea’s in house TV station.

With these examples as just and introduction to a list of Stadium nightmare stories, the fact that West Ham,are  not only increasing their venue capacity to 60,000 from 35,000 but also only are only paying £15 million up front and over CENTURY are only responsible for an amount that at best covers half of the costs a modern day club would spend in building a new Stadium is simply amazing.

The other aspect of this deal that most people haven’t noticed is that with such a low yearly financial obligation after the initial £15 million, West Ham doesn’t need to worry about relegation threatening their ability to  meet their rent payments.  In the business of organized sports, there are three major sources of revenue; corporate sponsorship,  ticket sales & merchandising, and broadcasting rights.

Of these three sources, Corporate sponsorship is least likely to change due to relegation given the specificity in the length of sponsorship agreements.  This leaves ticket sales and broadcasting rights as the biggest potential impact on revenue that could prove disastrous to a club facing new stadium payments.  For West Ham, the fact is that they survived their previous stint in the championship and gained promotion back into the Premier League after only one year’s absence.  If relegation were to occur, they are in fact even better prepared the second time around with this new stadium since they have the potential to almost double their entrance revenue depending on ticket prices.  According the the BBC report mentioned above,it is believed that West Ham takes home all ticket and merchandising revenue in the stadium for its games and only shares hospitality and catering with the LLDC.

In the end relegation takes the biggest hit on broadcasting revenue.  The premier league distributes domestic broadcating revenue on a 50:25:25 basis among the 20 participating clubs according to their official website.  50% gets divided equally among all clubs, 25% is distributed based on league position at the end of the season and the final 25% is distributed as a facilities fee to clubs based on the number of times each club’s matches were shown on television.  With current domestic and international rights deals in place, until the end of this current 2012/13 season the BBC estimates that each club is guaranteed at minimum £40 million a season.  That number will surely rise with the new domestic rights deal increasing by almost 70%.  Combine that with the Independent’s estimate that 98% of Premier League broadcasts are viewed overseas indicating a probable increase in foreign rights value and overall broadcasting revenue for clubs looks only set to increase.

All this money however disappears upon relegation because while Premiership TV rights counts into the billions, Championship rights for this season amount to a total of £195 million, distributed among 24 clubs.  Even based on the assumption that the English Football Association divides Championship broadcasting revenue the same way as the Premiership that still accounts for a massive hit to any relegated clubs’ bottom line.  If Arsenal were relegated while they still have to pay off the Emirates, they’d find themselves in hot water owing around £20mil a year.  West Ham however, only have to pay £2 million a year.  In this current financial climate, most premiership player sales break that mark easily.  West Ham would find a way to pay it without much hassle, potentially even from their increased ticket sales revenue.

As of this past weekend’s fixtures, West Ham have 5 teams between them and the relegation zone with a high probability of staying in the Premier League at the end of the season.  Relegation can still occur though, should the Hammers find themselves in a horrific turn of form.  Even if this happens, this new stadium deal that they have agreed has very shrewdly put the club in a  position to financially survive such a disappointing result where many clubs would be treading water.  Critics of the deal may find ammunition elsewhere, but Club CEOs and owners should tip their hats to West Ham on pulling off this incredibly sound financial deal.

Reporting on the business side of the world's game.