How to Score Major League Returns Investing in Minor League Baseball

NEW YORK (The Deal) -- On Sept. 8, 1999, the Rockford Reds, the Single-A affiliate of Major League Baseball's Cincinnati Reds, played their final game in Marinelli Field in Rockford, Ill., in front of a crowd of just 684 people.

The Chicago Cubs had sold the former iteration of the team, the Rockford Cubbies, a year earlier, and the Rockford Reds were set to undergo a huge transformation with a new affiliation and a new ownership group. Mandalay Baseball Properties, a subsidiary of former Columbia Pictures head Peter Guber's media conglomerate, Mandalay Entertainment Group, backed by New York private equity firm Seaport Capital, had just purchased the team with plans to move it from the 164th most populous city in the U.S. to Dayton, Ohio -- the 43rd largest.

Over the next 15 years, under Mandalay's ownership, the club was revitalized with a new name -- the Dayton Dragons -- new sponsors, and new food and beverage options. Most important, Mandalay managed to negotiate a $23 million state-of-the-art stadium in downtown Dayton that was largely funded with public dollars.

The stadium, as well as the host of other improvements Mandalay would make to the club and the venue, were key drivers in making the Dayton franchise one of the most successful minor league teams in baseball history. Coming into the 2015 season the Dragons had sold out 1,051 consecutive home games, and are expected to sell out the entire 70-game 2015 home schedule.

But Mandalay and Seaport weren't terribly interested in good baseball. They are in the business to make money. So in July Mandalay sold the team to Palisades Arcadia Baseball, a group led by Michael Savit, an investor in the National Basketball Association's Memphis Grizzlies, for a record $40 million, according to a person familiar with the situation, marking it the most expensive sale ever of a minor league club. The record was set at a time when minor league properties, especially underperforming clubs, were trading hands in the low single-digit millions, according to industry watchers.

The Dragons were the first of as many as eight teams that Mandalay Baseball would either own or manage over the next decade and a half. Like the Rockford team, the investments Mandalay made were predominantly in teams in need of new stadiums or teams that could benefit from new starts in new markets.

Mandalay would purchase the rights of the teams and negotiate continued affiliation agreements. But for one of the largest expenditures -- the new ballparks -- the group relied largely on public money. Thus, Mandalay got taxpayers to cover its biggest cost, which also produced the greatest increase in the teams' valuations. Bigger, better stadiums mean more people in the seats. And bigger crowds mean bigger price tags when the teams are sold again.

"Dayton was the poster child for this strategy," said Larry Grimes, head of the Sports Advisory Group, who worked with Palisades to purchase the Dayton team, but declined to comment on the valuation. "The team has been phenomenally successful." Grimes noted that Dayton does not have any major competing sports venues, is a relatively large metropolitan area, and that the city was willing to help in building a sports complex for the team.

The deals worked out great for Mandalay, if the Dayton outcome is any indication. And the city officials who pushed for the stadium projects insist that they are happy with the results -- and so, apparently are the fans filling the seats. But investors and municipal officials elsewhere thinking about emulating the Mandalay model should know that the arrangements are not without costs. Public funds spent on stadiums can't be spent on schools and other municipal services. That downside has been enough to convince some voters that baseball isn't worth the price. And there's no guarantee that minor league baseball will work everywhere. Even if a city builds a beautiful ballpark, the fans -- and thus redevelopment -- won't necessarily come.

In 1998, the city of Dayton approved a $14 million bond sale to fund its first baseball stadium. The bonds were incrementally forgiven with each passing year, and the Dragons agreed to pay about $80,000 per year to rent what would become Fifth Third Field and control the gate, according to the Dayton Business Journal.

The Dragons' sale surpassed the previous record for a minor league club, which Mandalay set in June 2014 when it sold the Texas Rangers' single-A affiliate, the Frisco RoughRiders, of Frisco, Texas, for around $30 million. Frisco RoughRiders, a group led by the team's president, Scott Sonju, and Chuck Greenberg, the former CEO of the Texas Rangers, was the buyer.

"Opening a state of the art stadium these days provides you with an opportunity to dramatically increase revenues because you can take advantage of the new technology in everything from easy access for deliveries for concessions, storage facilities, merchandising, suites and number of seats as well as club seating and potentially better signage," explained Randy Vataha of Miami's Game Plan Special Services, who advised Mandalay on its exit from minor league baseball.

The story of the Rough Riders mimics the tactics employed with the Rockford/Dayton franchise. Mandalay purchased the team in June 2000 when it was known as the Class AA Shreveport Captains, in Louisiana.

Mandalay approached the city of Frisco, Texas, which expressed a willingness to help fund a $22.7 million stadium in downtown Frisco.

"The ballpark, as we call it, was the first major development in downtown Frisco. There was nothing there before the team got here," explained Dana Baird, Director of Communications and Media Relations for the City of Frisco. "I would call it a total development, not a redevelopment. It was the first step in the downtown development."

The stadium, now known as Dr Pepper Ballpark, was the first project in a $300 million public-private development, which includes the National Hockey League's Dallas Stars training headquarters and practice facility, a gymnastics center, a hotel and convention center, as well as residential, retail and office space. The city contributed about $67 million to the total bill, according to a 2002 statement from the city, while private entities, including the Rangers' and Stars' owners Southwest Sports Group and real estate developers, covered the balance.

Being a driver for the economic revival of a depressed, underdeveloped or under-served community was one of the factors that allowed Mandalay to justify asking for public funds to build or significantly renovate stadiums.

According to a 2013 report by Nola Agha, an assistant professor in the Sport Management Program at the University of San Francisco, published in the Journal of Sports Economics, "teams can theoretically affect [municipal] income if they generate substantial new spending by out-of-area residents or discourage residents from spending outside the local economy. Both of these are more likely to occur in geographically isolated metro areas, especially small cities with few other entertainment options."

Frisco and Dayton, two cities with minimal entertainment options, were prime examples.

"When both Dayton and Frisco teams moved, they took advantage of the newest design features and were very innovative," said Game Plan's Vataha. "Getting a new ballpark was critical to the value of those teams and those stadiums have held up pretty well."

Given the economic impact a minor league baseball team can have on a community, it is no surprise that when Mandalay took control of the Scranton Wilkes-Barre RailRiders, the Triple-A affiliate of the New York Yankees in 2012, the county of Lackawanna, Pa., paid up to keep the team in Pennsylvania.

Mandalay and the New York Yankees agreed to purchase the team in 2012 from the Lackawanna County Stadium Authority for $14.6 million. The sale set in motion a $40 million renovation of the team's Moosic, Pa., ballpark that was constructed in 1989. Lackawanna County funded the majority of the project for which SWB Baseball (the Mandalay-Yankees joint venture) agreed to a 30-year lease. The club pays somewhere between $600,000 and $900,000 in annual rent, according to various reports.

Dan Etna of Herrick Feinstein, who advised Mandalay on in the stadium negotiations in Lackawanna County, explained that the county realized that it could not run a for-profit baseball team as efficiently as private investors, but also decided the team was a "business draw worth keeping."

Etna explained that Mandalay and the Yankees added a new cachet to the Scranton team via branding and sponsorships. The owners also added better in-game entertainment and more gourmet food options, making the stadium and the team a bigger draw to attract more business. "Don't forget the Yankees had a whole separate value-add they were able to bring to the table -- their own promotional repertoire," he added.

Mandalay eventually sold its 50% stake in the team to David Abrams, David Blitzer, Grant Cagle and Michael Hisler in August. Terms of the deal weren't disclosed and the New York Yankees continue to own the other half of the franchise.

But behind every city- or county-funded project, there are taxpayers feeling some affect in their wallets. In Dayton's case, the city issued $14 million in taxable bonds to fund the stadium. And while the Dragons are drawing sold-out crowds, the Dayton Public School system is in such disarray that the district may have to be taken over by the state. As recently as May 12, Dayton officials said that if things go unchanged for the district, the Dayton school district could be placed on Academic Distress and the state would put its own board in place. The city's investment in baseball didn't cause the district's problems, but the redevelopment clearly didn't help.

Sometimes, taxpayers simply aren't willing to make trade-offs, leaving team owners to either foot the bill or find another city. In 2012, for instance, Mandalay and the Atlanta Braves joined forces with the intention of bringing a team to Wilmington, N.C. After several months of campaigning, 70% of Wilmington voters decided against the city building -- and largely funding -- a $37 million ballpark.

"Baseball has been discussed in our community for a number of years and this was the first viable proposal we had seen, involving not only Major League Baseball, but also a nationally known management entertainment company," said Wilmington Mayor Bill Saffo in a statement in November 2012. "Clearly this opportunity came knocking at our door at a tough time, when citizens are worried about government spending, even when the benefits are large."

And Wilmington isn't alone. More recently Savannah, Ga., officials decided against funding expensive renovations to keep its minor league team.

Over the past few months the city and Hardball Capital, a group that is following Mandalay's lead and scooping up teams, negotiated to try to keep the Sand Gnats, the Single-A affiliate of the New York Mets, in the city. The team had been wrestling with Savannah officials, who had already put up $3 million to replace lighting systems, the grandstands and other aspects of the park over the previous six years, about replacing or dramatically renovating the 89-year-old Grayson Stadium on the edge of Savannah's historical district.

The team announced May 21 that it will move to Columbia, S.C. The city of Columbia in January broke ground on $37 million ballpark.

"While we have always believed that Savannah would be a great home for professional baseball, the challenges and expenses of operating a facility as dated as Grayson Stadium have proven to be insurmountable," officials from the team said in a statement May 21. "We offered to co-invest with the City ... to insure the long-term success of baseball in Savannah and to allow us to bring concerts and other civic and community events to this City. Unfortunately, we were not successful on that front."

Savannah officials said the would try to keep baseball in the town and that they are in "active discussions with several other professional baseball owners" to bring another team Savannah. "While we have enjoyed nearly a century of professional baseball in Savannah, we have experienced a number of seasons when we have had no team. We are confident that, just as before, baseball will return to Savannah soon enough," said Mayor Edna Jackson in a statement.

Despite Columbia's eagerness to land a baseball club -- breaking ground on a stadium before it had a club to play in it -- industry sources question whether the team can succeed in the town. Grimes, for example, said he wonders whether Columbia will be able to support a professional franchise, given its proximity to the University of South Carolina and its sports teams.

"There are teams that are looking to move every year, but you have to pick the right city and the right situation to make it successful," said Grimes. "What's interesting with Columbia, S.C., where they are rabid baseball fans, is how the team will draw. There are still some questions in my mind because they are assuming that the fans will flock to the minor league team. Its hard to tell."

For Mandalay, when it ran into trouble moving a team, or getting public money for a stadium, the group moved on to other ventures.

During its years of investment in minor league baseball, Mandalay has owned or managed the Staten Island Yankees, the short-season single-A affiliate of the Yankees; the Hagerstown Suns, which is the single-A affiliate of the Washington Nationals in Maryland; the Oklahoma City Red Hawks (now the OKC Dodgers) and the Las Vegas 51s, formerly the triple-A affiliate of the Toronto Blue Jays, which now fills that same role for the New York Mets.

The group also owned the Erie SeaWolves, the Double-A affiliate of the Detroit Tigers minor league baseball team in Pennsylvania, which it sold on March 27 to Fernando Aguirre, former chairman and CEO of Chiquita Brands International. The SeaWolves' sale marked the end of Mandalay's tenure in minor league baseball.

But Mandalay's successes in Scranton, Dayton and Frisco, as well as the subsequent impact on those local economies, has inspired other cities to pony up for stadiums to attract teams and spur local economies.

On April 16, the New Britain Rock Cats, the Double-A affiliate of the Colorado Rockies, began their final season in the Connecticut stadium they have called home since 1996. The Rock Cats, which were purchased in March 2012 by Josh Solomon, the president of real-estate investment and development firm DSF Group, are set to move to Hartford, Conn., and become the Yard Goats, named for the engines that haul trains around rail yards.

In 2016, the team is set to begin play in a $56 million, publicly funded ballpark in a more favorable geographic and demographic location that could have significant impact on the valuation of the team, according to sources.

The Rock Cats were purchased for about $15 million according to two people familiar with the matter, and will likely see that valuation increase moving into a $450 million downtown development. "You move into a new stadium, you can bank on a pretty dramatic increase in revenues, not only in attendance but in general revenue, concessions and sponsorships," said Grimes.

Thomas Deller, Director of Development Services for the city of Hartford, said that talks between Solomon and the city about a move began just after new ownership took control of the team in 2012. "For six to eight months, we called around the country to cities that have built stadiums to gauge what makes sense for minor league teams," Deller said. "It became very clear to me and my staff that the stadium could be a catalyst for redevelopment."

Deller said he made calls to the cities of El Paso, Memphis, Lehigh Valley, Pa., and Dayton. The city approved the plan and broke ground on the stadium on Feb. 17. The stadium itself is set to be ready for the 2016 season while the entirety of the development, which includes retail space, residential space and commercial space, will be completed by 2019.

But Hartford officials have not figured out exactly how it will fund the $56 million baseball stadium project. As recently as April 30, the city had suggested a bond sale, but those talks remain ongoing. Hartford, which broke ground on the stadium in February before financing was in place, has since said it will pay for thestadium with revenue-sharing bonds, although some in the city are still grappling with the state for assistance.

Under the current bond program, which was underwritten by Jefferies and William Blair & Co., the stadium authority in Hartford will borrow about $60 million, including $39 million raised through the sale of tax-exempt bonds with a 4.2% interest rate, Deller said. Of that total, $56 million will be deposited into an account to pay the developer, DoNo Hartford, as construction progresses, while the remaining balance will be used to fund interest payments.

As for New Britain, the Hartford Courant reported April 15 that the city is negotiating with a number of teams, including unnamed franchises in the the Atlantic League, a non-affiliated independent professional baseball league, about a move to Connecticut.

Just after the Rock Cats announced their departure, New Britain Mayor Erin Stewart earmarked $500,000 for improvements to help lure a new club. But with the Atlantic League's Bridgeport Bluefish and the Long Island Ducks already in the area, the effort seems like a long shot.

While stadiums are a huge boon for team valuations, their upkeep and maintenance are huge capital expenditures that almost always the cities that claim the teams are expected to help support. Only two of the roughly 240 minor league franchises -- the Lansing Lugnuts, the Class-A affiliate of the Toronto Blue Jays in Michigan and the Lexington Legends, the Class-A affiliate of the Kansas City Royals in Kentucky -- actually own the stadiums they call home.

"The issue that's been going on since 2008, for these municipalities and for the voters is: What is the return on investment for the community," said Grimes, who has advised on minor league transactions for over 20 years. "I obviously am a bit prejudiced, but I think that having a minor league sports team dramatically adds to the quality of life in many communities."

And not all communities are created equal.

"In many cases you have a small town that is paying for these stadiums. If you take the Yankees out of New York City, you still have a lot to do in New York .... If you put a team in Geneva, New York, for instance, and you take the team out, it'd be more likely that people would have to leave Geneva," said Andy Zimbalist a professor of economics at Smith College who has written extensively on the business of sports.

Zimbalist pointed out that unlike major league teams, which require hundreds of millions, if not billions to construct a stadium, a minor league stadium is a relatively small investment that can have large implications depending on the city and ownership.

Maybe so. But some cities would rather not be taken out to the ballpark.

This article was originally published at 4:01 p.m., June 5, 2015 on The Deal.

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