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Why the Chargers' move to LA makes financial sense

Daniel Roberts
Senior Writer
Chargers owner Dean Spanos

One year ago, Los Angeles didn’t have an NFL team. By September, when a new football season starts, the city will have two.

The San Diego Chargers are officially relocating to LA, and at first glance, the numbers might make the move look puzzling.

For the right to move, the owners (the Spanos family) have to pay a $550 million relocation fee. In their first two seasons in LA, the team will play in the StubHub Center, the home of the LA Galaxy (a soccer team), a stadium that only seats 27,000. It will be the NFL’s smallest stadium by far—the closest, the Oakland Coliseum, holds more than twice as many.

After two years, the Chargers will move into the $2.6 billion stadium in Inglewood, Calif., currently being built for the LA Rams. The Chargers will only pay the Rams $1 per year (along with contributing a $200 million stadium loan from the NFL), but will basically amount to a tenant; the Chargers’ owners won’t own their stadium, and it’s unclear what the revenue split will be between the two teams over naming rights and other stadium deals.

So: why does it make financial sense to leave San Diego?

There are a number of answers, but the most important is team value in the Los Angeles media market.

Critics of the move keep pointing out that LA hasn’t demonstrated it can support two NFL fan bases (in the past, it has failed to even produce one), LA is already home to two “Power Five” college football teams (USC and UCLA), and football fans won’t come out for the team. But that doesn’t matter much to the Chargers or the Rams.

This isn’t about whether the teams will be popular among real sports fans. This is purely business. Being in glitzy LA gave the Rams a more premium brand identity overnight, and it will do the same for the Chargers.

Team value and luxury suites

In the most recent Forbes valuations of NFL teams, the St. Louis Rams doubled in estimated value to $2.9 billion simply by moving to LA (this was their first season in LA). Forbes pegs the Chargers at No. 21, worth $2 billion—expect the team to get a much higher slot next time around. (And the Forbes values err on the low side, recent team sales have shown.)

Chargers chairman Dean Spanos’s $2 billion team is about to become a $3 billion team; it would be no surprise to see him sell in the next five years.

Spanos has given no indication he wants to sell the team, but once he’s in LA, he could do it at an eye-popping price. (And no one ever says they’re trying to sell until they sell.) It doesn’t matter much that the team had a losing record this year and hasn’t won its division since 2009.

For proof of the instant resale value LA delivers, look no further than the LA Dodgers selling for $2 billion in 2012, or the LA Clippers selling for $2 billion in 2014. It’s about being in the No. 2 media market in the country (and many argue it’s quickly becoming No. 1).

A team’s media market has an effect on everything from TV advertising sales rates to merchandising, and even on the players’ abilities to get lucrative endorsement contracts. In 2013, when baseball slugger Robinson Cano left the New York Yankees for the Seattle Mariners, experts noted that despite the big money he’d get, his star profile would fall because he’d be playing in a tiny media market. That proved correct.

In the first two years, the Chargers will almost certainly fill the StubHub Center, and they will be able to reap luxury suite revenues from the types of corporate groups that buy NFL packages these days as hospitality suites for entertaining clients.

“In an odd way, they’re probably in a better position playing in a small stadium than the Rams are [playing for the time being in the LA Coliseum, home of the USC Trojans], because they’re not so reliant on ticket sales,” says Robert Boland, director of the sports administration graduate program at Ohio University, who also runs a stadium consultancy. “They can sell it out, and they’ll probably even have some small sense of a premium feel. It’s like the idea that you should do everything in a room three sizes too small, so that people are clamoring to get in.”

The Rams and the Chargers have agreed to terms for revenue sharing at the Inglewood stadium in 2019, and while the terms are not public, the Chargers will still make more money from a split (even if uneven) in LA than getting all of it in San Diego. Boland expects that the Rams “will always be considered ‘first among equals’ at this stadium,” but both teams are helped by having the other. “I do think the synergy of trying to sell deals for a stadium is remarkably assisted by having two teams. If you’re selling naming rights, the sponsor is getting two teams, two fan bases.” That applies to the eventual naming rights for the stadium, but also to “pouring” rights (soda), beer rights, and in-stadium signage. Each team will retain their own game-day sales from gate receipts and concessions.

As for the suites at the Inglewood stadium, the teams could go either way. The Jets and Giants in New York, who share MetLife Stadium, were initially going to sell their suites together, but ultimately opted to do it separately. Suite labels, and even signage for sponsors like DraftKings (Giants) and FanDuel (Jets), have to be swapped out every game, but the teams benefited.

At their glitzy shared Inglewood home with the Rams, the Chargers won’t be courting the average fan. Prices will go way up immediately, as they did when the San Francisco 49ers opened up fancy Levi’s Stadium. It’s the high-end suite and club-seat buyers who will matter.

It wasn’t working in San Diego

Sportswriters are arguing over whether Dean Spanos really tried as hard as possible to keep the team in San Diego.

In November, a ballot measure Spanos pushed to raise $1.15 billion from the city in hotel room tax for a new Chargers stadium downtown was roundly rejected—57% voted no. Spanos personally spent $10 million on the ballot measure. ESPN reports that at the NFL owners’ meetings last month in Texas, Spanos told his peers, “I don’t want to go to LA. I want to stay.”

On the other hand, at the same owners’ meeting, owners approved a waiver of the debt ceiling, which allows the Chargers to borrow a portion of the relocation fee from banks and pay it off over longer than the standard 10 years. Spanos’s fellow NFL owners made it easier for the Chargers to move.

Regardless of what Spanos’s true feelings were, the move will benefit his investment. Ticket resale interest for Chargers games at Qualcomm Stadium had been falling; the team ranked 15th in 2015 for average listing price on secondary market site TickPick, but fell to 29th this past year.

Of course, St. Louis fans hate Rams owner Stan Kroenke now, and Chargers fans will hate Dean Spanos. San Diego Mayor Kevin Faulconer said, “He will regret it.”

But losing the team is a win for San Diego, which was losing millions every year in operating Qualcomm, a 50-year-old stadium that will likely be demolished.

The NFL stadium game has completely changed

More NFL teams have relocated in the past 20 years than in any of the other three major sports leagues. If the Oakland Raiders are allowed to move to Las Vegas (owners will vote in March), that will be three teams in two years.

These moves are all about new stadiums. And the expectations for these massive, $2 billion to $3 billion homes have changed: NFL stadiums aren’t just about the NFL anymore.

Look to the comments made by Las Vegas Sands CEO Sheldon Adelson as an example. Adelson, who has committed $650 million of his personal wealth to getting a new $2 billion stadium built for the Raiders (if the NFL owners approve it), told Yahoo Finance that the appeal of the stadium project isn’t just the football team, but all the other events it can host. “We could package our rooms with prime seats in the stadium for concerts, for mixed martial arts, for boxing, for college football, for major league soccer,” he said in September. “And we think we could bring in Premier League soccer teams like Manchester United, Chelsea, Arsenal, Liverpool, Barcelona, Real Madrid, they could come in and do their friendlies. And that would bring crowds. It’s a tourist attraction like conventions are a tourist attraction.”

The $2.6 billion stadium in Inglewood will surely follow the new norms: it can host college basketball games, likely a Super Bowl, concerts, and political conventions. The Rams and Chargers reportedly will share revenue from non-football events. And the city of LA “will certainly benefit tremendously from having this stadium,” says Boland.

The Chargers will benefit from their move. Yes, LA sports fans may not even want the team; yes, the team isn’t good right now; yes, the team might play second fiddle to the Rams. It doesn’t matter.

The LA Chargers will be a far more valuable property than the San Diego Chargers were.

Daniel Roberts is a writer at Yahoo Finance, covering sports business and technology. Follow him on Twitter at @readDanwrite.

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