Please release me, let me go: Part 1, harder to get rid of than Mark Sanchez

January 22, 2013 | Bonds, Capital markets, Finance, Football, Humor, Municipal bonds, New York Jets, Personal seat licenses, Securities, Speculation

By:David A. Smith


Up front or over time? 


Can we give back our overpaid underachieving quarterback … and my overpriced underachieving tickets?


When it comes to expensive purchases that cannot be financed from normal available cash flows, would you rather accumulate capital (via savings or grants) or indenture yourself for years into the future?  That question is one (of many) that should have been asked by two unlikely partners in misery: New York Jets coach Rex Ryan, who approved an expensive acquisition of a highly-underperforming quarterback, Mark Sanchez, and devoted New York Jets fan Kenny Scarabaggio (pictured above), a Jets season-ticket holder since 1983, who recently made an expensive acquisition of a highly-underperforming Personal Seat License (PSL).  As profiled in the New York Post (January 7, 2013):


Fed-up Jets fans are desperately trying to unload their personal seat licenses


As we’ll see, in this our fractal world the micro reflects the macro reflects the micro: Mr. Scarabaggio’s plight is a small-scale replica of the financing conundrum that confronts the State of New Jersey in its modern version of the gift that keeps on costing – and since because a state is made up of millions of Mr. Scarabaggios, the decisions he personally made in a time of economic excitement are also the decisions his elected representatives made at that same time.


It’s the only thing harder to get rid of than Mark Sanchez — a Jets personal seat license.


Five years ago, Jets tickets, Mr. Sanchez, and the new stadium were all hot commodities. 


Mark Sanchez in 2008: star amateur quarterback at star-maker university: the University of South California


Now they’re not, and in that collapse of aspiration is a collapse also of economic value.


Mark Sanchez at the end of 2012: none of those things, but at least extremely well paid (as we’ll see)


Five years ago, the New York Jets thought they needed three things:


  1. A re-energized fan base.
  2. A new quarterback.
  3. A new stadium.


For all three, the Jets thought the solution would be a combination package, where the reenergized fan base would make fifteen-year pledges to buy tickets, and make up-front payments for that privilege of guaranteed access, and the proceeds would then be used both to build the cathedral of football necessary to attract and keep such talent.


82,500 empty seats that will need to be turned into revenue


The selling of PSLs — pricey licenses for the right to buy season tickets — were used by both the Jets and Giants to help fund construction of the $1.6 billion, 82,500-seat MetLife Stadium they share that opened in 2010.


PSLs are a postmodern innovation born just about the time securitization was being birthed, and needless to say, long before we understood how dangerous securitization could be, if sliced and diced into little pieces parts many uninformed hands. 


The antiseptic view of securitization


They are a ‘combination security’ in that they represent two different capital outlays:


·         A mutual mandatory buy-sell of season tickets.  For the ensuing years (in the Jets’ case, 15 years), the Jets must sell specific-seat season tickets to the PSL holder at a stipulated price, and the PSL holder must buy them at that price.  (We’ll deal later with the resale implications, which are relevant and complicated.)

·         A cash payment up front for the privilege of obtaining the mandatory buy-sell agreement.


Now, given those economics, it has to be self-evident that the strike price for the season tickets themselves must be set below the expected market price of those season tickets.  That entails two competing scenarios of the future: the fan’s and the club’s. 


·         The fan dreams that the team will become immensely successful, so that seats become greatly in demand, and the tickets will have a resale value [scalping implications aside – Ed.] much higher than the insider’s option price. 

·         The club worries that the seats will go unsold, or drop in value, so it is willing to give away the seat-price upside risk in exchange for a fifteen-year guarantee on the occupancy.


Sure hope those are empty PSLs, not unsold tickets


The economics of the mutual decision are fairly dramatic:


“Coaches Club” tickets run $700 each, so someone with two seats must shell out, on top of the $60,000 plus interest they’re spending for the PSLs, $14,000 yearly for 10 games including preseason.


Beyond the PSLs, the NFL some years ago introduced another cash-extraction innovation.  A season consists of sixteen games that go into the standings, of which eight are home games, and eight are road games.  In addition, the preseason consists of four games – two at home, two on the road – which are the equivalent of dress rehearsals – formerly they were called exhibition games – which tend to feature players other than the best ones, and coaches who are less intent on winning and more intent on learning which of their tryout players might be good enough to supplant one of the squad’s regulars.  Back in the day, exhibition games were offered at ticket prices much lower than regular-season games (just as playoff games usually have higher ticket prices than regular season games), but then the NFL realized that if they were bundled into a ‘season ticket package’ the clubs could charge for ten games a season, not eight, in effect a 25% surcharge embedded into the price.


All of that makes a PSL a very large commitment for the average fan.  Using the figures above, and assuming for convenience a 4% rate of inflation on season ticket prices, and a 7% discount rate on future present values, the net present cost of a PSL and accompanying season tickets is about $117,000 per seat.


For a hundred grand, I can scream and wave a towel if I want!


In other words, whether Mr. Scarabaggio appreciated it or not, buying his PSL was equivalent of taking out a $117,000 mortgage – recourse.  [Plus the cost of tickets to playoffs, which will for any given club will be somewhere between zero and three more home games, and which will always be higher than regular-season tickets. – Ed.]


And like a house bought with a recourse mortgage, a seat [Which is really a time-share asset – Ed.] bought with a PSL may depreciate in value based on a declining neighborhood (losing team) and hence declining demand (booing fans) and declining home prices (resale ticket prices on Stub-Hub or equivalent).


This isn’t helping resale values, you know


An owner of four “Coaches Club” PSLs behind the Jets bench paid $30,000 for each seat but is now trying to unload them for $12,000 a pop.


Meanwhile, by what may be serendipity or may be proof of mind-imprinting, those same owners who have structured PSLs and season ticket prices also have a financial structure strikingly similar to that of NFL players’ contracts – except that occasionally, the shoe is on the other foot.


Butt ugly


Unlike every other major US professional sport, where the contract is mutual for its length, NFL contracts reserve to the club one element of optionality: in general, contracts are not guaranteed, meaning that the club has the unilateral right to cut the player, and cancel the remaining contract.  This shouldn’t be done lightly, because the player, if so cut, immediately become a free agent, and hence there if there’s a bargain or value element in the contract, the player is a financial asset who could presumably have been traded.


Because players can be cut, they and their agents negotiate for a large up-front payment, a ‘signing bonus’ as it has become known in the lingo, to rebalance the optionality.  [Though the signing-bonus-and-cut-option is fairly balanced as between teams and players, sportswriters persist in misunderstanding it, seeing it as unfairness or cruelty.  That’s because they only notice when the player is cut, and they have long since forgotten the signing bonus.  In actual fact, many NFL contracts are front-loaded, so that the signing bonus is conceptually amortized over the contract’s life – and that is how it is pro-rated for purposes of calculating the NFL’s hard salary cap. – Ed.]


In theory, a football contract gives the team optionality, because the club can write off the previous capital investment by cutting its ties.  On the other hand, Mr. Scarabaggio and those like him have a worse problem – they have recourse payment obligations that they have personally guaranteed.


Fed-up season-ticket holders are desperately trying to unload their PSLs, setting up a potential mass exodus of Jets fans that could become an even bigger challenge for the team than finding a new general manager.


Like a recourse home loan, a PSL is not something that can be dumped as easily as a player’s contract; for every seller there must be a buyer, and though the PSL cash price was equity, the recourse seat-payment obligation is debt.  So it’s entirely imaginable that a PSL could have a negative remaining value, in other words that you actually pay someone to take it off your hands.


Not your PSL’s, anyway


And ironically, though the Jets have succeeded in giving their fans this miserable economic bargain, they find themselves on the other side of the same one-way optionality.


Guaranteed, baby


[Continued tomorrow in Part 2.]