Back To Basics: Why is there a Lighthouse Project?

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The recent acrimony between the Lighthouse and the Town of Hempstead has renewed questions from some observers about why the Lighthouse Project is necessary in order to provide a new home for the New York Islanders. Some supporters speak about is as if Charles Wang and Scott Rechler dictated it by fiat, and many opponents try to duck the real issue by repeatedly saying they are in favor of a new Nassau Coliseum but not in favor of such a large-scale development. Therefore, I think it is time to update this post from March, with updated numbers and commentary.

Just the Coliseum in Numbers

We know that the Islanders are choked by the onerous lease with SMG, in which they do not have access to most of the revenue streams enjoyed by other teams (with the exception of luxury boxes), and they would still lose money if they sold out every game at Nassau Coliseum. This doesn't mean the Islanders can never be profitable, especially since all "profit" means is taking in more money than you give out. There is a big difference between making money and making enough money to justify the $320 million (updated number) that Mr. Wang and Mr. Rechler will spend to renovate Nassau Coliseum.

There is a simple calculation in the finance world called Net Present Value (NPV) that can help us understand this. Money does not have universal value; thanks to inflation, a dollar today is worth more than a dollar 10 years from now. NPV looks at the initial money spent and the money expected to come in to judge whether something is a good investment.

Forbes Business of Hockey 2008 was my guide for this calculation, which I did using this online calculator. According to Forbes, the average profitability for an NHL team in 2007-2008 was $4.7 million. According to their team page, the Vancouver Canucks had an operating income of $12.8 million in 2006-2007 playing in a privately-financed arena. I decided to use this number, guessing that a new arena and a better lease would help make the Islanders one of the more profitable teams in the NHL.

4% is the average rate of inflation, so I decided to use that as the discount rate.

Finally, as mentioned earlier, $320 million is the cost of the renovation.

With that little background, here we go:

Discount Rate: 4%
Life of Project: 30 years
Initial Investment: -$320 (in millions, of course)
Income, Years 1-10: $12.80 (using the Vancouver figure)

NPV: -$216.18

In other words, asking Charles Wang to privately finance his hockey arena would result in a net loss of over $200 million. I realize nobody is going to feel sorry for a man as rich as Mr. Wang, but none of us would take that deal.

Public Money

Things get far more interesting when you look at using public money for the facility. Sports economist Andrew Zimbalist, who was gracious enough to answer a few questions for this blog back in May, pointed out that the average public share of a stadium/arena is 65%. For fun, I took a look at what would happen if that same $320 million renovation was financed with the average public share:

Discount Rate: 4%
Life of Project: 30 years
Initial Investment: -$112 (35% of $320 million)
Income, Years 1-10: $12.80 (using the Vancouver figure)

NPV: -$8.18

It's still a net loss of $8 million. However, look at what happens when you use Prof. Zimbalist's previous study that said the average public share was 75%:

Discount Rate: 4%
Life of Project: 30 years
Initial Investment: -$80 (25% of $320 million)
Income, Years 1-10: $12.80 (using the Vancouver figure)

NPV: $23.82

Stand-alone arenas can be built for a situation such as the Islanders', in which the arena has one major tenant and competes for regional events with Madison Square Garden and the Prudential Center, only if taxpayers foot the bill.

Oh, and by the way....in both of those calculations, if you put in the public share, the taxpayers stand to lose over $100 million, and that assumes the County would make the same money as the team (the real figure is probably far less).

Scaling it Down?

The Lighthouse Project, like every proposal of its kind, is designed to make money for the developer - insert gasps and "duhs" here. However, and this might be surprising for some, the project is not designed to maximize potential profit. There are certain pieces of this, like the arena and the convention center, that are usually built by municipal government because they don't usually make money. Therefore, the other pieces that will make money (housing and commercial) are meant to support these investments - I talked about this previously with the Coliseum as loss leader.

Changing the project might have to be done; it looks almost inevitable if the Lighthouse wants to build in the Town of Hempstead. However, this might not be as simple as cutting a piece here and a piece there. How can we tell if the Lighthouse would even consider a scaled-down option? Well, I bet they would start by doing a calculation like I just did on whatever the new proposal is.

Bottom Line

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I am not trying to spin this as a purely altruistic gesture by Charles Wang, because it isn't. He is a businessman, just like I'm starting my own business right now, and businessmen are not necessarily saints. However, Charles Wang and Scott Rechler are not Santa Claus, either. Since the government is not willing (some would say not able) to provide funds toward refurbishing the Coliseum, the Lighthouse principals took another route. Rather than trying to force taxpayers to shoulder the full burden of an arena (with no path toward getting it back), the Lighthouse principals have proposed a visionary project that, if done right, will help provide the economic engine Long Island sorely needs and spur new investment and industries in a place in desperate need of both. To make things better, they want to invest money and generate tax revenue in an area that currently loses the taxpayers of Nassau County millions of dollars every year.

The Lighthouse is not one man's fantasy, and it is not a pipe dream. This doesn't mean people should not still judge the Lighthouse on its benefit to the community, it is just important to keep in mind why we're here in the first place.

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