Investors in MLS hope for growth

Former UnitedHealthcare executive Bill McGuire and several wealthy business partners are prepared to spend about $250 million of their own money to bring a Major League Soccer expansion team to Minnesota.

Which begs the question: Will this be a moneymaking venture?

Several national and local economists with strong sports backgrounds agreed that such a large initial financial outlay comes with risk, one the McGuire group is attempting to minimize by requesting tax breaks for construction costs and property taxes for a new soccer-specific stadium. But it also comes with the opportunity to make money, although most economists interviewed agree it's a long-term proposition because of the anticipated early debt payments associated with the stadium.

"They're not going to get rich overnight," said Smith College professor Andrew Zimbalist, one of the nation's leading sports economists. "They're looking at probably at least 10 years before they're beginning to get a return [after paying the stadium debt]. It's a long haul."

John Wendt, an economics professor at the University of St. Thomas, said "the owners are taking a gamble, but it is calculated. Most owners will not make money [on an annual basis]. But they are in the game because owners are in an exclusive club and because they hope the value of their club will appreciate."

And that appreciation is the pot of gold at the end of the rainbow anticipated by every owner. The appreciation of the franchise will determine whether McGuire and his partners — including the Pohlad family, owners of the Twins, and Glen Taylor, who owns the Timberwolves and the Star Tribune — are making an astute decision in getting involved with MLS, or a decision they'll come to regret.

"The big question," Wendt said, "is how long do you want to lose the money in the hope that the team value is appreciating?"

The gamble in investing in MLS is that financial success is linked to the continued growth of soccer in this country, and more specifically on broadening the MLS fanbase. Unlike the four major professional sports leagues — the NFL, NBA, NHL and Major League Baseball — soccer is in its relative infancy in America, at least at the professional level.

On one hand, that's a positive: plenty of room to grow. But there is no guarantee of that growth, at least enough to turn MLS into a moneymaking venture, which it currently is not.

Minnesota United FC President Nick Rogers said "you would need a crystal ball to know" whether putting money down on a MLS team will prove to be a good investment. At present there is more hope than certainty about American soccer.

MLS Commissioner Don Garber said in December that league franchises collectively lost more than $100 million dollars in 2014. Only 10 of the league's 19 teams turned a profit, he said.

The traditional major sports, Wendt said, "are a lot safer bet" than soccer. "They have an established franchise, recognized licensing, a lot more tangible assets," he said. "The TV contracts are insane … it's almost like Monopoly money."

MLS felt good about getting a $90 million per year, eight-year TV package that started this year. By comparison, each NFL team in 2016 will reap $181 million in a single season from the league's national TV contract. A number of MLB teams have local TV contracts that pay more per year than soccer's national contract.

TV viewership also stamps MLS as a risky bet. Each of the four major sports leagues in North America is regarded as the world's best.

It would be difficult to find a knowledgeable soccer fan who would make that argument about MLS. The league, at best, is well behind the top European and Latin American leagues in talent.

American soccer fans watch the English Premier League on TV in greater numbers than they do MLS.

"My sense, right now, is the MLS has a really long uphill road to climb," Zimbalist said. "Real soccer fans look at the MLS like minor league soccer. And that's a real challenge."

Garber talks confidently about closing the talent gap within a few years. But MLS finances make that difficult. The league has single-entity structure in which individual player contracts are signed with the league, and each team has a strict payroll with the exception of the Designated Player Rule, which has brought a handful of international stars to America, many on the downside of their careers.

The best evidence of the talent gap: the average salary in the Premier League in 2014 was $3.5 million, compared to $220,000 in MLS. That helps explain why United States national team coach Jurgen Klinsmann wants top American players to compete in Europe, rather than in MLS.

Rogers said better coaching throughout all levels of American soccer should ultimately develop better talent. But MLS is lacking a built-in insurance on better talent that the English Premier League has from its promotion and relegation system, whereby bottom teams are dropped each season and replaced by the top finishers in the league below it.

While a continued increase of DPR players will help, others say MLS has bigger issues in upgrading its talent level. MLS, said John Vrooman, an economics professor at Vanderbilt University, has no natural development system "that renews itself through a natural process of promotion and relegation. This is a major structural flaw in the MLS system." Vrooman said comparing MLS to the Premier League is like comparing Japanese professional baseball to MLB: "an isolated minor league with no attachments to the living football player development system that extends throughout Europe."

Rick Welts, president of the NBA's Golden State Warriors and an investor in the new Los Angeles MLS expansion team, acknowledges the economics of MLS have to grow to allow the league "to compete on the world stage for player talent." Improved talent, Welts said, will lead to richer TV deals — the lifeblood of every American professional sport — and, in turn, increased franchise values.

The good news is that by almost any measurement, MLS is growing — game attendance last year was an all-time high — and franchises are increasing in value. According to Forbes, the average MLS franchise in 2013 was worth $103 million, an increase of 175 percent from the average franchise value of $37 million in 2008.

Investors in MLS are betting the upward trajectory in attendance, TV money and, most important, franchise value, will continue.

Welts, in explaining his MLS financial interest, says there are only two true "world games": soccer and basketball.

"I think the world gets smaller everyday, and Americans will become more and more interested in [soccer]," he said. His willingness to put money into MLS, he said, "comes from a long-standing belief that the sport of soccer in the United States will continue to become more and more important as time goes on."

McGuire, the face of Minnesota's expansion ownership team, said in a recent interview that "while we're talking about the here and now, what we're really looking at is the future." He cites data that shows "football is diminishing and interest in hockey is diminishing in many areas. … Soccer is going up, both in our state and around the country."

The bet, Wendt said, is similar to the one the original Vikings franchise owners made in 1960, when they plunked down $600,000 for an expansion team. The team is now estimated to have a value of $1.15 billion.

"The owners of Minnesota United are gambling on the future worth of the franchise and the future of the MLS on TV," Wendt said. But, he cautioned, plenty of work is needed.

"They need a quality product," he said. "They need success on TV. And finally, they need to expand their reach beyond their diehard fans to reach the casual fans."

The bottom line? The economists all note that owning a franchise is always about more than simply having a team. There are tax breaks — for depreciation and losses incurred — and stadium deals generally include plans to develop adjoining land.

And if the team itself is successful, all the better.

McGuire has said that without tax breaks, revenue will barely cover expenses, including stadium debt. The long-term financial future is brighter.

Vrooman believes the stadium will be paid for in 15 to 20 years, and in the meantime the owners reap the tax benefits of depreciating the stadium. He said a moderate growth of franchise value would probably place the value of the team itself about $300 million by 2027 — triple the original $100 million expansion fee.

"Risky business," he said, "has become easy money."

Perhaps. But Rogers said: "Economics can change in eight years [the length of the current MLS TV contract]. It could be a good investment. It could be a huge debacle. It's a risk, a big risk."