A Quick Look at Offer Prices for Elland Road
Disclaimer: this essay has been simplified for clarity and deliberately ignores some niceties of property sales and uses indicative future interest and inflation rates which are open to individual guesses.
The legal documents surrounding the Elland Road leases and options to buy that have made it into the public domain are not clear – as far as I’m aware up to date documents should have been filed at the Land Registry but haven’t been. There is also some doubt that leases and agreements made between Gadford and other companies that have now been liquidated have definitely transferred to be in effect between Leeds United Football Club (not Leeds United AFC who sold the stadium initially) and Teak Investments. I’m not addressing that here and will assume that the content of the documents is still valid between the two parties.
There is also more than one parcel of land that makes up the stadium and the land around: I’m only talking about the stadium itself.
For the purpose of this essay I’m going to assume that this year is spent negotiating the sale with a sale being completed at the year end.
Option Purchase Price
Assuming the legal aspects above are Ok then the Club has the right to buy the stadium freehold at an agreed price – this price increases each year and, using the timing I’ve said above, will cost the Club £17.2m.
This price will increase annually if the purchase is delayed.
Whilst this price is agreed it doesn’t prevent the Club making a different offer or Teak offering to sell at a different price. It would not benefit the Club to buy at more than this amount (although Teak would like that!) so any offer from the Club would be less than £17.2m.
The stadium is subject to council imposed planning usage which is currently restricted to sports related activities: whilst it is feasible for the planning to be changed the council will take a lot of convincing before this happens – the council is working to a long-term planning document and I’m going to assume that planning will not be given for housing or industry.
Without any realistic prospect of an easy change to planning the stadium only has a value to a sports company – basically a football club – and is effectively worthless to others.
The land around the stadium is old industrial land and is contaminated which makes it unlikely it will be cost effective for a developer to buy for housing. Similarly the underground mining works make building expensive and land elsewhere in the City will be preferred by developers.
The Club has a lease until 2029 and Teak cannot change this: the stadium has a value to the Club because it generates revenue (and hopefully profits) from it. At the end of the lease the Club and Teak can negotiate a new lease or the Club can move away – if the club moves out to a new stadium elsewhere in Leeds there will not be another football club ready to move into the stadium so Teak will not be able to charge any further rent and, since it cannot sell for other uses, the stadium is therefore worthless to them at this time. I’d estimate that a sale after the Club moves out to be worth only a couple of million pounds at most.
Looking at the sale from Teak’s point of view
As always in a sale there are two parties who have different needs and will benefit differently. Firstly let’s look at how much the deal is worth to Teak at the moment.
The rent is fixed until 2029 and will be £1.5m next year rising each year to £2m in the last year.
In total, this means that by 2029 Teak will have been given £21m by the Club in rent.
However, if we take 2029 as the “reference” point inflation will have eroded the “real” value of this money – using an annual inflation rate of 2.5% this pot of cash will have been reduced to an effective £17.7m.
The rent and inflation are not the full story though: Teak will not take each years’ rent and stuff it under a mattress, it will invest it in some way (maybe other property, stocks and shares, etc) and each year the money will increase – rates of return vary dependent upon financial matters: US shares bring a long-term average return of 10% but let’s assume a lower figure of 6% per annum.
Taking each annual rent and investing at 6% will increase the £21m rent sums to a very nice £29m by 2029.
Investment and Inflation
Putting the gains from investment together with the losses in real value due to inflation we arrive at a net figure of £25m in the Teak pot in today’s money.
What this means for Teak
This means that from Teak’s point of view, accepting 12 staged annual payments, they will have £29m in the bank but will only have the same buying power that £25m gives today due to inflation.
Putting this another way, the value of the lease to Teak is £25m in today’s terms plus a small amount on future sale of the land: if they sell for a lower figure then they are not maximising their position.
Since the stadium is only of value to Leeds United due to planning etc. at the end of the lease Teak are left with relatively worthless land and will be willing to negotiate a new lower lease or sell for a peppercorn.
Looking at the sale from the Club’s point of view
The total rent the Club will pay up to 2029 is £21m.
The Club has an option to purchase the stadium for £17.2m.
At first sight this would seem to be a good deal and definitely the way to go but there is a little more analysis to do here.
Just like inflation affects Teak’s position over the next 12 years so it also affects the Club’s. In 2029 the Club will pay £2m in rent but as we know that value has been eroded by inflation and so in today’s terms (using 2.5% rate as above) this £2m is effectively only £1.5m in today’s money.
This concept is a little hard to grasp: think of how much a pint and a pie costs today, say £5; in 12 years time inflation will have pushed the price of the pint and pie up to, say, £7.50. In money terms £5 today is equivalent to £7.50 in 2029 and vice versa.
In the same way £1.5m today will buy the same as £2m in 2029 so we need to adjust the total amount of rent the Club pays to bring all the rents back into today’s terms. When we do that the Club pays only £17.7m in rent in today’s terms. This is confirmed by the same figure from Teak’s point of view.
This allows us to compare buying the stadium today for £17.2m against today’s rental adjusted total of £17.7m.
It is still better to buy than to rent but the figures are much closer and we haven’t considered the effects of investment yet.
I talked above about Teak investing money and of course Mr Radrizzani can do so too.
Let’s consider the case where the £17.2m is not used to buy the stadium but is invested at 6%. After the first year this will have earned interest of £1m. The rent due is £1.5m so this interest and only £0.5m extra is needed to pay the rent.
At the end of 12 years the Club has paid its rent each year and still has £6m left in accrued interest in the bank.
This means that although in today’s inflation-adjusted rental terms we pay £17.7m it is better NOT to buy the stadium back but to invest the money and use the interest to pay the rent instead.
In fact we don’t need to invest £17.2m to be able to pay the rent over the next 12 years (that figure leaves us with a profit of £6m). The minimum investment needed is only a little over £14m to be able to pay the rent from the interest and capital and have nothing left at the end.
What this means to the Club
The above analysis shows that from the Club’s point of view the best option is to invest £14m and continue to rent rather than paying the agreed price in the lease.
Bringing this together
There is a slight twist to the story here: once the Club have invested £14m they do not touch it again except to take out the annual rents.
Exactly the same effect is achieved if the Club gives £14m to Teak and they invest it themselves, taking out the annual rents themselves as before.
This may seem odd at first sight but is only the increase in value due to leaving the money in investment at 6% for 12 years – £14m grows to £29m naturally over that period.
Remember when we looked at Teak’s point of view – we showed that their rental return by 2029 after investment if they didn’t sell was £29m?
Investing £14m at 6% now will bring that self same return by 2029.
The Club does not want to waste money and there is a simple solution: pay Teak now £14m. This offer brings Teak a return of £29m by 2029 and is in line with the lease return. If Teak do not agree then the Club just pays the rent from its own investment and moves to a new stadium in 2029 leaving Teak with worthless land.
If the Club spends (wastes!!!) an extra £3m and decides to just pay the option price of £17.2m then Teak must agree and sell.
Teak will benefit (obviously) if the Club pays more money – by investing the option price they will net £35m instead of the rental value of £29m.
This analysis gives a rough negotiating strategy at prices between £14m and £17.2m
In my analysis I’ve assumed that both Teak and the Club can access investment returns of 6%. In reality both parties will have different investment strategies and produce different returns.
By offering the lower price of £14m the Club matches the effective rental revenue streams in the lease – Teak are a property investment company and returns from property often exceeds 6%: if Teak can use the money to invest in its own property then returns could be 10%.
At a 10% investment return Teak will end up with £36m in 2029 from the rental streams whereas if they accept the £14m offer then they will net £45m – this method brings them an extra £9m.
This makes it attractive for Teak to accept the Club’s lower offer of £14m if the alternative is the Club will not buy at all and just pay the rent until the end of the lease.
Both parties in this deal are looking to maximise their position: the Club can pay £17.2m and insist Teak sell; however, they are within their rights to offer a lower amount on the basis that Teak will not be worse off than if the Club just pays the rent and leaves.
An offer of a single £14m payment now can be argued as being at least equivalent to the rental revenues and could bring an extra £9m to Teak, depending upon interest rates, making this lower offer attractive to Teak. This £14m is probably a realistic minimum offer price with £17.2m option price being the upper offer limit.
The value of the stadium is close to zero without a football club to play there meaning Teak will find it difficult to sell on to another party if the Club walks away in 2029.
Addendum: as a further part of the negotiations the Club can point out to Teak that if they don’t come to agreement now then they’ll wait five years before looking at it again: at that point the option purchase price will be £20m but it will only need to Club to set aside £10m to pay off the rest of the lease and move to a new build stadium.
The Club intends us to be a large Premiership Club by then and will need much more capacity in the stadium: the costs of changing Elland Road at that time could well mean a new stadium is best option.
The Club would then rent out all its Elland Road office space to offset costs and let the terraces decay. By 2029 the Club would only be around £5m out of pocket and the stadium would have to be demolished leaving Teak with nothing.
I hope this essay, despite some simplification of a complex subject, goes some way to showing why and how the Club can justify offering less than the agreed option price.
22nd June 2017