Cal Struggles With Unproven Stadium Funding Model
A student walks by the recently renovated Cal Memorial Stadium. UC officials have retooled their plan to pay back $321 million in debt from the project.
This story includes reporting from KQED's Charla Bear and by Hannah Mintz and Zach Stauffer of UC Berkeley's Investigative Reporting Program
Inside Cal Athletics' new Sales and Service Center, Matt Honerkamp reached up and struck a bell the size of his head. A single gong rang out across the salesroom and silenced the chatter of the other employees selling tickets to Cal sporting events. As the ringing faded, pitches resumed, and Honerkamp returned to his desk to make another call.
Honerkamp has a tough job: selling the most expensive seats in the recently rebuilt California Memorial Stadium, ranging in price from $40,000 to $225,000 for 50 years of football tickets. Honerkamp and a handful of other salespeople are part of Cal's aggressive new effort to bolster sluggish sales for its Endowment Seating Program, or ESP.
The program’s success remains critical for Cal to be able to pay back the nearly half-billion dollars in debt used to renovate the seismically vulnerable stadium and build a new state-of-the-art training facility.
But Cal is the only university trying to raise funds through this novel method, after the creator of the idea failed to sell it to scores of other universities and professional teams.
The ring of the bell meant Honerkamp had closed a deal after months of courting a customer, but the bell’s chime is rarely heard. According to figures
recently released by Cal Athletics, Honerkamp's team sold just 15 ESP tickets in the final quarter of 2012, all of them below the University Club level where a seat costs at least $175,000.
In a typical day, Honerkamp gets shot down about 38 out of 40 times.
"If you have a good conversation, one or two good conversations, a week, that’s pretty good,” he said.
Through the end of last year, Cal Athletics had sold 64.5 percent of all available ESP seats. Cal has sold only 24 percent of University Club seats. The totals are well short of their goal of selling 90 percent of their ESP quota by June of this year.
The three ESP sections make up roughly 3,000 seats out of 63,000 total seats in Memorial Stadium.
Figures show the Athletic Department has cash in hand or received pledges for just more than half of the $273 million it hoped to raise by then to pay back the debt.
With ticket sales and cash flows falling short of expectations, UC Berkeley Vice Chancellor of Administration and Finance John Wilton realized about a year into his tenure that things needed to change.
“I was worried,” Wilton said of the financial outlook, though he believed the campus had time to address the problem.
Some projections showed Athletics might not be able to make payments starting in the 2030s when the debt service balloons. The debt is structured so that for the next 20 years, Cal only needs to make interest payments on the debt. The principal kicks in in the early 2030s, resulting in payments between $24 million and $37 million per year.
“That was comforting in a way that we didn’t have a near-term problem,” Wilton said. “But it was worrying that we would have a medium-term problem, and we were guaranteeing to the rest of the campus that the cost of the new facilities would not impose any tax on the rest of the campus budget,” he said.
Recognizing a potential looming crisis, Wilton sought advice from three Haas Business School professors, each an expert in finance.
Richard Stanton, Nancy Wallace and William Fuchs spent the past nine months untangling the complex financing model to determine if Athletics will be able to fund its operation and meet its debt obligations. They have come up with different scenarios, but big questions remain about how many seats Honerkamp’s team will sell and how much revenue the endowment will generate.
Big questions remain about how many seats Honerkamp’s team will sell.
"They’re very far away from their original projections," Wallace said, “Especially for the most expensive seats, there’s some considerable uncertainty.”
Wallace and her Haas colleagues are quick to point out that the university has taken advantage of fixed low interest rates, around 4 percent on much of the $400 million in debt it has already issued.
“From our vantage point, I don’t think they could have structured this debt more cheaply,” Wallace said.
Still, lackluster seat sales have brought about a change in emphasis in messaging from the campus. Berkeley’s athletic director Sandy Barbour once hailed ESP as a “critical aspect” of financing the stadium. Now total ESP sales are touted as part of wider revenue streams, relying on donations, media rights and stadium rentals. But the premium tickets remain essential to the Athletic Department’s ability to meet its debt obligations.
Back in the sales office, Honerkamp remains undeterred.
“We’re going to do everything we can. We’re not going to be complacent,” he said. “We will find people to fill the building up.”
To improve their chances of success, the sales team is offering bundles of discounted tickets in the University Club to corporations on a short-term basis.
Regents try an untested model
Five years ago the University of California Regents insisted that Cal make Memorial Stadium seismically safe, or the Bears would have to find another home. The Hayward Fault runs directly beneath the stadium and geologists say it is overdue for a major earthquake.
The size and scope of the project would be substantial. Major donors to Athletics were tapped out from supporting Cal's posh new training facility, so the project would have to be financed through external debt, just like many other capital projects on campus. ESP tickets, supplemented by philanthropy and naming rights revenue, would be a way to pay back the debt.
At a meeting of the Board of Regents in September 2009, a Berkeley campus administrator, armed with numbers from Athletics, told the Regents that 65 percent of ESP tickets were sold to date, even though the actual figure was far lower. Convinced the plan was viable, the Regents approved $321 million in debt financing for the stadium.
When asked about the discrepancy, Barbour and other administrators said Athletics had changed its definition of the word “sold.”
Though the Berkeley campus has pledged that Athletics will make its debt payments, ultimately the Regents are on the hook for the bonds.
Origins of ESP
The basic elements of ESP were the brainchild of Lou Weisbach, managing partner of Stadium Capital Financing Group. Weisbach said the idea of ESP was completely fresh: use up-front premium seat sales to finance stadiums or provide capital.
“Nobody in the world had ever done this. To that extent it was very novel,” said Weisbach, who has a patent pending for the idea.
“Any idea that has never been done before in a marketplace, to try to figure out the percentage likelihood of success is really quite difficult,” Weisbach said. “Really, I guess at the very best is an educated guess,” he added.
Weisbach says he based his confidence in the untried financing model on his success with his prior company, Ha-Lo Industries. He started the promotional-product business in 1972 with a $3,500 loan from his mother. Before he left the post of CEO in 1999, the company was a multimillion dollar enterprise. Weisbach remained chairman.
With a little more scrutiny, Berkeley administrators might have noticed that Weisbach is a man who dreams big but sometimes comes up short. Weisbach’s resume took some hits before he signed his deal with UC Berkeley in 2009.
Weisbach tried and failed to bring a professional baseball team to Las Vegas.
In 2002, Weisbach, along with Ha-Lo Industries, was sued for securities fraud. Investors alleged that Ha-Lo and its officers sent out fraudulent press releases and other documents showing the company was in better financial health than it really was.
Weisbach denied all allegations in a signed declaration and said he was personally cleared of all charges. The case settled for $18 million, according to court records. This lawsuit never came up in his dealings with Cal, Weisbach said.
In the meantime, Weisbach has been striving for a decade to create a $750 billion center for finding cures to diseases.
To date, UC Berkeley is the only organization that Weisbach convinced try his financing model. He said he has shopped the idea around hundreds of other universities and pro-teams in the United States and Great Britain, but no one else trusted that the numbers would add up.
"The deal with the UC Berkeley is the one deal we’ve consummated at this point," Weisbach said.
So who was responsible for making the decision to go with long-term VIP seating?
"That’s one of the things we discovered," said Professor Stanton. "Many of the people who are here now were not here when the decision was made,” he said.
“There was a lot of chaos, unnecessary confusion,” said Professor Nancy Wallace. She pointed out that of the many senior people involved with developing the ESP program, only Barbour remains.
When asked what was known about Weisbach and Stadium Capital before the deal, Barbour replied, “We knew who the principals were by reputation from some of their previous work. Certainly they were backed by Morgan Stanley.”
According to Berkeley’s contract with Stadium Capital Financing Group, Weisbach’s company was slated to earn a 3 percent commission fee on ESP’s gross proceeds. A Cal Athletics spokesperson said the department paid Stadium Capital $4.8 million for its services.
Professional marketing team for amateur sports
Cal’s new professionalized Sales and Marketing team is unusual in college sports.
Before coming to Cal, Honerkamp sold tickets for the St. Louis Rams, and his colleagues bring experience from other pro teams, including the New York Jets and Los Angeles Clippers.
Honerkamp said he makes more money than he did working in professional sports.
“This is a step up for me,” he said. Honerkamp also makes a bonus for every seat he sells: “Money makes you go and hungry to sell more, right?”
For fiscal year 2013, the budget for entire Marketing, Sales and Service group is $2.7 million out of a nearly $90 million Athletics budget, according to public records received by the Investigative Reporting Program. Payroll for Honerkamp’s elite premium sales team of five people is $500,000, according to a department spokesperson.
UC Berkeley recruited former NFL ticket salesman Matt Honerkamp last fall to boost interest in its Endowment Seating Program. The program gives fans the right to a seat for 50 years for spending $40,000 to $225,000.
Whether Cal will sell enough premium tickets remains a "major risk" according to Professor Wallace.
"It's a problem that needs to be solved," she said.
Vice Chancellor Wilton remains focused on the stadium’s finances despite the long timeline.
"Even if the probability is low, the amount is big, " Wilton said of the prospect that Athletics would not be able to pay back the debt. “It’s a high impact event, so you can’t ignore it."
Despite a reworked financial plan, the department admits it does not know what the future holds.
“Our crystal ball is no better than anyone else’s,” read a statement on the Cal Athletics website on February 15.
“We’re not backpedaling, but we have taken a look at where the model is. We’ve done the prudent things and added more elements to it to strengthen the model,” Barbour said. “By doing so, we’ve reduced the reliance on seat sales.”
But the hustle in Honerkamp’s office tells a different story. A photo of the ESP sections on game day last season hangs above his desk.
The patches of empty blue and yellow chair-backs are a constant reminder of his challenge.
This article has been updated to include a more thorough account of Lou Weisbach’s business history.