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Sox win big in deal to use streets

Lansdowne, Yawkey Way lease yields an estimated $45m

The Initiative For Investigative Reporting / November 7, 2011

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This article was reported by Colman M. Herman, Callum Borchers, and Stephen Kurkjian of the Initiative for Investigative Reporting at Northeastern University. It was written by Kurkjian.

Over the last nine years, the Boston Red Sox have increased their revenue by an estimated $45 million through the use of two streets that city officials handed over for a relative pittance: an average of $186,000 a year in lease fees.

Every home game, the Red Sox close off Yawkey Way, where thousands of fans congregate and, over time, spend millions at concessions before heading into the park.

Around the corner, the team has turned the air rights over Lansdowne Street into 269 expensive seats and 100 standing-room spots atop the Green Monster.

The leasing agreement, whose details have never been publicly reported, has been a bonanza for the Red Sox, because the city set the lease fees without taking into account how much money the team could make from use of the properties.

If the city had demanded a portion of the revenues, as is common in commercial ventures, the team would have paid the city millions more over the first nine years of the 11-year lease, according to industry estimates and an examination of city records.

After inquiries from a reporter and subsequent questions from the state inspector general’s office, Peter Meade, executive director of the Boston Redevelopment Authority, has written to the Red Sox asking for an expedited start to negotiations for a new lease.

In an interview, Meade said the city will seek a percentage of the revenues after the current contract expires in 2013 and will also try to renegotiate the remaining two years left on the existing lease to do the same.

Susan Goodenow, the Red Sox spokeswoman, defended the lease fees as appropriate but refused to respond to questions about the estimated revenues. In a written statement, she said team officials would not discuss the issue because of negotiations with the BRA.

In 2002, the BRA declared the two streets to be “urban blight’’ to legally justify taking them from the city and handing control to the Red Sox. This is a common tool the authority uses to take destitute property in the city for redevelopment, though it is unclear how these prosperous streets fit the definition.

Instead of seeking a share of the actual revenue, the city’s outside appraiser decided to base the Lansdowne Street lease payments on the value of the land only, which they determined was worth little because the only possible buyer would be the team.

As for Yawkey Way, the appraiser recommended a lease payment based not on what large pregame crowds would spend there, but on the business done by pushcarts in shopping malls.

Mayor Thomas M. Menino is unabashedly supportive of the 2003 lease agreement. In a recent interview, he acknowledged that although the BRA could have driven a harder bargain, other financial benefits to the city have offset the revenue the city might have gained by claiming a share of revenue.

“What we’ve made from more real estate taxes, more jobs, and increased business in that area over the past 10 years more than makes up for it,’’ Menino said.

To be sure, expansion and improvements at Fenway have increased the park’s real estate value three-fold since 2002, to $88 million. This year, the team is paying the city $2.67 million in property taxes, three times as much as it paid a decade ago.

But with a big boost from the generous lease agreement, the team’s revenue and its value have also soared. Since 2002, the year John Henry’s ownership group took over the Sox, the team’s value has more than doubled, from $426 million to $912 million, according to Forbes magazine.

What was once baseball’s fourth most valuable franchise is now second only to the Yankees and worth $112 million more than the third-place Dodgers, Forbes reported.

After taking control of the team, Henry moved quickly to expand the ballpark to increase revenue and make the park more fan-friendly. The city, in turn, was eager to help new owners who were intent on preserving the oldest park in baseball.

Before the 2002 season ended, the team announced the first major steps in their long-range plan to preserve Fenway Park: constructing a new section of seats atop the iconic Green Monster and setting up ticket gates outside the park itself, on Yawkey Way, to relieve the crush of fans in the concourse behind home plate.

But both goals required city approval. The first hurdle was easily cleared: For the last 12 home games of 2002, the city gave the team temporary rights to close off Yawkey Way and open up ticket gates at each end of the street, for four hours before and two hours after each game. The fee: just $900 a game.

The Sox painted the experiment as a critical indicator of whether they would be forced to build a new stadium.

But the long-term leases faced major obstacles. The city itself could not give the team long-term use of the streets without a public safety justification, so Menino turned to the BRA, the development agency he has often micromanaged.

On Dec. 12, 2002, the BRA board declared that the two streets were within an area of “urban blight,’’ even though the area is among the most commercially attractive in Boston. The board’s action empowered the BRA to use its eminent domain power to take them from the city and lease them back to the team.

The BRA’s unusual action has gone largely unnoticed, save for a 2008 article in the New England Law Review. Brian Mahler, who is now an attorney in the Massachusetts Superior Court Department, wrote that the BRA had “stretched the definition of blight’’ to justify taking Yawkey Way. In his article, “Kick Me Out of the Ball Game,’’ Mahler wrote that a court could conclude that the taking of Yawkey Way “was done in bad faith, with the Red Sox’s financial benefit the dominant reason for the taking.’’

Mahler added: “While the public may minimally benefit from improved lighting, landscaping, and store fronts along the street, the Red Sox receive an economic windfall by having exclusive rights to sell food, alcohol, and merchandise on the street before and during home games for a minimal licensing fee.’’

Using “urban blight’’ as justification for a land taking is a throwback to the mid-20th century, when the federal government authorized local redevelopment agencies like the BRA to make such declarations to justify slum clearance.

Its use for the Fenway deal is not the first time in recent years that such a declaration has generated objections. Meade, in an interview, called it a “term of art’’ that, he said, perhaps ought to be scrapped for something like “investment zone.’’

When the Sox gained control of the street, they barred outside vendors, handing over all concession sales to the team’s vendor, Aramark. According to industry specialists, stadium concessionaires like Aramark generally pay the host team 45 percent or more of all sales. Neither the Red Sox nor Aramark would discuss their business arrangement.

The ban on outside vendors prompted one of them - Michael Rutstein, who had hawked game-day programs outside the park for years - to file suit in US District Court.

At a federal court hearing, Rutstein’s lawyer minced no words about what she asserted was the motive behind her client’s banishment: “Mayor Menino is planning to do anything he can to help the Red Sox make more money and the players make more money, and that’s the bottom line here.’’

In an interview that fall, Red Sox president Larry Lucchino downplayed the importance of added revenue from the closed-off street. “We do think there will be some additional revenue,’’ he said. “But in the largest part, it’s designed to improve the quality of the fan experience.’’

In September 2002, US District Judge Robert Keeton temporarily put aside Rutstein’s request for an injunction until a full hearing could be held. A few months later, Rutstein dropped his lawsuit because, he said, the cost of proceeding was prohibitive. That left the Red Sox and the BRA free to negotiate a long-term lease.

But at what price? The city had never before given a private company such extensive use of city land and had no standard fee structure in place.

To set the lease price, the BRA hired Casey and Dennis, a Boston real estate appraisal firm that had done contract work for the city, to determine the value of Yawkey Way and Lansdowne Street.

Based on the appraisals, the BRA and Red Sox signed an agreement in February 2003 that called for the Red Sox to pay $165,000 for the first year of the lease, with annual increases set by the change in the Consumer Price Index. This year, the annual fee topped $200,000 for the first time.

However, the appraisals minimized the value of both pieces of property by failing to take into account their revenue potential: 19,500 square feet of sidewalk and public street on Yawkey Way; 5,800 square feet of air rights above the Green Monster on Lansdowne Street; and 3,262 square feet of subterranean space below it, which the team needed to strengthen the foundation for the seating.

The appraisers reasoned that air rights above Fenway Park’s left-field wall would not be marketable to anyone but the Red Sox. Therefore, the appraiser determined that whatever the property on Lansdowne Street would attract in a competitive market would have to be reduced by 75 percent, since no one would bid against the Red Sox.

In its appraisal, Casey and Dennis said it did not consider a revenue-sharing option for appraising the Lansdowne Street parcel, contending it was “applicable, but highly hypothetical.’’

Commercial real estate specialists, however, say that revenue-sharing arrangements in such cases are more advantageous to the property owner, in this case, the city. Meade’s move to reopen negotiations suggests the BRA now agrees.

In a twist on this issue, a lawsuit filed in 2002 by the Chicago Cubs demonstrated just how valuable air rights behind a popular major league stadium can be. Thirteen restaurants had established themselves on separate rooftops just beyond Wrigley Field, with views not unlike the view from the Monster seats. Collectively, the 13 were grossing about $15 million in annual sales of food and drink. After the Cubs sued, the businesses agreed to turn over to the Cubs 17 percent of their gross revenue.

To calculate the team’s revenue boost made possible by the BRA, reporters from the Initiative for Investigative Reporting compiled Red Sox attendance figures and ticket prices and consulted with baseball industry revenue specialists, including Victor Matheson, a sports economist at the College of the Holy Cross, and Jim Grinstead, who publishes the newsletter Revenues from Sports Ventures, which is regarded within the industry as a reliable guide to how sports teams make money.

In the nine years since the appraisal, the Red Sox have shown what a financial bonanza could come from building a block of seats above the Green Monster. After subtracting construction costs, the section of 269 seats and 100 standing-room-only spaces has conservatively generated more than $21 million in sales of tickets and concession items for the team since 2003, according to calculations based on industry studies of ticket and concession sales at Major League parks.

The city could have used the team’s potential income as a barometer for the lease arrangement, according to specialists consulted by the Initiative for Investigative Reporting. In the real estate business, it is called the Income Appraisal Method.

When Casey and Dennis turned their attention to the value of Yawkey Way, the firm looked for comparable lease arrangements. They determined that the lease fee should be based on what “push carts or temporary kiosks located in shopping malls’’ would pay, instead of what vendors would pay for the chance to sell at a thriving sports stadium.

The BRA did not allow the appraisers to discuss their work for this report.

Since 2003, the team’s share of Aramark’s concession sales on Yawkey Way has exceeded $23 million, according to calculations based on industry studies.

Michael H. Harrity, a commercial real estate specialist who teaches at Babson College, said potential income is a more reliable benchmark when the property being valued is unique and comparable sales cannot be found.

“I would calculate a fair price of the properties to be the excess profitability the Red Sox stood to earn from the long-term operations on these properties,’’ Harrity said in an interview.

On the Yawkey Way concessions, Grinstead suggested the vendors located there could add as much as 10 percent to Fenway Park’s overall $33 million concession and souvenir sales annually.

If the city, for instance, had insisted on a 10 percent revenue-sharing arrangement for the $45 million in revenue from both the Monster seats and Yawkey Way, the city would have received an estimated $4.5 million over the last nine years, instead of the $1.67 million in fees.

Goodenow said that the team disputes the estimates, and that the fees paid by the team “have been fully adequate and appropriate to compensate the city.’’ Lucchino would not consent to an interview.

Andrew Zimbalist, a sports economist at Smith College, said he believes the city made the best deal it could at the time, since it created an incentive for the team to remain at Fenway. Given the disruption and potential taxpayer costs to build a new stadium, Zimbalist said, “this was a worthwhile investment for the city.’’

Meade, who became BRA director earlier this year, said he believes the 2003 agreement helped the Red Sox stay at Fenway and in the city. But he said it is time to change it.

The BRA has added impetus to seek a new agreement. The office of state Inspector General Gregory W. Sullivan requested information earlier this year about the lease after a reporter inquired about the agreement.

Meade, who said he had been unaware of the inspector general’s inquiry, wrote to Lucchino in July to say he wanted to jump-start negotiations for a new lease.

“We are sure you agree that the fan experience created by the game-day closure of Yawkey Way and the seating made possible by the license of the Lansdowne Street property rights have been wonderful additions to Fenway Park,’’ Meade wrote.

“We’re in a different place than we were several years ago,’’ Meade said in an interview. “Just to use the [Monster] seats as an example, we weren’t sure that was going to work. Even for closing the street, nobody knew if that would work or if it did, how well it would work. Now we have a pretty clear idea that it works well, so we’re better armed now going into negotiations on a new agreement.’’

Melissa Tabeek contributed reporting for this report. Stephen Kurkjian can be reached at stephenkurkjian@gmail.com. The Initiative for Investigative Reporting, in the School of Journalism at Northeastern University, is funded by a grant from the John S. and James L. Knight Foundation to support nonprofit investigative reporting. Further information about this issue can be found at the website northeastern.edu/watchdognewengland.