"Correction: A column in this space on Oct. 1, 2004, praised District officials for having negotiated the best deal possible with Major League Baseball on the financing terms of a new city-owned stadium. In fact, the deal was flawed. The columnist regrets this rare lapse in judgment."
What prompts this confession is the news that Major League Baseball has set a sale price of $450 million for the Nationals, based on the bids submitted from the groups competing for ownership.
What that means is that the 29 other team owners will enjoy a windfall of $150 million -- an amount over and above the $300 million they spent to buy back the old Expos franchise, cover the team's operating losses, pay off Orioles owner Peter Angelos and earn a modest return on that investment.
It means that there is some part of $150 million that Major League Baseball could -- and should -- throw into the pot to help finance a new stadium for the Nationals, either through an upfront contribution or higher annual rent.
It means our guys got rolled.
In all fairness, when the details were being hammered out last summer, I doubt anyone expected that the Nationals would go for anything approaching $450 million. This was, after all, a lackluster team moving into a hemmed-in market with a history of low attendance, at a time when franchise values were falling. If you had proposed a deal guaranteeing $300 million for the team, I suspect the league would have snapped it up.
What does the sale price of the team have to do with the terms of the stadium financing deal? Actually, quite a bit.
The only justification for subsidizing the cost of a baseball stadium is that teams -- caught in a bidding war for talent -- generally don't have enough money left over to pay market rent for their facilities and provide a reasonable return on the owners' initial investment in buying the franchise.
That's not true for all teams: Having failed to get New York City to play the subsidy game, both the Yankees and the Mets now plan to privately finance their new stadiums. But a year ago, in the context of competitive bidding against other cities, Washington officials reasonably believed they didn't have the leverage to insist that MLB build its own stadium or pay a true market rent for a city-owned facility. A higher rent would lower the team's projected operating profit, which, in turn, would lower the amount would-be owners would be willing to pay for the franchise.
To satisfy the league's desire for a higher sales price, the city offered to charge a subsidized rent of $3.5 million in the first year, rising to $5.5 million by year six, with 2 percent increases every year thereafter. Most of that subsidy would come from a new tax on the city's biggest businesses and professional firms that is expected to raise $8 million a year -- an unpopular tax that nearly scuttled the deal in the spring.
But now, a year later, we know that the economic assumptions underlying the negotiations were too conservative. In their first season in Washington, the Nationals are likely to attract 2.7 million fans to an aging stadium with a team without any superstars -- and still manage to eke out a $20 million operating profit. As a result, not only can MLB demand a near-record $450 million for the franchise, but rich guys are lining up for the privilege to pay it.
To their credit, the city's negotiators last year tried to get MLB to share some of the "upside" if things turned out better than expected. But all they got was an extra $1 per ticket above the first 2.4 million sold, plus 15 percent of any capital gain in the unlikely event the new owners sell the team within five years. In hindsight, the city should have held out for more.
Maybe it's not too late. The city and MLB are still haggling over the final stadium lease agreement. This time, the city should have the upper hand. It is MLB that has more to lose in terms of money and reputation if the deal falls apart. How likely is it that MLB would walk away now, give up a sure thing in the nation's capital and roll the dice by moving the franchise to Las Vegas?
Major League Baseball loves to talk about the partnerships it has forged with the cities in which its teams play. Maybe it's time to make good on that rhetoric and share with Washington some of the windfall value that the city has helped create.
Steven Pearlstein can be reached at email@example.com.