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How Much Is Memorial Stadium Worth?

Honestly, I don't have any idea how much the stadium is worth.  I don't even have a ballpark (ha!) figure.  But in the wake of yesterday's ruling, pretty much everything rests on answering that question.

After reading yesterday's ruling, I came away with the feeling that UC won on pretty much every point of contention, and while that is the case, it's not enough.  We're not keeping score here -- UC has to do more than just win the most arguments.  In a conversation overheard at the grove yesterday, a PHA representative described the voluminous CEQA objections raised by the petitions as nothing more than 'gnats in front of UC's face', side issues used as 'distractions' and as 'delay tactics'.  There wasn't much merit to many of these issues, as Judge Miller attests in writing page after page of her ruling, striking down each argument with ease (and what I read as overtones of annoyance).

No, the really important issue, as the PHA representative pointed out, the one issue that could potentially kill the whole project, was the valuation of the stadium, and it was on this issue that UC lost a couple of key points.  First of all, UC contended that the Alquist-Priolo Earthquake Fault Zoning Act (A-P) didn't apply to them.  Personally, I felt that this was the weakest point of UC's argument, and Judge Miller evidently agreed, ruling that, in fact, A-P did apply to UC.  (I think UC also knew that this was a weak argument, but if they had won this point, the rest of the case would have been basically moot.  Hey, if you're stuck in court anyway, you might as well swing for the fences!)

OK, so for those of you who have been following the case (and the excellent analysis of OaktownMario, danzig, Ken Crawford and others), this is old news, but I'll recap just in case.  Basically, because of A-P, the University is limited in any alterations and additions they do to Memorial Stadium to 50% of the value of the Stadium.  Fortunately, Judge Miller also ruled that the Student Athlete High Performance Center (SAHPC) is not an addition to the stadium -- it merely sits next to it.  However, here's where UC lost on a second, seemingly minor, issue:  while the SAHPC is a separate structure, certain parts of it are considered alterations to Memorial Stadium:  a grade beam, some staircase alterations, and a some floor penetrations.  Pretty minor stuff, but it's enough for the plaintiffs to get their foot in the door.

See, one thing that UC left out of its project proposal was the value of the stadium and the value of the alterations to it.  Understandable, because UC assumed that it didn't have to comply with A-P, and even if it did, phase I of the project (the SAHPC) is a separate structure that wouldn't trigger A-P.  Well, now that the judge has ruled that A-P applies and the SAHPC triggers it, UC has to go back and fill in the blanks before it can proceed.  No big deal, right?  I mean, it's pretty obvious by any reasonable measure (not that the plaintiffs won't argue otherwise) that the Stadium is worth more than twice the value of a grade beam and some floor penetrations.  The project can proceed!  Hooray!

Well, yes and no.  Before UC can proceed, they first must say exactly what the stadium is worth.  While these minor alterations certainly won't go over the 50% limit, if the value is set low enough, they won't have nearly enough cap room to for phases II and III of the stadium renovation.  This is important.  Very important.  I mean, the SAHPC is nice and all, but the overarching goal of all of this is to renovate the stadium, and UC doesn't want to be stuck with a decaying bowl that they can't legally renovate.

So, now the stage is set for a court battle over how much the decaying California Memorial Stadium is worth.  UC will try and value it as highly as possible, while the plaintiffs will try and lowball it to the point where it's basically worthless, forcing UC to tear it down and build a new stadium in next to Great America in Santa Clara (or some other ridiculous alternative).  I expect Judge Miller will rule on a reasonable value, but I don't expect her to do UC any favors.  Hanging in the balance is UC's ability to renovate the stadium and retain Head Coach Jeff Tedford.

So how much is the stadium actually worth?  As the cliché goes, that's debatable.  There are actually many different correct answers to this question, but the real answer is:  it all depends on your method of valuation.

One could argue that the stadium, being that it is a World War I Memorial and it is on the National Register of Historic Places, is irreplaceable (true!  UC would be legally barred from build a replacement on the same spot, due to the Hayward Fault) and therefore priceless.  Man, that would be nice.  One could also argue that, since the stadium cost only $1.4M to build and it has now been through roughly 90 years of depreciation, it is essentially valueless, especially in light of the fact that it's on an active fault and can't be renovated except under the restrictions of A-P.  I've no doubt the plaintiff's lawyers will try to make this argument.  However, I've also no doubt that Judge Miller will not buy either of these extreme arguments.

What we'll probably see is that UC will choose one of a number of accepted methods for valuing commercial property; basically whichever one gives them the highest dollar amount.  The plaintiffs will then argue that UC's valuation method is unrealistic and that the stadium is actually worth much less than UC says, based on some other, much less favorable valuation method.  Expert testimony from licensed property appraisers will no doubt be given, and Judge Miller will then get to sort through another mountain of evidence.  Lucky her!

So how does a property get valued?  Well, three common methods are (thanks, Wikipedia !) the cost approach, the sales comparison approach, and the income capitalization approach.

- The Cost Approach - This method basically says that a property is worth what it would cost to replace it.  It is not the original construction cost in today's dollars; modern construction costs, methods, and restrictions should be taken into account.  However, as Judge Miller cautioned in her ruling, it is also not what it would cost to simply build a new stadium.  Since the old stadium has undergone serious decay and depreciation, such depreciations must be taken into account.  Basically, this method determines what it would cost to build a new replacement, and then subtracts the value of such depreciations as would bring the new building down to the same condition as the current stadium.  This could be significant, and not in UC's favor.

- The Sales Comparison Approach - Basically, what is the stadium worth on the open market?  What are similar buildings in similar locations selling for?  This method is pretty worthless in this case, as there is essentially no market for used stadia.  And even if there were, trying to compare Memorial Stadium to, say, Candlestick Park would be incredibly difficult; although their functions are roughly the same, their capacity, construction, location, amenities, age, historical significance, etc., are all so different as to render a comparison essentially worthless.

- The Income Capitalization Approach - Here, now, is an interesting approach.  Instead of considering the stadium a pile of wood and concrete, consider it an investment.  You can then use the stadium's revenue stream and an expected rate of return on commercial investments to calculate a value.  For example, say you bought an apartment building for $1M, and that building in turn brought you $75K in income every year; essentially, you'd be getting a 7.5% rate of return on that investment.  Now, we can turn that equation around; if, for example (caution: numbers are entirely made up! for demonstration purposes only!), Memorial Stadium brings in $10M every year, and the investment market expects a 6% rate of return on an average investment, then Memorial Stadium would essentially by worth $10M/0.06 ~= $167M.  Now, of course, there's a lot more complicated math involved, but that's the basic idea.

Without seeing some actual numbers (and being a lot more familiar with the formulae involved), I couldn't say whether the cost approach or the income capitalization approach would produce a higher valuation.  I also know that there are potentially lots of other factors that could be involved in determining the value of the stadium, and that both sides have a whole host of data and expert witnesses already on hand to advocate their views.

Overall, there is absolutely nothing in Judge Miller's ruling that says UC can't build the SAHPC just as soon as a few procedural hurdles get cleared up.  However, one of those hurdles is the stadium valuation, a potentially major roadblock for UC's future stadium plans, and I expect to see quite a legal battle on this front in the months to come.  Unfortunately, the SAHPC, and the students and staff it would potentially serve, are caught in the crossfire.  By no means is this project dead; Stephan Volker's assertion to the contrary is at best a gross mischaracterization and at worse a barefaced lie.  Still, there is a long road yet to hoe.  A long, long road.