Jets, Others Concerned About Defaulting on PSLs Agreements in a ‘Reduced Fan’ Scenario

JohnWallStreet

Texas Governor Greg Abbott announced last Thursday (5.28) that effective May 31st pro sports fans could once again attend games within the state, permitted the event was held within an open-air stadium and attendance was capped at 25% of normal capacity (the order did not address collegiate sporting events). While on the surface the prospect of a limited gate would seem preferable to playing games in empty stadiums and no gameday revenue, one high-level team executive tells JohnWallStreet by Sportico that government restrictions on crowd size - a near certainty in markets across the league this fall - is “a significant concern” for several clubs including the New York Jets. The problem the Jets (and others) have is their ‘Personal Seat License Agreement’ states in one form or another that the holder maintains the “right and the obligation to purchase admission tickets for [a certain number of seats] for all pre-season and regular season home games” and in a reduced fan scenario that likely (dependent on how many fans were ultimately permitted) would not be possible. There is a belief amongst some clubs “that [from a liability standpoint] they might be better off [with the state or county determining] no fans can be in attendance than a limited number of fans.”

Our Take: It’s important to note that while there are multiple clubs facing the prospect of defaulting on their PSL agreements if fan capacity is reduced/restricted, it’s not a universal problem within the league. Irwin Raij (O'Melveny) said that “there is enough variation or differentiation within the language of PSL contracts - as it relates to what the licensee gets” - for some teams with seat licenses to still meet their obligations. For example, the high-ranking team executive we spoke to said there are franchises that do not specify the number of games included within a season ticket package (in their agreement with seat holders). Those clubs may be able to fulfill their contractual commitments by creating a series of mini or partial plans (think: if capacity was limited to 50%, each PSL holder would get 4 regular season and one preseason game). Of course, there are other franchises that never sold PSLs and thus don’t have to worry about being in breach of a contract (see: Dolphins).

The NFL maintains that it will be business as usual once September arrives (think: capacity crowds) and with orders at the state and county level destined to remain fluid over the next 90 days there’s little reason for teams or PSL holders to panic at this point. But with PSLs levered for stadium financing purposes, the possibility that some teams could be forced to award refunds (they’ll almost certainly try to issue credit first) and replace the contractually obligated income that would otherwise be servicing the debt on the building represents a scary proposition (granted the coverage ratio may be sufficient to cover their losses for one year). Remember, as we noted in our story entitled Limited Fans, No Fans Will Create a “Bad Financial Situation” For NFL Teams’ there are owners already having to tap into the league's expanded debt limit. The loss of 2020 PSL premiums would only seem to increase the likeliness of potential LP sales.

If/when states/counties announce formal restrictions on game fans will begin to seek out remedies. Raij suggested that the clubs in default would do their best to fulfill obligations (think: perhaps relocating luxury box holders first) and keep the as many PSL holders as possible happy. It's possible that the teams could waive (or refund) PSL premiums for 2020, but the sport bankers said it's more likely they’ll “require fans to pay their respective and issue some sort of credit later because they know they have to make a debt service payment.”

Fans who wish to walk away may from future payments may also be legally entitled to do so if the team defaults, though there’s really nothing currently preventing licensees from that now. It’s not as if teams have made a practice of suing their most loyal supporters. Disenchanted fans looking to recoup all of the premium payments made on their PSL to date are likely to be disappointed. Raij said it’s going to be difficult to convince a judge that a licensee suffered damages in previous years “when they enjoyed the benefit they paid for. They paid for access and received access.”

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