Over the last few months it has emerged that several clubs have sold their stadia to companies connected with their owners. It’s perfectly legal, but should it be? And why have some clubs taken this rather drastic step…?
A handy trick if you’re ever feeling bad about how you’re managing your finances is to take a look at how Championship football clubs are doing it. If you do, you’ll quickly realise the logical assumption that a business should probably not spend more money than it brings in is, in fact, adorably naive.
In 2017/18 the average wages to turnover ratio in England’s second tier was 115 percent. That’s one hundred and fifteen percent. And that’s the average. And also just wages, before you even factor any other costs in. Only three clubs spent under three-quarters of their revenue on wages, while for 13 the ratio was north of 100 percent. Birmingham’s figure was 202 percent, which looks an awful lot like a typo, but astonishingly enough is not.
This will tell you several things, including but not limited to a) it looks a lot like a significant portion of our football clubs are being run extremely recklessly, but also b) it’s bloody hard to make ends meet just below the top level of professional football.
#hcafc frugal approach is highlighted by their very low 51% wages to turnover ratio, which would have been the lowest in the 2017/18 Championship (by an amazing 17%).To place this into perspective, more than half the Championship clubs have ratios above 100%. pic.twitter.com/XChaxJiPwo
— Swiss Ramble (@SwissRamble) September 16, 2019
Which brings us to a new trend in the exciting world of football finance. Over the last few months it has emerged that at least four clubs – Aston Villa, Sheffield Wednesday, Derby County and Reading – have sold their stadia to companies associated with or completely owned by their owners.
It is, of course, essentially a creative method of injecting money into a football club, in these cases so that they comply with profitability and sustainability rules (FFP to you and me), which stipulate that Football League clubs cannot lose more than £39million in a three-year period, but also limit the amount of money that owners can directly invest into clubs to pad out their finances.
In their last financial results Derby reported a pre-tax profit of £14.6million after Pride Park was sold to owner Mel Morris for £80million; Sheffield Wednesday’s profit was £2.5million after owner Deljphon Chansiri bought Hillsborough for a tidy £60million; Villa Park is now the property of owners Nassef Sawiris and Wes Edens who paid £56.7million for it; and the Madejski Stadium was sold to Reading’s owners Renhe Sports for £26.5million.
It feels like that old trick in Football Manager where you would take charge of a second club and buy your reserve right-back for £20million. And it essentially stems from an alteration in the regulations from 2016 which allowed clubs to book the profit from sales of ‘fixed assets’, which was previously not allowed.
It’s commonly referred to as a loophole, but actually, the clubs involved dispute it’s that at all, any more than a director wearing clown shoes and lederhosen in the ground is a ‘loophole’: not only is it not banned by the regulations, but it’s specifically allowed.
“We didn’t use a loophole,” Mel Morris told talkSPORT recently. “Let’s be very clear on this, there is no loophole here. The rules are extremely specific on this, that the sale of a fixed asset is allowable. It’s a single sentence. It is allowable.”
Whether you call it a loophole or not is just semantics. There are more important questions afoot, specifically that while the reason for doing it is obvious, is it a good idea? Or, more specifically: is it a sensible idea?
We didn't use a loophole. Let's be very clear on this, there is no loophole here.
“[It’s something that] I guess the EFL hadn’t expected to be seen or indeed used,” football finance expert Robert Wilson tells the Totally Football Show. “It’s a one-off thing, so you can reasonably assume the clubs that have done it recently will have made losses in excess of the permissible amount under FFP, so have used the sale of the stadium to plug that gap, essentially as a form of owner investment in the club that’s permissible.”
From a layman’s perspective, it seems like an extremely risky move, firstly because it’s something you can only do once, so if the clubs are in the same position next season they’re stuffed, but also because technically separating clubs from stadia feels like the sort of thing that, if things go wrong, could be identified in years to come as the point it all started to go downhill.
Wilson isn’t quite as concerned, though. “There is undoubtedly an element of risk. But it’s as safe a risk as you can make, because the owners ultimately have a controlling stake in the companies that own them. I guess you could envisage a situation where the club goes into administration or liquidation and they don’t retain the principle asset, but I think it’s a very limited risk because of the way they will have done the deal.
Could there be a scenario in a few years when the club might buy back the stadium for a very competitive price? “I wouldn’t suggest in the medium term we’ll see that,” says Wilson. “I would think the only time that might happen is if the club is sold, and the arrangement by which it was sold included the stadium, because that’s the principle asset. Nobody in their right mind would buy a football club without a stadium attached to it.”
Naturally, the whole thing has caused some consternation among other clubs in the Championship. Leeds owner Andrea Radriazzani has said Derby and the others should face sanctions; QPR director of football Les Ferdinand called the whole thing “ridiculous” and “a joke”; Middlesbrough chairman Steve Gibson is reportedly threatening to sue…someone.
Judge for yourself whether all of the irked clubs are really in a position to lecture others about managing their finances, and there is the nagging feeling at some of the clubs involved that the complainants are simply trying to apply pressure to the EFL to dish out punishments for…something.
And that is a more serious prospect: according to a report in the Times, the EFL is investigating the valuation of the stadia, which is understandable but also slightly curious, since at least one of the clubs involved worked closely with the EFL during the sale process, which does lead to the suggestion that this investigation is simply to placate some of the clubs making a noise. Independent valuers were used, and one of the clubs involved confirmed to the Totally Football Show that the final sum was arrived at on the assumption that the land was being sold for commercial purposes, shops, housing etc.
If I was the EFL, I would probably hold my head a little bit, thinking we should never have allowed this to happen.
But should the ‘loophole’ be closed? “I think it would be more controversial to close it now,” says Wilson. “I think they should leave it. Because you could only sell the stadium once to yourself, in theory. They might tighten up the regulation to do with the ownership – you could envisage a scenario where an owner decides to set up another company, which buys the stadium for even more money and that gets routed back through, but I just can’t see that, it would be too complicated.
“If I was the EFL, I would probably hold my head a little bit, thinking we should never have allowed this to happen, but it has, and probably be a bit more savage with the penalties for breaching FFP.”
Interestingly, Wilson suggests the money could have been used for purposes other than complying with the regulations. “I would have used it to my competitive advantage rather than to cover losses. So rather than sell the stadium back to yourself to get around FFP, I would have done so and reinvested into the transfer market so I could’ve had a massive cash injection, buy players and build the team.”
This is one of those things that ‘feels’ iffy, but technically is perfectly acceptable. Wilson likens it to wealthy or high profile businesses or individuals using current regulations to pay less tax. “We feel it’s wrong, that they’re circumventing the system, but actually it’s entirely legal under the regulations… I doff my cap to the lawyer or accountant who found the loophole in the first place. Whether we agree with it or not, the fact somebody found it and has been able to do it is fairly ingenious.”
Clubs have used creative ways to increase their funds for years, the difference in this case being it’s more brazen than most. But morally it’s not that different to an owner ‘loaning’ a club money then turning that debt into shares, which has been done countless times before.
Ultimately though, the primary objection must be that it feels like a sticking plaster, a method of papering over clubs spending beyond their means. It feels like the sort of ‘smart’ move that others will copy, a magic method of putting off complying with well-intentioned financial rules: naturally we will have to see what happens next, but surely there is a danger of this simply extending the cycle of overspending and putting off making financial decisions necessary for the future of the sport.
It’s perfectly legal. It’s within the rules. Hats off to the clubs for doing it. But that doesn’t mean they should have done it.
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