Why the deal to buy back Elland Road is even better than you think

Leeds United’s new owner Andrea Radrizzani said something very interesting the other day about buying Elland Road back from it’s current owners. Now while the club only pays £1.5 million in annual rent from the ground’s current owners, that figure is set to increase by 3% every year. Radrizzani also wants to build a new training facility, so he’s got some ambitious building plans in mind. The buy-back clause currently sits at £17 million, which is hard to swallow given that the team sold the ground for £8 million back in 2004.

Figuring out the value of buying back the ground is a little tricky. While it’s easy to just look at the rent, £1.5 million, and divide that into the cost of the buy-back, £17 million, and come up with a number of 11.34 and think that they investment will pay itself off in just over 11 years. But that doesn’t take into account the rent increase nor inflation. Financial types refer to this as the “Time Value of Money” because a pound or a dollar is worth more today than it is in the future.

Now taking UK inflation into account, which right now is estimated at 2.3%, and the annual 3% increase in rent means that the “price” of the rent will go up 5.3% each year, and needs to be taken into account when figuring out the benefits of the deal.

So using a fun little spreadsheet, I figured out when the investment, the £17 million, would pay itself off for the club. Here is what I got.

As you can see, the pay-off actually comes during year 9 of the investment period, and will steadily climb the longer the team owns the ground.

There are a number of other factors that go into an investment, more than what my rough estimate on a spreadsheet can provide. For example, I don’t know what kind of opportunity cost of capital that would go into the decision to buy the ground back, or what kind of tax related expenses go into the decisions making process. I have no idea how one would come up with a depreciation schedule for a ground that is literally over a 100 years old, or if it could be used as a tax shield and the idea of looking into the UK equivalent of GAAP makes my head hurt. I’m not an accountant in the US, and I’m certainly not one in the UK.

But take heart, besides buying back Elland Road so that the club owns its home again, this is actually a pretty good deal. And anything to save some money that could otherwise go into football operations is a good thing. I have no idea what kind of owner Mr Radrizzani will be, but it at least appears he’s a good businessman.