Expansion fees could be moving target based on location: Sources

When the NHL officially opened the expansion process in June, it was generally assumed that the price tag for a new franchise would be set at $500 million. But that might not be the case.

When the NHL officially opened the expansion process in June, it was generally assumed that the price tag for a new franchise would be set at $500 million. But multiple sources have confirmed to thn.com that the price has not been set and, in fact, it may vary depending upon location.

Which is possibly good news for Quebec City, not so good for Toronto. Good news for Seattle, not so much for Las Vegas.

Whichever city or cities the NHL chooses in addition to the slam-dunk that appears to be Las Vegas, it’s going to be an exorbitant amount of money to get into the club. But it’s pretty clear that a team in the Greater Toronto Area would be worth much more than in Quebec City, hence the possibility that the expansion fee would be greater. In fact, it’s believed that if Toronto were to get an expansion team, the fee would be somewhere in the $600 million range – which, contrary to popular belief, would include an indemnity payment to the Toronto Maple Leafs – but might be somewhere in the $350 million to $450 million range for Quebec City.

Conversely, Las Vegas wants in the NHL badly and the team will be owned by a billionaire, so the price tag there might be closer to $500 million, whereas Seattle, a place where the NHL would like to place a team, might be in the neighborhood of how much it would cost Quebec City to get a team.

So if you’re someone in Toronto looking to get in, you’d have to wonder whether it would ever be a big money-making project. If it costs $600 million to get a team and another $400 million to build an arena, that’s $1 billion dollars. If half of that is debt and say you clear $50 million a year, most of your profits would be going just to servicing the debt. There has to be a point where even in the most fertile hockey market in the world that it might not make financial sense.

Which is why whoever is going to own one of these teams is going to need a billionaire, or perhaps more than one billionaire, to make it work. Same even goes for the Pittsburgh Penguins, a team that is reportedly on the verge of being sold for somewhere between $750 million and $850 million. This is a franchise that clears somewhere in the range of $25 million in profits each season. When you look at it that way, how are you ever going to make money when the purchase price is so high? No publicly traded companies are going to be interested in that kind of investment, which leaves it to billionaires who want to leave a legacy and don’t mind not making a lot of money on their investments. Which is precisely why NHL teams are being bought by the likes of William Foley in Las Vegas, Jeff Vinik in Tampa and David Thompson in Winnipeg.

No, the expansion gambit is not a cheap one by any stretch of the imagination. As first co-reported by thn.com and The Seattle Times last week, the price just to apply for a team is a minimum of $2 million. But wait, there’s more. Prospective owners are required to put down $10 million when they formally apply for a team. If they do not get a team, in a best-case scenario, they’d have $8 million returned to them. But that would only be if the league doesn’t have any costs associated with doing due diligence on the bid. Any of those costs, which are determined arbitrarily by the NHL, are passed on to the owner from the $10 million and are not refunded. So, to recap, the NHL keeps $2 million, uses whatever it wants of the remaining $8 million to pay any costs associated with investigating the bid and returns whatever remains if no team is awarded. If a team is awarded, only what remains after the $2 million plus costs is applied to the expansion fee. And that doesn’t include the interest lost on that money while it is tied up in the expansion application process.

It’s believed the NHL has only received a completed application from Las Vegas so far and another is coming from Quebec. (Full disclosure: Quebecor, which owns the subsidiary that publishes The Hockey News, is the bidder from Quebec City.) There are two parties interested in Seattle, but knowing that one of them is going to lose millions of dollars just for applying, will both of them submit an application? What about Toronto? If Las Vegas is a slam-dunk and Seattle is another preferred destination, do you apply and lose that money knowing there’s a good chance you might be shut out of this round of expansion?

Well, we’ll know by next Monday when the applications and the $10 million deposit are due at the NHL office.