England’s Silverstone Circuit is perhaps the world’s most venerable auto-racing venue, a place where Formula One staged its first world championship. Rivals in Wales would love to dethrone Silverstone with a Formula One facility they are now building for a reported $500 million.
That potential rivalry is an ocean away. But it is fraught with financial questions that stretch all the way to Austin, which a week from today hosts its third annual F1 U.S. Grand Prix. One question is particularly pertinent: How can investors in the $500 million Wales facility think it is worth that money when the owners of Silverstone, the more storied and recently refurbished F1 flagship, have been trying to sell for more than a year and gotten no offers better than $17.4 million?
Just how much is an F1 track really worth?
It is not merely a question for F1 aficionados and playboy investors, according to an American-Statesman analysis done with the assistance of London-based Formula Money, an independent annual financial guide to the sport. Lawyers will begin arguing in Austin courts this spring about the taxable value of this city’s F1 track, Circuit of the Americas. Millions of property tax dollars are at stake.
Those millions could fund expanded services for Austin-area local governments, including one of the state’s poorest school districts. Or those millions could be a government overreach that threatens the financial viability of an attraction that brings huge sums to the area’s hotels, restaurants and other entertainment venues.
The track was built in 2012 for between $300 million and $450 million, according to various reports. Government appraisers say it is now worth $271 million, based on the recent construction cost, an assessment that would come with a tax bill of just more than $7.1 million. Circuit of the Americas executives contend the value has already dropped to about $100 million, which would mean a bill around $2.8 million.
One thing is clear from the dispute and from similar situations in other parts of the world: Formula One tracks are dicey investments. They face such bizarre financial realities that they appear to lose most of their value the moment construction is finished — complicating the task of figuring out how much track owners should pay in taxes.
The underlying economics “call into question why investors would agree to fund construction,” said Christian Sylt, the editor of Formula Money. “Maybe investors are not always aware of this destruction in value before they commit their money to a project … which costs around 20 times more than it will be worth.”
A stunning revelation
For an example of how these dynamics play out, start with Silverstone — and the reality that Formula One is owned by an English plutocrat named Bernie Ecclestone. His business is separate from the tracks that host the F1 races.
Silverstone is the oldest of those tracks. It was once a Royal Air Force bomber station. Racing enthusiast Maurice Geoghegan and several friends staged the first race there in 1947 and, according to track lore, dodged sheep as they navigated the turns, briefly earning the event the nickname of “Mutton Grand Prix.” (Geoghegan’s reflexes are said to have failed him at one point during the race, ending both his day and the sheep’s.) Silverstone hosted the first round of the F1 World Championship in 1950, and the Royal Automobile Club subsequently converted the site into the circuit of today.
By the 2000s, the facility needed an upgrade for the privilege of continuing to host the race. So the Silverstone ownership group paid just over $52 million to upgrade a new pits-and-paddock complex, known as The Wing. The upgrades won Silverstone a new F1 contract that started in 2010, allowing the track to host the race for 17 years.
But rumors of financial problems followed, along with plans for a sale. In November, Sylt uncovered a tightly kept detail: The actual 467 acres associated with racing was under contract to be sold for $17.4 million. That deal, which the track owners struck in late 2013, fell through earlier this year when the buyer backed out. A perhaps related fact Sylt uncovered: Last year, Silverstone lost $5.3 million.
“It is a revelation which could shake the F1 circuit industry to its core the world over,” Pitpass.com, a website devoted to F1 coverage, later stated.
Plans for the rival $500 million track in Wales are proceeding anyway.
Sylt said this financial dissonance is common in the F1 world. As a spokesman for the Silverstone ownership group told him, the organization was essentially trapped into making $52 million worth of improvements even when losing money. Otherwise, the spokesman said, “There would have been no 17-year F1 contract, (and) the circuit would have had no value.”
Circuit is losing money
Sylt said these dynamics tend to surface in the way governments determine the value of F1 tracks.
“F1 tracks tend to have very low valuations,” he said.
Tracks can’t be used for much, so their value is tied largely to F1’s willingness to host a race there. That willingness is only guaranteed to run through the length of a contract, Sylt said. And Ecclestone extracts a hefty fee: in the case of Circuit of the Americas, a reported $22 million in the first year, with an undisclosed annual increase, until the 10-year contract expires, Sylt said.
Circuit of the Americas pays for that and other costs with state incentives, which came out to about $29 million for each of the first two F1 races. All but one F1 track — Silverstone — has such an arrangement, which is necessary to make them financially viable, Sylt said.
Circuit of the Americas is not just a race track. It also has a music venue (sponsored by Austin360, the American-Statesman’s entertainment website) and hosts more than 200 events each year, some as small as a 5-kilometer race, some as large as the X-Games and MotoGP motorcycle race. Tracks also make money from food and beverage sales and parking fees, among other sources. And some tracks make money from corporate title sponsorship, though Circuit of the Americas does not, despite having the opportunity, Sylt said.
Still, he said, these are ancillary pieces of an F1 track’s finances, which rest primarily on the event itself, even with F1 keeping the money from the trackside advertising, corporate hospitality and TV rights fees.
Circuit of the Americas officials wouldn’t reveal how much revenue the track brings in, or its expenses, citing the upcoming court dispute over its property tax bill.
But the venue is losing money, they say — even as it has created a regional economic impact greater than the South by Southwest Music festival, according to a report that city and track officials are scheduled to release next week, said circuit Chairman Bobby Epstein.
“A lot of people think we are Formula One. We are really just an entertainment venue. The people making money are the entertainers, including Formula One, and the people who work in Austin’s hospitality business,” Epstein said.
Of the roughly $4 million difference between what track executives and government officials think is due in property taxes, Epstein said, “The venue cannot afford that kind of tax bill. If it creates an upside down company, I could see the property — without the race contracts — going up for sale.”
Following the cash flow
Texas appraisers seem to acknowledge that tracks lose much of their value once the concrete sets.
Fort Worth’s Texas Motor Speedway, which is NASCAR’s second-largest track, with a seating capacity of 191,122, opened in 1997 at a construction cost of $250 million. In 1999, the value had dropped to $65 million. Strip out several million-dollar condominiums at the site, and the track is now worth $61.2 million, according to Denton Central Appraisal District records.
Circuit of the Americas officials say the main reason to discount the cost of construction — a seemingly simple way to judge value — is that a prospective buyer might not land the F1 contract.
And state law doesn’t even allow the contract — the basis of the track’s economic value — to be considered by government appraisers, said Mark Hutcheson, a lawyer representing Circuit of the Americas who specializes in appraisal law. Only the physical structure can be considered, he said. The track is still the same track, no matter who is racing there.
A better way to determine the value of a commercial property, circuit officials contend, is to base it on the income the property generates.
There is a term in the state appraisal code called “external obsolescence.” It is a catchall for everything from bad neighbors to business-model quirks that keep a property from making its owner as much money as its construction cost would suggest it should. If the income seems too low to justify the construction cost, everyone must be missing something — and appraisers must adjust an appraisal downward to whatever the cash flow justifies, Hutcheson said.
Thus, the contention that Circuit of the Americas, built a few years ago for a reported $300 million to $450 million, is now worth around $100 million.
Travis County’s government appraisers see things differently, as do the track’s critics.
To many of them, the dispute is yet another element in an ongoing civic debate: about the fairness of the state appraisal system; the use of tax incentives; Austin’s rising tax burden and its skyrocketing cost of living; and just what kind of place the Texas capital is becoming. Despite studies showing that F1 is a net-plus for Austin’s economy, critics remain skeptical.
“It’s ridiculous that after going around telling everyone what an asset to the tax base they would be, and getting tens of millions in tax breaks (in the state incentive deal) on the notion they are such an economic boon, that they would turn around and argue it isn’t really worth that much,” said Bill Aleshire, a former county judge, former chief county tax collector and tenacious critic of the kinds of subsidy agreements the state and Circuit of the Americas reached.
Appraisers hired by the Travis Central Appraisal District had finished their inspection of the track just prior to completion. At the time there was no cash flow on which to base an appraisal, and nothing comparable had sold recently. Construction costs and assumptions about wear-and-tear were the only thing available to establish a taxable value, according to the appraisers hired by the district. They landed on a $273 million value for that first year.
On July 8, 2013, the district held a standard public hearing to review a protest filed by the track’s management.
“It is the only type of this track in the United States. Obviously, there are no comparables in Travis County,” Gregg Davis, of Capitol Appraisal Group, told the three-member volunteer panel that held the hearing. “I was wanting to examine the (construction) cost data a little more, but they just weren’t really helpful.”
No Circuit of the Americas representatives spoke at the meeting. Track management simply filed a notice that they intended to take the matter to court. Likewise, the track management declined to protest the following year’s value of $271 million when it was presented to the appraisal review board.
Sometimes the kinds of arguments Circuit of the Americas is making hold weight, and sometimes they don’t, said Robert Mott, an attorney working for the appraisal district.
“We hear it for virtually every kind of case involving a single-occupant property, even office buildings” and fuel-storage sites, Mott said. “‘It’s all just dirt and concrete, and what could that be worth?’” He said such cases are complex and that the upcoming legal proceedings, where Circuit of the Americas can share information confidentially with the appraisal district in an unhurried fashion, might produce an agreement on the track’s taxable value.
“This will be considered carefully and skeptically on behalf of the public,” Mott said.
Two other tracks illustrate how dramatically value can dissipate.
Germany’s Nürburgring is not only an F1 track but a shopping mall, hotel and theme park. The publicly owned facility was also reportedly $500 million in debt when bankruptcy was declared in 2012. It struck a deal this year to sell for $160 million.
South Africa’s Kyalami facility, meanwhile, went up for sale earlier this year. It had hosted an F1 race for nearly two decades but lost the F1 contract in 1993. The departure of F1 left it to rely on lesser races until the last one, a 2010 Superbike championship.
Kyalami sold in July for $19.5 million.
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By the numbers
$300 million to $450 million: Reported cost to build Circuit of the Americas.
$271 million: Value assigned to the track by Travis County officials for tax purposes.
$100 million: Estimated value of the track according to Circuit of the Americas.
$4 million: Approximate amount of annual tax bill in dispute.
American-Statesman reporter Marty Toohey worked with Formula Money editor Christian Sylt to piece together the finances of Circuit of the Americas and other racetracks around the world to show how the value of such facilities can plunge. His reporting provides a unique glimpse into the difficulty of valuing such tracks — and determining what their tax bill will ultimately be.