Bloomberg News

Texas Billionaires Bet on Austin F-1 Race Backed by State

November 16, 2012

Co-Founder of Paul Mitchell John Paul Dejoria

Co-founder of Paul Mitchell John Paul Dejoria. Photographer: Stephen Yang/Bloomberg

The first U.S. Formula One auto race in five years, slated for Austin, Texas, in two days, would’ve been doomed without a state pledge for as much as $290 million in aid over the next decade, backers say. Keeping that money flowing may prove as tricky as negotiating the track’s curves.

Billionaires Red McCombs and John Paul DeJoria joined other locals to build a $450 million speedway, looking to ignite the nation’s interest in races that draw 50 million television viewers worldwide. Their Texas-size bet came despite past failed efforts to keep the series going in the U.S.

“The staying power of the Austin race is its ability to maintain state funding,” said Christian Sylt, editor of the Formula Money report, published in London. “We can’t say for sure the organizers will receive the state’s funding over time, because it is dependent on the event’s economic impact.”

Subsidies for the Austin race, backed by Governor Rick Perry and Comptroller Susan Combs, will depend partly on the effect the first event has on tax receipts. With just days to go before the start, more than 115 hotels in Austin had vacancies, Priceline.com and other travel websites show. That may signal that forecasts of a Super Bowl-caliber boost won’t pan out.

“The economic studies said every hotel would be completely filled all the way down to San Antonio,” a 90-minute drive from Austin, said Danielle Crespo, who runs two websites that link Formula One visitors to lodging. “That isn’t the case.”

Slow Month

Fewer fans are coming to Austin from Europe and Canada than hoteliers expected, and they’re booking three nights instead of the projected five or six, said Randy McCaslin, a vice president of PKF Consulting who tracks the Texas hotel market from Houston. In a normally slow month, the race may boost occupancy rates as much as 2 percent, he said.

Perry, a Republican, called the event “a great opportunity to showcase our state” at a Nov. 8 news briefing in Austin, the capital. Some of the more than 20,000 visitors expected from other countries will include corporate chief executives who may be interested in expanding in Texas, the governor said.

The state’s support has drawn criticism from lawmakers and raised fairness concerns among other motorsports leaders.

“It’s caused a lot of questions and there has not been a reasonable explanation so far,” said Eddie Gossage, the president of Texas Motor Speedway, a NASCAR venue in Fort Worth. More than 700,000 fans in the past two years have attended six NASCAR and Indy Racing League events there, yet it has received a far smaller subsidy, $5.7 million, a state report shows.

Funding Imbalance

“You have a fund that is going to pay them much more for not nearly as large of a crowd as we have,” Gossage said of the Austin group, called Circuit of the Americas LLC.

Texas is the only U.S. state with funds dedicated to subsidizing major entertainment and sporting events, as a way to attract them, said Robert Wood, the comptroller’s director of local government assistance and economic development.

State law permits municipalities to ask for money from the Major Events fund, which is overseen by Combs, on behalf of organizers, Wood said. The comptroller analyzes the request and the economic effects before deciding on whether to provide a subsidy. Local governments backing the application must put up $1 for every $6.25 of state money.

For the Formula One event, a private group with ties to race organizers agreed to contribute Austin’s portion of $4.2 million. The state has been asked to chip in $25.3 million.

Controversial Support

In 2010, Combs approved giving race organizers $25 million from the fund before the first event, approximating a fee charged by Formula One’s London-based overseers, led by Bernie Ecclestone. Under pressure from state Land Commissioner Jerry Patterson and amid bickering among event organizers, the Republican comptroller backtracked last November, saying nothing would be disbursed until after the race.

“The trust fund can be very beneficial to the state, but I don’t believe it has been handled right by the comptroller,” said state Senator Kirk Watson, an Austin Democrat. He said lawmakers will examine the issue after they convene in January.

Motorsports executives including Tom Cotter, the former president of a New Jersey group that sought unsuccessfully to stage a June 2013 Formula One race in the New York metropolitan area, said even with subsidies, it won’t be easy to sustain the circuit in Austin.

Tempting Business

“Racing is one of those industries where it all looks easy to conquer from the outside,” Cotter said. “Normally wise business people will make potentially unwise business decisions in order to have an event like this one.”

Austin, experienced at attracting throngs of visitors for occasions such as the South by Southwest and Austin City Limits music festivals, is closing several downtown streets to foster a party atmosphere and entertain visitors and locals alike. Among musical acts set to appear are Aerosmith and rapper Flo Rida.

Among accommodations around Austin for well-heeled fans will be a pop-up restaurant, the Sapphire Room Supper Club, which will offer dining, dancing and live music, according to partner Barbara Kelso, who heads a local entrepreneurs organization. Prices for the club range from $50 to $2,100.

Formula One tends to attract the wealthiest fans of any major international sport, said Christopher Pook, who once ran the circuit’s Long Beach, California, road race. They’re drawn by finely calibrated Lotuses and Ferraris that blast through turns and straightaways reaching 220 miles per hour. Winning drivers such as Sebastian Vettel and Fernando Alonso pocket millions of dollars and often become heroes to their countrymen.

One fan, Frederico Fuentes, a civil engineer from Caracas, said he saved for a year to come to Austin for the race with two friends. He said he spent “a lot” of money to make the trip so he could see Spaniard Alonso drive, “and I love fast cars.”

Civic Motive

For Austin resident DeJoria, whose companies include John Paul Mitchell Systems hair-care products and tequila marketer Patron Spirits Co., his purchase of a 10 percent share of Circuit of the Americas was for both business and civic reasons.

“That $25 million from the state will generate over a few hundred million dollars in economic impact for Texas,” DeJoria said. “Besides the business plan, I always consider how it feels inside and this is one of the coolest things I’ve seen.”

About 119,000 tickets priced from $159 to $4,300 have been sold for the Austin race Nov. 18, according to Steve Sexton, president of Circuit of the Americas.

“We’re more excited today than when we started this two years ago,” said Rad Weaver, president of McCombs Partners, Red McCombs’s investment firm in San Antonio, citing ticket sales. Formula One is growing while revenue from NASCAR and other motorsports has been declining, he said.

“It’s not obvious you’re going to be successful,” said Austin bond trader Robert Epstein, the track’s largest investor. “But there are few things you can do that will produce a return for the area’s economy more than something like this.”

To contact the reporter on this story: David Mildenberg in Austin, Texas, at dmildenberg@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.


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