In response to massive upheaval in college athletics, schools are thinking outside the box. Facing a budgetary crunch, higher education institutions are exploring structures to unlock new revenue streams and access to funding, including investments from third parties.
With college athletics’ popularity, ratings and revenues at all-time highs, the sidelines are filled with potential investors of all sorts waiting for a chance to get in the game. But how can a school—a highly regulated and complex nonprofit organization—accept an investment in connection with its athletics program?
Schools can vet alternatives by analyzing several considerations, including (1) tax planning, (2) existing partner obligations and evolving rights, (3) institutional and athletic department strategic aims, and (4) legal and regulatory constraints.
Critical considerations
1. Tax planning
Universities have long enjoyed tax-exempt status. However, the rules involving joint ventures between a university and a for-profit enterprise are nuanced.
Avoiding unrelated business income tax (UBIT) and preserving exempt status hinge on compliance with these rules. Additionally, the increased commercialization of college athletics has heightened political scrutiny of its tax-exempt status.
Tax considerations for an athletically related investment deal are mission critical and include the following:
- Adopting an investment structure that facilitates the university’s realization of tax-exempt income, including by ensuring the university retains sufficient control
- Compliance with laws prohibiting private inurement or benefit
- Evaluating potential UBIT implications
- Ensuring that the joint venture’s activities are substantially related to the exercise or performance of the university’s tax-exempt purposes
2. Existing partner obligations and evolving rights
Many institutions have existing arrangements with commercial partners, like multimedia rights holders and apparel companies, that have bargained for certain athletically related rights and already seek to maximize sponsorship-related revenues to schools. Institutions have assigned other broadcast and sponsorship rights to athletic conferences.
Additionally, the evolving regulatory structure further impacts related rights. For example, following a recent change to NCAA legislation, corporate logos will soon appear on uniforms, equipment and apparel—a new and valuable sponsorship opportunity—across college athletics.
Any investment deal must carefully align with already assigned rights and be sensitive to the evolving regulatory framework in which these rights are exercised.
3. Institutional and athletic department aims
A threshold question for institutions considering an investment in athletics is whether the institution seeks a strategic investor. On the one hand, an institution may welcome a strategic investor who has experience and skills that can enhance an institution’s ability to execute on new revenue generation aims.
On the other hand, an institution may not want to complicate decision-making in athletics by adding an influential voice whose interests may not fully align with the institution’s interests.
4. Legal and regulatory constraints
Any deal must be sensitive to university-specific legal and regulatory constraints, including:
- State laws that govern university activity, which may include financial covenants and restrictions regarding the use of assets
- Existing university entity structure, including any subsidiaries, foundations and direct support organizations and those entities’ rights, duties, and governance structures and restrictions
College athletics deal structures
An interested university can consider deal structures that provide the best balance of the factors noted above. Hypothetical deal structures at both extremes may feature the following characteristics:
- In a deal with a passive investor, the investor might receive a return equal to a percentage of certain revenues (for example, a percentage of distributions received from the conference), with those revenues not serving as collateral but providing a manner in which to calculate return. The deal can have a fixed duration, avoiding complicated exit terms, and offer funding in a manner preferable to the institution, which can be an initial lump sum, pursuant to a graduated schedule, or on an as-needed basis.
- In a deal with a strategic investor, the institution and the investor might form a new entity to house key athletically related rights. The new entity’s governance structure may provide for a new board that enjoys majority representation by university staff and minority representation by the investor. In exchange for an investment in the institution, the investor receives an ownership interest in the new entity, with deal documents carefully delineating duties and roles among the institution, investor and any current non-university entities (for example, any multimedia rights partner) that have a role in revenue generation activities.
In general, the more passive the investor, the lower the hurdles for each set of considerations identified above. While there’s no existing playbook for investment in college athletics programs, careful analysis of the above factors can position schools to accept desired funding via a deal structure that aligns with institutional goals.
