TYNECASTLE STADIUM
"NOT FIT FOR PURPOSE"
CONTENTS
1. INTRODUCTION
2. ORIGINAL VISION FOR TYNECASTLE
3. UEFA LICENSING PROPOSALS
4. PLANNING ISSUES
5. McLEOD STREET STAND
6. ALTERNATIVE STADIA
7. LAND VALUES
8. VIABILITY
9. MURRAYFIELD
10. ASSET OWNERSHIP
11. INVESTMENT
12. CONCLUSION
1. INTRODUCTION
The Board of any plc has extensive and detailed Corporate Governance responsibilities along with the normal Companies Acts and Fiduciary Duty responsibilities of acting in the best interests of shareholders.
In terms of Risk Assessment the Executive and Non-Executive Directors have to satisfy themselves that all risks to the business are fully assessed and where appropriate insurance provisions made and contingency plans in place (see page 11 of the Report & Accounts). Such risk assessments clearly include the suitability of the premises where the Company trades and gains the bulk of its revenue.
It is against this background that the "not fit for purpose" assessment has been made. As part of the assessment the Board also have to consider the Company's ability to trade successfully from the premises.
It has been regularly stated in recent years that the Company's strategy is to operate as a viable business. In our terms we consider viability to be at worst break even on a cash flow basis, followed by break even on a trading basis and after that obviously profitability is a clear target.
In preparing all of our financial forecasts, the Financial Director's remit is to forecast costs and income on the basis of exiting both Cup competitions and Europe, if applicable, at the first entry point.
In preparing our detailed forecasts all income streams are taken into account and we benchmark both income streams and cost lines against similar football clubs to Hearts - both north and south of the border. In cost terms we operate efficiently and have very few areas, if any, where substantial cost reductions can be made - with the exception of the costs of players and associated football department staff. In income terms our analysis clearly shows that we are deficient in commercial income by comparison to other clubs who have more complete stadia and facilities.
Such commercial income is derived from corporate boxes, car parking, improved perimeter advertising and high value corporate seat sales including lounges, restaurants etc. Our analysis also shows that our revenue per seat is low due to two particular factors:
(i) the poor quality seating and sight lines from the McLeod Street Stand
(ii) high percentage of concessions in our overall crowd average
There are many other factors adding to the financial projections and viability. In our current trading position we expected to be at cash flow and break even by 31 July 2003. All of our cost cutting and player cost reductions planned in recent years led us to this view. However, the goal posts moved in as much as the predicted increase in media revenues two or three years ago have in fact become decreases. This has affected not only Hearts, but all of our peer group in the SPL.
Another important factor in the Club's projections is (and must be in the future) that we cannot rely on player sales to achieve cash flow break even.
It is important to explain all of the factors which have led to a conclusion by the Board that Tynecastle is "not fit for purpose".
2. ORIGINAL VISION FOR TYNECASTLE
The vision for Tynecastle having completed the Wheatfield, Roseburn and Gorgie Stands in quick succession over the period 1994 to 1997 was after a period of financial consolidation to finish the stadium by rebuilding the McLeod Street Stand fully facilitated to meet the normal facilities enjoyed by a top class professional football club.
Plans were drawn up by the Club's Architect, Jim Clydesdale, for an 8,000 seat capacity two-tier stand, with some 30 corporate boxes at the mezzanine level. As well as these boxes this Stand would include substantive facilities for spectators, licensed premises, lounges, restaurants etc. As well as the grandstand, the Club believed that it was necessary to have substantial car parking to meet the modern day requirements of high value corporate customers. The Stand itself was to be of a similar design to the existing three stands, and would use the corner towers already in existence at the north-east and south-east of the Roseburn and Gorgie Stands.
Over a twelve month period discussions were entered into with major property developers in the City with a view to facilitating this development which would require the acquisition of the Adult Training Centre buildings, the Local Authority Nursery and the City Roads Department offices and depot. By clearing these buildings the opportunity existed to develop a mixed-use development covering retail and office buildings. Some of the benefits of the retail and office developments would help to cross fund the stadium development.
Discussions took place with officials and a variety of schemes were prepared. These were not, however, progressed as it became apparent that land values were such that the viability of the scheme would be difficult to deliver. Also around the same time in the year 2000 we were advised of the European Licensing proposals which first cast a shadow over any development at Tynecastle. This information was put into the public domain at the Club's AGM at the end of that year when it was first mooted that Hearts would require a new stadium.
3. UEFA LICENSING PROPOSALS
The first UEFA consultation paper was issued in the Spring of year 2000, followed by a more detailed document later in the year. There were many aspects of these proposals which the Club could not meet.
The two which gave the most concern were:
(i) The dimensions of the playing field
(ii) The dimensions of the playing arena
The original proposals stated that this particular infrastructure requirement would have a longstop date of 2010. We believed at that time that there was adequate time to find a suitable new stadium site.
To deliver the UEFA Licensing regime, UEFA decided to delegate responsibility to the National Associations. The SFA have therefore undertaken a licensing scheme taking the UEFA criteria and adapting where appropriate to suit any characteristics of Scotland. At the end of last season the SFA approved Heart of Midlothian FC on a conditional licence.
The problem which we have at Tynecastle is that the stadium was built in a very tight, confined space due to there being no alternative site found.
The minimum requirements for the SFA Licence have been set at 65m wide x 100m long, and the UEFA requirement for the UEFA Cup and Champions League is 68m x 105m. The further dimension by UEFA in terms of the playing arena is 80m wide x 120m long. Appendix A illustrates the affect of such an arena on Tynecastle.
Whereas width is not a problem for the SFA or UEFA, length is most definitely a problem. We cannot even extend a metre at either end to meet the minimum SFA requirements. Any examination of the structure of Tynecastle, taking into account the position of the corner towers will show that it is simply not possible to create even this minimum pitch size. To achieve the minimum playing arena, which is based on safety implications, would require us to remove the first eight concrete plinths at the Gorgie and Roseburn Stands. We would also require to virtually reconstruct the stadium due to the four corner towers.
At the start of this season the SFA advised that they were having difficulty in convincing UEFA that matches in this year's UEFA Cup should be allowed to be played at Tynecastle due to the aforementioned non-conformity of field size and playing arena.
There is a further level of legislation in terms of UEFA other than the delegated SFA/UEFA Licence requirements and that is the Competition Rules themselves which naturally mirror the Licensing requirements. Officials in charge of the competitions at UEFA will not necessarily accept the views or pleas of officials of the SFA.
Also at the start of the season the SFA issued a further document in respect of the National Club Licensing stating the position with regard to UEFA mandatory criteria. This is enclosed at Appendix B and makes it clear that the exceptional circumstances derogation, which would be required from Season 2004, is a minimum length of 100m.
As part of our efforts to retain Hearts at Tynecastle a Stadium Steering Group was formed in September 2001 and all options were considered for reconfiguring Tynecastle in the existing site and/or the associated land under the ownership of the City of Edinburgh Council.
Our appointed architects, the Miller Partnership, considered a variety of options for the new stadium in the area. The financial analysis of these options, however, showed that there would be an excessive cost in relation to what could be provided elsewhere. In simple terms the total cost due to having to acquire land and provide infrastructure facilities was some £35.8 million compared to costs for a new build stadium on a peripheral site where the maximum cost may be in the region of £20 million. It is easily seen why a new stadium in or around the existing site has no feasibility.
In terms of viability, all of our projections show that participation in European football is an essential component of the Club's future viability. To this day the most valuable game we have ever had in the Club's history has been the Stuttgart home match, closely followed by the recent Bordeaux game, and this includes SFA Cup Finals.
To consider continuing at Tynecastle set against the UEFA compliance position is not one which directors of any plc could ever take.
4. PLANNING ISSUES
Even if the Directors were minded to take on board risks of non-compliance in terms of pitch size and playing arena, viability for the Club at Tynecastle would require the rebuilding of the McLeod Street Stand.
The estimate for construction cost for a two-tier stand previously described in the year 2000 was circa £8 million. This estimate excluded any cost of land acquisition. The two-tier stand required a footprint which extended to some 20 metres from McLeod Street, i.e. encompassing the bulk of the existing Nursery School and Adult Training Centre buildings. The cost of acquiring this land could only be at current values for residential planning consent as the City of Edinburgh would not be allowed under statute to either gift us or sell at below market value the land.
We would also require to deal with our existing landlord for the office building which we occupy in terms of acquiring this. On the basis of current land values this could add between £2 million - £4 million to the cost without adding any further land cost for the provision of parking. It would not make commercial sense to spend between £8 million - £12 million on a new grandstand without the further expenditure of up to £10 million to acquire the car parking area.
In terms of planning we were advised at a meeting of the Stadium Steering Group on the 4th February 2002 of new Regulations in respect of COMAH relating to industrial plants. An extract of the minutes of that meeting is enclosed at Appendix C. On the 7th August 2002 we received formal notification of the consultation distances and copies of this notification and the distances are shown at Appendix D.
In August 2003 we received the second notification in terms of the consultation distances which had been set in relation to the North British Distillery. Having met with the Manager for Scotland of the Health & Safety Executive - Dr. Cook - we have been advised that the existence of these zones both in relation to Macfarlan Smith and to the North British Distillery mean that any planning applications in respect of our stadium would be the subject of their scrutiny, and that whereas they could not object to development on the existing site/footprint, any increase in the site size/footprint would raise objections from them. The Director of Planning has advised that it would not be normal Council policy to grant planning against objections from the Health & Safety Executive. The reasons for this should be obvious.
The implications therefore are that any rebuilding of the McLeod Street Stand could only be on the existing footprint and this would therefore not meet the modern day requirements and stand specifications and therefore the viability of the Club.
5. McLEOD STREET STAND
The McLeod Street Stand is rapidly approaching a position where its Safety Certificate is under threat. Structural Engineers are concerned about the integrity due to corrosion of the internal steel beams.
The Stand itself does not conform with the Green Guide in terms of exit widths and evacuation times. The roof of the Stand, which is asbestos, has become very brittle and breaks and fragments on the rare occasions that balls land on the roof. Netting has been placed underneath this to protect spectators. The main seating deck is timber and therefore a higher risk for fire.
6. ALTERNATIVE STADIA
During the period 2000 to the present day alternatives to Tynecastle have been exhaustively investigated. As previously stated the alternative to rebuilding here at Tynecastle has been considered and ruled out on the grounds of financial feasibility.
Using the vehicle of Euro 2008 and Scotland's UEFA submission, a scheme was put forward for Braehead Quarry that was rejected by the SFA. It has been made clear to us by planners that a site in this location would not under any circumstances achieve the requisite planning consent.
A further site has been investigated in the area surrounding the Ingliston Showground and it has not been possible to convince landowners of the merits of developing a stadium on their land, and it has been made clear by planners that a development in this area of such a scale could take many years to be considered due to future Edinburgh Airport expansion plans.
The joint stadium proposal with Hibernian FC has been widely publicised and clearly there is land in the Straiton area where it may be possible to develop a stadium. In consultation with supporters, doubts were expressed with regard to the access and egress of the chosen site as well as the objection to share with Hibernian. This site search has proved no more successful than that of the previous attempts in the late 80's and early 90's where over a long period there was significant planning and political resistance towards developing a Greenbelt site stadium for one of Edinburgh's professional football clubs.
The failure of the previous attempts and the impending Lord Justice Taylor Report ended up with the rebuilding of Tynecastle in its current situation. The legislation which now makes Tynecastle "not fit for purpose" in terms of COMAH and UEFA Regulations have of course been subsequent to that rebuilding.
Tynecastle ironically is much loved by those in football precisely because it does not meet the Regulations. The steep stands and the closeness to a small, tight pitch create a unique atmosphere.
Whatever the outcome, it is clear that the playing arena dimensions required will always mean that wherever the stadium is located or occupied, that atmosphere can never be recreated.
7 LAND VALUES
Land values and a shortage of land for housing and commercial development are such that solutions to finding a new stadium site will continue to be difficult in the years ahead.
8. VIABILITY
In terms of viability, as previously stated the Company can no longer continue to sustain the losses which have affected not only Hearts but football throughout Europe in recent years any longer.
The Board strategy is that from financial year 2004/05 the Club must try to strike viability and this will require every attempt to raise our level of income and further cost cutting measures which will be most marked in terms of the playing squad.
As a counter balance the Club has significantly invested in only the second Youth Academy for a senior club in Scotland which will open in the Spring of 2004. It is believed this Academy and the quality of youngsters that are currently at the Club and in development will assist the future viability.
Given the clear view that mandatory requirements such as pitch dimensions will be instigated for Season 2004/05, the Board have taken the position that we cannot continue at Tynecastle and we must consider the opportunity that presents itself. This opportunity in sharing a stadium close by to Tynecastle which is world class - Murrayfield - is a direct result of the Board's informed decision that Tynecastle is no longer "fit for purpose". Clearly the fact of Tynecastle not being "fit for purpose" allows the realisation of the land value if Tynecastle receives residential planning consent. Given the Club's debt position, the move to occupy nearby Murrayfield can also be carried out against a background of significant debt reduction.
9. MURRAYFIELD
As an option Murrayfield has everything that can deliver viability to Hearts' Business Plan - corporate boxes, car parking, corporate facilities, space for perimeter advertising, seating without limited sight lines/restricted views, opportunities for licensed facilities for both corporate and non-corporate supporters. Clearly it also has a significantly increased capacity.
This latter point gives an opportunity to market Hearts to try to fill some of the excess capacity. Should the Club move to Murrayfield we would look at ways of masking/blanking out the top tier so that the impression of the stadium is much smaller and more compact.
10. ASSET OWNERSHIP
Many supporters (and your statement) gives the impression that ownership of assets is important to a business. Whilst owning assets is undoubtedly a benefit, owning assets which are effectively assigned through "registered charges" to providers of debt neutralises these assets. This is in fact what the balance sheet of the Company illustrates.
What is important for any business is the ability to trade and deliver whatever is its goods, services etc. to its customers. In this context many of the largest businesses in the world do not own their assets, but simply lease, rent or have arrangements to utilise them.
In the contemplation of any move to a rented stadium this would be on the basis of a significantly long period of security of tenure. There is added benefit in such arrangements through the lack of requirement to maintain the asset and also to depreciate the capital cost against a profit and loss account each year.
Not owning the asset itself does mean that future borrowing cannot be secured against a stadium. As a policy, however, the Company and its Board of Directors consider that borrowing would not be used as a source of developing the team by buying players or funding the wages of expensive players. We have been down this road and would not want to repeat it. In any event, the investment in the Youth Academy is specifically designed to provide a growing proportion of our players of the future.
11.INVESTMENT
Suggestions have been made that we could consider a Rights Issue or new investment by private individuals or others and this is always something the Board will give every consideration to.
What should be clear from this document is that any new investment will have no bearing on the fact that Tynecastle is no longer suitable for the business of Hearts. No investors, entrepreneurs or company carrying out a due diligence exercise would specify that the investment should be made in the existing stadium. Any investment, therefore, would - at the Board's recommendation - be used to strengthen the balance sheet of the Company through either debt reduction or the creation of reserves.
12. CONCLUSION
In its deliberations in recent years, and particularly in recent months, the Board of Hearts have been particularly sensitive to the views of supporters and have had regular dialogue with them. Everyone is aware of the strong emotional ties that exist for Tynecastle as a stadium. We know only too well the atmosphere that is created within Tynecastle. It will be a huge wrench for all Hearts supporters to leave the stadium.
The Board, however, is charged with recognising and realising the situation as described in this document, and this is a situation where the head has to rule the heart. The future of the football club is more important than simply the stadium that we play our football in.
In our risk assessment we are only too aware that there are risks in relocation wherever that might be, but the risks of remaining at Tynecastle outweigh the risks of moving. Our financial planning for Season 2004/05 has been completed now for several months and we have factored in what can be achieved through relocation.
It will, however, require everyone involved in Hearts accepting that relocation is essential, embracing it and continuing to support the Club rather than simply the Club at Tynecastle Stadium.
CHRIS ROBINSON
CHIEF EXECUTIVE
December 2003
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