CC image from wallyg.

The New York City Council recently voted to approve Madison Square Garden’s operating permit for a period of just ten years, with the goal of expediting the arena’s replacement and thereby easing the potential renovation of the city’s main inter-city rail station. Given that operating permits are frequently handed out indefinitely, and given the emerging consensus of the city’s elites that the station needs to be replaced, it’s not surprising to see this characterized by some as an eviction notice.

MSG, unsurprisingly, is pushing back. They argue the arena cannot “be forced to move” through the permit process, as they own the arena and the air rights it occupies outright. The government can certainly force MSG (with proper compensation) to move through eminent domain, though the cost of buying MSG out could be prohibitive, and Mayor Bloomberg has ruled out using eminent domain to do so.

Regardless of the method, moving MSG will require a great deal of money. Taking the property would be plenty expensive; luring MSG to move with a new arena would be similarly pricey. Unlike the previous plans for a new MSG as a part of a Penn Station redevelopment plan, the arena’s operators are finishing a large renovation, essentially a complete re-building of the interior of the venue. With the renovation complete, the promise of a modern arena is less lucrative – particularly when a re-located arena would likely require a less-valuable location.

Proponents of the short extension of the operating permit assert that ten years is enough for MSG to amortize the investment of their renovation. When considering the value of the property alone, that claim is dubious:

Further, under these projections, if MSG were forced to move in 15 years, it would have earned back only $375 million. To recoup its entire renovation cost would take 40 years—which is about equal to the useful lifespan of the rehabbed arena. The building had undergone only minor updates since it opened in 1968.

This analysis, however, is the most conservative way of looking at MSG and isn’t at all the way the business community has seen the Garden since Madison Square Garden Co. was spun off from Cablevision three years ago.

To the Wall Street crowd, MSG is not merely an arena, but a fast-growing media company whose crown jewel is the MSG Networks, which broadcast games for the teams that call the Garden home, plus the New York Islanders, New Jersey Devils and Buffalo Sabres. Operating margins in MSG’s cable business are 68%, based on data from research firm SNL Kagan. The robust revenue stream explains why the company has been able to renovate its signature arena without taking on debt.

For the purposes of valuing a piece of real estate to be taken for public use, considering the value of the entire media business would not make sense. Either way, even if the costs of the renovation are fully amortized, MSG would still be owed just compensation for its property.

The high costs of relocating MSG against their will make the outcome unlikely. Even with MSG as a willing partner in a relocation, completing a deal would be complicated and expensive. Realistically, the likely outcome will involve station improvents that fall short of demolishing the arena. These can address some of the staiton’s design flaws, rather than mere aesthetic concerns.