David Conn: City banking on Premiership to pay mortgage

Keegan era has cheered up Maine Road but club accounts reveal huge cost of winning promotion from First Division

Manchester City fans discovered this week the cost of promotion Kevin Keegan style – £31m and counting – and that City are to pay this off via a £30m mortgage on future gate receipts at the new Commonwealth Games stadium, whose athletics track is currently being ripped up at public expense to accommodate them. City's accounts, which revealed a record £13.8m loss last season and debts of £39m, were also important for shining a little more light on the deal for the stadium itself, the details of which have been painfully difficult to extract.

For a club which has become a footballing monument to misfortune, the stadium, built for the summer's Games with £110m public money, including £33m from Manchester City Council and £77m from the Lottery, represents a huge, uncharacteristic dollop of luck. It is known that City will pay no basic rent on crowds up to the current average attendance at their Maine Road home, 32,500. Above that, for crowds up to the new capacity of 48,000, they will share a proportion of gate receipts, after deducting their costs, with Sport England, the Lottery distributor, and the council. Even this week, the council told me that details of the allocation were private, but Sport England, the Lottery distributor, said that City will deduct their costs first, not simply share the face value of ticket prices. This money will be used to maintain the other publicly-funded facilities at the Sport City complex next to the stadium, and, according to the council, to "promote sport in the community".

The triple-jumper Jonathan Edwards complained that the nation's best-ever athletics stadium was being dismantled and handed to City "on a silver platter". Howard Bernstein, the council's chief executive, said they had offered to build a national stadium with a permanent athletics facility but that the Government and Sport England had rejected Manchester in favour of Wembley, a decision which looks expensive in the light of developments this week.

Both the council and Sport England had to ensure that the deal complied with the National Lottery Act, which says Lottery-funded projects must not be "intended primarily for private gain". However, City's shareholders look bound to profit from having a spanking new stadium built for them with public money, increasing the capacity and earning power; City's chairman, David Bernstein, states that the club turnover could rise to £60m next season. This would inevitably increase share value. Manchester City is a plc, 65 per cent owned by four shareholders: former centre-forward and chairman Francis Lee, 7.13 per cent; Rupert Murdoch's BSkyB, 9.88 per cent; Walbrook Trustees, an offshore fund in the Guernsey tax haven, 18.75 per cent and 29.9 per cent owned by "the trust interests of John Wardle and David Makin", the owners of the retail chain, J-D Sports.

For years, the council said it would restrict the shareholders' ability to make a profit and was taking an option over City's shares should they increase in value. But the terms of the option were difficult to uncover.

Helpfully, City's accounts this week revealed how this vaunted share option works, and it looks bizarre. If City's market value rises to £75m, the council simply has the right to buy 2.5 per cent at the market price, £1.875m. If it rises to £100m, the council can buy five per cent at £5m. There appears to be no profit in this for the council – although there might be for the shareholders, by selling their shares to them.

Share options usually provide a profit by fixing a low price at which shares can be bought in the future, when their value has risen. For a model, Mancunian council tax payers need only look at two City directors, Chris Bird and Alistair Mackintosh, who have options to buy 250,000 shares for 45p at any time between May 2003 and March 2010.

They presided over a year in which City's at times exhilarating First Division championship win was achieved via a record loss and borrowings which tripled to £27m. This includes £17.8m in bank loans and overdraft, at a time when banks are increasingly nervous about football clubs' solvency, and loans from Wardle and Makin of more than £6m.

City's chairman, David Bernstein, who said Keegan's impact was "difficult to take in", said the money was spent maintaining and strengthening the squad, resulting in "much higher transfer fees and new players' salaries". Even then, after May this year, the period covered by the accounts, City spent a further £21.5m, on seven players, all foreign, including striker Nicolas Anelka and goalkeeper Peter Schmeichel, while selling three players, including two home-grown youngsters, for only £3.9m.

"[Our] performance together with our transfer activity since 31st May 2002," Bernstein's notes record, "has necessitated a restructuring of our finances." So, gate receipts at the new stadium will be mortgaged to an American company, Bear Sterns, for £30.3m. This must be repaid, along with 7.27 per cent interest a year – £2.2m in interest alone – over 24 years. Bernstein said the money would effectively repay City's current borrowings.

The Keegan era has thoroughly cheered up a Maine Road crowd made glum by previous manager Joe Royle's attritional approach, and if City play their way to Premiership survival this season, they will cross Manchester for the new stadium on a dual carriageway of optimism. Paul Stanley, a partner at accountants Begbies Traynor who dissects City's accounts for the fanzine King of the Kippax, said it is a gamble. "It seems like Premiership or crash," he said. "All football clubs have to gamble because of the gap between the Premier and First Division, but we will really have worries if we go down."

Nobody from City was available this week to answer questions about the finances or the new stadium. The council sent a series of terse replies to specific questions, but neither Howard Bernstein nor council leader Richard Leese was able to do an interview. The council maintains that the Games, acclaimed as a success, vindicated its deal with City, which is giving the stadium a use after the Games. Around the stadium, East Manchester, one of the country's most poverty-stricken areas, is receiving hundreds of millions of pounds from various regeneration initiatives, which is intended to build and improve around 20,000 homes and create up to 10,000 jobs. The council cites the stadium and the Sport City complex, which includes a massive Asda-Walmart superstore, as "the centrepiece" and "catalyst" for regeneration.

Locally, though, there is resentment at the council money seen to be lavished on preparing the stadium for City, while local council services are cut and money is tight. In Gorton, the local swimming pool was closed last September and is still shuttered up. "Closed to pay for Commonwealth Games," said some graffiti, which was quickly removed. Lynda Shentall, who led a doughty campaign to save the pool, said: "Local people cannot see what we are getting from the Games, and there is huge resentment about the money being spent building that stadium and now converting it for a rich Premier League football club."

In Miles Platting, the swimming pool adjoining the stadium was marked for closure and is now being maintained out of a separate, time-limited budget. Local Liberal Democrat councillor Marc Ramsbottom said: "Now the Games are over, services for local people are declining even more. The millions being spent on the stadium do really jar with the appalling economic and social conditions of people in the neighbourhood. It's great that the Games were a success but unfortunately regeneration, true regeneration, is a lot more complicated than a football stadium and some jobs at Asda."

While the council is satisfied that the City deal means the stadium will not be a white elephant, Maine Road, which they will inherit, could be an albatross. Eighteen months ago the council announced that Sale Sharks rugby union club were their preferred occupant, but Sale have since considered other options. Their new chief executive Niels De Vos, previously commercial director of the Games, is now promising a decision by Christmas.

City fans have been more concerned with their football renaissance and thinking up a suitable leaving party for Maine Road than the mechanics of the deal – although some have slyly thanked United fans for contributing to building it. The future is blue, they hope, fervently. This week they learned something real. The future is mortgaged.

davidconn@freeuk.com