So you have decided to build a new concert venue or music festival site and want to quickly assess how much it will cost. Hopefully, as part of your pre-development budget there is an allocation for a market study. Not only does this process help you determine whether the market needs and can support the new venue, but also what physical elements will be required to make it competitive and, in turn, the related costs of building them.
There are a few ways to build a project budget for a music concert venue. A top down approach includes a pre-defined budget based on how much you want to spend. In essence you have a ceiling on your outlay and need to build to that number. The amount may simply be based on what you can afford or on a set of financial projections that you have already prepared. At first glance, it seems like a relatively simple concept with little risk since you know that you can’t exceed the budget and you will simply back into the design and physical elements accordingly. However, there is still risk in designing to a budget that ultimately turns out to be inadequate in terms of getting a design that provides what you need to allure top headline talent and their fans. The result may be a venue that doesn’t lift at all or requires more improvements later at a much higher cost.
A bottoms up approach is when you determine the basic venue type and prepare a line item budget that addresses everything that you want and need in terms of design, functionality and unique attributes to do it right from the start. Certainly, there is less risk as compared to doing a top down budget where you may end up with an inadequate facility or spending more in the long run when you add the missing pieces. However, there is a catch. If you do a true bottoms up, you may create a project budget that isn’t ultimately supported by the financial projections you must prepare before embarking on the project. So now what? As live music consultants, we often see folks do one of two things which both have potentially dangerous consequences. Most often, people start to pump up the financial projections by tweaking the key drivers such as the projected number of events, attendance and talent expense. A tweak here and another there and the next thing you know you have a pro forma that supports the required capital budget. The problem with this is what started as a moderately aggressive model is now completely unrealistic. The other thing folks do is to cut some critical pieces out of the project budget that you shouldn’t live without. Not great either way.
Experienced venue consultants will typically apply a modified bottoms-up approach. Do the math and see what the project will cost and what it will throw off in cash flow (“bottoms up”). Then assess your required rate of return against the anticipated cash flows. Tweak the pro forma (not too much) and value engineer the design and project budget a little at a time (“top down”). Since you have a detailed project budget and set of projections in front of you, you can cut and tweak in a fully informed way. Clearly, the most conservative line of attack is to cut the project budget with guaranteed savings to the extent you cut and hold to the revised budget. Tweaking revenues and expenses in your projections to find savings and expected return on investment is much riskier since they are only projections that are subject to significant swings once the venue is operational. Having said that, some would argue that it’s better to leave the project budget intact ensuring that you get a high quality venue even if you earn a lower return on investment in the early years. This allows for entering the market with a killer venue and avoiding the risk of having to add back the items that you cut when realize you underbuilt the project.
Unfortunately, as well prepared as you may be by following the above, you will continue to face these same issues throughout the design and construction phases as you face ever changing variables once you get into the ground. So be prepared to tweak, just tweak wisely.