Formula 1 - Formula One’s $300m American Dream

When the dust settles on the track after Sunday’s inaugural US Grand Prix in Austin, the capital of Texas, it will be the culmination of more than six years of work.

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Circuit of the Americas in Austin, Texas

The plans to build the first purpose-built F1 track in the US were originally dreamt up by entrepreneur Tavo Hellmund and in 2010, long before construction work had begun, he signed a deal for it to host a Grand Prix. Two years later the 3.4 mile Circuit of the Americas is finally ready to host its first race. It is a bold gamble as estimates have put its construction cost at between $250m and $450m. So how much did it really cost to build?

There is no such thing as hosting a Grand Prix on the cheap but the quickest way to pull it off is certainly to run a street race. These tend to be located on roads in cities or on the outskirts of town whilst permanent circuits are purpose-built venues designed specifically to host high level motor races.

Street races are cheaper to get off the ground than those on purpose-built tracks since they don’t require construction of a new venue. However, the annual running costs of a street race are greater than those of one on a permanent circuit. This is because grandstands need to be built then taken down and the roads need to be upgraded to F1’s high safety standard which is known as Grade 1 homologation and is set by its governing body the Fédération Internationale de l’Automobile (FIA).

An alternative is hosting a race in an permanent facility and this is where things get expensive. There are two possibilities here. The first is using an existing circuit but this means that the promoter has to settle for whatever flaws it comes with and unless it has been designed with F1 in mind it could also require significant conversion costs to ensure that it is up to Grade 1 homologation. This alone can run into hundreds of millions of dollars.

In contrast, designing a circuit from scratch gives the promoter complete creative flexibility which can make all the difference when it comes to attracting interest in the race. This was the precise reasoning behind the creation of Circuit of the Americas.  Several of its corners were modelled on the most exciting ones of other circuits and its site was deliberately chosen to give the track an elevation change of 133 feet. In common with three other beloved F1 races – Singapore, Abu Dhabi and Brazil - it will also run in an anticlockwise direction.

Circuit of the Americas has spent a long time securing enough funding to ensure that the end product lives up to expectations. It began in March 2011 when Austin Formula 1 Racing and Entertainment, a company connected to the circuit, raised $12.5m from 10 investors. Then, earlier this year, a further 24 investors invested $106m into COTA Racing & Entertainment, another company in the group. This was followed by a $90m loan provided in February by 17 lenders to the track’s parent company Circuit of the Americas LLC.

All in all, this yielded just over $200m and although the names of all the investors have not been revealed, some have been released such as John Paul DeJoria, a key investor in the high-end tequila company, Patrón Spirits. The names of the lead backers, who have also put money into the project, have been in the public domain since the race was first announced.

First up is Bobby Epstein, founder of Prophet Capital Management, an Austin-based hedge fund. He is joined by billionaire Billy Joe ‘Red’ McCombs, co-founder of advertising company Clear Channel. They have estimated that the cost of the first phase of construction is around $300m. So where did it go?

“It is very simple to calculate the total cost since so many of the permanent components needed to build a Grand Prix circuit are standard and only vary modestly from country to country,” says a source close to the situation.

Before construction could even begin, the 1000-acre site needed to be prepared and this was far from straightforward. Several underground gas pipelines needed to be relocated first but then came the big challenge. Beneath the surface of the site was a layer of black clay soil which needed to be stabilised because it expands and contracts significantly depending on moisture levels. This had not been a problem until then because the site was largely scrub land. However it needed to be resolved in order to build a track there.

Tilke, the German circuit architecture firm, came to the rescue and recommended digging a foundation down to nine feet which is deeper than usual. Around 4 million cubic yards of earth were moved for the project which is roughly enough to fill up the Empire State Building three times.

The source says that earthworks and infrastructure including water, waste water and electric costs come to between $40m and $50m (see box). The track itself including safety fencing, run-off, drainage and special asphalt is between $50m and $75m according to the source. Next up is construction of the grandstands, which is between $25m and $30m, with the pit building and Paddock Club costing another $50m. The source says that team buildings cost $15m which is the same amount as needs to be spent on the media centre. The final essential structure is the medical centre which comes to between $3m and $5m.

Drilling right down into the fine detail of the costs, the source says that special electronics, including timing, scoring, video, surveillance and specific F1 software, had a price tag of $25m to $30m.

“This could come to as much as $270m and that’s excluding the cost of buying the land,” says the source adding “the people in Texas are building everything for multi purpose use, so that too will increase the costs.”

The second phase of construction includes an open-air amphitheatre which will open in early 2013 and the source concludes that “I seriously doubt they will be able to keep it under $300m.” If the race is a success, the investors stand a chance of making back almost all this money.

The Texas state has committed to paying the organisers up to $25m in each of the ten years that the race is scheduled to take place. The size of the payout depends on the economic impact of the race and thereby the amount of money it generates in tax receipts. At least two studies analysing the economic impact will be done after the race by an F1 agency and one commissioned by Austin’s Circuit Events Local Organizing Committee. If the investors manage to recoup their investment through the success of the race then their gamble will indeed have paid off. The race is most certainly on.

BOX: The cost of building Circuit of the Americas

Earthworks and infrastructure: $40m - $50m

Track:$50m - $75m

Grandstand:  $25m - $30m

Pit Building/Paddock Club: $40m - $50m

Team buildings: $15m

Media centre: $15m

Medical centre:  $3m - $5m

Special Electronics: $25m - $30m

TOTAL: $213m - $270m

Christian Sylt is author of Formula Money

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