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July 1, 2011
Exclusive: How (And Why) An NBA Team Makes A $7 Million Profit Look Like A $28 Million Loss
Deadspin
by Tommy Craggs
Deadspin takes a fascinating look at how pro sports franchises "lose" money while actually making money. And what team do they use for their example of flim-flamming? Bet you'll never guess.
We've excerpted part of the article, but the whole thing is well worth a read.
We've obtained audited financial data for the New Jersey Nets covering the three fiscal years from June 2003 to June 2006. Though the numbers end five years ago, you can still see the roots of the argument that will have NBA owners, come midnight, again locking out their players. You can also see how a team makes money and how it pretends not to be making any money at all.
It's not hard to see the benefits. Owners who've set themselves up as a partnership or a Subchapter S corporation can pass their "losses" onto their personal income tax forms. Let's assume that's what the Nets owners did, and let's put them in the 33 percent tax bracket. (The audit here covers the last year that Lewis Katz and Ray Chambers owned the team, the fiscal year ending in June 2004. In August 2004, six years after buying the Nets, they sold the franchise for $300 million to real estate developer Bruce Ratner. In 2009, Ratner sold an 80 percent share to a Rocky and Bullwinkle character named Mikhail Prokhorov for $293 million in equity.) That $27.6 million loss would mean tax savings of $9.1 million ($27.6 x .33).
If we're trying to arrive at some idea of how much money the Nets really made in 2004, we'll need to do a little crude math. Knock out the $25.1 million RDA — a paper loss, remember — and add the $9.1 million in tax savings. Suddenly, that $27.6 million loss becomes a $6.6 million profit.
...Bruce Ratner's ownership group took over in fall 2004, and the Nets became a small piece of Forest City's $12 billion portfolio. This includes the Atlantic Yards land grab in Brooklyn, the future home of the Nets and the best explanation for why a buccaneering real estate developer like Ratner might buy a middling franchise like the Nets in the first place. As Neil deMause, co-author of Field of Schemes, explains: "If Ratner had gone to Brooklyn politicians and said, 'Hey, I want to build offices and residential buildings on public land,' they'd have hung up on him. But when he says, 'I'm going to bring professional sports back to Brooklyn,' suddenly here's [Brooklyn Borough President] Marty Markowitz holding press conferences and sobbing about the Dodgers. [Buying the Nets] helped him get a foot in the door with Brooklyn politicians."
Related coverage...
The Star-Ledger, Report says Nets made money in 2004, despite what the team's books said
According to the story, the Nets claimed to lose $27.6 million in 2003-04, when the team actually made a profit of nearly $7 million.
The team took advantage of a 1959 law that allowed them to reduce its tax obligation by $25 million under something called the roster depreciation allowance (RDA) which says that players, once signed to contracts, begin to depreciate almost immediately, a little bit like new cars, whose value dips the minute they are driven off the sales lot. According to the story, once you eliminate the $25 million RDA, and add the $9.1 million in tax savings the RDA got them, the team earned about $6.6 million in profit.
ESPN.com, Is the NBA really losing money?
The [NBA] contends that 22 of the 30 teams are losing money, to the tune of about $370 million per season collectively. The individual team owners are seeking a complete overhaul of the league's financial model, and have submitted proposals to the players that feature a $45 million hard cap and rollbacks to existing salaries (reductions in existing contracts of 15 percent to 25 percent, based on the players' starting salary) -- a proposal the players association termed "a non-starter." They have also discussed an alternative in which salaries are pegged near their present levels, so the players' share of revenues declines over time as revenues increase over the next 10 years.
That sounds exactly like Bruce Ratner "negotiating" with construction unions.
"There has been ongoing debate and disagreement regarding the numbers, and we do not agree that the stated loss figures reflect an accurate portrayal of the financial health of the league," Hunter said in a statement released during the All-Star break.
The players association contends that a significant portion of the losses is merely an accounting artifact, and doesn't reflect an actual operating loss.
"There might not be any losses at all. It depends on what accounting procedure is used," Hunter said. "If you decide you don't count interest and depreciation, you already lop off 250 [million] of the 370 million dollars."
Atlantic Yards Report, Deadspin: Nets exemplify how basketball team owners use paper losses to mask profits (also see ESPN analysis of sale price)
Larry Coon of ESPN.com adds some analysis:
Brooklyn Basketball (the Nets' parent company) paid $361 million for the team. In order for the balance sheet to balance, it had to show assets in that amount. Some of these are real, physical assets; accounts receivable; and the like. Other parts are "intangible" assets, which represent the amount the buyer paid above the value of the tangible assets. These assets (but not the franchise itself) are amortized over their "useful lives," with a portion of their value (a total of $200 million for the Nets) counted as an operating expense each year. For the Nets this expense added up to $41.5 million in 2005 and $40.2 million in 2006.
In other words, $41.5 million of the Nets' $49 million operating loss in 2005, and $40.2 million of its $57.4 million in 2006, is there simply to make the books balance. It is part of the purchase price of the team, being expensed each year. This doesn't mean they cooked their books, or that they tried to pull a fast one on the players. It is part of the generally accepted accounting practice to transfer expenses from the acquisition to the profit and loss over a certain time period. However, it's an argument that doesn't hold water in a discussion with Hunter and the players association, who would claim that the Nets didn't really "lose" a combined $106.4 million in those two years, but rather that they lost $7.5 million and $17.2 million, respectively.
...Unless the players can share in the profit when a team is sold, they don't want to be burdened with the costs associated with buying the team in the first place. And if they don't have a say in the team's management decisions, they don't want to pay the cost when those decisions go awry.
Posted by eric at July 1, 2011 6:48 PM