July 8, 2011
Exclusive: Recent New Jersey Nets Books Reveal Huge Losses
by Darren Rovell
News flash! Under Bruce Ratner's stewardship, the woeful New Jersey Nets lost a lot of money.
The biggest battle in the NBA lockout right now might be the public relations battle. Are the losses the owners are claiming real or fictional?
Not many teams have balance sheets that are publicly available, but there is one team whose balance sheets anyone can view and it happens to be a team that at least claims to have lost a ton of money.
With that in mind, we were provided the financial statements of Nets Sports & Entertainment LLC, that included the finances of New Jersey Nets properties in 2009 and 2010 (through June 30). The team was owned through April of 2010, by Bruce Ratner, chairman and CEO of Forest City Ratner Companies.
If you go through the report, audited by PWC, and you understand how the NBA reported what was in this document to the Players Association, you will understand that it's not out of the realm of possibility that the league's owners were losing north of $300 million for years.
For the 2008-09 season, the documents reflect that the Nets lost $77,227,184.
NoLandGrab: The news that the Nets lose big money isn't news. Also not news is that NBA owners and players disagree about how losses (or profits) are measured, which is at the core of negotiations over a new NBA collective-bargaining agreement.
CNBC's analysis of Nets Sports and Entertainment Consolidated Financial Statements for the years ending June 30, 2010 and 2009 (embedded below) is billed as an "exclusive," but the exclusive, I believe, is the analysis, not the documents, which were made available to the Securities and Exchange Commission.
According to CNBC Sports Business Reporter Darren Rovell's analysis, even if the team's claimed $77.2 million loss in 2008-09 is overstated, a more realistic $44 million figure could be used to back claims of NBA losses.
I'd suggest an additional conclusion: the new arena will help the team do much, much better.
The document describes the loan between Brooklyn Arena Holding Company (ArenaHoldCo) and entities controlled by Mikhail Prokhorov (MP Entities) that filled an arena financing gap. The loan was reported back in May 2010, but not, to my knowledge, that it bore a junk-bond level interest rate of 11%:
On May 12, 2010, ArenaHoldCo entered into a loan agreement with an affiliate of the MP Entities in the amount of $75,842,086 (the “Loan”). The Loan bears interest at 11% per annum, compounded monthly and matures on June 12, 2013. Both interest and principal are due at maturity. As of June 30, 2010, accrued interest on the loan of $1,162,947 is recorded as part of the Loan from affiliate and has been capitalized to Land and Arena under construction.
A fee equal to $1,000,000 is due on the date the Loan is paid in full, or a pro-rated portion on the date of any partial repayment of the Loan, which is recorded in Accounts payable — affiliates. In the event the Loan is not paid upon maturity, the Loan converts into an equity position in Brooklyn Arena based on a stipulated formula.
So if ArenaHoldCo, which is controlled by Forest City Enterprises, does not pay Prokhorov back, his share in the arena would be converted to equity (as has been reported).
Ratner gets at least 5%
Since July 2007, when the Times reported it, we've known that Forest City Ratner would get a development fee of 5%. This document suggests the fee could be somewhat more:
On June 1, 2005, Brooklyn Arena entered into a Development Agreement with an affiliate (the “Developer”), pursuant to which the Developer will plan, develop and oversee construction of the Arena for a fee not to exceed the lesser of $7,000,000 per year or 5% of the total project cost at completion. Through June 30, 2010, $35,000,000 of development fees have been incurred and capitalized to Land and Arena under construction.
Forest City likely would earn much more, especially if it can cut costs via modular construction and continue to finagle low-cost financing from immigrant investors.
Posted by eric at July 8, 2011 11:17 AM