Monday, April 21, 2014

Bubble Tops - Buying an NBA Team

It is easy to take shots at Bill Simmons and Grantland. With Simmons specifically, it is what he is capable of writing versus what he often writes. He is also a well paid employee of ESPN/ABC, which also indirectly owns the NBA through its television deal. His column last week on buying NBA teams to be part of the world's most exclusive club was idiotic to anyone with any knowledge of money and the ownership selection process. His framing of the story is because he is a paid promoter of the NBA product and his audience is not entirely basketball fans, so he's reaching out for new viewers. Even digging into the idea, crappy NBA teams going for record deals is a sign of a money bubble near a top.

Simmons is an NBA fan with a masterful book on the NBA on his resume. He even pimped the game when it was at a nadir, and no one on ESPN was enthusiastic about the game. Simmons' own readers mock his slavish devotion to the NBA. Fortunately, ABC/ESPN bought into the NBA with a television deal in 2002, and his pimping of the game has been useful. It is amazing how many insider things he knows, jeez, it is like he's a channel for the NBA to hint at where it is going. He spent this entire February not talking or writing about the Super Bowl, the Seahawks, Pete Carroll's vindication, the Manning flameout, NCAA basketball or anything else besides the NBA. Pimp the NBA enough, and a sliver of his viewers might watch more playoff games on ABC/ESPN. His claim the NBA's ownership circle is the most exclusive is a joke in itself as Mark Cuban has owned the Dallas Mavericks for over a decade, running it extremely well, while Major League Baseball has repeatedly denied Cuban the chance to own an MLB team (Dodgers, Cubs, Rangers). The NBA had to find a Russian billionaire with a shady past to buy the Nets and only with the promise he could move the team to Brooklyn.

Simmons mentions legit reason for people wanting to buy a team like the new collective bargaining deal and coming media deal, but he does not dig into the mechanics of other reasons. Why did the Dodgers go for $2 billion? What about purchasing cost depreciation and salary depreciation? Simmons will tell his readers these teams are a sideshow for owners but the prestige is so awesome, but he will not explain how they financially help an ownership group in their financial bookkeeping. When a team is bought, 100% of the purchasing price can be depreciated over fifteen years. Other sources said 50% depreciation of tangible assets over 5 years and 100% of salaries over 15 years, but those might be the old rules. This is on top of considering the player salaries as a business expense. Teams can turn big revenue years into small revenue years and low revenue years into losses. Those losses then can be applied to an owners other income. Yes, the 1% use tax loopholes to keep more loot and the IRS rolls over and shows its belly rather than play tough.

It should come as no shock that in the last two sales (the Warriors and Bucks) a hedge fund and private equity maven has been one of the leaders of the purchasing group. These guys have been enjoying the wonders of the latest bubble (the Bernanke Bubble). What better way to hide income from bubble gains than a giant capital investment with huge depreciation allowances and low current revenue? This is where gains for the 1% of the 1% go, baubles. Only their baubles are sports franchises that leech off of municipalities for stadium deals and subsidization. To his credit, Simmons does mention the leagues that hold municipalities hostage by threatening to leave. If I were a big city mayor, I would call their bluff. Simmons and Grantland will not go into those specifics because they are not paid to explain the whys of the sport or business, only push the idea that the NBA is fannnnnntastic.

7 comments:

Anonymous said...

Even the most cursory glance at MACRS can be an eye opener. It's not a totally arbitrary system. There are good reasons that race horses and working horses have different recovery periods. It's just not something most people would think tax law would specifically address.

The framework of MACRS is logical. Things don't start to get interesting until you start digging into the application of MACRS. Let's just say the application of tax law is somewhat inconsistent. The US Tax Court has this neat disclaimer attached to all of its rulings:

PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.

klejdys said...

Great post.

One small correction:

Last two NBA franchise purchases were Vivek Ranadive buying the Kings & these hedge fund tools buying the Bucks. (Ranadive, to his credit, is more software oriented). Joe Lacob bought the Warriors after being a minority owner of the Celtics; he came from the very connected Kleiner, Perkins.

peterike said...

Baubles, bangles, hear how they jing, jinga-linga
Baubles, bangles, bright shiny beads
Sparkles, spangles, your heart will sing, singa-linga
Wearin' baubles, bangles and beads

A little Sinatra to drive home the point, well made, that sports franchises are just another bauble for our increasingly noxious elite. Though an NBA franchise seems very declasse. A baseball team is classy; football team is a power move (or a top soccer team in Europe); but NBA? Is there really any social cred to owning an NBA team?

The next step will be individual athletes selling themselves to individual sponsors/owners, rather than just wearing corporate logos. Imagine the cachet of owning a top golfer or tennis pro! I need to work out this business model.

Son of Brock Landers said...

@Anon - I can see racehorses and equipment, but the salaries as a depreciation allowance when they already deduct salaries as a business expenses is a joke.

klejdys - I forgot about the Kings save job. They should move the Kings to Seattle. Sacramento doesn't need the Kings just like Miami doesn't need the Marlins. I'd prefer to see every league drop 2 teams with the NBA and NHL dropping 4 each. NBA could've folded New Orleans and dropped Sacramento at the same time, had a dispersal draft, and seen a dozen teams get a solid piece from the dispersal draft before the rookie draft.

@peterike - I agree the cachet is NFL right now, then MLB, then NBA. Weird thing about the NBA is it is drawing less in attendance than the NHL right now, but it has a great TV deal so it makes more $ and gets more press. ESPN cancelled its NFL highlights show just as soon as it dropped the NHL TV deal and picked up the NBA. Marketing. Someone once told me that if they could film hockey up down, it would do better. I think the coming of HD TV helped hockey a lot because you can SEE the puck better now on 60 inch HD TVs.

nikcrit said...

The Bucks are so moribund a team that i was even half-heartedly hoping that someone would buy 'em who insisted in moving the team elsewhere.

Anonymous said...

@SOBL

My suspicion is that player salaries are depreciated / amortized over the duration of the contract. So instead of putting their salary down in the salary box on schedule c, they instead get written down in the depreciation box on schedule c. Being able to deduct each dollar of player salary more than once would be a gold mine, but I doubt there is much of that going on.

It is possible that they are allowed to deduct more salary than is actually paid out in early years, which results in them being forced to deduct less than they pay out in later years. Maybe as players are traded / cut / retired the recapture of those earlier larger deductions is incomplete.

I might dig into this over the weekend, just for the hell of it. The tax law labyrinth fascinates me. Every time you turn a corner there is another loophole or recapture.

klejdys said...

Would you rather own the Bucks for $550M or an NFL team for $770M? (Jaguars). We'll know more about the NFL when the Bills go up for sale later this year, of course.