2011 NBA CBA Rumblings: What Constitutes “Loss” for NBA Owners?

My Gchat comrade Ethan @SherwoodStrauss slapped up an interesting post on Warriorsworld.net late last week. To summarize Strauss’s own summary of a Tim Kawakami interview with new Warriors owner Joe Lacob in the Mercury News, Lacob basically said that that owning a pro franchise was a license to print money. It was a statement that Lacob’s new colleagues around the NBA probably didn’t appreciate. After all, David Stern (as Strauss points out) has been on a PR crusade to promote his wildly successful sport’s financial failures.

This meme is, implicitly at least, a condemnation of Stern’s own abilities. How can he mismanage a league with more young, relatively clean cut stars than any time since the mid 1980s? How can a league with an asset worth as much to a franchise as LeBron James–according to Forbes his departure lowered the franchise value of the Cavaliers by at $85 million–be losing $400 million dollars each year?

Well, unlike the MLB, which had its dirty financial diapers paraded on Dead Spin, the NBA has kept its books completely closed. So we don’t have a very clear picture of how Stern’s accountants came up with this number.

But Lacob’s comments shed some light on the NBA’s shadowy math. About owning the lowly Warriors, who have a dysfunctional front office and a number of players allergic to victory, Lacob said:

“This is an incredible business opportunity. Turning this into a winner No. 1 and running this business better in certain ways… Look, sports franchises appreciate 10% a year on average over three decades, the last three decades. There’s no reason to think this won’t appreciate in value. So that is the least of my worries. We will make money on this team in appreciation of value.”

Unlike James Dolan, Joe Lacob knows a good investment. He’s had a stupendously successful career in venture capital investing, and while he knows that the amount of money he spent to buy the franchise could appreciate more rapidly elsewhere—it’s far from a losing proposition.

Here’s an analogy that makes sense to me: You buy a house for $200 million because you are rich and awesome. You like the house, but you don’t live there, you need to rent it out. So you rent it out for slightly less than your mortgage, property tax and upkeep cost. Each year, the house “costs” you about $10 million more that the rent you collect.

However, at the same time, property values are skyrocketing. Because they aren’t making any more land or huge houses (or expanding the NBA anytime soon), your property simply becomes more valuable because the market/league is strong. Each year, your property value increases by $20 million.

Are you getting that money now? No. But in ten years when you sell the team/house for $420 million dollars, even Arthur Anderson will agree you have turned a healthy profit ($120million in this analogy).

So, are teams “losing money” because gate receipts, TV deals, product, endorsements and revenue sharing don’t exceed the cost of payroll, upkeep and other costs? It’s hard to imagine payroll is really the problem, as owners and Stern have implied (I won’t get into it here, but yes it’s nuts that the people who decide to overpay under-performing employees blame the employees for asking for a bunch of money).

Strauss quips, “I’m not calling anyone a liar, but more information would be helpful–especially in lieu of our sad-sack Dubs clearing a 450 million buck price tag. If we’re running teeth-first into a soul-scratching NBA work stoppage, I’d like to know why.”

It’s not even clear that these teams are actually “losing” money. Howard Shultz, who, along with his ownership group, claimed to have lost tens of millions on the Sonics, ended up selling the team to Clay Bennett for a $50 million dollar profit only a handful of years after he purchased the vibrant franchise.

Today’s teams must pay 57% of Basketball Related Income to the players. But teams like Cleveland and Los Angeles, which both spent close to $100 million in 2010 (the average NBA team salary is around $58 million), are losing cash while distributing far more than 57% of BRI to players. In Cleveland’s case, it’s becoming clear that the leadership and decision making of owner Dan Gilbert were simply not up to the task. He spent on awful contracts to appease a star he never had a shot of keeping.

Is it Shaq’s fault he is an awful defender and kind of a punk with $20million price tag? One year after Gilbert forked over this sum, his market value was determined to be $1.3 million. Yikes, Danny.

If the current arrangement is the primary problem for insolvent teams, Lacob seems confident that the new CBA will provide a new, more advantageous payment structure (the NBA has suggested 45% BRI). Or maybe he’s just an excellent business man who did the math.

Related posts:

  1. Surviving the Sonics: A Personal Story of Basketball Loss

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