Thursday, December 04, 2008

As the value of the Nets declines, the pressure to build the Brooklyn arena must increase

The stakes for New Jersey Nets principal owner Bruce Ratner grow even higher and the pressure to build a valuable new arena increases, now that Forbes reports, as summarized in NetsDaily, Nets Now Worth Less than When Ratner Bought Them.

The ownership group he led spent $300 million in 2004 but the team is now worth $295 million and ranked 26 out of 30, while last year's article valued the team at $325 million, good enough for a rank of 16.

Now the Nets' debt/value ratio is a league-leading 71%. That suggests a need to turn things around soon and move to a new arena--or maybe even sell the team.

Decline in value

Only seven of 30 teams saw a decline in value, and the Nets experienced the largest retreat, of 13%. It may get worse; Forbes predicts that the current recession will hit the league as a whole.

Forbes doesn't explain its calculations in detail in its piece, headlined The Business of Basketball, but the Nets' revenues are among the lowest in the league, likely because of low attendance at an antiquated arena with few suites, the Izod Center in New Jersey.

While a move, at least temporary, to the Prudential Center in Newark might increase revenues, it would not achieve the significant increases in team value that owners expect from the Brooklyn move.

New arena needed

Forbes notes that "Value of team based on current arena deal (unless new arena is pending) without deduction for debt (other than arena debt)."

I'll interpret that to mean that Forbes has not yet incorporated the value of the planned Barclays Center arena in the Atlantic Yards project, given that construction has not begun.

But a $950 million arena designed by starchitect Frank Gehry, with a plethora of luxury suites and sponsorship opportunities in burgeoning Brooklyn, surely would raise the value of the team significantly.

After all, Forbes reported regarding the Portland Trail Blazers:
Owner Paul Allen took control of the Rose Garden last year after he relinquished his stake in the arena during bankruptcy proceedings during 2004. The move gave Allen access to the arena's revenue streams, including luxury suites, concessions and ad signage.

Forbes reports that teams that play in arenas that host only one pro team--such as the Newark arena--are particularly vulnerable. That raises questions about the Brooklyn arena, as well, though New York might be a robust enough market to pull it off.

The potential in Brooklyn

So the potential in Brooklyn is why, despite the credit crunch, Ratner and fellow Nets owners expect profits after holding onto the team or hope that foreign investors understand the upside.

Regarding Atlantic Yards, Forest City Ratner has a favorable ruling on tax-exempt bonds for the arena and a recommitment (though without specified numbers) of the Barclays Center naming rights agreement.

The developer's allies in government have to be considered the favorites to prevail in pending litigation (though that's hardly guaranteed, and resolution likely won't be as soon as they hope). And City and State Funding Agreements give the developer a long leash, leading parent Forest City Enterprises to declare that "we control the pace" of the project, which has, crucially, gotten its official approvals.

Delays and other strains

Then again, the project has been delayed far longer than anticipated, and the team's best-case scenario is a move to Brooklyn in 2011, exactly one year after free agents like superstar LeBron James may be searching for new homes. (James, one expert kibitzes, won't move to the Nets without a new building.)

Also, FCR has suspended work on the Vanderbilt Yard, perhaps because of cash-flow difficulties, and doesn't seem to have much chance to gain an anchor tenant soon for Building 1.

(The Daily News reports skeptically today on the suspension, noting that "workers were told two weeks ago to finish up what work they could before a deadline last week, said an employee who was laid off" and that the suspension "marks a reversal of an earlier commitment to continue construction despite a barrage of lawsuits." The article closes with DDDB spokesman Daniel Goldstein blaming the stall on financial problems, which is a legitimate speculation, but not a firm conclusion.)

FCR has laid off staff. And investigations by Rep. Dennis Kucinich and Assemblyman Richard Brodsky into questionable aspects of the Yankee Stadium financing could extend into the Atlantic Yards arena.

Some very big issues remain in question. There's been no word on whether the city would make available tax-exempt bonds for the affordable housing. And, even with a favorable IRS ruling, it would be tougher to issue tax-exempt bonds for the arena given the current credit crunch.

Still, it's unlikely there's money for the additional direct subsidies the developer apparently has requested.

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