Saturday, September 05, 2009

NetsDaily, quoting many "insiders," says sale of team, bond issuance face tight deadline; can financing and sale be bundled?

The pseudonymous Net Income (aka Bobbo), the ill-tempered and amply-but-anonymously-sourced Nets superfan behind much of the NetsDaily blog, has posted The Nets’ Future-An FAQ, which is worth a close look.

It's very interesting stuff, though the lack of clear sourcing should be taken with a grain of salt. I've provided some excerpts, plus some commentary of my own and, notably, from blogger Gari N. Corp, who questions the bundling of both the team sale and arena financing, observing on his Gumby Fresh blog:
This is a tremendously over-leveraged developer trying to pitch a tremendously over-leveraged project to the market.

(Here's coverage from Can't Stop the Bleeding, Field of Schemes, and NLG.)

Nets for sale

Net Income (NI) writes:
In spite of denials and protestations, Bruce Ratner has been trying to sell the Nets for the past nine months, hoping to find a buyer who’ll be willing to pay $400 million for the team, a $100 million premium on what he paid for it five years ago, according to Nets insiders.

Three previously named investment groups have shown interest, including one led by Brooklynite Vincent Viola, the team’s second largest investor after Ratner, described by NI as a savvy season-ticket holder. (Ratner, not so much.) "Insiders" say the prospects for a sale are 50-50.

(A clause in the Empire State Development Corporation's General Project Plan, as I wrote in December 2006, states, in part:
In addition, in the event the Nets professional basketball franchise is sold to another entity prior to the completion of the Arena, Project Sponsors may transfer their interest in the Arena to the purchasing entity or its affiliate, provided ESDC and the City are reasonably satisfied that such entity can satisfactorily complete the development of the Arena or if such entity retains the Project Sponsors to develop the Arena.)

All the new owners are committed to moving to Brooklyn, given that the new arena would be key to team profits, given ticket sales, events, and a significant increase in TV revenues.

The value of the lease and the naming rights

NI reports that Ratner wants to retain control of the arena and require new owners to pay "a large annual lease," more than the current $2.02 million paid to the New Jersey Sports and Exposition Authority for the IZOD Center.

It's worth noting how Ratner gets to generate profit from the lease. Unmentioned in the FAQ: the arena is nominally publicly-owned so the developer can gain the benefit from tax-exempt bonds. But the state gets no profit from that lease, nor from the naming rights--$400 million, reportedly--it bestowed on Forest City Ratner. (An ESDC lawyer in July called naming rights "part of the financing for the project.")

"The Arena will not be leased for 'one dollar per year,'" another ESDC lawyer wrote recently in legal papers. "The tenant will be required to pay tens of millions of dollars to pay off the tax-exempt bonds to be sold by ESDC's Local Development Corporation to finance the Arena's construction."

But that's not rent. Now Ratner aims to sell the team to someone who'll pay rent.

Newark option and tax-exempt bonds

NetIncome writes:
Ray Chambers, one of the former owners, is still pitching Newark. A second insider hinted that Mayor Cory Booker had spoken to some of the owners a while back at Chambers’ request. “If you talk to Ray Chambers and Cory Booker, they’ll tell you how good Newark would be”, said the insider, but he reiterated that Brooklyn is the better deal because of the arena.

Later, he comments more dyspeptically, saying that the Newark investors are illusory--well, the sources are anonymous, as are so many of his--adding:
Again, for about the 1,000th time, there is NO WAY for the Nets to make money in Newark. NONE. Vanderbeek can’t make money on the Devils, for God sake, or the arena, even with all those open dates.

I think it's more complicated. For the Prudential Center, at least, the scenario would change if the Izod Center closes and no longer competes for lucrative concerts.

While it would obviously be more difficult for the Nets to make money in Newark, attendance--the lack thereof which has caused financial woes--almost surely would increase.

The federal subsidy

Moreover, there's no argument, from a public policy perspective (as opposed to NI's fan perspective) that federal taxpayers should subsidize a new arena with $100 million in foregone taxes when there's an underutilized arena across state lines.

As sports economist Andrew Zimbalist wrote in 2003:
While one may legitimately question the costs and benefits to a particular metropolitan area of attracting a professional sports team, there appears to be no rationale whatsoever for the federal government to subsidize the financial tug-of-war among the cities to host ball clubs. If there is a global welfare gain from the relocation of a team from city A to city B (because city B may be larger or wealthier or have more avid sports fans), then city B ought to able to pay for that gain without a subvention from Washington, D.C.

Zimbalist a year later served as a consultant to Forest City Ratner, writing a report that said the project would be a boon to city and state treasuries, but he somehow left out the federal issue.

Timing issues and bonds

Insiders tell NI that ownership would have to be settled by November, a schedule complicated by a state Court of Appeals decision not expected until mid- to late-November (and, I'd add, potential other court cases). Bond rating agencies must approve the deal.

To build the $772 million Barclays Center (the FAQ says $774M), with $650 million in tax-exempt bonds, according to NI, the team owner must put up $200 million in cash and prove the availability of revenue streams, such as the lease and naming rights.

Last year of losses?

While the Nets have lost $70+ million over the past two years, parent Forest City Enterprises, which has increasingly absorbed team losses "reportedly has told Ratner after this year 'we’re done,'” according to NI.

Barclays Capital also has a December 31 deadline for groundbreaking, but has previously extended the deal and recently announced its commitment to Brooklyn.

Debt issues

The Nets' debt/value ratio at a league-leading 71%, as Forbes reported last year, and that's catching up with the team.

An insider tells NI that half the $400 million sale price would go to reducing the team debt and half toward the new arena. Add to that, according to "second insider," $150 million in upfront costs on the arena, plus carrying costs.

Credit to opponents

Interestingly, two "insiders offered begrudging praise for the critics’ legal plan," given the slow process involved in first filing the eminent domain case in federal court, then going to state court.

Sale delayed until after bonds issued?

Gumby Fresh blogger Gari N. Corp commented on NetsDaily, then on his own blog, praising the FAQ as "awesome" and suggesting:
But buried down in the information is something pretty momentous - Ratner needs to scare up another $200 million from somewhere to finish his new stadium in Brooklyn.

Corp had previously thought that the developer's $150 million investment on the arena site--I'd note that, as of October 2007, FCE had invested $250 million on the project--would be considered an in-kind equity contribution, but has concluded that the money must first be repaid to Gramercy Capital Corp.

Corp thinks that the the bond "ratings agencies, no matter how supine they can be when confronted by the considerable charms of the Goldman Sachs sports financing team, might start to bite back," thus requiring the "developer... to kick in some more cash to absorb revenue shortfalls before bondholders do," given the difficulty of selling luxury suites.

Corp sees a logistical challenge:
Ratner wants to sell the team, and use the proceeds to fund the stadium. But buyers - with the NBA's support, apparently - do not want to be locked into an above-market lease for a Brooklyn arena. They want to own the arena, but probably don't have the resources to convince the agencies to follow through.

The Nets losses then, are only part of the reason Ratner needs to sell. But Ratner might not be able to sell the team until the financing is in place, but needs to sell the team to conclude the financing. Can he bundle both into a single instantaneous transaction? Watch this space.

(Emphasis added)

What if Brooklyn fails?

NI writes:
“The team will be sold to whoever can pay for it,” said an insider. “They could wind up in Seattle or St. Louis.” A sports marketing expert agreed, suggesting that Brooklyn gets less and less likely every day.

Later, in comments, he adds:
The REALITY is that the critics may very well succeed in killing the project and if they do, say goodbye to the Nets. Once the team is put up for sale, expect city fathers in places like Seattle or Kansas City to fall all over themselves to get a deal done.

...Then finally, a REAL offer from Steve Ballmer of Microsoft or someone similarly interesteed will emerge. A deal will be done so fast it will make your head spin. That’s the pattern.

It will be quite appropriate for both the critics and New Jersey-centric Nets fans to be left with gaping holes. Forest City could easily have to declare bankruptcy afer sinking a half billion in the overall project, leaving their commitments to the rail yard and new infrastructure, as well as ownership issues in bankruptcy court.


If the critics "succeed in killing the project," surely there'd also be multiple self-inflicted wounds by Forest City Ratner and its state overseers.

And the New York market obviously should be able to support two basketball teams.

Cursing the darkness?

NI concludes:
Both the critics and fans will wind up cursing the darkness. Goldstein will be hero for about an hour, then reality will set in. The site will become a fenced in dump that will reduce property values and the area’s attractiveness in ways that can’t be imagined by activists. Fans will blame Ratner. It will be eerily reminiscent of the Brooklyn Dodgers exit when fans blamed Walter O’Malley. Like Nets fans, Dodger fans didn’t support the team even when they made the World Series, then were shocked and appalled that the team could head to greener pastures.

Keep in mind this guy lives in New Jersey and has been to Brooklyn once in four years. The "fenced-in dump" is a complicated site including extant buildings that can be re-filled or refurbished, empty lots, and a railyard.

It hasn't yet killed property values--though indefinite interim surface parking on the southeast corner of the site might have an effect on the adjacent blocks.

If it's a "great piece of real estate," as Forest City Enterprises CEO Chuck Ratner once said, it's a great piece of real estate. It's a complicated piece of real estate, for sure. But there never was any bid for the whole site, nor for the railyard itself after Ratner was anointed the site.

It's not 1957. Brooklyn's still doing pretty well, if you ask Borough President Marty Markowitz.

1 comment:

  1. Bobbo should sign his name Bob Windrem.

    ReplyDelete