Thursday, June 30, 2011

Deadspin: Nets exemplify how basketball team owners use paper losses to mask profits (also see ESPN analysis of sale price)

Updated: Exclusive: How An NBA Team Makes Money Disappear [UPDATE WITH CORRECTION]

CORRECTION: Portions of the analysis below are wrong. They were based on a misreading of the "Loss on players' contracts" line item, which, it turns out, wasn't an RDA claim after all. (If you look in the audit notes for 2004, No. 8 refers to a "player buy-out and a player injury" — the former of which is almost certainly Dikembe Mutombo — totaling the same $25.1 million listed in the "Loss" line item.) The example is bad, and I apologize for that. I'm leaving the text here for a couple reasons: 1.) The roster depreciation allowance is real, even if we've misidentified it here, and it provides owners with a significant tax shelter based on a baroque logic. 2.) The Nets, like all franchises, do use large paper losses to pad their expenses. Here's what ESPN's experts found using the same set of documents (particularly the 2005-06 financials):
In other words, $41.5 million of the Nets' $49 million operating loss in 2005, and $40.2 million of its $57.4 million in 2006, is there simply to make the books balance. It is part of the purchase price of the team, being expensed each year. This doesn't mean they cooked their books, or that they tried to pull a fast one on the players. It is part of the generally accepted accounting practice to transfer expenses from the acquisition to the profit and loss over a certain time period. However, it's an argument that doesn't hold water in a discussion with Hunter and the players association, who would claim that the Nets didn't really "lose" a combined $106.4 million in those two years, but rather that they lost $7.5 million and $17.2 million, respectively.


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Deadspin provides Exclusive: How (And Why) An NBA Team Makes A $7 Million Profit Look Like A $28 Million Loss:
Tommy Craggs — We've obtained audited financial data for the New Jersey Nets covering the three fiscal years from June 2003 to June 2006. Though the numbers end five years ago, you can still see the roots of the argument that will have NBA owners, come midnight, again locking out their players. You can also see how a team makes money and how it pretends not to be making any money at all.
They key? A $25 million cut in the owners' tax obligation under the roster depreciation allowance, or RDA.

In the midst of this came the sale to Bruce Ratner. Craggs writes:
This includes the Atlantic Yards land grab in Brooklyn, the future home of the Nets and the best explanation for why a buccaneering real estate developer like Ratner might buy a middling franchise like the Nets in the first place. As Neil deMause, co-author of Field of Schemes, explains: "If Ratner had gone to Brooklyn politicians and said, 'Hey, I want to build offices and residential buildings on public land,' they'd have hung up on him. But when he says, 'I'm going to bring professional sports back to Brooklyn,' suddenly here's [Brooklyn Borough President] Marty Markowitz holding press conferences and sobbing about the Dodgers. [Buying the Nets] helped him get a foot in the door with Brooklyn politicians."
Also see comments and links from NetsDaily.


ESPN analysis

Larry Coon of ESPN.com adds some analysis:
Brooklyn Basketball (the Nets' parent company) paid $361 million for the team. In order for the balance sheet to balance, it had to show assets in that amount. Some of these are real, physical assets; accounts receivable; and the like. Other parts are "intangible" assets, which represent the amount the buyer paid above the value of the tangible assets. These assets (but not the franchise itself) are amortized over their "useful lives," with a portion of their value (a total of $200 million for the Nets) counted as an operating expense each year. For the Nets this expense added up to $41.5 million in 2005 and $40.2 million in 2006.

In other words, $41.5 million of the Nets' $49 million operating loss in 2005, and $40.2 million of its $57.4 million in 2006, is there simply to make the books balance. It is part of the purchase price of the team, being expensed each year. This doesn't mean they cooked their books, or that they tried to pull a fast one on the players. It is part of the generally accepted accounting practice to transfer expenses from the acquisition to the profit and loss over a certain time period. However, it's an argument that doesn't hold water in a discussion with Hunter and the players association, who would claim that the Nets didn't really "lose" a combined $106.4 million in those two years, but rather that they lost $7.5 million and $17.2 million, respectively.

...Unless the players can share in the profit when a team is sold, they don't want to be burdened with the costs associated with buying the team in the first place. And if they don't have a say in the team's management decisions, they don't want to pay the cost when those decisions go awry.

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