Second look at naming rights payments: documents offer little insight on claimed $12 million fee and confusing language regarding allotment to Nets

The main news from the FY 2020 annual report from the Barclays Center operating company, Brooklyn Events Center, is that revenue fell well short of projections.

I've also reported on the curious amount of "Goodwill" cited among arena assets, that Joe Tsai has contributed funds to help the arena pay workers through the end of 2020, and that the arena has agreed to provide $11 million in "make-goods" to sponsors.

But the latest annual report prompted me to revisit another issue: naming rights. I found complication and confusion, but no resolution.

Previously, $12 million?

I reported last week on how a September 2019 presentation to arena bond investors, upon the finalization of the sale of the team and arena company from Mikhail Prokhorov to Joe Tsai, suggested that Barclays would by then be paying $12 million a year: $10 million to the arena company and $2 million seemingly to the Brooklyn Nets.


As I wrote, it was unclear is whether Barclays had been paying $12 million a year all along, and/or whether the annual payments to the Nets relate to specific conditions or performance, and/or whether the sum had changed over time.

The deal from the start?

I should have emphasized that the chart--titled Allocation of Revenues to ArenaCo Post-Sale--came after this statement in the presentation:

In addition, the Amended and Restated Nets License Agreement was amended and restated to return to the original 2009 revenue splits between the Team and ArenaCo.

That suggests that the original 2009 revenue split was, in fact, $10 million to ArenaCo and $2 million to the team--and that split persists today. 

That's confusing. Nobody ever claimed--and no documents confirmed--that the naming rights agreement was worth $12 million a year, or $240 million over 20 years.

Is it possible that the amount paid by Barclays increased? Or that the presentation was in error?

Looking at the arena's financials: FY 2018/2019

A look at the arena's three most recent financial reports provides confusing clues but not answers.

Remember, the arrangement cited above was said to be the original one, which was restored after a revenue split that gave more money to the Nets. Here's text from the arena company's FY 2018 and 2019 reports, before the return to the original revenue split:

Brooklyn Events and an affiliated entity related through common ownership entered into a Naming Rights Agreement with Barclays Services Corporation (“Barclays”), where, in exchange for certain fees and other considerations, the Arena is named Barclays Center and Barclays is entitled to certain additional sponsorship, branding, promotional, media, hospitality, and other rights and entitlements. This Agreement expires on June 30 following the twentieth anniversary of the opening date of the Arena, subject to certain extension rights. In connection with the sale... the Nets are now entitled to an additional 25% of the revenue for the naming rights.

(Emphases added)

No dollar amount is cited.

That language suggests that the additional 25% of naming rights revenue was on top of some unspecified existing portion.

But the syntax is confusing. The phrase "now entitled" suggests that it has already been enacted, but also could mean "ultimately slated to get."

Elsewhere, the language in the documents suggested a potential contradiction with the term "additional," and an unfolding process:

As part of the sale... the Nets now are entitled to a portion of sponsor revenue. In year 1, the Nets are entitled to 10% of sponsor revenue which increases 5% per year until year 4 where it reached 25% and remains at that level for any subsequent years. 

The phrase "now are entitled" suggests that it has only just begun, and that only in the new arrangement--not the original one--would the Nets get sponsor revenue. So it wouldn't be "an additional 25%" but simply "25%."

Moreover, it also suggests that it would take four years--not immediately--for the team's share to reach 25%. That conforms to one of the two interpretations of "now entitled to... 25%," as in "ultimately slated to get."

The passage refers to this initial transaction that allocated more money to the Nets and less to the arena company:

On April 11, 2018, [Prokhorov's] OS&E sold a minority interest (49.9%) of the Brooklyn Basketball Holdings, LLC (owner of the Brooklyn Nets, LLC, referred to as Brooklyn Nets) to an independent third party. Brooklyn Basketball is a sister company to Brooklyn Events.
In connection with the sale, the lease agreement between Brooklyn Events and the Brooklyn Nets was amended resulting in a reduction of revenues and related cash flow at Brooklyn Events. 

What about now?

The recently released FY 2020 report indicates that both the arena company and the team are getting something--fees and/or "other consideration"--but does not delineate any financial allotment:

The Company and TeamCo entered into a naming rights agreement with Barclays, whereby, in exchange for certain fees and other consideration, the Arena is named Barclays Center, and Barclays is entitled to certain additional sponsorship, branding, promotional, media, hospitality, and other rights and entitlements. This naming rights agreement expires on June 30 following the twentieth anniversary of the opening date of the Arena, subject to certain extension rights.

It does not describe how this differs from the arrangement--as described in previous years--that had the Nets "now entitled to an additional 25% of the revenue for the naming rights."

What was/is the split?

The documents are confusing. Remember, the September 2019 presentation to investors--not an annual report--stated that Barclays was paying $10 million to the arena company and $2 million to the Nets, once the original split was reinstated.

That suggests that the team, during the interim period--after the first phase of the Prokhorov sale to Tsai--earlier was getting even more.

Reading the documents literally: assuming a base of $12 million, if the Nets, in year 1 of the interim period, were entitled to 10% of sponsor revenue, that suggests an additional $1.2 million that first year, on top of the extant $2 million, rising in year 4 to 25%, or $3 million. (That would have never come to be, of course, because the original split was restored after Tsai took full ownership.)

But what if the presentation was misleading or mistaken? For example, assuming a base of $10 million, with no previous payment to the Nets, the team, in year 1, would entitled to 10% of sponsor revenue, or $1 million, rising in year 4 to 25%, or $2.5 million. 

Bottom line: it's confusing, and unresolved.