Barclays Center operating company, after deep losses in FY 2021, relies on $52M from billionaire Tsai to pay the bills, and debts. (But he'll do fine.)

On 9/30/21, Brooklyn Events Center, which operates the Barclays Center, released its FY 2021 financial report, confirming a brutal year in which the arena was largely shuttered by the coronavirus pandemic. (The fiscal year ends June 30.)

Net Operating Income: $23 million in the red

With revenues of $35.9 million and operating expenses of $58.9 million, the arena suffered a net operating loss of $23 million--and that's before having to pay another $19.4 million in interest on construction bonds, part of a larger payments in lieu of taxes (PILOTs) package.

In a "normal" year--though the goal hasn't always been met--the arena is supposed to have sufficient net operating income (NOI) to not just pay off the bonds, but deliver a cushion of profits.

No wonder billionaire Joe Tsai, who owns the Brooklyn Nets and the arena operating company, had to pony up $52 million to bolster the arena's finances--nearly four times as much as the $13.5 million that he contributed in the previous fiscal year.

Don't worry about Tsai, though: he gets to save big on taxes, as I'll explain, and the value of the team is jumping, according to Forbes (which I'll write about more shortly).

Comparisons, and prospects

In FY 2020, which was only partially halted by the pandemic, the arena operating company was in the black, but not enought. It had $12.5 million in NOI, which couldn't cover the arena's construction bonds and PILOTs.

Note: $6 million of Tsai's contribution in FY 2020 was used to pay furloughed staff; the new document makes no mention of paying part- and full-time employees while the arena was dark.

(Tsai's recent $52 million payment was first disclosed by Forbes's Mike Ozanian on Twitter, but no one else apparently thought it was news.)

In the three months since the end of FY 2021, Tsai contributed another $4.5 million to support the arena, though $18 million in payments--that sum extrapolated over a year--seems unlikely, given that the arena is back in business.

The need for such payments presumably will decline--and the possibility of profits re-emerges--as the arena returns to a more regular schedule and reaps the benefits of a top-flight Nets team, higher ticket prices, better attendance, and new sponsorships.

Deep red ink

As I wrote last year, keep in mind that the fiscal reports present the arena awash in red ink, even if net operating income is in the black. 

That's thanks to calculations of depreciation (how much of a tangible asset's value has been used up) and amortization (similar to depreciation, but for intangible assets like Goodwill), thus ensuring accounting losses and tax benefits.

The report indicates $19.7 million in depreciation, and $50.8 million in amortization. So more than $70 million in paper losses took the official loss to nearly $113 million.

The COVID-19 hit

A section on "Risks and Uncertainties" notes the impact of COVID-19 and future uncertainties, stating:

The Arena has reopened for Brooklyn Nets and New York Liberty home games and a handful of small events since December 2020 but overall, the full programming of the Arena has been limited.

The spread of COVID-19 has resulted in market disruptions and a global economic slowdown, which has impacted demand for a broad variety of goods and services and disrupted sales channels and marketing activities around the world. The duration of ongoing regulatory limits on mass gatherings is uncertain and difficult to predict, as is consumer demand for attending live events once regulatory bans are lifted. 

That's true, but there should also be a pent-up demand for live concerts and events that were stalled by the pandemic. Meanwhile, it helps to have a billionaire backstopping the arena, so it's not in danger:

Management has evaluated the significance of the financial impact of these conditions and has concluded that the Company will be able to satisfy its future liquidity needs, based primarily on the fact that a parent company with sufficient liquidity has committed to make any and all capital contributions to the Company as needed for a period greater than one year from the date of issuance of these financial statements, including those required for the Company to comply with the Company's Operating Support Agreement with the NBA and certain of the Company’s affiliates and to satisfy all of the Company's financial obligations as they become due.

Concession losses

While typically the arena reports concessions as revenue--$10.3 million in FY 2019 and $8 million in FY 2020--this fiscal year it was reported, anomalously, as a $4.5 million expense.

From the document:

To the extent the concession operator generates a profit or loss at the end of the fiscal year, the Company records its share of those profits as provided for in the Company’s agreement with its concession operator within the period the revenue was earned. Since the Arena was only open to fans on a limited basis, the Concession operator had an accumulated loss for the year. These losses are recorded as a net expense on the statement of operations.

Concentration of credit risk: LIU and Barclays

In a section regarding credit risks, the arena reported that it has "one customer, Long Island University, that represents 39% of gross trade receivables," which suggests that LIU has not been paying its obligations.

Another section states that accounts receivable, less allowance for $294,618 in doubtful accounts, total $10,510,601. That seems to imply that LIU may be $4.1 million in arrears, but, given the lack of specificity--and evidence of shaky math elsewhere in the report--we can't be certain.

Updated/corrected: Regarding shaky math:  The document states that naming rights sponsor Barclays "represents 43% of net revenues." But that makes no sense, because there are no net revenues.

Note: I originally read that wrong. There's no net income, but net revenues were $35.9 million. So 43% of that would be $15.4 million, which is... confusing.

Note that sponsorships and suites are reported as $24 million in revenue; 43% of that is $10.3 million, which could plausibly represent Barclays' $10 million (and more?) annual payment.

Below-market contracts: arena naming rights?

From the report:

As part of the valuation of assets acquired and liabilities assumed in connection with the Acquisition [of the arena company], the Company determined that certain of its contracts are considered below market.

The contracts are not cited, but the document states: 

Amortization for these contracts is computed on a straight line basis, approximating the impact of these below market contracts over their remaining useful lives, which the Company has determined to be 13 years.

That seems to be the naming rights contract, but if so, they were sloppy, since the previous year’s financial report similarly said 13 years.

The liability was assessed at $21.4 million--which seems low, if it's the naming rights contract, given the recent deal for the Los Angeles Clippers, apparently more than $21 million. The annual amortization was $2.5 million.

More on PILOTs

The payments in lieu of taxes (PILOTs) provide a minimum of 110% coverage of the estimated net debt service requirements of the tax-exempt bonds that pay off construction.

Nominal state ownership of the arena allows for tax-exempt bonds, which significantly lowers the cost of financing, saving the arena operators--companies controlled by Bruce Ratner, Mikhail Prokhorov, and now Joe Tsai--hundreds of millions of dollars over time.

Those PILOTs are composed of three components: principal repayment, interest expense, and operations & maintenance (O&M) Funds.

In other words, while the arena company made $36.85 million in PILOT payments in FY 2021, that included $3.2 million in principal repayment and $22.2 million in interest (this according to the annual report's text, not the chart excerpted above, which cites $19.4 million).

The remainder goes to some $11.4 million in O&M funds, which are used by the arena operating company to reduce any costs that were previously out of pocket. A refinancing in 2016, which significantly lowered interest rates--but could not lower the PILOTs--thus left more money for O&M. 

Estimated savings: $90 million over time, on top of the $122 million federal subsidy previously calculated before the refinancing. (The latter figure, compounded with a tax break to bondholders, costs the public $161 million, according to the Brookings Institution.)

The PILOTs for FY 2022 will be $37.6 million and rise some $800,000 a year. However, as of FY 2026, the interest payment component of PILOTs will rise significantly, by about $5.5 million. That puts pressure on the arena operator. Then again, sponsorship values are rising.