The amortization bonus: as major-league team values increase, owners deduct more. The ethereal concept also helps the Barclays Center bottom line.

It's interesting to see Andrew Zimbalist, the country's most famous--if not most respected--sports economist, wear the white hat, as the prime source in HOW AMERICAN TAXPAYERS SUPPORT SPORTS TEAMS AND ATHLETES, as Sportico's Brendan Coffey reported on April 17,

Atlantic Yards watchers would recall that Zimbalist, on contract for original developer Forest City Ratner, produced a "study" in 2004, later updated, that predicted that Atlantic Yards would be an economic engine and deliver significant city and state tax revenues.

There was much wrong with his analysis. In 2006, I called it the "$6 billion lie." Today, with the project delayed and stalled, it's clear it was even more irresponsible, since it assumed a buildout as scheduled.

Today, though, if you follow Zimbalist's current take on amortization, that should lead to the recognition that the rise in the Brooklyn Nets' value is not completely deserved.

Some "reasonable" subsidies?

Taxpayer support of sports “is a complicated question,” Zimbalist told Sportico, suggesting that public money can promote entertainment and a sense of community, but acknowledging that the public subsidies typical in the United States are atypical around the world.

“On a conceptual level, I would say some of the subsidies are reasonable and they make sense and some of them are not reasonable,” Zimbalist said.

One that's not is federal support for teams to move, such as via bonds that are exempt from federal taxes. (That includes the tax-free bonds used to pay off Barclays Center construction debt, via payments in lieu of taxes, or PILOTs, enabled by a tax-exempt site.)

As 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.

Zimbalist hedged about that, though, when interviewed by Brian Lehrer in July 2008.

Toting up subsidies

The Sportico article cites various subsidies, including direct support for venue construction.

With the Atlantic Yards arena, there were relatively less direct subsidies, $200 million, then increased by $105 million. Those also were used for needed infrastructure.

Another example, increased sales taxes to fund facilities, doesn't apply to Atlantic Yards. However, various tax breaks did and do help the arena and larger project.

As Sportico notes, tax-exempt municipal bonds, even if paid off by the team owners, cost the public. That applies to the Brooklyn arena, as well. 

Unmentioned: tax-exempt property or property provided free or below cost, such as public streets or railyard development rights.

The amortization bonus

The most interesting piece of the article addresses the curious dichotomy between the increasing value of sports teams, even as their reported value on owners' tax returns seems to fall. 

The explanation: amortization, a useful fiction that lowers the value of intangible assets, in an analog to depreciation of aging physical property. From Sportico:

One team owner, speaking not for attribution, said amortization is like the government paying for a third of his franchise. Said Zimbalist: “Unless the intention is to bolster the prices of sports franchises, which I don’t think it should be, it’s hard to think of a rationalization that created this.”

About the Nets and arena

We don't know exactly how amortization figures into the steadily increasing value of the Brooklyn Nets (and arena company), most recently estimated at under $4 billion, but with a potential pending sale by Joe Tsai of a slice at a valuation of $4.8 billion.

But it would be interesting to find out, if and when such information seeps out.

We do know that amortization is a big deal for the arena company, as Tsai's company in 2021 reported:

The Company recognized $50,785,068 of amortization expense related to goodwill during the year ended June 30, 2021. The Company expects to recognize amortization expense related to goodwill of approximately $50,785,068 in each of the next five fiscal years.

That ensures the arena company would report a loss, even in a robust year. (The last few haven't been so.) And that means--I assume--the loss can be used to offset taxes.

What's goodwill? Well, it seems to refer to the premium Tsai paid, which now may not have been a premium at all.

To quote Zimbalist, "it's hard to think of a rationalization that created this.”

Sure, the arena does age, as a physical asset, so from that perspective its value may decline. Then again, the creation of new high-end seating areas helps bolster value.

Also, as I've written, the presence of the arena is crucial to the rise in team value. That seems counter to the amortization bonus.