Busier Barclays Center finally reports a moderate profit, thanks to big boost in event, ticketing, and concession revenues. But what about $51M in capital expenses?

According to its latest financial report, the Barclays Center is finally making a moderate profit: $15.5 million, at least by my alternative calculation, though the arena operating company still declares significant--if dubious--losses for tax purposes. 

For the first time in his ownership, billionaire Joe Tsai did not need to supply capital or draw on a reserve fund to bolster operating finances. 

Still, subsequent to the June 30, 2024 end of the fiscal year, "a parent company" supplied $51 million "to fund ongoing capital projects at the Arena and support the Company’s operations," according to the report.

It's possible large portion of that went to convert 30 suites (of 87) for club-like spaces called The Row and The Key, accommodating a total of 436 seats.

Note that in late June--and perhaps formalized in the new fiscal year--the family of billionaire Julia Koch, widow of the businessman and notorious right-wing funder David Koch, paid $688 million for a 15% slice of Tsai's BSE Global, including the Brooklyn Nets, New York Liberty, and arena operating company.

The Barclays Center is nominally owned by New York State to enable tax-exempt land and lower-cost tax-exempt financing, then leased for $10, plus an obligation to pay off construction bonds. So the operating company, Brooklyn Events Center, reports financial results to bondholders.

Net operating income doubles

The arena's FY 2024 results, released last week, indicate that the revenues exceeded operating expenses by $35.8 million, which was enough to pay off construction bond interest and leave a profit of some $15.5 million.

Total revenues, $144.4 million versus $99.1 million in FY 2023, includes a significant increases in event, ticketing, and concession revenues, surely attributable to a busier concert schedule achieved by the return to the vendor Ticketmaster, allied with the booking company Live Nation.

While net operating income (NOI) reached $35.8 million, more than double the $16.1 million in FY 2023, that's below the original NOI estimates, which started at $70 million and were downgraded to $55 million, but were never met.

So that both lags significantly and represents progress.

After all, in FY 2023, the arena company reported $16.1 million in NOI, but had to pay $21.1 million in interest, leading to a loss of $5.1 million--as I've re-interpreted the calculations.

Note that the report this year counts nearly $71 million in paper losses--depreciation and amortization--that surely help avoid taxes. That suggests the arena operator will long be in the red. But my framing reflects the financial structure presented to potential bond buyers and the public.

Drilling down

Sponsorship and suite revenue rose modestly, to $40.6 million from $36.1 million, likely limited by the struggles of the underperforming Brooklyn Nets. However, revenue from events and other income rose dramatically, to $53.9 million from $37.6 million.

Similarly, ticketing, facility, and related fees rose to $32.9 million, from $15.5 million, and concession revenue rose to $17 million, from $9.9 million.

Of course, expenses also went up, to $48.2 million for events, from $27.6 million. Operating and maintenance hit $50 million, up modestly from $47.1 million. Selling, general, and administrative costs were $10.4 million, up from $8.3 million.

Contribution from owner

The $51 million contribution, which may be reflected in the arena's FY 2025 report, likely is not needed to pay operating expenses.

In FY 2023, Tsai put up $18 million to bolster the arena's finances. That's less than the $38 million he contributed in FY 2022 and the $52 million he contributed in FY 2021. (In the two previous fiscal years, a reserve account helped bolster bond payments.)

Despite the red ink that prompted such spending, the arena's part of a financial success, since the availability of a Brooklyn venue, in the world's media capital, has allowed the value of the Brooklyn Nets (and the arena company) to soar. 

The Koch investment valued BSE Global at a reported $5.8 billion, after Tsai, in 2019, completed a purchase--without the later-acquired and increasingly valuable New York Liberty--valued between $3 billion and $3.3 billion. 

A paper loss?

As noted in my previous coverage, keep in mind that the Brooklyn Events Center fiscal reports present the arena awash in red ink, albeit less so this year: a net loss of $34 million, vs. $76 million in FY 2023.

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.

(Note the criticism of amortization when applied to sports teams, since their values rise even as their reported value falls, as reported on owners' tax returns.)

The Fy 2024 report indicates $19.9 million in depreciation, and $51 million in amortization. So that's nearly $71 million in paper losses, which brought the FY 2023 loss to $76 million.

Goodwill has dropped from $316.8 million in FY 2023 to $265.8 million. What's that? According to Investopedia:

Goodwill in business is an intangible asset that's recorded when one company is purchased by another. It's the portion of the purchase price that's higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process."

Based on the trend, Goodwill will decline to zero in less than six years. Then what? And how legitimate is the accounting move now, given that Tsai's 2019 purchase price was surely lower than the value of the assets, given the recent Koch investment.

Member's Equity declines

Member's Equity--as owned by the limited liability company (LLC) controlled by Tsai--has steadily declined, from $138.2 million to $83.3 million. How that decline of nearly $54.9 million was calculated is beyond my ken.

As of FY 2020, Member's Equity was $329 million. So the trend is pointing to a negative number.

According to PWC, Member's Equity reflects cash contributions. Another source suggests Member's Equity has a number of definitions. I'm not sure how it's being defined here, and whether a negative turn would be meaningful. After all, the arena props up the value of the Nets.

More on PILOTs

The required 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, sequentially, by Bruce Ratner, Mikhail Prokhorov, and now Tsai (and the Koch family)--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 $39.3 million in PILOT payments in FY 2024, that included $5.9 million in principal repayment and $21.8 million in interest.

(That's according to the annual report's text, not the chart excerpted above, which cites $20.3 million. Note that principal repayment is not attributed in the annual operating numbers excerpted in the above chart, so I've omitted it.)

The O&M bonus

Though the FY 2024 $39.3 million in PILOTs does exceed the Net Operating Income of $35.8 million, that doesn't mean a loss.

From the PILOTs, $11.6 million goes to O&M funds, which can be used by the arena operating company to reduce any costs that were previously out of pocket, but otherwise simply go back to the company.

The increase in O&M funds came from a 2016 refinancing, taking advantage of lower interest rates. Estimated savings from: $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 will rise some $800,000 a year over the next few years. The FY 2025 bill should reach $40.1 million, again, with a significant slice being O&M funds returned to the arena company. 

In other words, a similar performance in FY 2025 should again leave the arena with a profit, not counting depreciation and amortization, of course.