How (And Why) An NBA Team Makes A $7 Million Profit Look Like A $28 Million Loss

[BMP 424]

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.

 

The documents are embedded below, but here are the salient parts:

 

 

The big loss: That $27.6 million net loss looks bad, but, as you'll see, it's an illusion — a trick of accounting, one practiced by every sports franchise with the full blessing of American tax law and one we should keep in mind whenever an owner pleads poverty.

 

"Anyone who quotes profits of a baseball club is missing the point," Paul Beeston once said (at the time he was a Blue Jays vice president). "Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss and I could get every national accounting firm to agree with me." If anything, he was being too modest.

 

 

 

The hustle: The first thing to do is toss out that $25 million loss, says Rodney Fort, a sports economist at the University of Michigan. That's not a real loss. That's house money. The Nets didn't have to write any checks for $25 million. What that $25 million represents is the amount by which Nets owners reduced their tax obligation under something called a roster depreciation allowance, or RDA.

 

Bear with me now. The RDA dates back to 1959, and was maybe Bill Veeck's biggest hustle in a long lifetime of hustles. Veeck argued to the IRS that professional athletes, once they've been paid for, "waste away" like livestock. Therefore a sports team's roster, like a farmer's cattle or an office copy machine or a new Volvo, is a depreciable asset.

 

The underlying logic is specious at best. As Fort points out, a team's roster at any given moment isn't actually depreciating. While some players are fading with age, others are developing and improving. But the Nets don't have to pay more taxes when a player becomes more valuable. And in any case, the cost of depreciation is borne by the athletes themselves, when they pass their primes and lose their personal earning power.

 

Nevertheless, the IRS not only agreed with Veeck but allowed any owner claiming the write-off to deduct roster expenses twice — first under "player salaries," in the case of the Nets' documents, and then under "loss on players' contracts" — and an enormous tax shelter sprang up within the balance sheets of franchises everywhere. This can't be emphasized enough: Every year, taxpayers hand the plutocrats who own sports franchises a fat pile of money for no other reason than that one of those plutocrats, many years ago, convinced the IRS that his franchise is basically a herd of cattle. Fort calls it "special-interest legislation." "It's not illegal," he says. "It's just weird."

 

The rules have changed over the years, but the depreciation shelter remains one of the great graces of owning a sports team. In some ways, it's gotten more fanciful. Between 1977 and 2004, owners could write off half the team's purchase price over five years, thanks to the pretend-loss of player value. One consequence, Fort notes, is that teams would change hands every five or six years, once the exemption had dried up. Now, after tax law revisions in 2004, owners can write off 100 percent of their team's purchase price, albeit over a 15-year span. What they're buying, as far as the RDA is concerned, is a set of players — the brand identity, the right to stage games and charge admission, and everything else are throw-ins. (According to Fort's analysis [pdf], the new RDA rules had the twin effect of increasing both tax payments and team values.)

 

It's not hard to see the benefits. Owners who've set themselves up as a partnership or a Subchapter S corporation can pass their "losses" onto their personal income tax forms. Let's assume that's what the Nets owners did, and let's put them in the 33 percent tax bracket. (The audit here covers the last year that Lewis Katz and Ray Chambers owned the team, the fiscal year ending in June 2004. In August 2004, six years after buying the Nets, they sold the franchise for $300 million to real estate developer Bruce Ratner. In 2009, Ratner sold an 80 percent share to a Rocky and Bullwinkle character named Mikhail Prokhorov for $293 million in equity.) That $27.6 million loss would mean tax savings of $9.1 million ($27.6 x .33).

 

If we're trying to arrive at some idea of how much money the Nets really made in 2004, we'll need to do a little crude math. Knock out the $25.1 million RDA — a paper loss, remember — and add the $9.1 million in tax savings. Suddenly, that $27.6 million loss becomes a $6.6 million profit.

 

 

 

A typical profit: In the 2003-04 season, the Nets went 47-35, won the Atlantic Division, and lost in seven games to the eventual champions — the Pistons — in the Eastern Conference semifinals. (This was the last of the Kidd-Jefferson-Martin Nets.) That playoff run brought in an extra $4.8 million in revenue, a decent haul that few owners can count on every year. So let's pretend the playoffs didn't happen. Take away that $4.8 million, and the $1.4 million in expenses, and the $27.6 million net loss is now $31 million. Run the earlier calculation again and you would have a $4.4 million profit in a non-playoff season.

 

 

Read the rest here

[TheREALBrooksThompson 157]

Not sure how reliable this information is, but it wouldn't surprise me if it were 100% accurate.

 

I said it in the other thread, but I'll repeat it here. It is hard for me to believe that these people can be so successful to the point where they can buy an NBA team, but they can't manage to make that team profitable once they buy it.

 

Surely there will be bad situations that lead to losses sometimes, but I can't believe that 22 of the 30 teams are losing money as the NBA claims. I don't actually know, so I could be wrong, but it's hard to believe.

[BMP 424]

Not sure how reliable this information is, but it wouldn't surprise me if it were 100% accurate.

 

I said it in the other thread, but I'll repeat it here. It is hard for me to believe that these people can be so successful to the point where they can buy an NBA team, but they can't manage to make that team profitable once they buy it.

 

Surely there will be bad situations that lead to losses sometimes, but I can't believe that 22 of the 30 teams are losing money as the NBA claims. I don't actually know, so I could be wrong, but it's hard to believe.

 

Yep. And it seems to make sense why so many players don't want to pay for a lot of the stuff the owners want them to pay. Granted players do make a ridiculous amount of money as well.

 

 

 

I also meant to post I was no accountant/economist or pretend to be one so I can't tell whether this guy is full of ****, an idiot, or a genius. Thought it was definitely interesting, though.

[NittanyBuc 757]

Read the rest here

Too many numbers :panicworker:

[nbr 15]

It wouldn't surprise.

[Secretly Space Jesus 670]

If one wants to argue that player contracts shouldn't be considered depreciating assets, that's fine.

 

But given that, legally, they are, I fail to see what point is being made here. A company listing assets depreciating in value on their tax filings is pretty obvious, since that depreciation is part of what determines their tax amount.

 

Also, I don't know why he goes into that huge tangent about the guy getting a 9m tax break on his private taxes if he filed a certain way AND that he got the team classified in a specific way, given that he provided no evidence that the Nets owner did that or that anyone else in the league can or has.

 

 

[Secretly Space Jesus 670]

Also, if revenues haven't kept pace with the increased player salaries in the last 7 years, then there's no reason the 4.4m profit he lists from 2004 couldn't have turned into a huge loss now.

 

I mean, the salary cap in the year he listed was 43.84m. Last year it was 58.04.

[BMP 424]

Is the NBA really losing money?

 

Are the league's stated losses merely an accounting fiction? Here's a closer look

By Larry Coon

The NBA's collective bargaining agreement will expire at 12:01 a.m. on Friday. If a new agreement is not in place by then the league effectively will shut down, ceasing all business with the players until the labor dispute is resolved.

 

 

Are the league's stated losses merely an accounting fiction? Financial statements for the New Orleans Hornets were leaked to the public late last year, and Deadspin recently obtained similar documents for the New Jersey Nets. ESPN.com assembled a group of financial experts to review these documents and help determine whether these teams are actually losing money.

 

These statements give us a glimpse behind the curtain -- some insight into the inner workings of the NBA -- but it would be a mistake to infer too much from them. They represent just two franchises out of 30. They also are not current -- the Nets' documents are from 2005-06, the first year under the current CBA. The Hornets' documents are more recent -- 2008-09 to be exact -- but are nevertheless nearly two years old.

 

They also represent two franchises that were recently sold, and in the Hornets' case, reeling from the effects of poor management in Charlotte, relocation to New Orleans, and the devastation of Hurricane Katrina. Since most teams were not recently sold, and few teams have withstood the ordeals of the Hornets, these teams can be viewed as anything but typical.

 

But that's not to say that having information from these specific teams doesn't give us insight. The players association claims that the league is overstating its losses by mixing in costs associated with the purchase of teams with the profit and loss associated with the operation of those teams. In order to examine this claim, we need statements from teams that have recently been sold. Fortunately, we have them.

 

So while we can't extrapolate from these financial statements to draw firm conclusions about the league as a whole, we can still use them to inform ourselves about some of the arguments used in the ongoing labor dispute, and perhaps gain some insight into which side is on more solid footing.

 

 

 

http://sports.espn.go.com/nba/columns/story?columnist=coon_larry&page=NBAFinancials-110630

[Ibn Battuta 127]

thanks for posting this BMP, i'm gonna read and reread this (this will be my background eventually).

 

dom, is accounting your background? just curious. Also waiting on 30A/Ryan (I think that's what they do).

[Ibn Battuta 127]

from what I know, I don't see an issue with an RDA and reporting that as "depreciation." It seems like the author is confusing book value and future values (finance). Companies report depreciation based on book values.

 

And in any case, the cost of depreciation is borne by the athletes themselves, when they pass their primes and lose their personal earning power.

 

not true, bc teams can't terminate contracts at will. If a player starts decline, the team still has to pay his salary. Even if a player "gets better" there is no guarantee it will pan out. If we're talking about players like Anderson who are way undervalued, then the tax shield isn't as large anyway.

 

Knock out the $25.1 million RDA — a paper loss, remember — and add the $9.1 million in tax savings. Suddenly, that $27.6 million loss becomes a $6.6 million profit.

 

I don't understand why to add back 9.1 million, no depreciation expense thus no tax savings? idk someone can explain this.

[Ibn Battuta 127]

the rest of the article talks about owners making money through other projects, but I fail to see what that has to do with revenue for the NBA as a league.