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Since86
07-07-2011, 04:27 PM
Exclusive: Recent New Jersey Nets Books Reveal Huge Losses

The biggest battle in the NBA lockout right now might be the public relations battle. Are the losses the owners are claiming real or fictional?

The tension mounted earlier this week when a New York Times blog post used Forbes numbers to say the league operated at a $183 million profit (http://fivethirtyeight.blogs.nytimes.com/2011/07/05/calling-foul-on-n-b-a-s-claims-of-financial-distress/) for the 2009-10 season, the last year where numbers are available.
The NBA fired back and disputed the numbers and a column in Forbes, of all places, said that in 2009-10 the league's 30 teams had an aggregate loss of $340 million that year (http://blogs.forbes.com/sportsmoney/2011/07/06/audited-numbers-show-nba-lost-over-1-5b-over-last-five-years/).

Not many teams have balance sheets that are publicly available, but there is one team whose balance sheets anyone can view and it happens to be a team that at least claims to have lost a ton of money.
With that in mind, we were provided the financial statements of Nets Sports & Entertainment LLC, that included the finances of New Jersey Nets properties in 2009 and 2010 (through June 30). The team was owned through April of 2010, by Bruce Ratner, chairman and CEO of Forest City Ratner Companies.


If you go through the report, audited by PWC, and you understand how the NBA reported what was in this document to the Players Association, you will understand that it's not out of the realm of possibility that the league's owners were losing north of $300 million for years.

If you want to look at the entire document, you are welcome to click here (http://msnbcmedia.msn.com/i/CNBC/Sections/News_And_Analysis/_Blogs/Beat%20Blogs/Sports_Biz/_PDFs/Nets_Financials.pdf), but for those who just want the quick breakdown of how this all works, just read on below. It should be noted that this doesn't necessarily include everything related to the basketball team, some of that information may also lie in other companies Ratner and his partners had overseen, including the real estate at Atlantic Yards in Brooklyn (Forest City Ratner) and their stake in the new Barclays Center (Brooklyn Arena Holding Co.).

I will use the 2008-09 season instead of the 2009-10 season because the transfer of ownership to Mikhail Prokhorov means that the 2009-10 season is three months short of a full year of financials.

For the 2008-09 season, the documents reflect that the Nets lost $77,227,184. That number is reached thanks to the team pulling in $78,783,677 in operating income, including $26 million in ticket sales and $32.5 million in total broadcast revenues. Operating expenses were $147 million, off mainly $66 million in salaries and $33.3 million in "amortization of intangible assets." When the team's $13.3 million interest expense is added, the Nets loss for the 08-09 season hits $77.2 million.

Now let's break it down for you. Assuming the operating income is accurate, there are three questionable line items within the operating expenses that are worth exploring. The most important is the $33.3 million amortization, since it's the largest number and often the number that the players union says is creative accounting.

So let's explain it first and then how it's reported. When a person buys a team, the price paid is distributed throughout various expense lines, the amortization line is one of those places. It's not voodoo accounting, it's actually part of generally accepted accounting practices. But the point is, that the NBA doesn't include that line item when it breaks out the losses to the union. So subtracting that number, the Nets loss that season, as the owners reported to the union, is probably closer to $44 million.

I said that there were two other numbers, which could be disputed. Let's look at those. The first one is depreciation, which in this sense is the allocation of costs distributed over a certain period of time. In this case, the reported depreciation by Nets Sports & Entertainment is $2,041,611.

The players association says that depreciation shouldn't be included in the losses. The owners say it absolutely should because it does reflect the cost of expenses that could be related to growing revenues. If the players get a certain percentage of revenues, the owners claim they should be responsible for some of the costs to get to those higher revenues.

The other disputed number is interest. The Nets for the 2008-09 season had $13,412,981 in interest. The players association again says that that shouldn't be included in the losses. With depreciation, the actual loss might not be taken in the year it is credited to. With interest, the ownership is actually writing a check. The players can argue they shouldn't share in this, but there's no debate that that is a real loss.

Finally, let's explore the bigger number. For the 2008-09 season, NBA owners told the players they lost a single-year record $370 million. Not only that, a record 24 teams lost that amount of money. Consider that amount of money an aggregate loss. Sources have told me that those 24 teams lost approximately $485 million, which leaves the six profiting teams with a net gain of $115 million.

So now take the Nets loss of $44 million that year. That means that the Nets share of the losses were nine percent of the total losses. If all teams used generally accepted accounting practices, is it possible that 23 other teams lost an average of $19.1 million that year? Of course it is.


http://www.cnbc.com/id/43674877

pacergod2
07-07-2011, 06:51 PM
The two numbers I would contend with are the amortization figure and the interest figure. I would verify who those loans are with. If the loans are from one entity to another entity owned by the same team owner, some of that interest will be imputed interest, which is basically paying entities under the control of the same person. That number could be fabricated based on intercompany loans as opposed to the owner making contributions to (or taking distributions from) the organization, depending on the corporate set-up of the ownership group.

As for the Amortization. Typically the amortization is based on the amount that was actually paid for the company up front. Any amount that was paid over and above what the company valuation is, is considered amortizable expenses. Those are then spread over the life of the asset (or company). So if they spent $380M and the team's book value was $300, they would have amortizable costs on a yearly basis over say 20 years, is $4M per year. But the owner came out of pocket for this expense at one point, and would probably want to speed up the recovery of that money in its expense timeline to prevent paying more taxes. There is some ambiguity over the expensing of the intangible asset, as the life of the asset could be changed to increase costs. This is typically set up front and taken over several years, but again this payment has already been incurred. When the team is sold, it considers Goodwill and other intangible assets, which the owners hope would net them a gain on their initial investment, so if I were the Players' Union, I would look at the amortization expenses as they pertain to the sale of teams. If the teams are being sold above goodwill, the owners will make money in the end. This is almost counter intuitive to their argument, though because the teams would be taking fewer expenses now to have a bigger gain in the end. Doesn't make much sense for the owners to lie about amortization. The only thing they would change that effects anything would be the life of the asset, which the PA would have a qualm about.

wintermute
07-08-2011, 07:09 AM
pacergod2,

According to that article, the numbers that the NBA reported to the union doesn't include amortization, i.e. they reported a Nets loss of $44m vs the $77m that would have included amortization. It does include about $13m in interest charges, and $2m in depreciation charges. Taking out those "disputed" expenses, and it's a still substantial $29m loss for 08-09 for the Nets.

I think most people would agree that the Nets are losing money - that's why they're hell-bent on moving to Brooklyn after all. Makes you wonder though, whether the $15m expense in interest and depreciation is representative of other teams. Multiply that by 30 and you get $450m - a very substantial amount. It's no wonder that the union is disputing whether these expenses are valid or not.

The question then is whether these costs should be extracted from the players or the owners. The owners are saying that these are the costs of doing business; the players on the other hand say these costs are on the owner (i.e. taking on debt to purchase the team) and not valid operational costs.

I think if you lock up 10 accountants in a room for a year, you might still not get a consensus at the end. It's not really a matter of right or wrong isn't it - it really comes down to who in your opinion should be paying for these things. So it boils down to negotiation, which frankly is what the whole lockout is about all along.

These PR battles are a nice distraction, but in the end all that matters is who can hold out longer.

able
07-08-2011, 08:04 AM
Wintermute if you check those balance sheets you will find some more "dubious" posts.

and in no way are the Nets representative, this "ownership" had only one goal, development of real estate, and it got the required permits.

The value of that alone is more then the value of the Nets in their hay-days.

Indra
07-08-2011, 08:08 AM
The two numbers I would contend with are the amortization figure and the interest figure. I would verify who those loans are with. If the loans are from one entity to another entity owned by the same team owner, some of that interest will be imputed interest, which is basically paying entities under the control of the same person. That number could be fabricated based on intercompany loans as opposed to the owner making contributions to (or taking distributions from) the organization, depending on the corporate set-up of the ownership group.

As for the Amortization. Typically the amortization is based on the amount that was actually paid for the company up front. Any amount that was paid over and above what the company valuation is, is considered amortizable expenses. Those are then spread over the life of the asset (or company). So if they spent $380M and the team's book value was $300, they would have amortizable costs on a yearly basis over say 20 years, is $4M per year. But the owner came out of pocket for this expense at one point, and would probably want to speed up the recovery of that money in its expense timeline to prevent paying more taxes. There is some ambiguity over the expensing of the intangible asset, as the life of the asset could be changed to increase costs. This is typically set up front and taken over several years, but again this payment has already been incurred. When the team is sold, it considers Goodwill and other intangible assets, which the owners hope would net them a gain on their initial investment, so if I were the Players' Union, I would look at the amortization expenses as they pertain to the sale of teams. If the teams are being sold above goodwill, the owners will make money in the end. This is almost counter intuitive to their argument, though because the teams would be taking fewer expenses now to have a bigger gain in the end. Doesn't make much sense for the owners to lie about amortization. The only thing they would change that effects anything would be the life of the asset, which the PA would have a qualm about.

Waaaaay off topic here, but who is that woman in your avatar? She is gorgeous.

Since86
07-08-2011, 09:20 AM
I seriously doubt some weekend warrior accountants are going to go through their books and find "dubious" posts.

Like I've said multiple times in the past week. The NBPA has had every team's books for quite some time now. They've hired some of the best lawyers in the country, have the ability to hire some of the best accountants, and still haven't shown where/how the NBA is wrong.

I seriously doubt a non-professional is going to stumble upon something that hasn't been combed over multiple times by someone getting paid thousands of dollars on the hour.

The NBPA needs to wake up to reality and start negiotating with actual facts instead of their misguided opinions. All that's happening is merely delaying the enevitable.

Until the accept the fact that the NBA is not in a good financial position, their "talks" are pointless. All it's doing is making the lockout last longer.

BRushWithDeath
07-08-2011, 09:36 AM
Like I've said multiple times in the past week. The NBPA has had every team's books for quite some time now. They've hired some of the best lawyers in the country, have the ability to hire some of the best accountants, and still haven't shown where/how the NBA is wrong.


I don't think this is factually accurate. At all.

Since86
07-08-2011, 09:40 AM
I don't think this is factually accurate. At all.

Which part? The first part is fact, the second part is opinion but the NBPA are idiots if they didn't hire the best lawyers and accounts to comb through the NBA books.

But yes, the NBPA is in possession of every single team's books. They were required by federal law to hand them over to the union because they were claiming losses.

The NFL didn't hand their's over, because they were claiming a profit.

BRushWithDeath
07-08-2011, 10:22 AM
Which part? The first part is fact, the second part is opinion but the NBPA are idiots if they didn't hire the best lawyers and accounts to comb through the NBA books.

But yes, the NBPA is in possession of every single team's books. They were required by federal law to hand them over to the union because they were claiming losses.

The NFL didn't hand their's over, because they were claiming a profit.

The last part. They massive loss claims made by the owners have been proven to be inaccurate and grossly exaggerated. Some individual teams have lost money recently due to the poor economy. Many, many businesses have. But the league losses haven't even come near what is being thrown about by the NBA. The players have recognized that profits have fallen in this economy. They've offered back, and then some, what the NBA has actually lost. Yet they're not even in the ballpark with what the NBA is asking for. The NBA isn't out to recoup their recent small losses. They're out to add to their billions knowing full well that the economy will eventually rebound and a new TV deal is in the works. The CBA which resulted from the last lockout is claimed to be such a cherry deal for the players that the NBA could not possibly continue without wholesale changes. Yet, who won the last lockout? By all accounts, it was the owners in a bloodbath. Every rule the owners are looking to impose is to protect themselves from themselves.

My favorite part of this whole thing is that everyone thinks the lockout will be good for the smaller market teams like Indiana who make small profits. The Pacers haven't been uncompetitive because of a lack of money. They've been uncompetitive because they have spent massive amounts of money in the wrong places. That a low and hard salary cap will put us on a more even ground with the teams who make massive profits is patently false. With revenue sharing, the salary cap could be $100 million and the Pacers could compete. The players want revenue sharing. The owners do not. The fight to level the playing field between the big markets and little markets is being portrayed as the fight between the owners and players. When in reality, the only fight for a level playing field is within the owners' camp themselves. And they're not interested in it.

Since86
07-08-2011, 10:32 AM
The NBPA hasn't shown any of that. We've had a couple of articles on the issue, and every single one has been taken to task. The first article about depreciation was even edited later correcting the mistakes the writer had made.

The NBPA is claiming that the losses have been exaggerated, but they've failed to prove anything.

EDIT: And the Pacers aren't making a profit, not even a "small profit." If they were making money, then why did PS&E need to restructure their deal with the CIB? The city of Indianapolis isn't going to pay out more in expenses, while PS&E collect a profit and end up paying less. That doesn't make any sense.

If the Pacers were collecting a profit, then the deal wouldn't have needed restructuring.

Brad8888
07-08-2011, 10:36 AM
The NBPA hasn't shown any of that. We've had a couple of articles on the issue, and every single one has been taken to task. The first article about depreciation was even edited later correcting the mistakes the writer had made.

The NBPA is claiming that the losses have been exaggerated, but they've failed to prove anything.

Agreed. What the NBAPA has done so far sounds an awful lot like typical union rhetoric in the face of a difficult financial time for their industry to me.

pacergod2
07-08-2011, 11:09 AM
Waaaaay off topic here, but who is that woman in your avatar? She is gorgeous.

Our own Pacermate, Shea.

ksuttonjr76
07-08-2011, 12:59 PM
I seriously doubt some weekend warrior accountants are going to go through their books and find "dubious" posts.

Like I've said multiple times in the past week. The NBPA has had every team's books for quite some time now. They've hired some of the best lawyers in the country, have the ability to hire some of the best accountants, and still haven't shown where/how the NBA is wrong.

I seriously doubt a non-professional is going to stumble upon something that hasn't been combed over multiple times by someone getting paid thousands of dollars on the hour.

The NBPA needs to wake up to reality and start negiotating with actual facts instead of their misguided opinions. All that's happening is merely delaying the enevitable.

Until the accept the fact that the NBA is not in a good financial position, their "talks" are pointless. All it's doing is making the lockout last longer.

100% agree. Most of the articles that I have read merely state the players disagree with the figures, but haven't really provided anything of substance as to why.