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Thread: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

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    Default IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Indiana Business Journal article excerpts. Link to full story is:

    http://cms.ibj.com/ASPXPages/6iframe...1256&NoFrame=1

    IBJ uncovering/covering/instigating Conseco wrangle?
    It's a fairly long article. Check out the link.-- kester99

    Fieldhouse flop?
    Pacers: We’ve lost money 9 of last 10 years
    Sat. February 07 - 2009
    Anthony Schoettle - aschoettle@ibj.com



    Swamped by fi nancial losses that go back to the time Herb and Mel Simon bought the Indiana Pacers in 1983, team officials are now looking for a new game plan—one that may involve fi nancial assistance from taxpayers and visitors.

    Apparently, not even housing the team in the much-ballyhooed Conseco Fieldhouse or a trip to the National Basketball Association fi nals could stop the Pacers’ bleeding.

    .................................................. .................................................. ........................

    The Indiana Pacers have lost money in 25 of the last 27 years, including nine of the last 10 seasons in Conseco Fieldhouse, said Pacers Sports & Entertainment President Jim Morris. The losses, he added, are much higher than recently published estimates of more than $6 million annually.

    .................................................. .................................................. ............................

    “No one,” said Morris, shifting forward in his chair and raising his voice for emphasis, “has ever suggested that we would move the Pacers out of Indianapolis. The Simons have not asked the city for anything. The question is, how do we keep this franchise here for this community for the next 50 years?”

    .................................................. .................................................. .................................

    Rosentraub, who will publish his second book on professional sports operation later this year, said CIB, City-County councilors and the mayor must closely scrutinize the Pacers’ fi nancials before any tax money or users’ fees are put toward Fieldhouse operations. While Rosentraub thinks PS&E could have lost $20 million to $30 million over the last three seasons, he’s mystified by the team’s other claims.

    “I would be hard-pressed to accept that, in the robust economic years, Pacers Sports & Entertainment lost money,” said Rosentraub, who is a commissioner of the Gateway Economic Redevelopment Corp., which oversees operations for Cleveland’s NBA and Major League Baseball venues. “I don’t buy it. There are a lot of ways to categorize financial losses and gains. I certainly wouldn’t accept the argument that the arena is an albatross to operate.

    “As part of their fi duciary responsibility, the city council and mayor at a minimum have to see those numbers. And I mean everything. The Pacers have to state their case.”
    [~]) ... Cheers! Go Pacers!

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    100 Miles from the B count55's Avatar
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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    I, too, question this statement:

    The Indiana Pacers have lost money in 25 of the last 27 years, including nine of the last 10 seasons in Conseco Fieldhouse, said Pacers Sports & Entertainment President Jim Morris.
    I believe that the Pacers have had an overall loss over the last 27 years, and an overall loss over the last 10 seasons, I do not see how they could've shown losses in 25 separate years.

    I find that bothersome, because their position is strong enough with simply the net Operating Loss over the ownership. It does seem to be an odd claim to make. Either, they're making an imprudent exaggeration, or they have pretty strong data to support the claim. It simply seems foolish to me to make that specific of a statement, because they have to know it will be challenged.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    If there is truth in the numbers presented, and the claim of losses in the pre-brawl Conseco days is true as well, I can't see where our franchise will ever be financially viable without the entire NBA agreeing to absorbing all of the St. Louis TV money losses AND reworking the entire structure of revenue sharing to support its financially strapped franchises.

    The expectation of additional taxpayer support, if there is any, will likely alienate most casual fans and reduce attendance in any market that attempts to subsidize teams, even if the facilities are fully utilized for non-basketball functions. Ticket prices for any of the events held at the facilities will go up, as well as many other local taxes on totally unrelated discretionary spending, further dampening the very economic activity that nearly every area of our country needs to be encouraging.

    What are the odds that the "haves" in the NBA, from a revenue standpoint, will help the "have nots"? Is it in the league's best interest to go through a contraction and thereby reduce the total number of teams and therefore players, which would also theoretically improve the overall average quality of players actually in the league while encouraging more prospects to actually attend college in a meaningful way? If so, would that also make players more NBA ready, injuries notwithstanding, than they have been in many years, making the overall talent pool even better yet, while boosting interest in NCAA basketball due to fewer players being able to leave early due to a reduction in overall roster spots available in the league?

    I don't want to be, but I am worried about the future of the franchise, regardless of the claims of TPTB. It could get quite rocky from here, and were it not for the overall economic impact of the franchise on Indianapolis and, to a much lesser extent, central Indiana, the decisions could become no-brainers. It will be a tough sell for all involved to get our franchise the assistance it likely requires from whatever sources who might be willing / able to provide it.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by kester99 View Post
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    “No one,” said Morris, shifting forward in his chair and raising his voice for emphasis, “has ever suggested that we would move the Pacers out of Indianapolis. The Simons have not asked the city for anything. The question is, how do we keep this franchise here for this community for the next 50 years?”
    This right here, along with everything else being said assures me that NOTHING is going to happen relocation-wise to this team. The city has too much invested in the Pacers for them to leave.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    There is no way the Pacers have lost money 25 of the last 27 years, unless Don King is their financial adviser.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Besides reworking the lease to the tune of $15M/year... What else do they want from the taxpayers?
    ...Still "flying casual"
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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by Shade View Post
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    There is no way the Pacers have lost money 25 of the last 27 years, unless Don King is their financial adviser.
    I agree. If they lost it then "PS&E, concert division" made a ton of money, or "PS&E, catering" made a ton of money.

    There are all sorts of ways to work the books and divide out separate divisions or even companies with each getting cherry picked for which assets and debts belong to them.

    PS&E could be basically paying themselves as different entities for all sorts of services, from parking to concessions to branding rights and so on. Maybe all those other divisions are way in the black because they are getting credit for the income in those areas while they are counted as debts for the main operation.

    This is why I totally agree that the city would need FULL disclosure about their operations before any more money is handed to them. The claims of those kinds of losses means 100% that 15 or more other teams have to be losing money every single year. It's not like all other teams sell-out their arenas or that they aren't all part of the CBA with the player's union.

    This is not baseball. There is a reason we talk about the cap, and it's based on LEAGUE INCOME. Last I checked the cap wasn't set at negative $50m, as in "we all lost money so we are going under, players will have to pay us to play". It's not like the Lakers or Knicks or Celtics have separate TV deals with ESPN.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by Roaming Gnome View Post
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    Besides reworking the lease to the tune of $15M/year... What else do they want from the taxpayers?
    I am all for keeping the team here but hearing about all the handouts franchises want makes me crazy.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Hey, it's tough all over.

    If they are losing money, they should consider salary freezes or reductions like the rest of us. If they did that, they would continue to be millionaires AND there would be no financial issue. They at least need to do something more creative than standing at the corner of Illinois and Washington begging like a bum.

    Seriously, this is just pure greed. It's funny how people who are free market proponents seem to be leaning the hardest on government (i.e. the tax payer) at the present time.


    Edit: BTW, the Pacers and other teams probably do lose money. An NBA franchise is not something people buy to make a lot of money. They buy them for status symbols and because they already have a ton of money. Just look around the league. Now that it's becoming a bigger financial liability and the investments are down....the hand comes out.
    Last edited by BlueNGold; 02-07-2009 at 05:50 PM.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    While its entirely possible that they have shown losses over most of their time here, one thing is for certain-The value of the franchise has skyrocketed since they bought it. Im guessing even after calculating all the losses over they years and adding that to the purchase costs they are still sitting pretty when you compare that to the current franchise value.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by Naptown_Seth View Post
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    I agree. If they lost it then "PS&E, concert division" made a ton of money, or "PS&E, catering" made a ton of money.

    There are all sorts of ways to work the books and divide out separate divisions or even companies with each getting cherry picked for which assets and debts belong to them.

    PS&E could be basically paying themselves as different entities for all sorts of services, from parking to concessions to branding rights and so on. Maybe all those other divisions are way in the black because they are getting credit for the income in those areas while they are counted as debts for the main operation.

    This is why I totally agree that the city would need FULL disclosure about their operations before any more money is handed to them. The claims of those kinds of losses means 100% that 15 or more other teams have to be losing money every single year. It's not like all other teams sell-out their arenas or that they aren't all part of the CBA with the player's union.

    This is not baseball. There is a reason we talk about the cap, and it's based on LEAGUE INCOME. Last I checked the cap wasn't set at negative $50m, as in "we all lost money so we are going under, players will have to pay us to play". It's not like the Lakers or Knicks or Celtics have separate TV deals with ESPN.
    All very good points.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by cinotimz View Post
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    While its entirely possible that they have shown losses over most of their time here, one thing is for certain-The value of the franchise has skyrocketed since they bought it. Im guessing even after calculating all the losses over they years and adding that to the purchase costs they are still sitting pretty when you compare that to the current franchise value.
    The franchise value is worth nothing more than the paper it is written on until the owners decide to AND successfully sell the franchise. If the losses are true, the "value" is likely a lot less than previously thought.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Don't confuse GAAP net income/ loss, or a taxable loss, with losing cash.

    Who takes the depreciation expense for the building? I don't know, but that could be a big non-cash number on the income statement.

    Sports franchises have unpredictable profit margins, so they generally are sold for a multiple of revenue instead of earnings. This is likely to be some "funny math" or "funny accounting" to get a subsidy similar to the old MSA subsidy.
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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by ChicagoJ View Post
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    Don't confuse GAAP net income/ loss, or a taxable loss, with losing cash.

    Who takes the depreciation expense for the building? I don't know, but that could be a big non-cash number on the income statement.

    Sports franchises have unpredictable profit margins, so they generally are sold for a multiple of revenue instead of earnings. This is likely to be some "funny math" or "funny accounting" to get a subsidy similar to the old MSA subsidy.
    This is true, but my understanding is that the Pacers are paying a lease on the building. If they have a lease, then it would be highly unlikely that they are the owners, therefore they could not claim the depreciation.

    I have no definitive proof, but this website lists City of Indianapolis/Marion County as the owner.

    I do not know enough about the lease to say whether it would be capitalizable or not. I'll be honest, my background and experience is more on the operations and P&L side than the hardcore balance sheet side.

    My gut reaction to the Pacer P&L and Operating loss is that it is probably a closer representation of cash before taxes than the OP of most companies. My reasoning on this is that, absent ownership of the arena, there would be relatively little in terms of plant & fixed assets. However, I'm not sure if the nature of a professional franchise would be more or less prone to generate "Intangible Assets," which in turn would create amortization, another non-cash expense to the Operating Statement.

    It is a true and relevant point that the nature of the agreement between the City and the team could result in some different "rules" for the reporting of income. The old MSA agreement dictated that the Pacers share half of the profits with the city in any year that there were profits. While I stop well short of saying that the Pacers reported false losses, I will say without reservation that I'm sure that they presented the financials in the manner most advantageous to them within the auspices of the agreement. That is to say they probably reported the minimum revenues and the maximum costs allowed. How materially different that is from what would be considered "normal" reporting, I cannot tell you.

    All that being said, I still find it likely that the Simons have put more cash into the Pacers over their ownership than they have taken out. Even so, it has still been a good investment for them, and their estates stand to get a nice chunk of change on the sale of the Pacers.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Considering player salaries and what has transpired with the Pacers ticket prices, considering the attendance figures as well, I do NOT find it hard to believe at all that the Pacers have lost money in 9 of the last 10 seasons. Considering all the lean years that we had in the 80s, I really can't dispute that we've lost in 25 of 27 years.

    You guys can talk about catering, memorabilia sales and concerts all you want, but the heavy hitters affecting the bottom line are player salaries, ticket/suite sales and TV revenues. I don't think the other items amount to enough to make a difference as to whether the bottom line is going to be red or black.

    For a lot of years, the Pacers have tried to come up with a way to help some seats hold the line on price to get the "average" fan into the fieldhouse, while raising prices on the tickets that would be purchased by high rollers. I really don't know what this has done to the average ticket price, but let's consider what the ticket increase would have to be to cover various levels of salary.

    Just to do some sample calculations, let's assume you have a team that draws 15,000 fans every year. With 45 home games (41 regular season and 4 pre-season), you would have to raise ticket prices an average of about $1.50 to break even on increased player salaries totalling $1M.

    Many forum members have stated that they really didn't care what players cost, they just wanted the best players we could get to produce a winner. But in the market that we are in, the Pacers cannot signficantly raise ticket prices (nor have they done so) while trying to maintain/build a contender. You always want more talent, but you must find a way to make the cost of that talent fit into the salary structure that you are forced to maintain. If you don't want to negatively affect your bottom line, then higher salaries must translate directly into higher ticket prices. It's as simple as that.

    What I am saying is that I don't believe our average ticket price has kept pace with the player salaries, therefore I am not surprised that the Pacers lose money year after year.

    Many of us have stated that we don't think there is a significant risk of the Pacers relocating in the next few years. Count55 has stated that he sees a greater likelihood in having fewer team franchises than in teams like the Pacers relocating. I agree with that statement.

    But what this league really needs to help small market team owners and their fans would be for an across the board reduction in player salaries and the salary cap. Reduce the major expenses that the owners have with the understanding that ticket prices could also be reduced within a year or two.


    Applying that through the years to some of the player salaries that were renegotiated like Reggie, Smits, Jermaine, etc.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by count55 View Post
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    I, too, question this statement:



    I believe that the Pacers have had an overall loss over the last 27 years, and an overall loss over the last 10 seasons, I do not see how they could've shown losses in 25 separate years.

    I find that bothersome, because their position is strong enough with simply the net Operating Loss over the ownership. It does seem to be an odd claim to make. Either, they're making an imprudent exaggeration, or they have pretty strong data to support the claim. It simply seems foolish to me to make that specific of a statement, because they have to know it will be challenged.
    To my knowledge I think the only years they actually made money was the first 2 seasons in Conseco. They never made money in MSA

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by Unclebuck View Post
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    To my knowledge I think the only years they actually made money was the first 2 seasons in Conseco. They never made money in MSA
    The Forbes data says that they showed (small) operating profits from 2001 through 2005 (IIRC), though the Simons dispute it.

    The article linked here said that they had made money one year in MSA, and I find that relatively believable.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    It always tickles me when people say, "You can prove anything with statistics." The real you-can-prove-anything game is accounting. I think it likely that the Simons' balance sheet shows what they say it shows, but that they could have figured it differently and gotten a different result.

    The important thing is, in this case the past is not prologue to the future.


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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    If we were valuing the intangible assets of an acquired sports franchise, we would look at the player contracts, (favorable) lease agreements, advertiser contracts/ customer relationships, broadcast contracts/ customer relationships, etc. There might be some others, but those are the biggies...

    For tax purposes, certain of these assets amortize over less than 15 years. This, of course, would not affect the Simons as they've owned the team for way too long to be carrying any intangible amortization. But there is a bit of a tax advantage to acquiring a business with that particular type of asset.

    You may now return to your day jobs. Mine seems to have followed me here to PD today.
    Why do the things that we treasure most, slip away in time
    Till to the music we grow deaf, to God's beauty blind
    Why do the things that connect us slowly pull us apart?
    Till we fall away in our own darkness, a stranger to our own hearts
    And life itself, rushing over me
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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    So what happens should one of the Simons pass on?
    Nuntius was right. I was wrong. Frank Vogel has retained his job.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Depends on their estate plan. But every sports owner is keenly aware of what happened to the Halas family because of estate tax issues. Just because "we" don't know exactly what is stipulated doesn't mean there isn't a plan.

    It is likely that the heirs would be taxed quite a bit on the increase in Fair Market Value. Of course, in the Simons' case, one would attempt to argue that the Forbes numbers are phoney-baloney and that the real FMV is much lower (thus a lower tax burden.)
    Why do the things that we treasure most, slip away in time
    Till to the music we grow deaf, to God's beauty blind
    Why do the things that connect us slowly pull us apart?
    Till we fall away in our own darkness, a stranger to our own hearts
    And life itself, rushing over me
    Life itself, the wind in black elms,
    Life itself in your heart and in your eyes, I can't make it without you


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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by ChicagoJ View Post
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    Depends on their estate plan. But every sports owner is keenly aware of what happened to the Halas family because of estate tax issues. Just because "we" don't know exactly what is stipulated doesn't mean there isn't a plan.

    It is likely that the heirs would be taxed quite a bit on the increase in Fair Market Value. Of course, in the Simons' case, one would attempt to argue that the Forbes numbers are phoney-baloney and that the real FMV is much lower (thus a lower tax burden.)
    Almost three times revenue does seem a bit hefty.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by ChicagoJ View Post
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    If we were valuing the intangible assets of an acquired sports franchise, we would look at the player contracts, (favorable) lease agreements, advertiser contracts/ customer relationships, broadcast contracts/ customer relationships, etc. There might be some others, but those are the biggies...

    For tax purposes, certain of these assets amortize over less than 15 years. This, of course, would not affect the Simons as they've owned the team for way too long to be carrying any intangible amortization. But there is a bit of a tax advantage to acquiring a business with that particular type of asset.

    You may now return to your day jobs. Mine seems to have followed me here to PD today.
    Since it sounds like we have the same day job, I thought I'd expound on things you already know for the benefit of those who actually want to trudge through a bunch of accounting/finance mumbo jumbo below:

    1-I totally agree about the subsidiary shell game. The only way to know the true value/financial status of the franchise is to get the consolidated books of the franchise and associated enterainment/management affiliates. The financial books and the tax books both, because as you're painfully aware, they're going to look a lot different and the actual cash flow generated can only be determined by taking components of both sets.

    2-There shouldn't be any (or at least too many) non-cash expenses associated w/ amortization because as you've mentioned, any amortization that comes from acquiring the franchise would have been taken years ago. Self-created intangibles that have emerged since then wouldn't be on the books as intangibles, so you don't amortize them.

    3-I am 99.99% sure that the Pacers are taking depreciation on the building even though they don't own it. This is the source of their "loss". Every franchise leasing a facility takes this paper loss and it's huge--probably about $15 million for the Pacers per year. To put it in perspective, that's 18,000 tickets sold at $55 a pop for 15 home games. Common sense says you can't take depreciation for an asset you lease, but do not own. Until I started seeing it with clients a few years back, I had no clue this provision existed... continue reading at your own peril. There are triggering events (lease pre-payment, certain capital investment, etc) a tenant can perform (at minimal cost) to secure the future depreciation of the facility (at great economic benefit). Anonymous entertainment bizco says it better here than I ever will:

    Due to certain structural elements installed during the construction of the space being leased and certain prepaid lease payments made by us, we are required to be treated, for accounting purposes only, as the “owner” of the [BLANK] Convention Center, in accordance with Emerging Issues Task Force Issue No. 97-10 (“EITF 97-10”), “The Effect of Lessee Involvement in Asset Construction,” even though we do not own these assets and do not participate in or control the operations of the convention center.

    This is only on the financial reporting books, so it doesn't have an impact on what the franchise actually pays in taxes. It does have the benefit of making nice soundbytes for how much money they're "losing". Mel and Herb are the brains behind one of the largest REITs in the world. If they did not take advantage of this, then they also happen to be the luckiest self-made real estate billionaire idiots in the history of the world.

    Quote Originally Posted by ChicagoJ View Post
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    Depends on their estate plan. But every sports owner is keenly aware of what happened to the Halas family because of estate tax issues. Just because "we" don't know exactly what is stipulated doesn't mean there isn't a plan.

    It is likely that the heirs would be taxed quite a bit on the increase in Fair Market Value. Of course, in the Simons' case, one would attempt to argue that the Forbes numbers are phoney-baloney and that the real FMV is much lower (thus a lower tax burden.)
    There is most definitely some sort of a plan and the FMV issue will come into play. Even if you assume the Forbes figure of $280 million is correct, that assumes the asset is fully liquid and can be sold tomorrow. As we know from other franchise sales, this is not the case. The Simons will (or have already) argued that it would take them about 2 years to find a buyer based upon prior sale attempts of franchises. During that time, the value of the franchise could go up or down, but they're stuck with it. Without getting into too much detail, they'll get a discount of roughly 25% on that $280 million in the stated value to reflect the actual FMV (marketability considered). There is probably an even chance that they're already in the process of "gifting" the shares to family right now, which comes at an even bigger discount (due to additional lack of control of a minority interest). Again, even if the $280 million total value is correct, a 1% interest in the franchise could probably be gifted for $1.7 - $2.0 million.

    Sorry to all who fell asleep reading this.

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    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by Ivan Renko View Post
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    Since it sounds like we have the same day job, I thought I'd expound on things you already know for the benefit of those who actually want to trudge through a bunch of accounting/finance mumbo jumbo below:

    ---'snip'---

    Sorry to all who fell asleep reading this.
    Wow, that was all over my head.
    ...Still "flying casual"
    @roaminggnome74

  25. #25

    Default Re: IBJ: Conseco Quandary; Economist Questions Pacers' Loss Claims

    Quote Originally Posted by Roaming Gnome View Post
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    Wow, that was all over my head.
    Like I said, accounting finance mumbo/jumbo. To make analogies:

    1-You (the Pacers) give your income to your two children (named Catering and Concessions), then you tell me you're broke because you have no income in your name.

    2-Doesn't matter in this case.

    3-You (the Pacers) help me build a deck on my new house and rent it from me. Even though you don't own the house and the mortgage is in my name, due to some strange accounting rule, you can claim the interest expense on my mortgage even though you don't pay it. You deduct this from your income to make yourself look less wealthy. Then you tell me you want the rent reduced because you have no money left after taking my interest expense.

    4a-something is only worth $15,000 if you can sell it for $15,000 immediately. If you have to wait a year or two to sell it for $15,000, it's worth less than $15,000 today.

    4b-Owning 1% of something doesn't mean you necessarily get 1% of the value of something because you don't control the asset. You give me 1% of the value of my house and expect to get 1% of the gain in a year when I'm supposed to sell it. I might just decide to hold onto it for 30 years in which case your $$$ is tied up in the house for 30 years. You just gave me an interest-free loan. Thanks.

    There are ways to combine 4a and 4b to give 100% of businesses to heirs over a number of years for much less than what 100% of the business would sell for. This is done to minimize estate taxes.
    Last edited by Ivan Renko; 02-11-2009 at 03:17 AM.

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