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This article gives a more detailed look at the Pacers lease situation than I have seen before.
The last 5 paragraphs are pretty scary.
Pacers would pay big if they moved
April 17, 2010
Indianapolis Business Journal
Moving the Indiana Pacers from Conseco Fieldhouse to another city would impose serious financial hardship on the franchise, according to one interpretation of the team’s 10-year-old deal with the city.
The Pacers are asking for $15 million annually—or $150 million over the last 10 years of the lease deal for Conseco Fieldhouse—to operate the 18,165-seat venue. The Pacers began asking for the money almost two years ago, but city officials—dealing with their own fiscal crisis—have been slow to comply.
If team officials don’t get a deal ironed out with the city’s Capital Improvement Board by June 30, Pacers officials confirmed that they will begin examining all ways to remain financially viable—and intimated in an April 14 Indianapolis Star story that moving the team was among their options.
CIB President Ann Lathrop did not return calls seeking comment for this story, but told IBJ March 30 that city officials are continuing to work with the Pacers to resolve the issue. She was noncommittal in her support of funneling cash to the Pacers and didn’t indicate any deadline the city is working under.
Sources close to Mayor Greg Ballard said the mayor seeks more control of Conseco Fieldhouse operations, and is resisting merely writing a check to the Pacers and letting the team continue to manage the facility on its own.
Attorney Paul Ogden has written extensively about the Conseco Fieldhouse lease deal.
The notion of having Conseco Fieldhouse sit vacant in the heart of downtown is a dire scenario for Indianapolis. To prevent such a situation, city officials who negotiated the lease included several clauses to discourage the franchise from moving.
The lease for the city-owned fieldhouse stipulates the Pacers organization would have to pay at least $50 million to the city if it vacated the venue, which opened in 1999. Pacers officials have been reticent to discuss the buyout, and declined to comment for this story.
Though the voluminous contract between Pacers Sports & Entertainment and the city is difficult to understand, local attorney Paul Ogden thinks the organization could be on the hook for more than $150 million if it decides to break the lease before it expires in 2019.
“I’ve spent two-plus years trying to interpret that one paragraph about contract termination,” said Ogden, who works in the local Roberts & Bishop law office and has written about the subject extensively for his Web site, Ogden on Politics. “The Pacers and city are largely insulated from [local media and citizens] looking at this contract because the average attorney, let alone layperson, can’t understand it. Nothing in this contract is clear.”
What Ogden was able to discern is that the Pacers must sell the team to break the lease, and the penalty to break that lease is tied to the sale price. Plus, the Pacers would be on the hook for part of utilities expenses CIB paid dating back to the team’s days in Market Square Arena.
The lease, Ogden said, stipulates that an “application termination percentage” will be multiplied by the net sale proceeds to come up with the biggest chunk of the penalty.
“That applicable termination percentage starts out at 50 percent in 2009 and declines about 3 percent to 6 percent every year,” Ogden said.
Forbes magazine valued the Pacers franchise at $281 million in December 2009, which, according to Ogden, means the penalty would be $132 million. Factor in $15 million in unforgiven MSA utilities expenses, and the figure reaches $147 million.
There’s another penalty provision that kicks in after 2010 that Ogden says would cost the Pacers $234 million if the lease is terminated. But that provision is to be used only if it is less than the first penalty.
CIB Treasurer Paul Okeson said, “When you peel it all back, the penalty isn’t as substantial as you might think.” Ogden disputes that. Even officials within Ballard’s administration concede that the penalty will be in the “tens of millions of dollars” range.
City officials don’t think the penalty would be big enough to impede the sale of the team to an out-of-state group, but said penalty proceeds would be enough to operate the fieldhouse without the Pacers for at least three or four years.
City officials also could potentially go after $3.45 million annually the Pacers have not paid for parking in a city-owned garage adjacent to Conseco Fieldhouse, though Pacers officials could be exempt from that if they demonstrate they’ve not met revenue thresholds while operating the arena.
Another important point, Ogden said, is that there is no stipulation within the contract to renegotiate it.
“There is only a stipulation if the Pacers don’t meet certain revenue thresholds to terminate the contract,” he said.
Bad time to sell
There’s another barrier to the Pacers’ moving out of town, said Marc Ganis, president of Chicago-based SportsCorp Ltd., which counts NBA and NFL teams as clients.
In this economy, with the average value of National Basketball Association franchises declining, the number of buyers who could absorb the penalty and pay enough for team owner Herb Simon to recoup anywhere near his losses over the years is extremely limited, Ganis said.
According to the contract, the sale of the Pacers is subject to CIB’s right of first refusal. But city officials said, due to time constraints outlined in the contract and also due to the fact that they have no expertise running a professional sports franchise, a purchase by the city is unlikely. The city would have 45 days to react after Pacers ownership receives an acceptable purchase offer.
Morris told IBJ earlier this year that the Pacers lost $30 million during the 2008-2009 season and he expected another big loss for the 2009-2010 fiscal year, which ends June 30. A financial loss this year would mean the Pacers have lost money 10 of 11 years in Conseco Fieldhouse.
Morris said the Simon family has lost more than $200 million since buying the franchise in 1983.
“I don’t think Herb Simon is the type of guy who will sell low,” Ganis said. “Besides Kansas City and maybe Las Vegas, I can’t think of any other markets that would have much interest in an NBA franchise right now.”
According to studies conducted by Forbes, the Pacers’ value declined $22 million in the last year. In Charlotte, N.C., this year, the Bobcats sold for $275 million to $290 million, according to NBA officials. That’s less than the $300 million Black Entertainment Television founder Bob Johnson paid for the franchise in 2003. Johnson told reporters he lost another $80 million in operations expenses during that time.
Another factor that will impede a sale is an uncertain labor situation and a faltering NBA business model, Ganis said.
The contract governing NBA players’ pay expires at the end of next season, and the 30 team owners are threatening a lockout unless players agree to massive pay cuts.
The Pacers are far from the only NBA team in financial distress. NBA Commissioner David Stern said during all-star weekend in Dallas that the league stands to lose $400 million this season, and has lost at least $200 million each of the last four seasons. He said as many as nine teams are in serious financial trouble.
Stern is calling for reducing the players’ take from 57 percent to 43 percent of the league’s total revenue, with an individual player salary cap of $13 million per season.
It’s a pretty radical shift, but Stern realizes he needs to act before teams begin to fold.
To no surprise, Billy Hunter, the NBA players’ union boss, scoffed at Stern’s suggestions, but Ganis thinks eventually he’ll have to play ball or teams like the Pacers might not survive.
“There’s a fundamental problem with the NBA,” Ganis said. “The players are making way too much money for the size of business it is right now. The teams are being forced to squeeze their markets for cash, and when the corporate markets won’t wield what they need, they’re forced, as the Pacers are doing, to try to enlist government support. And that hasn’t gone down well with taxpayers.”
Sources close to the Pacers said Simon—who took over as the team’s sole owner when his brother, Mel, died in 2009—is beginning to have serious reservations about the future of the team.
In previous interviews, Simon and Morris have been steadfast in saying the Simon family has interest in retaining the team long term. But Morris’ recent public pronouncements that Pacers’ brass would examine all possibilities casts doubt on that.
“The Simon family has poured millions and millions of dollars into this franchise,” said Milt Thompson, president of Grand Slam Cos., a local sports marketing firm. “If you’re in business, you want that business to be self-sustaining. If you can’t get it to that point, you start to consider other options. I think we’re at the point where Herb Simon realizes he can’t continue under the current circumstances.”•
Re: Good explanation of the Pacers lease situation...
No wonder they are begging for any help they can get. If true, what an onerous contract. But, the city built them a Taj Mahal, and did not want to get left holding the bag if things went south, which obviously they have.
Wow. This does crystalize the reality of how dire the situation may well be.
This would explain a lot of what has been going on. The Pacers may need to actively devalue themselves in any way they can just so the cost and subsequent penalty for selling the team is minimized so that they can stop the financial bleeding while hoping that somebody else will come in and take the team for just about ANY price.
Failing that, again if this article is true, if they feel there is little hope of getting things turned around, who could blame them if the franchise simply folds unless the taxpayers want to have Indianapolis to own and and operate the franchise going forward, kind of like Green Bay does with the Packers? Right now, though, that would be an even more difficult sell I suspect.