Thursday, July 22, 2010

Forget Lebron — bigger NBA stories are on tap for the summer

Forget Lebron — bigger NBA stories are on tap for the summer
By Evan Weiner - TheDC 2:07 AM 07/22/2010
The National Basketball Association’s biggest public splash of the summer is the Miami franchise signings of Lebron James and Chris Bosh and getting Dwayne Wade to stay in South Florida and forming the nucleus of a “super” team.
That story is garnering a lot of attention globally, but underneath Heat owner Ted Arison’s opening the checkbook and getting three stars on his roster, there is a boat load of trouble brewing in NBA Commissioner David Stern’s world. The sale of the Golden State Warriors by Chris Cohan to a group led by Jacob Lacob for a reported $450 million is a silver lining because it means there are still people willing to put up big money for a franchise for Stern, but it is one of the few pieces of good news that the NBA bean counters will get in the next 12 months.
In Stern’s world, two immediate problems have cropped up. And in the somewhat distant future, there is a possibility that the owners will lockout the players on July 1, 2011 in an attempt to rein in salaries as part of a new collective bargaining agreement. Stern’s owners allegedly lost $400 million in their business last year.
In California, Governor Arnold Schwarzenegger has threatened to cut state employees hourly wages to the minimum wage of $7.25 because of California’s extreme budget crisis, and that is not good news for the Sacramento Kings ownership group looking for funding for a new arena in California’s state capital. A good many workers in Sacramento are state employees and might not be able to afford Kings games if they lose money or their jobs. How can the Maloof brothers, the Kings owners, ask for public funds when there is nothing but fiscal bad news coming out of the state house on a daily basis?
Schwarzenegger had a court’s backing to cut the salaries of some 200,000 state workers until a state budget is passed. Schwarzenegger’s leverage in the political process disappeared last Friday. The Sacramento area could have lost as much as $60 million a week in wages if Schwarzenegger went ahead with the plan. But Schwarzenegger’s idea has been blocked by Judge Patrick Marlette of Sacramento County Superior Court for the time being.
On Tuesday, the Sacramento City Council passed a resolution asking Schwarzenegger to reconsider his order as one in five Sacramento workers are state employees.
Schwarzenegger promised that the pay cuts will be rescinded when the state comes up with a budget. None of this can please NBA Commissioner David Stern who stepped into the Sacramento arena battle in December 2006.
On November 7, 2006, Sacramento voters flatly turned down Proposition Q 72-28 and Proposition R 80-20; both measures would have provided funding for a new arena.
Sacramento voters just did not want to fork over anything extra for a sports arena for the Maloofs, but that did not made Sacramento politicians and business leaders any less determined to build a new venue for an NBA team. Nearly four years later, there are still options on the table.
Stern hired John Moag, who helped negotiate the deal which brought Art Modell and his Cleveland Browns to Baltimore. Modell cut the deal with Maryland in the fall of 2005 and moved his NFL team to Baltimore for the 1996 season. Moag has been working at an arena proposal for years but hasn’t delivered one quite yet.
Sacramento politicians were prepared to give the Maloofs something no other California city would agree to in 2006. There was five hundred millions of dollar available for a sports facility. But the Maloof brothers didn’t really like the Sacramento deal as presented. Compared with New York, Los Angeles, and Chicago, Sacramento is a weak TV and corporate market, so the Maloofs needed every penny generated in the arena for their business and wanted no competing businesses near the building. The Maloofs wanted a parking lot, not a rebirth for a depressed economic area, by the rail yards. The parking lot would have been a revenue generator for the Maloofs, the city wanted to build on the parking lot in an effort to create businesses, jobs and a tax base.
The parking lot was a deal breaker as the Maloofs went to the sidelines during the 2006 arena campaign because business development was not good for them.
In Stern’s world — as in that of other big league sports commissioners — every team should be viewed as a three-legged stool. All three legs are needed or the stool falls over. In sports, the three all-important legs are big press and broadcast dollars, corporate support, and government. And if you can separate emotions and apply rationality to this issue, the Stern Theory makes a lot of sense.
Government: Without the support of a local mayor, city council, county officials, state government, governor, and federal government, you can’t operate a franchise. Local and state governments typically raise taxes to build arenas and stadiums or give land away for a sports owner to build on in exchange for payments (in lieu of taxes) and a promise that the arena or stadium will serve as an economic engine that will spark a local economy and create jobs.
There is a lot of local government support in Sacramento to build a new arena, an absolute necessity yet there are questions about where to put the building and how the construction will be funded.
Sports owners and sports leagues need government to give them total control of the revenues a municipally built facility generates, including on-site arena restaurants and stores and — a big revenue source — parking. Owners also need a government that will give them sweetheart leases and create special tax districts within the facility so that if a team owner contributes to the cost of the building, he/she can pocket some of the sales taxes collected and earmarked for government coffers.
Owners also don’t necessarily want to see development (such as restaurants and bars) outside their arena, because those establishments become competition for the dollar. The idea is to keep customers in the building, where they’ll spend on products and franchise-owned enterprises that their owners can cash in on.
For the Maloofs, a parking lot is more valuable than the potential for new businesses to pop up around the arena. It’s that simple: The brothers keep parking lot revenues and don’t have to compete with other businesses that might attract their customers.
Local Broadcasting: Comcast probably overpaid to land the Sacramento Kings cable TV rights so it could in turn launch a profitable San Francisco Bay Area regional sports network. Sports owners make billions from cable television, which Congress deregulated in the 1980s. Because of deregulation, everyone who has basic expanded cable pays for sports channels even if they never watch a regional sports network or tune in to national networks like ESPN and TNT. Hapless cable subscribers may pay anywhere between $7 and $12 a month for sports channels alone, and sports are the most costly part of the monthly cable bill. Congress refuses to address a la carte pricing, which would allow cable subscribers to choose which channels they want, in part because the financial toll could wipe out many cable TV networks and have serious impact on sports finances.
Corporate Support: Part three of the Stern trilogy. Someone has to pay for high-end seating like luxury boxes and club seats, and it’s not the everyday fan. In fact, owners don’t court fans; they want customers who can afford luxury suites and seats surrounding the basketball court or rink side seats at a hockey game. Corporate types buy seats and reap the tax write-off, whether they’ve gone to the games because they’re fans or just looking to be seen.
You can’t really blame the Maloofs for playing hardball in 2006. They were just following Stern’s three-legged sports business philosophy; Sacramento got a lesson in what it means to be a small market in the major leagues.
In Indianapolis, Herb Simon got another city bailout to help the “struggling” Indiana Pacers franchise. These two storylines are far more important to the financial health of the NBA than the Miami singings although the loss of Lebron James in Cleveland will return the northeastern Ohio city back into the NBA doldrums and that could add Cleveland owner Dan Gilbert to the list of financially hawks who might want to shut down the NBA next year when the collective bargaining agreement ends on June 30, 2011.
In a fiscal-conservative state, Indianapolis officials through the city’s Capital Improvement Board and Simon have adjusted a 1999 lease agreement and the city will give Simon $33.5 million over three seasons for expenditures to operate the city’s arena.
There will be a $10 million per year bailout to operate the arena along with $3.5 million for capital improvements between 2010 and 2013. The Capital Improvement Board, which is cash strapped, hopes to use funds from a one percent hike in the Indianapolis hotel tax to pay some of the $33.5 million they have committed.
Indianapolis has spent over a billion dollars on the arena and a new football stadium. Simon’s original lease gave him the ability to control the operations of the building, pay virtually no rent and keep all of the revenues from Pacers games and other events in the building. Despite the one-sided nature of the lease where Simon got virtually all of the revenues and the city got whatever was left, Simon has claimed his losses are staggering.
Simon’s Pacers will continue to play in the building for the next three years which ends Simon’s threat of moving the franchise for the time being. In 2013, Simon can move the team if his annual losses exceed $2 million. Should Simon find a greener pasture (Kansas City, Louisville, and Newark, New Jersey—the New Jersey Nets franchise does relocate to Brooklyn— he would have to give back a portion of the $30 million and pay money for breaking the 1999 lease that he signed with Indianapolis officials. Simon is free to leave without penalty in 2019.
Indianapolis is a small market and cannot compete with major markets on the same economic playing field and has given team owners the wherewithal with taxpayers dollars to be on an even playing field monetarily with New York, Los Angeles, Chicago and together big market cities.
Jim Irsay’s Indianapolis Colts National Football League franchise keeps rights to all football-related revenue in the almost new Indianapolis taxpayers funded stadium, as well as half the annual non- football revenue, up to $3.5 million. Irsay pays no rent to use the facility and has a lease until 2034. Irsay receives all revenues from a stadium name, signs and sponsorships in the stadium. The Capital Improvement Board picks up the tab for stadium maintenance and game-day expenses.
In the United States, local and state governments have been pouring millions of dollars into building sports facilities since Milwaukee funded County Stadium in 1950. Milwaukee pioneered giving away the store philosophy when the city finally got a Major League Baseball team. Lou Perini moved his Boston Braves to Wisconsin and got a gift, a stadium to use 77 times a year in 1953 (and beyond) in exchange for $1,000 in rent. Perini had some guilt about paying $1,000 in rent and keeping all the concession money so he gave Milwaukee $25,000 for rent after nearly 1.9 million people paid to see Braves baseball in Milwaukee in 1953. There is no real reason that municipalities spend billions on sports facilities other than it gives an area a sports identity and a meeting place where people to bond watching a game. But it sure seems rather expensive to prop up the sports business.
Evan Weiner is an author, radio-TV commentator and speaking on “The Politics of Sports Business” and can be reached

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