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An NBA franchise is a field of dreams for hedging investments

City partners, beware! Such pro-sports deals are full of arcane opportunities for making money, including the art of hedging income.
Chris Hansen, left, with Mayor Mike McGinn during a press event.

Chris Hansen, left, with Mayor Mike McGinn during a press event. Office of the Mayor/Flickr

CenturyLink and Safeco Field could be joined by a sports arena.

CenturyLink and Safeco Field could be joined by a sports arena. Dcoetzee/Wikimedia Commons

Seattle Mayor Mike McGinn and County Executive Dow Constantine are working behind closed doors to draft a memorandum of understanding (MOU) with San Francisco hedge-fund manager Christopher Hansen, who wants to bring NBA basketball back to Seattle. Under the MOU, the city and county would provide up to $200 million of public financing for a new professional basketball and hockey arena in Seattle's SoDo district.

City sources suggest that the MOU will be released soon. Then will come intense scrutiny by the City Council and others. The vetting had better be intense, because in these negotiations the private side is thick with lawyers, clever deals, and arcane, hidden factors.

A good place for initial skepticism is the repeated claim that this project will be "self-financing."  That is absurd on the face of it. There are real choices to make in using $200 million of public financing. That much money is never free. There are up-front costs, opportunity costs, and major mitigation costs that will require more public money to be spent. Pretending otherwise is pure spin.

Another reason for alarm is the absence of a truly independent entity to do the due diligence, such as an Arena Due Diligence Commission. Such an independent entity should not be packed with politicians who stand to benefit politically, nor with private parties who stand to benefit economically (landowners, team owners, bondholders, hedge-funders, investors, construction unions, boosters, nearby real estate developers, etc.).

The Arena Review Panel that early on concluded the idea to be worth exploring sketched a roadmap, detailing 17 rock-solid due diligence items (Section 4)  still to be tackled. That panel's work was more "preview" than "review." A new panel should do the heavy lifting that is real due diligence.

But even where the reviewing entity is independent, in these stadia deals there is often a mismatch around the negotiating table, with the public playing defense. The true benefits to backers are greater than most people realize. The opportunity costs and the risks to governments are frequently clouded by fan-fueled boosterism. Vital questions that merit attention can be lost in the din: What is the best use of public financing? Is subsidizing private businesses really the most important thing we can do with these resources right now? Are we maximizing benefit to the public?
 
The strongest card that the city and county hold is their approval of the deal. The danger is that officials, pressured by the sports interests and their own political interests, will play that card way too early in the game, yielding negotiating strength before full public consideration of every deal detail. That may have already happened, with McGinn and Constantine rooting hard for the idea way before the full costs are known.

Critical in this arena proposal is the fact that Hansen, the backer, is in the hedge fund business, managing the money of high-net-worth individuals with a sharp eye on tax laws, offsetting losses, and hedging. Hedge funds find ways to make money while also paying far less tax on that money. This is a fairly rare skill that clients pay handsomely for. Combining ownership of a professional sports team (whether or not it makes money) with a publicly financed stadium deal offers a field of dreams for hedging opportunities.
 
On the face of it, investing in an NBA franchise seems risky and an almost sure way to lose money. But not really. These deals provide arena and team investors all kinds of ways actually to make money and capture value on some smart hedges that are unavailable to public financiers and almost invisible to the public eye.

Here are at least six ways for such a "foolish" investment to pay off for investors.

First, the owner group stands to make money on the dirt they already purchased. The MOU will likely specify that the City/County will purchase the land at an appraised price. But who specifies the appraisal? Will it be an arbitrative process (average of multiple appraisals from appraisers chosen by all the parties) or an arbitrary one (the seller's appraiser)? Even so, the purchased land, thanks to the speculative real estate interest it will have generated, is sure to make money, all the more so as years go by.
 
Second, the owners stand to make money on the acquisition and sale of the teams. Regardless of team performance or operating results, team prices go up, often by a lot, when they are sold over time. That's because team ownership offers powerful tax advantages, and also because there is a shortage of teams to be purchased, thanks to an artificially constrained supply.
 
Third, the Roster Depreciation Allowance  (PowerPoint) allows team owners to claim a significant financial benefit by pass-through depreciation of player salaries (as an asset, just like a herd of cattle), while also claiming their salaries as expenses. It's tricky, obscure, and it requires sophisticated accountants and lawyers who can easily be a few chess moves ahead of the team on the other side of the table. These allowances are worth millions if someone has a lot of other income to offset.


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Comments:

Posted Mon, May 14, 8:08 a.m. Inappropriate

Extremely well written piece. Thank you. The last couple paragraphs illuinate what really added expenses to the current sports stadiums and the Gates Foundation locations; the costs of rerouting traffic and building new transportation infrastructure to accomodate these structures. Generally these costs are hidden from the public. The City seems attracted to any project that gives them quick tax revenue like sports tickets. This money isused to pay for all the city employees. Really running the city is running a business, a comptetive business with the advantage of being able to skim a percentage off the top of every ticket (car rental, hotel room rented etc) sold. Thats wht the City Council is so enthusiastic without much due diligence. Quick cash.

chapala21

Posted Mon, May 14, 5:42 p.m. Inappropriate

Actually, you are wrong about the "quick cash." The tax revenue on tickets, concessions, etc., which would and should go to the city, will instead be used to pay off the construtciont bonds for the arena. So, the city (and county) won't get any "quick cash" from this deal, at all. That is the public tax subsidy for the arena -- the taxes collected at the arena that should go to the city and county general funds will instead be used to pay for part of the arena.

Lincoln

Posted Mon, May 14, 9:22 a.m. Inappropriate

There is a reason the backers are trying to rush this through with as little public scrutiny as possible, and great thanks are due Matt Fiske for illuminating these concerns in this well-written piece.

Here's a key point backers don't want focus on: "The true benefits to backers are greater than most people realize. The opportunity costs and the risks to governments are frequently clouded by fan-fueled boosterism."

There is no rush. There is no team. Even if a team becomes available, there are far better places to put a new arena than in the city's premier industrial and manufacturing center, and wiping out high-payng good jobs for low-wage service sector jobs.

Posted Mon, May 14, 1:24 p.m. Inappropriate

The key phrase here is "behind closed doors."

McGinn, the "progressive" darling of Seattle's hipsters, bicyclists, and all-night drinkers, has been just as secretive as any Republican plutocrat.

First he tried to give away the Key Arena as if he owned it. Then he uncorks some lie about how this isn't a subsidy to a California billionaire. He adds another lie about how the city is insulated from financial risk. He pretends to offer a citizens review committee, which winds up being packed with real estate developers. You know, the same ones he's trying to exempt from zoning laws that require them to including parking in their new buildings.

Okay, so we have another gigantic piece of evidence that McGinn is every last bit as corrupt as any other politician who's ever waddled through Seattle with his pockets stuffed full of cash. But let's not let the city council off the hook, because they're all in on it too.

Meanwhile, the voters will be required to vote on a series of tax increases to preserve basic services, as if what we pay now shouldn't fund them. We have the best local government that rich special interests can buy.

The cherry on top of this sundae is that the "progressives" of Seattle actually defend this cast of characters and call them "progressive." Why? Because they'll paint a few bike lanes on the crumbling concrete? The "progressives" are such cheap dates!

NotFan

Posted Mon, May 14, 2:03 p.m. Inappropriate

Public Policy Analysis in theory considers "worst case," more often than not the theory in practice is best case. This even though the problems with doing so now abound, and far beyond our fair city.

A mere five days ago the WSJ just reported the grossest one yet. Goggling exactly: "Glendale's Public Hockey Project" bypasses the paywall.

Less than a month ago the WSJ was reporting on missing in action sports teams at Kansas City. Goggle exactly: " Urban Center Is Budget Hole" for that one.

A few days before that another city was singing the blues. Goggle exactly: " Newark, Devils Walk Away From Fee Deals"

Prior to this latest "do I have a deal for you," I confess to paying attention to more important things.

afreeman

Posted Mon, May 14, 8:20 p.m. Inappropriate

Add Wenatchee to your list.

KAM

Posted Mon, May 14, 2:15 p.m. Inappropriate

I agree with the other commenters that this was a refreshingly useful and informative piece of writing. I had no idea of all the "hidden" extras in benefits Hansen and his investors could potentially reap. I knew for sure that this plan would involve public money and would result in other, more important, needs being unmet, or as NotFan notes, and extra taxes levied against us.

I have to say I am so disappointed in McGinn. As others note, he went right over to the dark side (this assuming the best that he wasn't part of it to start), and is ever more firmly entrenching himself there along with our council members.

It would be great to have someone not beholden to the developers (including the transit folks) for whom to vote. But that seems unlikely. They would never be able to raise the money to run a winning race. We should lobby for a local ordinance repudiating Citizens United.

mspat

Posted Mon, May 14, 3:41 p.m. Inappropriate

When all the data comes out, this will be revealed as a huge embarrassment for the Mayor's office, as well as his biggest failure.

Godwin

Posted Mon, May 14, 5:19 p.m. Inappropriate

One can only hope.

NotFan

Posted Mon, May 14, 4:30 p.m. Inappropriate

Maybe Matt would like to write this when he has the MOU, and not just the assertions he pulls out of his ass.

Or not.

Mr Baker

Posted Mon, May 14, 5:46 p.m. Inappropriate

Of course, Mr. Baker is already pushing this deal as hard as he can, without having see the MOU, right, Baker? Baker doesn't care what is in the MOU, he will support it no matter what.

How much crap have you written about this arena deal without having seen the MOU, Baker? You don't mind pulling assertions out of your ass, do you?

Is there anything that could be in the MOU that would cause you to withdraw your support for this boondoggle, Baker?

Lincoln

Posted Mon, May 14, 6:10 p.m. Inappropriate

I doubt he'd ever be against it. But I'd be for it if the guy who wants to build it will pay for it himself. You know, just like Amazon is going to pay for its own office building?

NotFan

Posted Mon, May 14, 10:39 p.m. Inappropriate

Seattle wants the NBA back, and will take the hockey that goes with it.It has wanted the NBA back ever since the Sonic's left. And now the "remorse" sets in which can only be satisfied by a lengthy "Seattle process." And process, and more process. Yes, the investors will make money, and hopefully the City will do its due diligence, which it should, and the taxpayers will be out some bucks. But bottom line: Does Seattle "want the car?" To be continued.

Posted Tue, May 15, 12:50 a.m. Inappropriate

The taxpayers "will be out some bucks" only if we tolerate official corruption.

NotFan

Posted Tue, May 15, 9:40 a.m. Inappropriate

Remember "you have to buy now or the opportunity will be gone forever"?

So 2007.

Godwin

Posted Tue, May 15, 1:48 p.m. Inappropriate

Certainly I do not have a vested interest in an NBA stadium in Seattle short of having some sympathy for the way the Sonics were so cruelly yanked out of town. That said, this is a good article with some problems as well. We are in a diverse global economy. Even sports function in this manner. A basketball fan is Madrid reads a story about Seattle Super Sonics and thinks positively about the city. Another is offered a job in Seattle from Boston and must decide if his/her lifelong love of NBA is to be forsaken as part of the cost. These factors help determine where companies locate or relocate. These same companies often gain great tax benefits from local governments for doing so (or not leaving). Seattle competes with other cities for these things to keep the city vibrant. Non-sports companies use the exact same tax laws to gain an advantage over competitors. Using depreciation of intangibles for taxes was around before NBA franchises. Same with depreciation of fixed assets. The article is carefully worded to mislead that only sports teams can do this. Still, I am not in favor of public financed arenas unless ticket taxes are dedicated to retiring the bonds and there is no up-front cost to the government except transportation. Yes, transportation is a cost to the government, as it is for a new mall or a new park. Most of those costs are borne by the federal government when they involve interstate highways.

lee3022

Posted Tue, May 15, 2:52 p.m. Inappropriate

Non-sports companies use the exact same tax laws to gain an advantage over competitors.

Within a week of McGinn having announced the sweetheart subsidy for his new billionaire BFF from California, Amazon announced that it would erect three office buildings downtown. Did you notice the city offering to pay half the cost of the buildings out of the sales tax receipts on the books Amazon sells?

I didn't notice anything like that. So don't tell us that every business gets a bucketload of subsidy, because it's not true. And if someone stays in Boston rather than take a Seattle job because there's no pro basketball team here, I'd say the dummy didn't want the Seattle job to begin with.

NotFan

Posted Tue, May 15, 3:20 p.m. Inappropriate

Frank McCourt, recent owner of the Las Angeles Dodgers surely must be or should be Mr. Hansen's inspiration. McCourt bought the Dodgers in 2004 for $430 million, he then ran up $579 million in debt, never made a profit and then sold out (after entering bankruptcy) for $2 BILLION. The LA market, the glamour, the publicity, the stars...etc. It is more than sad, it is sick-making, that Seattle would harm our port, the should-be soul of the city, to even one 15 minute traffic jam in order to join this mass hysteria of big image, big money sports. As most commenters above note there is no payoff except to those afflicted by media driven professional sports neurosis.

kieth

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