Tuesday, November 4, 2014

The Question, Answered

Will the Bucks stay in Milwaukee?

For quite some time, that has been the prevailing question for Bucks fans.  We don't have an answer yet, but there have been many lessor questions that have come up while we wait for an answer.

Why didn't Herb Kohl sign a 30 year lease?

The Senator signed a six year lease in Milwaukee a few years ago, thus securing the team's short term presence in the city.  He chose not to sign a 30 year lease, which would have alleviated a lot of stress on a lot of people.

Herb Kohl would tell you that the NBA would only allow the lease signed a few years ago to be for six years.  Ostensibly, that is true.  The League did want Kohl to extend for six years or less.  But he could have signed for 30 years, or more.  The League cannot stop an owner from signing a lease.  The League can try, but they would lose in court if push came to shove.

So why, then, did The Senator sign a lease that would put the team in peril?  For more money, of course.  The Bucks with three years remaining on their lease were worth $550 million (actually $350 million or $450 million, I suspect) in spring of 2014.  With 27 years left on their lease, they'd have been worth about $250 million (or less).  Herb Kohl put the Bucks' future in Milwaukee in doubt in order to pocket an additional $200 million or so from their sale.

Why did Kohl and the new owners pledge $200 million towards a new arena?

They didn't.  They demanded $200 million (or more) for a new arena.

Milwaukee is a difficult market for the NBA.  When the NBA sees a difficult market, they (and/or the local team) demand tax money from that market in order to make up for it.  The Bucks can't charge Los Angeles (or San Francisco, or even Portland) ticket prices, they can't draw fifty thousand TV viewers per game and they can't get corporations to pour money into advertising at the arena.

To make up the difference between what the Bucks would be worth in a replacement market (Las Vegas, St. Louis, Seattle, etc.) and what they are worth in Milwaukee, the NBA and the new owners want tax money.  It is politically difficult (though not impossible) to just ask a city for tax money so that an NBA team will stay.  It is far easier to ask for tax money towards a new arena, because the NBA team can claim that a new arena will be used for other things or will stimulate economic growth.

Here is how the math works: $100 million (the new owners' contribution) is equal to about $5 million per year over thirty years, after accounting for the time-value of money.  The Bucks only need to draw an extra $120,000 extra per home game per season to reach that amount.  They hope that higher ticket prices, increased attendance and better advertising possibilities will draw well over $120,000 per game, thus making the arena worth it to the new owners.

The famed $200 million pledge was not a terrible sign for the NBA's future in Milwaukee, but it was hardly reassuring.

Why was Jabari Parker drafted?

This was a worrying sign about the owners' commitment to Milwaukee.

The optimist's view is that Bucks' management felt that Jabari Parker was the best player in the draft, and that drafting Jabari Parker was the best basketball decision.

The pessimist's view is that if out-of-town owners aren't entirely committed to Milwaukee, then the prudent thing to do is draft the player who will generate the greatest immediate returns (rookie of the year hype, ticket sales bump, etc.) rather than the player with the greatest potential who has to sit out for at least several months (Joel Embiid).

Drafting Jabari may have been all about basketball, but it would also be a bread-and-butter part of the playbook for a team with an eye on leaving Milwaukee.

Why did the Bucks hire Peter Feigin as team president?

Peter Feigin is has a great resume and is by all accounts a very personable businessman.  He did amazing work with NetJets.  But he was brought in for one overriding reason: to secure tax money for a new Bucks arena.  Feigin is a relationships guy, not a nuts-and-bolts operator.  He is there to befriend Milwaukee businessmen and politicians so that they are more likely to contribute (either private money or tax money) towards a new Bucks arena.

Teams that are serious about their long term prospects in a city tend to hire an operator as team president.  The Brewers, for example, have had Rick Schlesinger in an equivalent role for years.  He is not out in public all of the time talking to the media and glad-handing local leaders.  He is trying to maintain a stable sports franchise.

Peter Feigin may end up being a great team president for the Bucks, but his hiring was another sign that the new owners want to pump up the franchise in the short term, but are only committed long term if they are given tax money.

***

Here we are.  New owners who have talked a lot about staying, but always with the caveat that someone must give them a lot of tax money.  A new player who is expected to win rookie of the year, but who may not grow to have the best NBA career.  A new president with a track record of growing businesses, but without a background in running a large, stable organization over a long period of time.  It all makes the author worry.

But then we get back to the overriding question: Will the Bucks stay in Milwaukee?

Amid all of the doubts and the demographic shortcomings and the worrying signs, this week brought a reassuring report: the Bucks want to build their new arena where the Milwaukee Theatre and MECCA (technically, "UWM Panther") Arena stand.  At last!  A true, reassuring sign that the new Bucks' owners are serious about staying in Milwaukee.

The $200 million pledge and Jabari and new team president didn't cause yours truly to believe that the new owners were serious about Milwaukee, but the reported site for a new arena does.  Why?  Because building a new arena on the site of the Theatre and Arena means that the new Bucks owners are taking a pragmatic approach.

Building a new arena at any site besides the site of the Arena and Theatre is not the most pragmatic option because it would require new taxes.  To economics professors, new taxes towards an arena may not be any more objectionable than existing taxes, but to the public, new taxes are worse.  New taxes don't have inertia and the public is naturally fearful of local and immediate change.  Existing taxes are already there.  The public is already paying them.  The public tends to be more approving of repurposing them.

The Theatre and Arena are already part of a district (along with the convention center) that receives around $25 million per year in tourist taxes (rental cars, hotels, downtown restaurants & bars, etc.).  Around $17 million per year of that goes to pay off construction and renovation debt on the convention center and Theatre, respectively.   The other $8 million or so per year goes towards administration and maintenance of those three buildings.  Take away two of those buildings, and much of that $8 million per year gets freed up for a Bucks arena.

$8 million per year may not sound like much when modern NBA arenas cost over $400 million, but it is worth around $120 million over an arena's 30 year life.  Add that $120 million to the $200 million that has already been pledged towards a new Bucks arena, and we're close.  Close enough that a new arena may be possible without having to create a new tax or extend the Miller Park tax (which are both political poison at the moment).  Close enough that the new owners may volunteer to cover the additional $80 million or so to prevent the NBA from buying back the team for $575 million in 2017 (as the NBA has the right to do if no arena is built by then).

So, let's celebrate Bucks fans!  The team is 1-2, but they look far better than they did throughout most of last season.  The first game had around 16,000 people in the building; all into supporting the Bucks.  And the reported new arena site is a big time confirmation that the new owners are serious about staying in town.

Will the Bucks stay in Milwaukee?  It looks like the answer is an emphatic, Yes!

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