Monday, August 17, 2015

The New York Times Does a Number on the Bucks' Arena Deal (and the Bucks Did a Number on Milwaukee)

An interesting part about following the Bucks' push for a new arena (actually, not so much for a "new arena"; more like for "$450 million or so in government subsidies and preferential tax treatment under the guise of needing a new arena") was the fact that many of my politically left friends who are Bucks fans felt surprised by Democrats' opposition to the deal.  I follow sports arena financing (an odd hobby, I know), primarily through a left leaning blog called Field of Schemes, and so I was WELL aware that people on the political right tend to believe in the economic power of successful sports arenas, while people on the political left do not.  It's a big reason why states like California, New York and Massachusetts so rarely provide significant government subsidies for new stadiums and arenas, while politicians in places like Indiana and Ohio practically fall over themselves rushing to hand public money to big time sports teams (and even little time sports teams, given the recent trend of certain cities helping get soccer stadiums built).

The New York Times is a virulent left wing publication, so it was no surprise when they sent out prose fetishist Michael Powell to assail the Bucks, Wisconsin politicians and, really, anyone from the area that supports the Bucks' arena deal.  (I mean, just look at that headline: "Bucks' Owners Win, at Wisconsin's Expense".  "The horror," Powell and the Times' editors surely hope their readership thinks, mere seconds before they scoop out the first bite from their Quinoa bowl at the local brunch spot.)  

What was surprising about the Times' hit piece -- and, credit where due to Powell for digging this up -- was that it revealed that the Bucks' owners are NOT EXTENDING THEIR LEASE as part of the deal.  Sounds unbelievable, right?  I'll say it again, just to be clear: the Bucks are NOT COMMITTING TO WISCONSIN for any additional amount of time in exchange for getting this ~$450 million kickback from the city, county and state.  (And if you're wondering why I keep writing $450 million instead of the conventionally reported $250 million, it's because the estimated value in escaping property taxes over the expected lifespan of the arena is $180 million, plus there are other ways the Bucks are being treated preferentially that aren't included in the $250 million number.)  According to Powell, city negotiators tried to get the Bucks' owners to agree to a 30-year lease (which, admittedly, would be on the long end of typical pro sports arena leases in mid-major markets), but Edens, Lasry & Dinan held firm and the local politicians caved.

In fairness, it should be pointed out that the Bucks' owners agreed to cover any arena bond debt if they move.  The new version of the Wisconsin Center District is going to offer $203 million in bonds for the new arena and if the Bucks leave the state before those bonds are paid off then the Bucks' owners have to cover whatever amount of bond debt remains (actually, the District is offering $223 million in bonds, but $20 million of that is to pay off debt on the Bradley Center, and I am unsure if the Bucks' owners are on the hook for that).  So, still a stiff penalty, right?  Construction debt tends to be backloaded, so even if the Bucks' owners wait ten years to move, they might still have to pay the Wisconsin Center District $180 million or so.  

The problem with holding the Bucks' owners to Milwaukee using a bond repayment promise rather than a lease is that it gives us ZERO leverage in preventing a Bucks' move.  In fact, even today -- before the first dollar of the first arena bond has been sold -- the Bucks' owners have no financial reason whatsoever to stay in Milwaukee.  What I'm saying is that the Bucks' owners could put a shovel in the ground in October, see that attendance and TV viewership is disappointing in December, announce that they're leaving Milwaukee in February AND STILL COME OUT AHEAD FINANCIALLY.  The reason is that NBA teams are worth way more money in big markets.  According to Forbes, the Bucks are worth $531 million (using the Forbes valuation of $600 million and subtracting 11.5% based on the fact that the fact that the Hawks sold for 88.5% of their Forbes valuation).  There are a whopping NINETEEN teams worth more than $734 million (which is the Bucks' estimated value plus the amount the Bucks would have to pay the Wisconsin Center District if they moved after NEXT season), including the Thunder, who reside in a market smaller than Virginia Beach (which is the most likely place the Bucks' owners would move without selling the team).  

There is also, of course, the threat of the Bucks' owners selling the team to a group that would move them.  Since the Bucks are unwilling to sign a lease, there is NOTHING that would prevent the Bucks' owners from selling the team in three or four years for $203 million more than it'd be worth in Milwaukee and then paying the District so that the team could move.

I don't actually think that the Bucks are going to move, but the impact of allowing the Bucks to stay without a long term lease is much worse than that.  What's going to happen is that the Bucks' owners are going to bleed Milwaukee dry.  Concert booking don't happen?  The Bucks' owners are going to demand that Milwaukee starts covering operating expenses for the new arena because of "revenues coming in below projections". Developers don't build on the areas around the new arena?  The Bucks' owners are going to ask for additional "tax incentives" to make it easier for them to lease or sell that property.  Bucks' attendance lags?  The Bucks' owners are going to ask that the county's 75% share of parking revenues be reduced in order to "keep the franchise viable in Milwaukee".

When a big time sports franchise is on a long term lease, they can't do these things as easily.  If the Wisconsin Center District says "no", the Bucks would still have to stay.  Since there is no lease and since the Bucks' owners have a viable option to either sell the team or move it themselves and pay off construction debt, the District will be under far more pressure to say "yes".

Here's the sad reality of all of this: the Bucks' owners are not committed to Milwaukee and they don't deserve Milwaukee's support.  The Brewers, for all of the extortion tactics they used to get a free ballpark, were at least willing to commit to Milwaukee for thirty years.  The Bucks won't even commit for five.  You can have nostalgia for when the Bucks were owned by Herb Kohl or you can like the fact that NBA players wear green and white and live in Milwaukee during the winter.  But this is not a partnership.  This is a marriage with an icon-clad pre-nup.  The Bucks have the right to keep a wandering eye towards other cities and ask the local government for more whenever they see fit.  Milwaukee may be getting a nice arena out of it, but the NBA team that occupies it does not love us back.

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