Baseball Deep In Debt (Part 1: The Scope of the Problem)

It gets worse. Baseball teams are often owned by other business entities, and these owner businesses also carry debt. The Texas Rangers’ bankruptcy was not caused by Texas Rangers’ debt, but by the debt owed by the Rangers’ parent company. It can be a difficult matter to consider what debt to assign to a baseball team that is owned by another business. For example, consider that the Toronto Blue Jays are owned by Rogers Communications, a company with more long-term debt than is owed by all thirty baseball teams combined.  Should we factor in any Rogers Communications corporate debt in determining how much the Jays team should be allowed to borrow?

Still other teams are responsible to repay “off balance sheet” forms of financing – these are obligations that are not treated as “debt” by the accountants, but look a lot like debt to the rest of us.  For example, the Yankees spend over $60 million annually to repay the bonds used to finance the new Yankee Stadium, but these bonds are not counted as “debt” owed by the Yankees. The Mets have a similar obligation to repay off-balance sheet debt incurred to build Citi Field.

The question of debt is a complicated one. It’s surprisingly difficult to calculate debt and to determine how much debt is too much.  When it comes to baseball, the question of debt becomes more complicated, because baseball teams (being private businesses) are not required to disclose their financial affairs to people like us.

It’s my job here to discuss these difficult topics, and to make them as understandable as I can.  Let’s give it a shot.

To discuss baseball’s debt, we need numbers to work with. Per usual, I’ll rely on the numbers published by Forbes in their annual Business of Baseball report. These numbers are estimates – baseball doesn’t share its financial data with Forbes.  So please keep in mind that the conclusions I’m reaching in this piece are only as good as the numbers I’ve pulled from Forbes. (You can read here how Forbes gets its baseball information.)

Forbes only attempts to report the debt owed by each baseball team directly – it does not disclose the debt owed by companies affiliated with baseball teams, nor does it touch the issue of off-balance sheet obligations. But the reported debt is supposed to include “stadium debt” regardless of who owes that debt, thoughForbes is not always consistent in what it considers to be stadium debt.  For example, the bonds used to finance the new Yankee Stadium were included as Yankees indebtedness in prior year’s Forbes reports, but not in this year’s Forbes reports.

The amount of debt for each baseball team as reported in the latest Forbes report is set forth below:

You might not have guessed, but the biggest team debt in baseball is owed not by the Mets or Dodgers, but by the Chicago Cubs. The Cubs took on this debt as part of the sale of the team out of the bankruptcy of the Tribune Company to the Ricketts Family. We will focus on this more in a later post, but the sale of baseball teams like the Cubs, Dodgers — even the Red Sox — has created much of the debt we see in the above chart.

The debt/value percentage in the above chart shows, simply enough, the percentage by which the value of each team is reduced by team debt.  So a team like the Rangers is not really worth the $561 million shown in the chart, but something closer to $191 million (the value shown minus the team debt).

Also notice the right-most column, showing the increased amount of team debt since 2005. Since 2005, the bulk of new team debt has been incurred by four teams: the Cubs, Rangers, Mets and Nationals. The remaining 26 teams have actually reduced their cumulative debt since 2005.

I want to reiterate, the numbers shown in the chart above do not include off-balance sheet obligations.  So before you read too much into the very low debt/value ratio shown for the Yankees, please keep in mind that the 2010 Forbes report showed the Yankees debt/value ratio at 89%.  The Yankees either have a lot of debt or a little bit of debt, depending on how your view those Stadium bonds.

But enough of the raw numbers.  Let’s jump to the more interesting question: which teams have too much debt?  The writers at Forbes appear to believe that any team with a debt/value ratio above 50% has cause for concern.  If this is true, then we need to be worried about a bunch of teams in addition to the Mets and Dodgers. The Rangers, Cardinals, Nationals and Tigers all flunk the 50% test, and the Padres just barely pass muster under this test. (The Cubs are a special case, as I’ll discuss below.)

Baseball’s rules (about to change) look at acceptable debt in a different way. Rather than comparing debt to value, baseball’s rules compare debt to earnings, or more precisely, a measure of earnings called EBITDA.  EBITDA is short for “earnings before interest, taxes, depreciation and amortization.”  EBITDA is frequently used by financial types (particularly bankers) to measure profitability, and in particular the ability of a company to pay back its debt.  Luckily for us, the Forbes reports ALSO use EBITDA to measure profitability, so we have Forbes numbers we can use to estimate each team’s EBITDA.

As I said, banks love this EBITDA stuff. In a past life, I used to document and negotiate bank loans, so I saw a lot of bank documents that tried to limit borrower debt based on the borrower’s EBITDA. The banks would do this by assigning a multiplier to the borrower’s EBITDA: the borrower could not have debt exceeding 2 times EBITDA, or 4 times EBITDA, or 5 times EBITDA. Put a slightly different way (and in rough terms), the bank was saying that it expected the borrower to be profitable enough to repay its debts in 2 years, or 4 years, or 5.

The baseball EBITDA debt test is this: each team gets a debt exception of $44 million. A team’s debt above $44 million cannot exceed 10 times the team’s average EBITDA for the preceding two years.  However, if a team has a new ballpark (one built during the last 10 years), then the test is relaxed: a team with a new ballpark cannot have team debt (above the $44 million exception) that exceeds 15 times the team’s average EBITDA for the preceding two years.

I can say from my experience that I’ve never seen an EBITDA multiplier as high as 10, or 15.  Granted, EBITDA multipliers are industry-specific: some businesses need to borrow frequently, others do not.  One EBITDA size does not fit all. I never worked on bank loans to sport teams, and I assume that high EBITDA multipliers are normal for sports loans.  Nevertheless, from my experience the baseball EBITDA test looks like it should be an easy test to pass.

Below you can find my chart showing (based on the Forbes estimates) the teams that passed and the teams that did not:

From the above chart, five teams have borrowed money in excess of what baseball allows: the Mets, Dodgers, Rangers, Tigers and Diamondbacks. (The Tigers are something of a special case: they flunk the test because they have negative EBITDA. However, the Tigers would need earnings in excess of those of the Cardinals in order to be in compliance with baseball’s rules.) There are three other teams on the brink of flunking the EBITDA test: the Red Sox (who would have flunked if they’d made just $300,000 less in EBITDA), Cardinals and Phillies.  The Cards and Phils would have flunked the test if they’d built their stadiums a few years earlier.

I’ve highlighted the Nationals because their ability to pass the EBITDA test requires them to continue to earn EBITDA above the league average.

You may wonder why I haven’t branded the Cubs as a EBITDA offender.  True enough, the Cubs debt is more than twice what the MLB rules allow.  But the MLB rules do not consider the Cubs’ debt to be debt!  The Cubs’ lender is the Ricketts family, the Ricketts family is also the team owner, and MLB rules provide an exception where the lender is the owner. But the Cubs’ debt is still debt, no matter what baseball might think.  The Cubs still have to pay interest on the debt (3% per annum, a nice interest rate if you can get it), and the debt still has to be repaid (or if possible, forgiven or converted into equity). Of course, if the Cubs have trouble paying what it owes on this debt, we can hope that their lender will be reasonable.

So let’s count ‘em up: by our 50% debt to value test, the Mets, Dodgers, Rangers, Cardinals, Nationals, Tigers and perhaps the Padres may be carrying too much debt. If we look at baseball’s EBITDA test, we have further confirmation that the Mets, Dodgers, Tigers and Rangers are all too deep in debt, we have additional cause for concern about the Cardinals, and we have to worry about the D-Backs and perhaps the Nationals. That’s 9 teams in all.

In other words, if you think that baseball’s debt crisis is all about the Mets and Dodgers, think again.

I want to end this discussion with a note of rationality: remember, we’re working here from estimated numbers.  We know we’re not looking at the complete picture.  I stressed above, some teams may have debt that we can’t see in the Forbes’ numbers.  Other teams may have assets that don’t show up in these charts. For example: the Red Sox own a big piece of the NESN regional sports network — that network may also owe money, but its value makes it silly for us to worry about the financial health of the Red Sox.  The same may be true for other teams on this list.  If I’ve mentioned your favorite team in this discussion, don’t be too concerned: we cannot reach conclusions about the financial health of any particular team without a hard look at the team.

Unfortunately, if your favorite team is the Mets or Dodgers, others have already looked hard at your team, and they didn’t like what they saw.  For those two teams, financially speaking, things will get worse before they get better.

This is about as much discussion on baseball debt as I can manage for the moment. But there is much more to discuss.  We’ve left the most interesting questions for another post, namely: how did baseball end up with all this debt?  And who is responsible for this mess?  Stay tuned.

26 thoughts on “Baseball Deep In Debt (Part 1: The Scope of the Problem)

  1. williamnyy23

    Great job! A very thorough and informative piece, but if I might, a few followups:

    The Mets and Dodgers are encountering two very unique situations (Madoff and messy divorce, respectively), so I am not sure they really fit in with the overall theme of team indebtedness. Also, it worth pointing out that Zimbalist said the “owners”, not the “teams, “are teetering on the brink”. That’s not really semantics because it acknowledges that personal issues are a big part of each team’s financial distress.

    A second point is baseball teams carried 39% debt/value in 2005 (using Forbes estimates of $9,960mn and $3,880mn), so that figure has actually been coming down. Nonetheless, there are a handful of teams that are in uncomfortable debt territory, but I don’t think it’s at the stage of a crisis. More accurately, it’s a situation in need of a slight adjustment.

    • williamnyy23

      Based on the Forbes’ numbers, the only team who seem to be facing a potential debt crunch is the Mets. Based on drops in payroll alone, the Diamondbacks and Tigers could find themselves within the current cash flow multiplier. Also, the slowly improving Detroit economy could help the Tigers on the revenue end. In 2011, the Rangers will start seeing the benefits from a reportedly mega-cable deal that the team just signed, so their EBITDA is expected to increase significantly. Even the Dodgers, who are just afoul of the guidelines, are a good bet to fall under the 10% limit if the team signs a new deal with FOX anywhere near the recently rumored amount.

      I’d also contest the notion that debt is a bad thing because borrowing fuels growth. The reason debt as increased over the last 10-20 years is because we’ve seen a ton of new stadiums built and a bunch of franchise sales, both of which require borrowing.

      • LarryAtIIATMS

        William, I'll address the second point first: debt can fuel growth only when the money borrowed is invested with growth in mind. The Cubs' debt does not fuel Cubs' growth because the proceeds of the debt were used by current ownership to buy the team. Those proceeds flowed out of the Cubs and went somewhere else. Ditto for the 2005 debt incurred by the Dodgers, and much of the debt on the books of the Mets. I'll address this in a later post.

        To your first point: baseball payrolls are obligations under guaranteed contracts, as you know. The D-Backs and Tigers can reduce payroll in the long run by letting expensive contracts expire and allowing expensive players to go elsewhere, or by trading their expensive players for cheaper ones (part of the motivation behind the Tigers' trade of Curtis Granderson to the Yanks in exchange for the cheaper contract of Austin Jackson). The problem here is that because baseball contracts are guarantee, baseball teams cannot reduce payroll as quickly as other businesses — baseball teams cannot act like Detroit car makers and simply lay off their workers when they need to reduce expenses. In baseball, payroll reductions are more gradual. So, I agree with you about the D-Backs and Tigers' abilities to reduce payroll, if we're looking at the long term.

        But then you have another problem to consider: teams that dump payroll may lose fans. Consider the Cleveland Indians, who have shrunk payroll some 41% in the last three years, and have seen attendance drop by around 36% in the last three years. I won't argue that we have a pure cause-and-effect relationship here, but I do think that every dollar saved in payroll is NOT necessarily an extra dollar of cash flow.

    • williamnyy23

      I think the idea that baseball is doing nothing to monitor its teams is kind of silly (not made by you, but suggested in the Forbes article). If anything, the MLBPA would not let ownership get away with turning a blind eye from mismanagement. As you noted, so much more goes into the calculations, so even if MLB makes one slight adjustment in what it considers operating profit (worth noting here is MLB reporting revenue that was almost $1 billion higher than Forbes), all of the ratios could be meaningfully altered.

      Finally, on the Yankees’ debt, it makes perfect sense to exclude the PILOTs from the total liability because they are non recourse debt. In other words, the Yankees are technically under no obligation to repay it. However, Forbes does net the PILOTs from revenue, so the payments are factored into the equation (i.e., instead of reporting higher debt, Forbes discounts the Yankees revenue and, by extension, operating revenue.

      • LarryAtIIATMS

        william, some of what you've written above will require a full post in response (don't worry, I had this post planned before you commented!). I personally do NOT think that baseball has done an adequate job of policing this situation. The player's union (MLBPA) seems to take a capitalistic free market view of this issue (as they do with, say, what a team is permitted to do with its revenue sharing receipts), and for the most part leaves teams alone to operate as they see fit.

        As for the PILOTs (the payments made by the Yankees on account of the Stadium bonds), true enough, these are accounted for as operating expenses and not payment on debt. True enough, the Yankees are not obligated to repay the bonds — if the Yankees were unable to make the PILOT payments, the bondholders would not be able to take the Yankees to court, or force them into bankruptcy. But the bond program DOES have first call on the Yankees' revenues — without getting into the details, the first $60 million or so of Yankees revenues earned each year must flow into the PILOT program. That IS a technical obligation.

        I don't pretend to know what would happen if the Yankees somehow reached a cash flow crisis and there wasn't enough money to pay the PILOT payments plus obligations like player salaries, revenue sharing, luxury taxes and the like. The prospectus for the Stadium bonds freely admits that if push came to shove the PILOT payments might not end up with a first claim on Yankees' revenues. This is one reason why the Stadium bonds are not rated more highly (there ARE bigger reasons).

        We shouldn't argue about labels. The Yankees' obligations under the Stadium bonds may not be debt, but they're something a lot like debt. In ordinary times the Yankees will make the PILOT payments for much the same reason and with the same purpose that you and I would make our car loan (or car lease) payments. It's cash out the door either way, ultimately going to repay the people who financed the Stadium (or our cars).

        • williamnyy23

          Are you sure about the Yankees obligations under the PILOT agreement? My understanding is these covenants can be very different, so the ramification of a non-payment are decided on case-by-case basis. By the way, I may have missed something, but your second and third paragraphs seem to conflict on this point.

          I don't think this is merely an issue about labels. Debt is not synonymous with long-term obligations to make defined payments. In some ways, the PILOTs are like Arod's contract. Also, keep in mind that the PILOTs are in place of expenses like rent and property taxes. For all those reasons, it would be misleading to consider them as debt, which is why Forbes decided to remove them from that category.

          • LarryAtIIATMS

            William, TRUE nonrecourse debt works like this: a loan is secured by an asset, let's say the asset is a car. If I default on the loan, the lender can take the asset (the car) but the lender cannot sue me to recover the debt or go after anything else I might own. The PILOT bonds work something like that — the bonds are secured by Yankees revenues, and if the revenues aren't enough, there's no recourse against the Yankees' team or anything else the Yankees might own.

            The PILOT payments are actually more complicated than this. The PILOT payments are "payments in lieu of taxes". (By law, the amount the Yankees pay each year cannot exceed the amount they'd have to pay if they owned the Stadium and was required to pay property taxes on this holding.) They arise as follows:

            The debt used to finance the stadium was issued by the NYC Industrial Development Agency, but the Agency is not directly liable for the debt. Instead, the debt is paid from the so-called "PILOT Revenues". The PILOT Revenues are paid by Yankee Stadium LLC, which is also the company that subleases the Stadium from the bond issuer and sub-subleases the Stadium to the Yankees partnership (which in turn owns the Yankees team).

            Yankee Stadium LLC is pretty much a shell company. It gets the money it needs to make bond payments from the Yankee partnership.

            The key to the whole thing is a document titled "Assignment of Ticket Sale and Suite License Proceeds". Under this agreement, the Yankees' partnership has assigned to Yankee Stadium LLC all proceeds received by or on behalf of the Partnership from ticket sales and suite license fees for Yankees home games played during the regular season. I'm relying on the bond prospectus here, but it appears that this Assignment document is structured as an outright assignment, and not (say) as a lien or mortgage on the revenues of the Yankees partnership.

            Of course, once the assigned proceeds equal the amount needed to pay the bonds for the current year, the Yankees are allowed to keep the rest of their money to pay for things like bats, balls and A-Rod's salary.

            If you read this literally, the Yankees do not own their own box office — it's all been assigned away to make sure the bonds get repaid. The better view (practically and probably legally as well) is that the assignment here is not outright, but is to secure the Yankees' non-recourse obligation to fund repayment of the Stadium bonds. But the clear intent is that this assignment is first priority, that the bondholders are first in line to receive Yankee ticket proceeds and that everyone else owed money by the Yankees must wait for the bondholders to receive their yearly allotment.

            Granted, I'm just a humble ex-bank lawyer seeking to understand these bonds by reading a 332 page prospectus (and at that, not always line by line). If there's anyone out there who understands these bonds better, speak up!

            Next we have the question of how to characterize these PILOT payments. From the Yankees' perspective, these payments are for the rental of the Stadium, so you're right that they'd be treated for accounting purposes just like any other current expense. That doesn't mean that we can't see these payments for what they are. A lease can be very much like a mortgage.

            I could write more, but I'm pausing for breath and for more comments.

          • williamnyy23

            Didn't mean to make you lose your breath, especially because my question was rhetorical.

            The structure that the Yankees and the city used to set up the PILOTs is well known, but the devil is in the details and one would really have to dig into that prospectus to understand the covenants. I know I don't want to read it, which is fine because I trust your understanding.

            Again, although the PILOT payments are like owing interest, they aren't the same. One clear distinction is how future potential lenders would view them. Again, depending on the details, normal debt vehicles would likely have precedence over non-recourse, which is what a new lender would care most about. We may have to just agree to disagree on this issue, but I don't think the PILOTs are as similar to debt as you seem to.

    • LarryAtIIATMS

      William, thanks! I'm going to spread out my replies to you over your three comments.

      I understand your point about the Mets and Dodgers being "unique" situations. As a lending lawyers, I've dealt with many of these "unique" situations, and in truth every borrower with a debt problem is unique. But all of these borrowers have things in common, and the biggest thing they have in common are lenders who have reversed course, will no longer lend them money and are focused on trying to get the debt repaid. So from my particular perspective, there's nothing unique about the Mets and Dodgers: they're just overextended borrowers who cannot survive without more credit, and cannot get that credit from conventional commercial sources.

      Yes, the Mets and Dodgers are affected by the personal situations of their owners. But for that matter, so are the fortunes of the 25 other baseball teams owned by wealthy individuals. Wilpon is in difficulty over his investments with Madoff, and the McCourts are struggling through a messy divorce and the losses they must have incurred in the real estate markets. Wilpon and the McCourts are unique because their stories are public. But their stories matter because they own teams where financial plans A and B have both failed. The Plan A is for teams to operate based on their own cash flows. Plan B is for the teams to be strong enough to attract credit to provide the necessary financing to fund operations.

      Because Plans A and B have failed for the Dodgers and Mets, they've each turned to Plan C, which is for ownership to provide additional funding, and for the moment neither Wilpon or the McCourts are able to do that. As you correctly point out, the Mets and Dodgers cannot turn to Plan C because their owners are "teetering". But these teams would not be looking to Plan C if the teams themselves were not "teetering" in some way.

  2. josh

    i have no problem with any amount of debt as long as there are ample cash inflows. cash actually talked about it in the offseason. if a team is taking on more debt than they should, then there's a problem. without context, debt will always have a negative connotation but creditors need to examine who's borrowing their money and assess the risk. naturally, the teams should use some discretion when borrowing, as well.

    • LarryAtIIATMS

      josh, yes. I tried to write a nuanced piece, something that didn't come across as "OMG! Debt!"

      But let's not go to the other extreme. Debt within limits is fine, but as I've tried to show, there are a number of baseball teams that appear to have debts in excess of reasonable limits. Again we must be nuanced, and acknowledge that our picture is incomplete and based on estimates.

      Yes, you can look at cash flow as one measure of when debt is at an acceptable level. This is kind of what MLB has in mind when it measures team debt against EBITDA (and yes, I understand that EBITDA is not the same thing as cash flow, but at least they are roughly related concepts). But remember that at some point debt eats cash. Reportedly the Dodgers' operating profits all (or mostly) go to paying interest on the team's debt. Moreover, at some point debt reaches its limit or starts to contract (lenders won't refinance existing debt and want to be repaid). The line between acceptable debt and too much debt is a fine one, and it's also a moving target.

      As a guy who used to document bank loans, I'm accustomed to using multiple tests to measure when debt is at an acceptable level: not just cash flow tests but also debt to value tests, and for that matter tests that distinguish between acceptable short-term debt and acceptable long-term debt. I'm ALSO used to seeing borrowers agree in advance to use debt in productive ways (for example, I'm used to seeing prohibitions against using debt to fund dividends or other distributions to owners).

      I'll try to address these questions in later posts. Thanks for your comment!

      • josh

        absolutely, larry. i think i understated it a bit. did i read you had a child recently? if so, congrats!

        • LarryAtIIATMS

          Yikes, not me! I think you're thinking of Larry Koestler at Yankee Analysts.

  3. Larry, this is great. All these economic pieces that you do are awesome.

  4. LarryAtIIATMS

    Sabrina, the CBA is paper. It's only as good as the will of the Commissioner's Office to enforce the paper requirements.

    In the case of McCourt, he bought the Dodgers primarily with money borrowed by the Dodgers. On day 1 of McCourt's ownership, the Dodgers were deep in debt, probably deeper than the rules allow.

  5. Magnificent, Larry. I love the tidbit about the Ricketts loaning the money to themselves. When the lender and the borrower are the same, I believe in my high school civics class they called that a "conflict of interest." But conflicts of interest don't really exist in anymore, do they? Or, maybe more accurately, we now call conflict of interest the predominant business model.

    • LarryAtIIATMS

      Hippeaux, thanks!

      To be fair to the Ricketts, I think they would have been willing to invest rather than lend that money to the Cubs. But the sellers (the Tribune Company, in bankruptcy) wanted to structure the sale so that they would not have to pay capital gains tax on the increased value of the Cubs. To do that, the two sides put together a structure that I could try to explain if there is interest, but part of the structure was that the purchase had to be financed with debt.

      As a rule, companies are healthier when they can attract new investors and don't have to rely on new debt (the old investors may not appreciate having to share the company with the new investors, but that's another story). But sometimes, new debt can be structured so that it looks and feels a lot like a new investment. One key feature is subordination: the agreement of the lender to be repaid last, after all other debtors have been paid. Sometimes, subordination includes an agreement by the lender not to sue for repayment or to push the borrower into bankruptcy (at least, not until the senior debt is fully paid). My guess is that the Ricketts loan is subordinated in some way … but I don't know for certain.

  6. williamnyy23

    First off, the Yankees have other revenue streams besides ticket sales, so even if the first $60 million from stadium revenue was promised to pay the PILOTs, it wouldn’t cover hundred of millions of dollars worth of other revenue (hence, a future lender wouldn’t be as concerned as if the Yankees were carrying real debt). Having said that, I am not so sure that the PILOTs are secured by anything other than the underlying collateral itself. Does the prospectus specifically mention otherwise? I don’t think it’s a point of law (said with all due respect to your former profession).

    • LarryAtIIATMS

      Yes, the prospectus specifically references the assignment of ticket and suite revenue to cover the PILOT payments. Good point about the other revenue streams — I roughly remember that the Yanks get about $80 million annually just from sponsorship deals, plus there's the bargain-deal broadcast right payments from YES at around $60 million. But remember that the Yankees' revenue sharing and luxury tax obligations are going to eat up a good portion of these other revenues, and we haven't even gotten to funding payroll.

      Deduct ticket and suite revenues from the Yankees' picture, and there's nothing worth lending to. Any Yankee lender needs to rely on those ticket-suite revenues, even with a secondary position behind the PILOT bonds.

  7. CS Yankee

    Good article, but when things seem the most complicated one needs to reduce things back to the simplist form…A+L=E, D/E, DSR, ROE, etc.

    These PILOT's are overhead…taxes that can't exceed property value is very fair and linear. I would think that an educated loan officer would prefer these to the typical scenerio. The tax liens always get the favorable position even in bankrupcy as the new owner pays those off to aquire the asset. Being overhead it is a liability for the period, but not long-term debt.

    The issue are the few high-fliers that put their lifestyle desires into the company creating a burden that affects operations. The Mets, Dodgers, D-backs are poorly runned teams in every sense of the word. The Twins, Marlins, Pirates, & Royals are exceptionally well runned (for their shareholders) but screw their fans (& fellow MLB owners). The NYY, Phillies, Tigers, BoSox & (new) Rangers do it right on both sides of the model (business & consumer). The rest fall somewhere in-between.

    • LarryAtIIATMS

      In simplest terms, the PILOT debt is for a fixed payment at a low interest rate — yes, a lot to like there if you're the Yankees. (There's less to like if you're a U.S. citizen and wonder why the Yankees get to borrow at a tax-free rate, but again that's another question for another time.) As for whether the PILOT bonds are essentially team long-term debt … that seems to depend on one's point of view. For me, if it walks like a duck, quacks like a duck, etc, though the PILOT bonds ARE an odd duck.

      I'll accept without comment your view of which teams are and are not well-run, though I'm not sure what the D-Backs have done to merit being mentioned in the same breath as the Mets and Dodgers!

  8. Mark

    You say that the Cards and Phillies would have failed the test if they built their stadiums a few years earlier, but if that were the case they would not be allowed to write off depreciation costs of their parks. Right?

    • LarryAtIIATMS

      Mark, I'm puzzling out your question. Let's just look at the Cards for the moment. New Busch Stadium opened in 2006, so between now and 2015 the Cards can use an EBITDA multiplier of 15 to determine compliance with baseball's debt rules. If the Stadium opened in 2000, the Cards multiplier would have dropped from 15 to 10 by now, and that multiplier is too low to allow the Cards to satisfy the MLB debt rule. (All this being said in reliance on the estimated numbers published by Forbes, which ARE estimates. Without the actual audited numbers, we can't be certain.)

      The MLB debt rule compares debt to EBITDA. EBITDA is earnings before interest, taxes, amortization AND depreciation. So for purposes of the test, depreciation doesn't matter.

      Of course, depreciation matters for a host of accounting and tax reasons having nothing to do with the MLB debt test.

      From reports on the web, the Cardinals team owns the new Busch Stadium (this may sound obvious, but it isn't — technically, the Yankees do not own the new Yankee Stadium). So while I'm not an accountant, I assume that the Cardinals are permitted to write off the depreciation cost of the new Stadium. I don't know the period over which a stadium owner is allowed to write off depreciation of a stadium, but I think it's a long period, something like 40 years. So moving back the opening of new Busch Stadium by a few years wouldn't affect the Cards' ability to write off depreciation on the building. I'm not sure I'm answering your question, and again I'll stress that I'm no accountant.

      For others reading this comment: I have not tried here to explain the concept of depreciation in any detail. Mark seems to understand the concept, but I don't assume that all my readers understand this topic as well as Mark. Anyone with questions, please post them as comments, and I'll answer if I can.

  9. Mark

    I have a limited understanding of it, but basically depreciation means that businesses can write down the value of new plants and equipment ( such as a new ballpark or the major renovations at Fenway) over a set period of time until it is "fully" depreciated . In baseball the depreciation period appears to be 15 years. It is one of the major benefits of a new ballpark as a tax write-off, but would have a negative effect on EBITDA.

  10. Mark

    Actually, it would not. Apparently I have a VERY limited understanding of EBITDA. Good thing I'm not an accountant.

    • LarryAtIIATMS

      Don't sweat the lack of familiarity with EBITDA. I'm familiar with this concept from my experience with bank lending, but I don't think it's the kind of financial measure that comes up elsewhere too often.

      That's a good description of depreciation. Another way to think about depreciation is to consider a business' balance sheet. A balance sheet is a financial statement that represents a "snapshot" of the condition of the business. The balance sheet values everything the business owns (its assets) and everything the business owes (its liabilities). So if my business buys a $500 computer, I add $500 to the value of the equipment shown in the assets side of the balance sheet. But over time, the value of that computer is going to drop, and I need to account for that drop in value on the balance sheet. This accounting for drop in value is called "depreciation". The depreciation of the value of this computer will reduce my business' assets as shown on the balance sheet, but I also get to deduct this depreciation as an expense from the income my business reports to the IRS and others.

      File this away as a lesson you did not expect (or even want) to learn on a baseball site.

      Where are you seeing that baseball stadiums can be amortized over 15 years? THAT would be an interesting little factoid for ME to file away.

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