Interesting story on what Jerry's been doing with his time. What's really interesting to me is there's another ownership group that has apparently bid significantly more, and plans to move the team to Ontario (where, you know, they actually like hockey) So basically it seems to me that the Canadian guy is offering $60M more dollars, plus he's not asking for millions of dollars of subsidies from the city of Glendale, AZ, population 250,000, to support hockey in a place where no one gives a shit about it. This seems to me like a pretty classic case of the local government throwing good money after bad. It's spent an ass-load to build a hockey arena, and there's just not much of a market for it in Phoenix. The team is pretty much bankrupt. Shouldn't they just let it go instead of wasting more money on it?
You'd think so, but I don't think local govt's think like that. I think there primary concern is tax revenue. If the team leaves, they have no tax revenue and they still have a big empty arena that they still have to maintain. The money is gone, but the city still has to pay off the debt somehow. Moyes is the guy screwing the city. It's not like he's going to dump any of the extra money he gets back into the local economy in any meaningful way. And if he ran the team better, they wouldn't be bankrupt.
No, I don't think that's the case. The city also has the Arizona Cardinals stadium, and they generate quite a bit of revenues from it. It sounds to me like Reinsdorf's "deal" basically proposed taxing people who go to Cardinals games to subsidize the hockey team he wants to buy. I don't see how they're going to pay off the debt on the hockey arena by giving away even more money. I think they pretty much just screwed themselves by thinking if they spent money building a hockey arena, anyone would want to watch it in Arizona.
Right, Reinsdorf assumes the debt, and the main difference is that Reinsdorf wouldn't be paying back Moyes for money he claims to have lent the team. So for Glendale and it's citizens, the better deal by far is Reinsdorf's, because they keep the team and it's revenue and tax streams. Balsillie isn't going to pay off the stadium, he's going to pay off Moyes and break the lease. Why do you think the city of Glendale wants to take his lower bid, and why do you think Moyes wants to take the Canadian bid?
Sort of, but not really. Reinsdorf is going to assume the secured debts of the team, not the arena. But, he's also getting indemnification of the city against any losses up to $30M/yr. So basically, it's the city that'd be taking on more debt and more risk. Reading through the court documents, the city is the creditor to the bonds on the hockey arena. The bonds aren't secured against the team or the building itself, meaning the city is obligated to pay it. Essentially, their payments constitute about $9-10M/yr. Their income from additional sales taxes due to the Coyotes is, charitably, perhaps $1M/yr, but probably quite a bit less (the city reported in its document total tax excise tax earnings growth going from $1.3M to $5.6M over the past several years, but laughingly failed to mention (despite including a month by month graph that made it glaringly obvious) the $5.6M generated in 2008 included roughly $2M in revenues that were probably associated with hosting the Superbowl that year). So in practice, they're looking at about $2-3.5M in revenues/yr. Of course, a big chunk of that comes from other businesses, and an even bigger chunk comes from the Cardinals, who also opened a new stadium in Glenvale. So at absolute best, the Hockey team is generating, perhaps, 500k-$1M in external revenue for the city per year. The city also gets a $2/ticket charge, which has come out to about $2.5M/yr. The team is supposed to pay a nominal lease amount of about $500k per year, which is doesn't pay. So in total, the benefits to the city are optimistically going to be $3-3.5M/yr and the costs are going to be about $10M per year. So even if things go forward fairly well, the City can expect to lose about $6.5M per year instead of about $10M per year. One could say that's still a benefit of $3.5M dollars/year. (Of course, that could be offset by freeing up the arena for other purposes- minor league hockey, basketball, conventions, concerts, etc... with more dates available, some revenues could come from alternative uses). Except, recall that as part of the agreement with Reinsdorf, the city is agreeing to pay up to $30M/yr in losses he might incur while attempting to sell a hockey team to Arizona. And the previous owner lost what, about $300M? And after five years, or earlier, if the city can't pay, he can move the team anyway. In short, the prospects for the city of making money, ever, are slim. The prospects of paying a significant amount more money to Jerry Reinsdorf for little real gain are pretty great. And, of course, we've not even broached the considerable legal issues that would have to be surmounted in unusual fashion, to say the least, to force the sale of an enterprise to a much lower bidder than a much higher bidder.
Don't forget to take into account the 30-50 people who are employed by the team and probably live in the area. That's a significant source of revenue. And all of it is gone if the team leaves. And is Moyes going to pay off the stadium debt if he gets the Canadian deal? I'd never go to a hockey game, but who knows, that might be an interesting thing to do in Phoenix. It's not hard to run a break even team. So it's not like they can't be a viable business there. The city is much better off if the team stays. And they're not trying to make money, they are at this point trying to cover their fixed costs as much as possible. And if the city is the major creditor, it's not hard to see them having the weight to make the deal go through.
Sounds like typically Reinsdorf, offer up a deal that is all upside and no downside for him, and cry like a spoiled brat when it doesn't go his way.
Not quite. There's difference between fixed costs and variable costs. Making money (profit) is covering both your fixed and variable costs. The debt on the arena is a fixed cost the city has to pay regardless of whether there is a team there or not. If the city has to pay $5 mil / year just in debt, plus another $3-5 million for sanitation, streets, cops, etc. The debt is a fixed cost while the sanitation, street maintenance and policing are all variable. If a viable team in town generates the $10 million in tax revenue needed to cover that total bill then everything is great. But every dollar the city gets over $5mil is also fine because the city can cut back on picking up garbage, paving streets, or employing cops. And every dollar past $5mil means an additional garbage run or cop on the job that doesn't have to be cut. If the team leaves, there is no money for anything. There will be no cops, garbage mean, etc, either. And the city will lose the arena when it can't pay the mortgage. As long as the city covers it's fixed costs, it has the opportunity to cover it's variable costs. If it loses the team, it loses the ability to cover either. And as long as the city structures the deal so that it can cover the fixed costs, it is better off. Reinsdorf assuming whatever debts there are probably saves the city a substantial amount just in financing. And I absolutely agree with you about GM and Chrysler, and the building of the arena in the first place. The danger is that if too many of these things collapse at the same time, the entire system can go down and then nobody can make any money. All of a sudden Glendale can't pay cops, or teachers, or garbage men all because they decided to let the team leave. It's not a broken window fallacy because nobody is calling Reinsdorf a humanitarian. He's making a shrewd business deal. And it's only a good deal if the city is covering enough of it's costs. If they aren't then I absolutely agree its stupid to sell to Reinsdorf because the city is going to default regardless. The real fallacy may be that the city will have the means to reimburse Reinsdorf if he continues to lose a lot of money. If people aren't going to the game, it's more likely due to the fact that they don't have money, not that they are spending it on anything else. If people aren't spending nobody is generating any money and the city certainly isn't collecting any of it through taxes. And Reinsdorf will be last on the list of people the city of Glendale worries about paying. The losers then will ultimately be the bondholders who financed the original stadium construction.
If people aren't going to the games, it'd be because of the type of owner Reinsdorf is. No hope of winning it all. The city doesn't exclusively need the hockey team as a tenant. They might cover most of, if not all of, their expenses by hosting rock concerts there, the circus, ice capades, and even flea markets.
Right, which is why the United center was sold out most of the time even during the really lean rebuilding years. I don't think the team went below 8-10 in home attendance, and has been top 5 since 2002-03, and top two most of that time..... But you might be on to something with the flea markets.
There's a sucker born every minute, so the saying goes. I absolutely think people are suckers if they think the Bulls are trying to become champions again. The sucker play is the constant "wait until player X reaches his potential and we're golden!" That started with the breakup of the dynasty, has seen the 3 Cs, Hinrich, Gordon, Deng, the "bear with us while we save up some cap space for Ben Wallace, etc." Of course, people might like to see professional basketball played by the opposing teams (most of them, anyway). San Diego had a basketball team once, but no more. The stadium is constantly booked, and they have flea markets every week. If you've got an arena and a mortgage to pay, you should do everything you can to rent it out as much of the time as possible. Especially if the team leaves.
And they can't do this b/c of the loss of the huge tax base from the 30-50 people who are employed by the team?
In the long run, there's no real distinction between fixed and variable costs. The difference in definition is simply a choice of time frame. For example, your mortgage is a fixed cost, but you can refinance, sell your house, or stop paying and be foreclosed on to change your "fixed cost" to something different. The city can do this too. 1. It could sell the arena to private interests (heh, I bet Jerry Reinsdorf would be interested). 2. It can work financial management tricks on its bondholders. 3. It can simply negotiate with the major ones. That sort of thing happens (increasingly) frequently. Sort of, but there's no reason to make up numbers out of whole cloth. As I said, I looked up actual numbers, and they suggest the city has (stupidly) obligated itself to the tune of $10M/yr on the arena, and is, optimistically, getting only $2-3.5M in revenues. The might get less than that, and there doesn't seem any obvious prospects for getting more from the team. So while yes, they lose more money if the team leaves, the amounts of money are quite important. No, based on the numbers, it's not like the team is paying for any of this now. If the team leaves, the city loses $2-3.5M/yr. I'd guess on the lower end of that. However, the team can also make up some of that loss by offering the arena out for events they can't with the team occupying the building. Minor league sports, concerts, conventions, flea markets, wrestling, etc. The city already does this, so they don't have to spend that much more developing that capability, they just add more open dates available. So with any sort of competence, they can make up a fair amount of their lost revenues. At that point, you then need to consider just what kind of expense to the city we're talking about. If they lose $3M/yr in revenues if the team leaves, but make up $1M a year in rebooking the arena to other uses, we're talking about a $2M/yr net loss. As the city has approximately 200k people, that's about $10/person. That's an annoyance, not a city killer. The sort of losses the city is offering to take on (up to $30M/year to Reinsdorf!) is on the order of starting to be real money. $150/per person. Maybe $500/family? Per year? That's a lot of exposure to cover the risk of losing $10/per person, isn't it? Actually it won't. The city paid for the arena with general obligation bonds, which are simply issued on the city's credit. The upside of this is the city "owns" the arena free and clear. The downside is the city is on the hook for the cost either way. But it does mean the city could sell off the arena even at a loss, if it really needed to, and substantially reduce its debt load. Not really. First, there's very little to suggest the arena can ever generate even 30% of the costs it's incurring. It's a serious money pit. More importantly though, it does appear capable of generating some revenue (through sale or alternative use) if the team departs. Reinsdorf's not offering to assume the city's debt, however. In fact, the city is offering to guarantee his losses in operating the team, while he assumes the team's debts. You are completely right about the structure of the deal being essential, but the structure as presented in the court documents is a terrible risk for the city, effectively doubling down on the bad risk it made in building the arena. They're promising to take on more debt at high probability, with low probability of much reward. The actual amounts here are quite important, and they are very clear. If the team leaves, the city is on the hook for an embarrassing but livable amount. If the team stays and is profitable, the team is probably still on the hook for an embarrassing but livable amount. Just a slightly smaller one. If the team stays and is not profitable, which a much higher probability event, then the deal leaves the city on the hook for absolutely obscene amounts of money. It's an awful bet. But the amounts in question indicate that's not really the case. On the other hand, it could be the case if the city follows up their initial bad decision with the follow up bad decision they're trying to do now. But they're not going to default. The city seems quite capable of paying what it has to pay regardless of what the team does. It has been and will continue to. Yes! Really? Revenues are falling for lots of spectator sports. In the end, it really doesn't matter whether people don't go because they can't or because they'd rather stay home and watch TV, or surf the net, or watch a move. It just matters that the team isn't offering a compelling product compared to the alternative uses of the money. I suspect Reinsdorf and the army of lawyers he undoubtedly has will disagree about the order of payment there.
If Reinsdorf pulls his offer, I think he is 100% making the right choice. The deal he proposed was fair. The leak wasn't fair. Maybe that's a blessing to a failing hockey franchise, maybe not. Six rings in the MJ era -- and yeah, MJ was MJ but MJ could have gone ringless. Yes, he could have, and its not as simple as "a monkey could have been GM and got the Bulls a half dozen rings." I truly don't believe that. MJ was an incredible talent, but there is a certain amount of truth to the "organizations win championships" Krause faux pas quote. White Flag White Sox? Perhaps. Union buster? Perhaps? World Series Ring? In the books. Understand, I'm not gunning to go out and have a martini and a cigar with Jerry R at the club. But I do think he gets an unfair amount of bile barfed out at him just because he treats business like business, has a measure of principles that includes "a deal is a deal" and refuses to join the Mark Cubans of the world and treat franchise business like you are at Circus Circus wearing a "No Fat Chicks" t-shirt and yelling "Come On 7!!!" On a related note, Go Knicks! Unlimited Spending FTW! There has been some bad luck, some untimely rule changes and there have been mistakes made and the Bulls are the worse off for it, but some of the cartoonish vitriol I read about Jerry has always made me roll my eyes. I do think he could do better and should take more financial risks (or at least better financial risks than huge investments in Ben Wallace or Albert Belle). But the P.T. Barnum aspect of the argument that his attitude is "meh, we'll milk the fans and they'll keep coming" just doesn't ring true to me. I think Jerry likes his rings and trophies and wants more. Maybe he and his GMs do fall in love too much with the potential of their assets. Maybe he does get gun shy after getting burned in a couple of major big deals (Wallace, Belle) one sour. Maybe he is a bit freaked from paying MJ the most enormous salary in NBA history and then giving him a raise the next year only to see everything come apart at the seams when MJ wanted his money for a third year, Scottie was wanting an MJ like raise, MJ and Scottie were leveraging their services to retain Phil, the whole Phil/MJ/Scottie/Krause fiasco that stirred the pot in that final year especially. Yeah, maybe JR has reason, based on his experience, to think that throwing money at a problem doesn't always fix things. I've suffered through 1998-present. I've seen some of the worst professional basketball ever played. I hate that. But the Jerry is a cheap buffoon thing is overplayed and not entirely accurate. An easy target, but not necessarily an accurate analysis.
Given the Bulls won a championship every year they paid MJ big bucks, I'm not sure why Reinsdorf would be "freaked out". And the Bulls never could have paid Pippen big bucks like MJ. A new CBA was in place after the strike. IMHO, the Bulls breakup was a lot more about ego than money. On the mgmt side, Reinsdorf and Krause wanted to rebuild, do it their own way, and have a basketball trophy that had nothing to do with MJ, Pip and PJax. You can say Jerry isn't cheap, but given how he has spent his money and how the Bulls have lead the league in profits, calling him cheap ain't exactly inaccurate either. It could be that his team's basketball experts just happened to take the least expensive route by accident as they were guided by their basketball acumen for nearly every decision in the last 10 years and change could be right around the corner, but I sure ain't holding my breath.
But no one's saying that. Here we're just looking at the deal on the table for the City of Glendale, and it's a terrible one. It exposes the city gigantic amounts of risk for very little upside. It might be a "fair deal" in the sense that it's the only deal that can be found to try to keep snow in the dessert, but it's not a good deal in that it involves a whole lot of cost and very little benefit for the city. For Reinsdorf, (who's family was fairly intimately involved and linked with the construction of the arena and bringing the team in, by the way), there's pretty limited risk because most of their potential losses would be indemnified by the city, and they'd have an out to move the team anyway after the city spends the next few years paying out the losses. It's a terrible, irresponsible deal on the city's part. Just the sort of thing you'd expect from a city.
