Official CBA/Labour Talks Discussion Thread II

[Reignman]

So what would you define as parity, reignman? And by that, I mean something quantifiable, not something that arbitrarily meets your individual definition of the word 'fair.' The NBA isn't really so far off the levels of parity that are witnessed in the NHL or even the NFL. The NFL has comparable disparity in team spending to what the NBA has had over the past few seasons.

The NBA can never be like the NFL. It doesn't have the revenues and it's a game that relies on a lot less players. The NFL's revenues aren't due to every team having a chance. They're due partly to gambling, but also partly to the fact that football is a game played by way more people in the US than basketball is. That breeds more fans that will go see games even in smaller markets, and even there, there are some teams that are perenially good in the NFL.

Here's what parity would mean for me:

- Hard cap (Let's say $60 mil cap with a $45 mil floor)
- Franchise tag with no max
- No sign and trades
- No exceptions (MLE/LLE)
- Shorter contracts (I like the idea the owners put out - 3 years for FAs, 4 years for your own FAs and 5 years for the franchise tag)
- (maybe) 2 1st round picks for non-playoff teams

Hmm, does that lead to parity?
I am seriously doubt Hard cap can lead to parity.

What you are assuming is, all the cities are the same, players would go for the money. Therefore, every team with the same cap will result in competition. But there are too many reasons that it will not fall into those assumptions, tax rate for instance.

Tax rate is already accounted for by the NBA. For eg, there are some exceptions for high tax regions like Toronto/Canada built into the payroll. Couple that with some schrewd accounting and the difference is negligeable. Especially when you factor in the no max franchise tag with hard cap.

[Fairview4Life]

Depreciation is treated as an expense because as equipment and plant serve their useful lives, they lose value through wear, tear and obselesence. As those hard assets decline in value, a business is accumulating an growing replacement cost for those assets. Depreciation is a tool to fund that replacement cost as a business expense over multiple years rather than having to fund it all in one year.

The problem with the Roster Depreciation Allowance is that you are not actually depreciating a hard asset. It is based on the 1954 theory that players are livestock, property of owners and with recurring replacment costs. But you are not accumulating a replacement cost with player contracts. You are constantly paying that replacement cost as an ongoing business expense in the form of new contracts to free agents, traded players and draft picks. There is no future replacement cost being funded here. And it's already a deductible expense.

I'm aware of that. My specific assertion is that the RDA has not been entered into the SOO as discussed: that was assumed due to a line-item on the Nets' SOO as leaked, "Loss on players' contracts". In fact, that was a buy-out for Dikembe Mutombo's contract - NOT an RDA entered onto the SOO. We've been all around the mulberry bush on that topic several times already.

So yes, I do know the difference, which is exactly why I refer to RDA as a tax break and NOT as an expense. There is no real expense and it's a huge part of how profits are hidden on a GAAP statement.

...except it isn't on any GAAP Statement of Operations.

http://edge-cache.deadspin.com/deadspin/nets0506.pdf

Page 5 of the PDF, or page 3 of the document if you go by the numbers on the scanned page instead. Down near the bottom of the expenses. The details of the amortization and depreciation are on page 12 of the PDF/10 of the document.

[Sleepy51]

Depreciation is treated as an expense because as equipment and plant serve their useful lives, they lose value through wear, tear and obselesence. As those hard assets decline in value, a business is accumulating an growing replacement cost for those assets. Depreciation is a tool to fund that replacement cost as a business expense over multiple years rather than having to fund it all in one year.

The problem with the Roster Depreciation Allowance is that you are not actually depreciating a hard asset. It is based on the 1954 theory that players are livestock, property of owners and with recurring replacment costs. But you are not accumulating a replacement cost with player contracts. You are constantly paying that replacement cost as an ongoing business expense in the form of new contracts to free agents, traded players and draft picks. There is no future replacement cost being funded here. And it's already a deductible expense.

I'm aware of that. My specific assertion is that the RDA has not been entered into the SOO as discussed: that was assumed due to a line-item on the Nets' SOO as leaked, "Loss on players' contracts". In fact, that was a buy-out for Dikembe Mutombo's contract - NOT an RDA entered onto the SOO. We've been all around the mulberry bush on that topic several times already.

So yes, I do know the difference, which is exactly why I refer to RDA as a tax break and NOT as an expense. There is no real expense and it's a huge part of how profits are hidden on a GAAP statement.

...except it isn't on any GAAP Statement of Operations.

http://edge-cache.deadspin.com/deadspin/nets0506.pdf

Page 5 of the PDF, or page 3 of the document if you go by the numbers on the scanned page instead. Down near the bottom of the expenses. The details of the amortization and depreciation are on page 12 of the PDF/10 of the document.

You can only lead a horse to water.

[ranger001]

And let's be clear on the timeline: Billy Hunter alleged that a lot of the losses could be dismissed as being interest and depreciation (why he thinks interest isn't a cash expense is beyond anybody who's thinking about the topic). After that, the NBA responded. Mr. Hunter hasn't said a peep about the subject since. That is telling.

Interest is a cash expense. But incurring interest expense is a result of capitalization strategy. Not an inherent component of cash flows. The reason that metrics like EBITDA exists is because investors find value in examining the books of a company in the absence of the prior owners capitalization strategy. You may have needed to, or chosen to borrow money to buy a business. That does not mean the next owner will have to do the same. That interest costs in not germane to understanding the cash flow value of the business.

That still does not mean you can throw away interest expenses when deciding whether a business is profitable or not. The players cannot just eliminate all interest expenses and say "just use a different capitalization strategy. Pay cash if you want an NBA franchise".

[Sleepy51]

And let's be clear on the timeline: Billy Hunter alleged that a lot of the losses could be dismissed as being interest and depreciation (why he thinks interest isn't a cash expense is beyond anybody who's thinking about the topic). After that, the NBA responded. Mr. Hunter hasn't said a peep about the subject since. That is telling.

Interest is a cash expense. But incurring interest expense is a result of capitalization strategy. Not an inherent component of cash flows. The reason that metrics like EBITDA exists is because investors find value in examining the books of a company in the absence of the prior owners capitalization strategy. You may have needed to, or chosen to borrow money to buy a business. That does not mean the next owner will have to do the same. That interest costs in not germane to understanding the cash flow value of the business.

That still does not mean you can throw away interest expenses when deciding whether a business is profitable or not. The players cannot just eliminate all interest expenses and say "just use a different capitalization strategy. Pay cash if you want an NBA franchise".

You are absolutely correct that depreciation of TANGIBLE assets, Interest and taxes are real cash flow items. I have acknowledged this fact multiple times since I first posted that table.

But on a $76MM purchase price and with GAAP statements "claiming" no taxable income, assuming 100% financing, the (deductible) interest on debt and depreciation of hard assets are not going to come close to turning the Spurs $61MM EBITDA into a loss without that monster roster depreciation allowance.

[floppymoose]

ranger, if you don't discount the interest on purchase cost, and instead take 57% of that (the last BRI split) out of the players hide, then you are effectively having the players finance a large portion of ownerships loans to buy the teams. In other words, you having the owners buy the teams with the player's money.

A great deal if you can get it.

[ranger001]

That still does not mean you can throw away interest expenses when deciding whether a business is profitable or not. The players cannot just eliminate all interest expenses and say "just use a different capitalization strategy. Pay cash if you want an NBA franchise".

You are absolutely correct that depreciation of TANGIBLE assets, Interest and taxes are real cash flow items. I have acknowledged this fact multiple times since I first posted that table.

I think F4L just posted your table with that statement and must have forgotten to add that acknowledgement.

But on a $76MM purchase price and with GAAP statements "claiming" no taxable income, assuming 100% financing, the (deductible) interest on debt and depreciation of hard assets are not going to come close to turning the Spurs $61MM EBITDA into a loss without that monster roster depreciation allowance.

Where are you getting that 61m ebitda from? Forbes has it at -5m for 2010, 2009 it was 19m.
http://www.forbes.com/lists/2010/32/bas ... 23002.html
Plus do you have records of how the Spurs have capitalized their business since the purchase? I would think that they must have bought assets since then.

[ItsDanger]

There are numerous differences between accounting deductions and ones used for tax purposes. Too many to outline here. One reason why accounting net income and taxable income are different numbers.

[ranger001]

ranger, if you don't discount the interest on purchase cost, and instead take 57% of that (the last BRI split) out of the players hide, then you are effectively having the players finance a large portion of ownerships loans to buy the teams. In other words, you having the owners buy the teams with the player's money.

A great deal if you can get it.

I don't follow. How is the players salary going back to the owners to buy the team?

[Sleepy51]

http://edge-cache.deadspin.com/deadspin/nets0506.pdf

Page 5 of the PDF, or page 3 of the document if you go by the numbers on the scanned page instead. Down near the bottom of the expenses. The details of the amortization and depreciation are on page 12 of the PDF/10 of the document.

Note:

I think Bruce Rather bought the team in 2004, so he would have been using the 5year/50% rule. When Russian Mark Cuban bought the team in 2009, he gets a new Roster Depreciation Allowance under the revised rule, now at 100% depreciable over 15 years.

[Sleepy51]

That still does not mean you can throw away interest expenses when deciding whether a business is profitable or not. The players cannot just eliminate all interest expenses and say "just use a different capitalization strategy. Pay cash if you want an NBA franchise".

You are absolutely correct that depreciation of TANGIBLE assets, Interest and taxes are real cash flow items. I have acknowledged this fact multiple times since I first posted that table.

I think F4L just posted your table with that statement and must have forgotten to add that acknowledgement.

But on a $76MM purchase price and with GAAP statements "claiming" no taxable income, assuming 100% financing, the (deductible) interest on debt and depreciation of hard assets are not going to come close to turning the Spurs $61MM EBITDA into a loss without that monster roster depreciation allowance.

Where are you getting that 61m ebitda from? Forbes has it at -5m for 2010, 2009 it was 19m.
http://www.forbes.com/lists/2010/32/bas ... 23002.html
Plus do you have records of how the Spurs have capitalized their business since the purchase? I would think that they must have bought assets since then.

I am getting $61MM in EBITDA from the cumulative operating income number from 2006-2010.
http://www.forbes.com/lists/2010/32/bas ... 23002.html

I do not have San Antonio's capitalization records. I have accepted Forbes valuations. They have been pretty consistently within reasonable tolerances on recent sales prices and these are the only numbers that the public has to work with that were not produced by a partisan source in the midst of a labor conflagration.

If you are looking for an "Aha I gotcha" in that spreadsheet, I am absolutely positive that you will indeed find several. It was a SKETCH. It was not an audit. If the NBA will give me their books I will have someone on my staff audit them for you. For now, I feel that a sketch based on Forbes research is sufficient for conversation level analysis.

After all we've talked about, do you still believe the league's loss is as large as they have claimed? and do you still disregard capital appreciation as a component of their investment return? If so, I can't imagine that I have any more ammunition or input to offer that you will find of any value.

[Fairview4Life]

I think F4L just posted your table with that statement and must have forgotten to add that acknowledgement.

I linked to where I got the post from and suggested reading the whole thread, which is how you knew to go there and drag him over here.

[Fairview4Life]

ranger, if you don't discount the interest on purchase cost, and instead take 57% of that (the last BRI split) out of the players hide, then you are effectively having the players finance a large portion of ownerships loans to buy the teams. In other words, you having the owners buy the teams with the player's money.

A great deal if you can get it.

I don't follow. How is the players salary going back to the owners to buy the team?

The owners want the players to give up a bunch of BRI they currently receive in order to cover interest expenses. Interest expenses that can come from the use of lines of credit and loans in the purchase of a team. So the owner is getting the players to in effect pay off their loans used to purchase the team, by giving up BRI. The other 29 owners get their franchise values to go up, and sell at a higher price since the players are paying off loans (in a sense), and they reap all of the benefit, while the players see nothing out of the sale of a team.

[Sleepy51]

I think F4L just posted your table with that statement and must have forgotten to add that acknowledgement.

I linked to where I got the post from and suggested reading the whole thread, which is how you knew to go there and drag him over here.

I've been dragged? Now I feel dirty.

[floppymoose]

Fairview4Life FTW

[ranger001]

Where are you getting that 61m ebitda from? Forbes has it at -5m for 2010, 2009 it was 19m.
http://www.forbes.com/lists/2010/32/bas ... 23002.html
Plus do you have records of how the Spurs have capitalized their business since the purchase? I would think that they must have bought assets since then.

I am getting $61MM in EBITDA from the cumulative operating income number from 2006-2010.
http://www.forbes.com/lists/2010/32/bas ... 23002.html

I do not have San Antonio's capitalization records. I have accepted Forbes valuations. They have been pretty consistently within reasonable tolerances on recent sales prices and these are the only numbers that the public has to work with that were not produced by a partisan source in the midst of a labor conflagration.

If you are looking for an "Aha I gotcha" in that spreadsheet, I am absolutely positive that you will indeed find several. It was a SKETCH. It was not an audit. If the NBA will give me their books I will have someone on my staff audit them for you. For now, I feel that a sketch based on Forbes research is sufficient for conversation level analysis.

If you believe Forbes then are you acknowledging that the Spurs lost money in 2010? (-5m ebitda).

After all we've talked about, do you still believe the league's loss is as large as they have claimed? and do you still disregard capital appreciation as a component of their investment return? If so, I can't imagine that I have any more ammunition or input to offer that you will find of any value.

I haven't ever believed the league has lost as much money as they have claimed, of course there are accounting issues, expenses that should never have been done, etc.

I am closer though to their submission that half of the teams in the league lost money than to your spreadsheet saying that only 2 teams really lost money not of their own choosing.

To me the proof is the length of the lockout. You don't insist on drastic changes and run the risks involved in a court battle when you already have a very profitable business model.

[knickerbocker2k2]

What is frustrating is that owners are really not negotiating in good faith. It is becoming evident that there strategy is wait until the players "feel pain" prior to putting their best offer. I think this is really short-sighted and not well thought through. Players for one are more organized and prepared financially and with addition money through escrow, can hold out a bit more. Even if their strategy works, we are looking at shortened season that starts at the earliest in January. Right now players are offering near the $300M they say they lost, and with projected income growth/increased revenue sharing, every team will be making profit even according to their books. Why are they pushing for more? It really is greed in its purest form.

The other thing I noticed in these discussions is about the "PR" war. Owners are in lose/lose situation here. Even if the public thinks players are greedy/and owners are in the right, it doesn't help the owners because they rely on these players to market their product. Winning the "PR" war might actually hurt them in the long term. It is in their best interests players come off as reasonable/positive light since when the lockout is done we will be hearing of the likes of Kobe/Lebron/KG/etc and not Dan Gilbert, Paul Allen, etc.

[ranger001]

I think F4L just posted your table with that statement and must have forgotten to add that acknowledgement.

I linked to where I got the post from and suggested reading the whole thread, which is how you knew to go there and drag him over here.

Did you read the thread and realized that he had acknowledged that interest expense affects cash flow?

[ranger001]

ranger, if you don't discount the interest on purchase cost, and instead take 57% of that (the last BRI split) out of the players hide, then you are effectively having the players finance a large portion of ownerships loans to buy the teams. In other words, you having the owners buy the teams with the player's money.

A great deal if you can get it.

I don't follow. How is the players salary going back to the owners to buy the team?

The owners want the players to give up a bunch of BRI they currently receive in order to cover interest expenses. Interest expenses that can come from the use of lines of credit and loans in the purchase of a team. So the owner is getting the players to in effect pay off their loans used to purchase the team, by giving up BRI. The other 29 owners get their franchise values to go up, and sell at a higher price since the players are paying off loans (in a sense), and they reap all of the benefit, while the players see nothing out of the sale of a team.

The economy is suffering you know. When a company has financial issues they cut staff to meet expenses. You expect me to cry for millionaire players who get a salary cut so their owners can pay interest on debt?

[BorisDK1]

"There has been ongoing debate and disagreement regarding the numbers, and we do not agree that the stated loss figures reflect an accurate portrayal of the financial health of the league," Hunter said in a statement released during the All-Star break.

Ms. Sawdye's response to the Deadspin article appears to have been issued on or around June 30, 2011. The statement of Mr. Hunter is said to have occured during the All-Star break, some 4 months prior.

I agree that lack of response does not establish truth of a proposition, but sure is suspicious when it's lacking.