Klomp wrote:Domejandro wrote:winforlose wrote:
I think he is referring to the fact that they needed to tap into the asset itself to fund the purchase. Additionally, assuming a traditional partnership structure, all owners share in profits and liabilities. So if the team operates at a loss to try and build equity (spends a lot in tax to increase the value of the team,) there are more voices putting pressure on ALORE to focus on short term profit instead of long term equity.
This is accurate, but an additional factor is that it suggests that they do not have a substantial amount of liquid assets, which potentially indicates that they do not have the capacity to operate at a significant loss for a substantial amount of time (ex: Being a Repeater-Tax team feels very unlikely).
Personally, I don't think people should be panicked, but I do want people to be prepared to see what an ownership structure that is more financially constrained looks like.
1. Everyone is doing whatever possible to avoid the repeater tax. It's the nature of the new NBA, not an indictment on any ownership group.
2. I'll admit, I'm not good when it comes to financial type stuff beyond the basic old-school cap sheet. But is asset liquidity really the most important thing for owners?
3. I think this is where the importance of a potential new arena comes into play. That's the single easiest way to help both the franchise valuation and profit line take a huge step forward. Taylor was stuck in the mud on this point, unwilling to consider making an upgrade. Just as a point of reference, Target Center is the NBA's second oldest arena, only ahead of MSG.
I am gonna answer out of order because everything is connected.
2. The issue is money in, money out. So you start with overhead, (payroll, operating costs for the various facilities, money owed to vendors/independent contractors, and really any other operating expense,) then you move on to expected money in (gross income or income before taxes.) If the money in does not exceed the money out, now the ownership must use independent wealth to finance the difference. If they are cash poor that means borrowing money against the value of another asset, and that means paying interest. So you compare the expected appreciation of the asset (the team,) against the cost to borrow money and you get your short term return on investment.
2A. Opportunity cost must also be considered. So you have a million dollars, and you can either invest in A or B. You know Anis returning 5% annually so if you invest 1 million you get $50,000. B is only returning 2% so you only get back $20,000. Now there can be a lot of reasons to invest in B (diversifying to lower risk, B having more potential to appreciate and create long term value, ect…,) but any investment in B is going to cost that 3% in opportunity cost. Getting back to the 1 million example, you lose $30,000 by investing in B.
2B. So we take our overall costs and our gross income (remember you have to pay tax and depending on partnership agreements the gross could go down, so net profit is often lower,) and we adjust for opportunity cost, and we ask how profitable is the return. Now we have all heard it takes money to make money, and this is very true in investing. If you see the Wolves as gaining x% in value and the base is in the billions, it might be worth losing short term money for that appreciation. But the more interest you pay to subsidize the loss, the harder it is to return enough money on that appreciation. I can simplify that more if you would like?
3. There are two ways to build the new arena. The first is with private funds, the second is public funds. Flagrant Howls thinks that Bloomberg is going to supply most of the money and that it gets done without public funds. This suggests a profit sharing agreement between ALORE and Bloomberg on all events and that Bloomberg will also have a long term investment in our teams success. Public arenas come out of the tax payers and are harder to get and come with delays and possible obligations to the tax payers and require no such long term investment by wealthy 3rd parties.
1. Building a new arena is one way to bridge the gap between operating loss (how much money you must pump in to keep the team running beyond what you take in net profit,) and investment appreciation. Cutting costs is another way to bridge the gap. This is where the concern comes in. Being a non tax team and a non 2nd apron team are very different things. In the modern NBA most contenders are tax teams. The ones that are not, are young enough (OKC,) that the payroll hasn’t caught up yet. Rookie scale Chet and JW are short term opportunities that will soon give way to big tax payments. If we are serious about contending we need to be serious about spending. The best way to do that is for the owners to NOT need to borrow money (and therefore pay interest,) on the money they use to cover the operating loss.