The Magic's Financial Situation
by Jtyler998 on Jun 29, 2011 11:45 AM EDT
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Is there anyone here (Evan?) with a decent grip on the Magic's financial situation? I'm not talking about salary, but about how much revenue the team is generating as a whole.
The Magic are not afraid to spend money. Maintaining one of the fattest payrolls in the league and a brand new state-of-the-art arena suggest there is plenty to go around. But then, when I remember how many teams are hemmorhaging money, and how revenue has declined steadily across the league since 2008, it gives me pause.
Are the Magic simply not effected? Did the 2009 Finals, and opening the Amway Center soon thereafter, do enough to keep fans spending?
I've only been to one game at the new arena, a November match-up against Cleveland, and was stuck up in the peasant-level. And even though I was too busy enjoying the game to notice, I'm pretty sure all of the luxury suites were full because the Amway Center was brand new.
But I recall reading or hearing something, even just a few months later, that said the money was drying up. Suites were empty on game night. Concession and merchandise sales were down. And so on.
And it makes me wonder: Are the Magic in the black?
The impending lockout should be pretty interesting. It'll be guys like Gilbert Arenas who force the players union to fold. He can't keep buying third world children to throw into his shark tank if there's no income.
I hesitantly admit that, after the Gilbert Arenas trade, I sloppily prophesied that Orlando would end up losing Dwight Howard and the Magic franchise over it. Sounds pretty nuts, I know.
However...
The Magic's financial viability is the main factor. Without Dwight Howard (for the sake of avoiding a comments section riddled with trade/free agency talk, I'm going to suggest that in this hypothetical, we lose Dwight Howard because he pulls a Dave Chappelle, folds under scrutiny and runs off to Africa to run free with the antelope) and any immediate big name acquisitions, the Magic are in serious trouble, are they not?
We talk about using the Amnesty Clause everyone is praying and sacrificing goats for on Gilbert. But even if we do this, he still gets paid. Big time. And we still need to go out and get new players. And they are going to cost money.
There's just so much money to consider!
And if Dwight goes to run with the antelope, and the Magic still have to spend $20+ million a year to pay off Gilbert Arenas, well...
We don't have Penny Hardaway this time. There will be little for fans to get excited about, other than potential lottery picks, possibly for years.
And as the sheen continues to wear off of the Amway Center, I seriously doubt Orlando's best and brightest are going to fork over big bucks to be seen at Magic games. Why bother?
So where is the money going to come from?
Are there not sizeable debt obligations tied to the Amway Center? If the Magic take a big financial dive in the coming seasons, could there not be serious consequences?
I don't mean this as a Dooms Day post. Really, I just wanted to stir up some conversation about the Magic's financial situation because, frankly, the numbers are driving the league right now. A lot of teams are sucking serious air, and even though the Magic don't seem to be among them, it's unclear where they stand.
And I'm growing very curious.
This FanPost was made by a member of the Orlando Pinstriped Post community, and is to be treated as the opinions and views of its author, not that of the blogger or blog community as a whole.
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The Magic aren't going anywhere for the foreseeable future..
The fact that a new stadium was just built virtually assures an NBA team in orlando for the next 10 year. Now, ownership could change if the financial situation detoriates, but Orlando will have a team
Plus, I could be wrong...
but I believe that the taxpayers of Orlando and Orange County footed the majority of the bill for the new Amway center, and that it’s actually owned and operated by the city/county. Therefore, the money to operate the Amway Center would not be a liability for the Magic franchise. However, if they don’t fill the seats, the Magic may have a problem paying the player’s salaries.
"
by TheOtherWhiteMeat on Jun 29, 2011 5:02 PM EDT up reply actions
Rich DeVos
Rich DeVos is worth 4.2 Billion dollars go ahead and google it… I dont think he is too worried about money at the moment. Which is why the Magic’s payroll is as high as it is.
But what does he do if the team goes deep into the red?
It doesn’t take long before a business is just a business. We’re one of the few teams to increase spending significantly (perhaps incomparably if you include the Amway Center) over the last three years.
Does anyone know whether or not the Magic turned a profit this season? My understanding is the vast majority of teams did not.
Yup
The NBA, like most sports league, is full of dodgy accounting although those numbers don’t necessarily add up like the author of the post KD links to is saying – tax losses are not the same as losses, but tax implications can seriously affect the cash bottom line.
I’d love to get a look at an NBA franchises’ books.
by eltharion_doa on Jul 4, 2011 6:18 AM EDT up reply actions
Coon just did an article on this, called "Is the NBA really losing money?"
http://sports.espn.go.com/nba/columns/story?columnist=coon_larry&page=NBAFinancials-110630
I don't get the whole 'pop-tart cats pooping rainbows thing,' but then, I'm old. So, there it is.
"deep in the red?"
So lets call “deep in the red” $200 million. (Whole NBA alone claims to have lost $300 million last season). $200 million for a guy worth over $4 Billion? Drop in the bucket.
You can't reason with stupid.
http://www.twitter.com/JShannonhouse3
http://www.twitter.com/Amway_Get_Loud
Rec'd for Dave Chapelle comparison
Dwight Howard - "My Gosh, what is that smell?"
Otis Smith - "That's the smell of success my man."
Dwight Howard - "No, it smells like a used Arenas... filled with... Turkoglu..."
Otis Smith - "You know, success smells like that to some people." (turns and walks toward a crowd of fans)
Fan#1 - (Disgusted) "What is that? Smells like a turd covered in burnt hair..."
Otis Smith - (Tries to act casual and walk away) "Woah, what's that smell?"
From an article in Forbes back in January
After the Indiana Pacers built a new home in 1999, rising attendance lifted gate receipts to $35 million but couldn’t be sustained, falling to $15 million in 2010.
To beef up the roster, in December the Magic staged an eight-player, three-team trade that pushed its payroll to $89 million. The moves break the league’s salary cap and will require a $19 million luxury-tax payment to the NBA, wiping out any chance at an operating profit in the arena’s inaugural year. This is the second season in a row the team will pay the tax. No matter. “Mr. DeVos is not getting any younger,” says Martins.
“The window of opportunity is here.”
So, I think it’s very realistic to suggest if Howard goes, the Magic could see drastic financial losses. Obviously the NBA has a vested interest in keeping a franchise in Orlando, but the money has to come from somewhere.
First you doubt the power of JJ Redick starting.
That is not a joke. Two, the Amway Arena is cheap. Tickets are not over priced. The Magic were bleeding cash, but deep playoff runs(this year not withstanding) and the new arena have put money back into the owners pockets. Attendance was off the charts this year, and as we can tell by empty 3rd quarters, fans are eating, drinking or doing something at the arena.
Obviously if they lose Dwight the value goes down, but the Magic would bring in more free agents to stay competitive. Honestly maybe two years they have not tried to be competitive and one of those years they were anyways. The other year they got Dwight Howard. Financially I believe the organization is fine. If they keep losing, then yes they will want to scale back, but I think the financial situation is fine.
Roll Bass and War Ryno for me
Not sure any of what you're saying is based in reality.
The DeVos family was writing personal checks to cover losses for the better part of the last decade.
And as I just quoted from Forbes, they were still operating at a loss this season because of the bloated payroll and luxury taxes.
I’m not sure starting JJ Redick is going to do much to help any of this.
Also, don’t take for granted the Magic’s luck over the past 20 years. Our legacy of #1 picks is lucky in and of itself; getting these picks in years where the likes of O’Neal, Hardaway (via Webber) and Howard were available, rather than Michael Olowakandi, Kwame Brown, etc., is unfathomable luck.
Assuming we lose Howard and can’t sign a big name free agent in Summer 2012, it’ll be a little while before another Grant Hill/Tracy McGrady type free agency class comes along for us to dangle our lack of state sales tax in front of.
And we won’t have Penny Hardaway around to keep us competitive in the meantime.
It is a bit more complicated than "black" or "red" conditions, so to speak. One has to look at the overall value of the team rather than the plain P&L numbers.
There are plenty of successful businesses which don’t show profit, year after year. Additionally, as a private entity Magic is not obligated to publish its financial statements, which negates the feasibility and/or the reliability of available numbers.
In January I posted a FanPost titled “What is Magic’s worth?”. Here is the link:
I cautioned the readers by stating that “The state of the art Amway Center is but one part of what adds to the intrinsic value of the team. For the faint of heart in business finance, I caution you not to read through since I do not wish to see a few Tl;DRs”. Fair enough, that post did not have a single comment.
Basically, there are 4 elements that constitute Magic’s value:
1 – The value of the leasehold on the Amway Center.
2 – The value of the players in generating the revenue.
3 – Projection of future revenue.
4 – Brand value.
I closed the post by mentioning that “Pulling all these elements together would constitute the team’s value, which is currently at $385 million, eleventh best in the NBA, according to Forbes. Think of what kind of hit that valuation would get if Dwight leaves?”.
To a billioniare like Devos its either a profit or a loss and when you already have plenty of profits from other buisnesses a loss can really help your taxes.
i wish i had a link to this article i read saying how on average only about five teams a year in the nba ever made money because the owners pretty much legally cook the books to show loss because they are already billionaires.
The whole tax loss thing is utterly bogus
Any billionaire is perfectly happy paying more tax if it means even more profit. Nobody gets rich from tax losses.
I’ll give you two scenarios:
Rich Devos makes $400m from his empire, exluding the NBA team. Tax is 25% = $100m. The NBA team makes a $50m loss – total empire profits $350m, for tax of $87.5m. His loss on his NBA team has “saved” him $12.5m of taxes, sure – but at the cost of $37.5m cash profit.
Alternatively, the NBA team makes a $10m profit. Now his empire profits are $420m, leading to a tax liability of $102.5m. Turning around his NBA team has “cost” him $15m in extra taxes – but put an extra $45m into his wallet.
Of course, taxation is a lot more complex than that and there can certainly be scenarios where fiddling the books to increase or decrease profits in a year can be helpful, but generally, any company or person wants to make as much money as possible as fast as possible. If that means paying more tax, so be it.
by eltharion_doa on Jul 4, 2011 6:25 AM EDT up reply actions 2 recs
Rec'd. That's as good as anybody can explain why profit is always better than loss even if one ends up paying more taxes ... for the simple reason that taxes never equal 100% of the profit.
But we have to realize that profits or losses shown in the books – if cooked – for tax purposes are not true numbers. A company could have pocketed quite a bit and yet using Generally Accepted Accounting Principles (GAAP) show losses for tax accounting. The end result is that the P&L for taxing is not reflective of true profits and losses.
Back to NBA, for example, they use depreciation deduction of players’ salaries when paid, the same way that a company uses depreciation on equipment or farmers on cattle … and so on and so forth. That is why some argue that NBA’s losses in excess of $300M is bogus to start with. But accepting that – regardless of the amount of loss – there is definitely losses on the sides of the owners – or at least a dismal ROI – then looking at the percentage of revenues paid to the players, which is basically a somewhat fixed cost, is the largest area to look at in terms of cutting costs and maximizing profits.
Can an entity like an NBA team declare "losses" in perpetuity?
Or is there a limit to that sort of thing? I don’t know anything abut big business tax structures, but I’m thinking of how self-proprietership business can declare a loss for a certain number of years.
I don't get the whole 'pop-tart cats pooping rainbows thing,' but then, I'm old. So, there it is.
It depends on how the entity is set up.
Sole proprietorship would never apply to large entities like NBA teams since it offers no liability restriction/protection. Therefore, large entities are set up either as a corporation or a limited liability company, and have to keep their accounting practices within the relevant laws. But even sole proprietorships could take advantage of laws relevant to depreciation of assets and equipment, above and beyond costs exceeding revenues, which is the simplest way of showing losses.
Even then you can't really depreciate in perpetuity
You can only do it whilst you have book value on your assets.
But yeah, a company can generate a cash profit whilst making an accounting loss for a fair while.
by eltharion_doa on Jul 5, 2011 7:14 AM EDT up reply actions
(This has nothing to do with your discussion, but I wish more people here in the US used “whilst”. What a great word.)
Otis Smith, what you've just done is one of the most insanely idiotic things I have ever heard of. At no point in your rambling, incoherent trades were you even close to anything that could be considered a rational thought. Everyone on this blog is now dumber for having witnessed it. I award you no points, and may God have mercy on your soul.
by MoveThoseChains on Jul 5, 2011 1:49 PM EDT up reply actions
They don't depreciate the salaries
They depreciate the value of the roster acquired when they bought the franchise, which is an intangible asset.
The habit of lumping acquisition costs onto the books of a sporting team is a bit of nonsense, really.
by eltharion_doa on Jul 5, 2011 7:23 AM EDT up reply actions
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