Sports business experts confirm what just about everyone has suspected: Despite years of complaining about the dismal finances in running the Sonics and Storm, Howard Schultz and his partners snagged a profit of at least $90 million when they sold the teams last week.
And while they had operating losses, the $350 million paid for the teams by Oklahoma City investors was $150 million more than Schultz and his 57 partners paid five years ago.
"This is a full price, especially for a team that has an unsettled arena situation that is losing cash," said Marc Ganis, president of Sportscorp Ltd., a Chicago-based sports business consulting firm. "This demonstrates that Howard Schultz, in addition to convincing Americans to fork over $5 for a 50-cent cup of coffee, was able to negotiate a good price for the Sonics."
As in residential real estate, previous sales are critical in determining the value of sports franchises. The Sonics deal is comparable with other recent NBA deals, said Jackie DeRosa, who values sports franchises for Chicago-based Willamette Management Services.
Recent sales include the 2004 sale of the New Jersey Nets for $300 million and the 2005 sale of the Cleveland Cavaliers and their arena for $375 million.
In other business deals, uncertainty tends to diminish value. That's not necessarily the case here with questions over the lease of KeyArena, DeRosa said.
"For someone it might be a good thing or not a good thing," she said. "Maybe they're looking to move the team. In 2010, and that's not that far away, maybe I can move to, say, Oklahoma."
And one expert said the $60 million in losses claimed by the Sonics were almost certainly softened by large tax write-offs available to sports-franchise owners.
The tax write-off stems from a rule that allows team owners to write off the value of player contracts for the first several years after they purchase a team, said Rodney Fort, a professor of sports economics at Washington State University.
Basically, owners get to treat player contracts like new cars — which lose value as soon as they leave the lot. Teams get to claim that decrease in value as an expense even though it doesn't cost them money.
In the Sonics' case, team financial statements reported losses of $183 million for tax purposes over the last five years. That's three times the $60 million in cash losses taken by the team. Because the ownership group is organized as a limited-liability company, profits and losses flow through to the individual members, as do any taxes. That means Schultz and the other owners can use their share of the $183 million in losses to erase taxes on profits from other business investments.
When you combine the tax write-off with the enormous increase in the Sonics' value, Fort said it is hard to feel sorry for Schultz's ownership group.
"I've got to suspect this is a fabulous rate of return even for someone used to getting a high rate of return," he said.
The Seattle Times estimated their internal rate of return — a key measurement often used to evaluate investment opportunities — at 10.6 percent
Schultz was vacationing in the Hamptons late last week and could not be reached for comment, according to a spokesperson. Other members of Schultz's ownership group contacted by The Seattle Times declined to comment.
In an interview last week with KJR-AM, Schultz acknowledged that sports franchises are good investments, but said his ownership group was fraying due to ongoing operating losses and frustration over the failure to convince elected officials to pay for a KeyArena expansion.
In addition to the purchase price, the owners' partnership last year issued a capital call, requiring owners to contribute $17 million to cover team expenses in the wake of ongoing operating losses. With a bleeding franchise, the owners anticipated writing additional checks to offset future losses.
"I think when we sat down with government officials over two-plus years. ... At some point we told them we would not be able to maintain and hold our ownership group together," Schultz said in the radio interview. "We were getting pressure from [our] own group — saying we don't want to keep having capital calls, what's the future?"
At a news conference Tuesday, Schultz said he had turned down offers of more than $350 million in order to sell the Sonics and Storm to a group that would try to keep the teams in Seattle. Sources told The Seattle Times last week those offers included a $425 million offer from Oracle CEO Larry Ellison, who wanted to move the team to San Jose, Calif.
Ellison's spokesman did not return a call asking for comment.
In the end, Schultz said the group sold because they believed new owners would have more leverage to pressure politicians for a new arena deal.
Fort said he was surprised Schultz's group "didn't ride it out" to see whether they could have negotiated a new arena deal that almost certainly would have boosted the teams' value even more.
Ganis, who has worked as a consultant for many teams and cities considering arena deals, said he believes Schultz, like other professional sports owners, was not motivated by short-term profits or losses.
"You go into it with an idea of holding the team on a long-term basis," Ganis said. "Most people who buy sports teams have enough money that they don't need to sell it. It becomes a lifestyle decision much more than an economic decision," Ganis said.
It might have simply come down to emotion, Fort said. "There could be, with this very rich person, hard feelings as well. We have to allow that something like that matters."
Seattle Times news researcher Gene Balk and reporters Monica Soto and Drew DeSilver contributed to this report. Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com
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