Revisiting San Jose

In November 2005, Gwen Knapp wrote what many called a tongue-in-cheek article about the A's trading Barry Zito to the Giants for the territorial rights to San Jose. How ironic it must be now that the Giants, facing dwindling attendance and sizable debt loads (one of which is Zito), may very well entertain such a concept. Mark Purdy is back drumming up San Jose again. We'll see if it goes any further from there.

Before I get into the transaction, it's important to set the table. According to Cot's, Zito is owed $101.5 million on his contract after this season, which includes the $7 million buyout for the 2014 season. If for whatever reason he's kept on the team, his salary is $14 million, bumping the remainder to $108.5 million. The Giants also supposedly have a mortgage payment of $20 million per year until 2017, with no way to pay it off early.

That doesn't mean the Giants are taking on water. Thanks to tax rules they can write off Zito's contract. They can write off the stadium in a similar manner. And they have the "actual stadium expenses" deduction as part of revenue sharing to soften the blow there too. That isn't to say it's a dollar-for-dollar write-off, it's more like 40-50 cents on the dollar. For argument's sake let's say that it's on the higher side. That puts the combined Zito-ballpark hurt at $19 million.

The Giants are also down 4,500 per game in paid attendance. Project that dropoff over the course of the season, and they're down $11 million in revenue ($35 x 4,500 x 81 games). From the looks of the TV broadcasts, it's far worse with what appear to be at least another 5,000 no-shows per game. That translates to another $5 million or so in lost concessions revenue through the end of the season. Revenue-wise that puts the Giants $16 million off from last year.

To compensate for the revenue drop, the Giants dropped payroll from $90.2 million last season to $76.6 million this season, a drop of $13.6 million. That doesn't quite make up for the shortfall, but it's close. In other words, they planned for this drop-off reasonably well. According to Forbes they made almost $20 million in profit last season. It's hard to say how much that will drop due to the switch from KTVU to KNTV, or Bonds' departure for that matter. The new 30% stake in CSNBA allows for the Giants to potentially hide some revenue from revenue sharing. For this season, they should be fine. Multiple years of under .500 teams will not look kindly on the Giants' ledgers, and their profits should drop significantly.

How to ease the burden? In my last post, I noted that the Bay Area is the only two-team market that is split, not shared. It's also the only market in which one team is a net payer into the revenue sharing system (Giants), while the other is a net payee/receiver (A's). It's been reported that the A's received anywhere from $12-20 million each year for the past several years, amounts that have allowed them to be profitable while escalating salaries. It can be argued that the Giants are directly paying the A's their revenue sharing receipt. Ted Robinson noted on his MSNBC blog that neither Giants nor the traditionally big market teams are happy about the baseball welfare state.

The simple solution, then, would be for the A's to give some of their revenue sharing receipt to the Giants. It could start at a minimum, around $15 million. Any amount above that could either go to the A's or be split between the two teams. $15 million would go a long way towards easing Giants ownership's concerns about the "unfair" aspects of revenue sharing, while also largely taking care of the ongoing, long-term debt burden. This adjunct to the revenue sharing agreement would continue until the A's completed construction of their new baseball stadium in San Jose, probably in 2012 or later due to the land acquisition costs at the Diridon South site and negotiations that need to be done with PG&E to move the substation there. If you're wondering, part of the site has already been cleared. Once all of the land has been acquired (not through eminent domain - that's been ruled out), the A's could conceivably start building thanks to the already certified EIR (some changes would have to be made to accommodate the smaller ballpark size). Surprisingly, even after the stadium's built, there's a decent possibility that the A's would continue to get revenue sharing if their TV contract situation doesn't improve. That smaller check could also go to the Giants until 2017. Total revenue sharing rebate for the Giants: $90 million over ten years($15 million per year from 2008-11, $5 million per year from 2012-17).

The A's would, of course, take a major hit to their revenue. However, the way the revenue sharing is conducted, with payments and receipts occurring well after the season ends, the A's see less benefit than if they had the money up front. Receipts are meant to be reinvested in the club, but as we have seen with the Marlins and Twins in recent years, that isn't always the case. To compensate for the drop in revenue, the A's would have to keep payroll low as long as they remained at the Coliseum. It could even drop well below the current $48 million level depending on which players the Billy Beane decides to retain. The $30 million drop in payroll this season, combined with the major drop in attendance, could translate into a $20 million revenue sharing check.

Beyond the day-to-day operations of the club, there still remain several questions:

• What about Fremont? This is where it gets dicey. Although the area columnists like to say that nothing's a done deal until the A's break ground, it's a lot more complex than that. The A's have invested in nearly $200 million worth of land that, if the ballpark isn't built there, will remain industrially zoned. They could move forward with plans to build up to 4 million square feet of office originally intended for Pacific Commons. They could also go with an alternative that could be mapped out in the EIR: the lifestyle center in Fremont, but surrounded by office/industrial instead of residential. The residential portion of the lifestyle center could stay or go. Fremont gets the lifestyle center but without the ballpark. Pros for Fremont: little infrastructure cost, less environmental and political opposition. Cons: No name recognition, less bang-for-buck appeal, the appearance of having been used as a stepping stone for San Jose. As for the A's, the problem with this is simple: they can't use this plan to finance the ballpark, at least not much of it.
• Is San Jose ready? No, not even close. They have a certified EIR, which is a big step. But they stopped with land acquisition proceedings and the prices are only going to go up. San Jose would have to sell the portion they've already acquired to the A's, which is good for the city's budget. The A's would be on their own to do the rest. The city's issue would be the renewed political squabbling that an impending deal would cause, especially neighborhood outcry. A lawsuit would seem possible if not altogether likely. The city could also buy the remaining land and lease it to the A's for cheap, similar to what S.F. has done with China Basin for the Giants. That would be harder to accomplish because of limited resources and budget constraints.
  
• How much would it cost? Fortunately for the A's, there are a dozen landowners instead of dozens. Still, it'll cost somewhere in the neighborhood of $100 million unless they are leased the land. Added onto that would be cost of the ballpark construction, currently $450 million and rising thanks to inflation and materials costs.
• How would it be financed? The only thing I can think of right away is development of the eight acres immediately in between the ballpark and the arena. The Sharks have already shown their opposition to a ballpark because it could reduce available parking, especially on nights when both venues are in operation. The A's could combine multi-level parking facilities with residential development there. In the past I projected that they could only get 900 units out of the land because of height restrictions. That land already has a light rail tunnel running underneath it and a future planned BART tunnel, limiting the amount of available below-ground development. Perhaps they could funnel some of the revenues from the scaled down Fremont development if that's approved, but I don't see how the numbers would add up. There may be the possibility of the iStar development, which the A's are using to finance the Quakes' stadium, but I don't know if taking a portion of that will make a big dent either.
  

It's for those financial reasons immediately above that I still say San Jose's a difficult proposition. In the end, these plans have to pencil out. In Fremont, it's pretty straightforward. My money's still on Fremont to be the future home of the A's, though if that doesn't pan out, it's not hard to see what Plan B could be.