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16 May 2008

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.

12 comments:

Mr. Plainview said...

I love this blog, but I must say I really hate how bias it is toward San Jose. Lets please not forget that the A's are an Oakland team...and even though they're probably moving to Fremont(which kills me a little every day) they're still in the East Bay. I know Lew Wolf said if Fremont doesn't work they would never move back to Oakland, but he's said a lot of things that he didn't back up. Like when he said he would never move the team when he became owner...These teams are in the San Francisco/Oakland Bay Area, there's no San Jose in that title. San Jose just gets left overs, as harsh as that sounds, its true. I realize San Jose is almost as big as Oakland and San Francisco combined, but the history of the bay area is fueled by Oakland and Frisco...

And thats what kills me the most about the move to Fremont...NO HISTORY, no purpose, just suburbs. All that Oakland A's History will vanish. San Jose is only good for providing a decent city(like Austin,TX or Columbus,OH)...Good cities but not worthy enough for major league sports...except for hockey...and the biggest reason why San Jose has one is because the Oakland Seals had very low attendance.

Stop trying to turn San Jose into something its just not...you can't "Revisit" something thats never been visited in the first place...

Marine Layer said...

mr. plainview,

Titling the post "Revisiting San Jose" is a reference to all of the work I did chronicling San Jose's EIR process in 2005 and 2006. The A's may not have done any formal work there, but I sure did. It's not bias. It's due diligence. Your calling it bias only shows your own prejudices about the matter. You're entitled to your opinion. But don't call me biased when I do my damndest to provide as balanced and dispassionate coverage as possible.

Tony D. said...

Mr. P.,
You state that you really hate how bias this blog is toward San Jose, but then go on to SLAM my beloved home town?! By the way, we live in the San Jose/San Francisco/Oakland Consolidated Metropolitan Area. And the generic term for our region is the San Francisco Bay Area, almost always shortened now to simply The Bay Area, because the largest bay in the region is named "San Francisco." It's not because of the city itself. I'm not going to comment on today's news ("ADIOS Magowan!") or territorial rights, because what's the use. I'll let people believe whatever they want to in peace.

FC said...

Mr. P.-

"Low attendance" seems to be a common thread running through most Oakland teams. History is important, but the way I see it, history means nothing if it's not putting butts in the seats.

Jeffrey said...

Yeah, the advent of the personal computer, internet as a consumer tool, all that other junk that has it's roots in the south bay have nothing to do with history.

The Bay Area is a great place to live. The whole place.

Mr. Plainview said...

Sometimes I feel like because a lot of the people on this blog are from San Jose, they feel the need to defend it so much...like I said I love this blog, but I honestly believe that most most people on it would rather the A's move to San Jose than stay in Oakland...

And about attendance...Oakland teams show great attendance! The A's themselves showed better attendance than the Giants plenty of times in the past. The Warriors hold the record for the largest attendance on the west coast(beating the Lakers!) And the Raiders have some of the most die hard fans in the NFL. Selling out games even when there team has been in the bottom 5 for the past 6 years! All this is Oakland loyalty considering the fact that these teams have played in the same crappy stadiums and arenas since 1968!

Anonymous said...

Mr Plainview, you a prime example of the SF snobbery that has taken over the east bay. You live in a San Francisco annex now. Your snide remarks are extremely dated and beyond ignorant, the product of the spillover hipster invasion seeking out cheap housing and chic slum imagery. I suggest you stick to critiquing indie rock instead of sports.

Jeffrey said...

Sustained attendance levels have never been the case in Oakland. SInce the Raiders came back, for the warriors every year until the last season (32 consecutive sell outs is their new marketing gimmick, meaning, they didn't sell out every game this season), the A's had a ver good attendance record in the late 80's early 90's but even when they were in the playoffs much of the last decade they hovered around 2 million every year.

Personally, I don't live in San Jose. I don't care where in the Bay the A's move as long as they stay in the Bay Area. So in Oakland (Uptown would have been awesome), Fremont (Cisco Field is truly a trend settign idea) or San Jose (Diridon has a lot of advantages) is fine with me.

The only San Jose "partisan" I see posting on here regularly is Tony.

BleacherDave said...

"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."

ML, not quite sure where you're going with on this. Tax is computed on net taxable income which includes all elements of expense, not just Zito's salary and the ballpark payments.

I believe when you buy a team, you can take an accelerated write-down on the value assigned to player contracts, but I'm not sure that's available without a franchise transfer.

I don't know what depreciation method they used for tax purposes, but if we assume they used MACRS, non-residential real property has a 39 year depreciable life. As a result, their tax benefit is much LESS than their $20 mortgage payment.

Without further research, I would assume that the total value of Zito's contract is expensed ratably over the life of the contract on a straight-line basis. Since he's "only" making $14.5mm this year (Cot's), the Giants will get a benefit from expensing an amount greater than their cash outlay. However, for the stadium (which is being paid off over 17 years?), the tax deduction may be spread over 40 years, resulting in a tax expense significantly lower than this year's cash outlay.

Ignoring interest costs, which are significant, if the ballpark cost $20mm/year * 17 years = $340mm, the MACRS tax expense this year is $340 mm * 2.564% = $9 mm. $11M less than the cash outlay - deferred tax asset.

The combined Zito-ballpark "hurt" may look more like: $14.5 cash outlay - 3.5 addl expense (Zito) + $20mm cash outlay + $11M deferred tax asset = $42mm.

Now, that's a Big Hurt.

BleacherDave said...

"Sustained attendance levels have never been the case in Oakland. "

Hunh? If I remember correctly, the Warriors once held the longest sellout streak in the NBA - I think it was 212? (I googled - it was 297) consecutive. It ended when the Warriors relocated to ....... San Jose.

Marine Layer said...

I can't independently verify the tax ramifications, as I've only read about them in various articles related to other teams' ownership situations. I don't think pro sports franchise are on the same playing field as typical businesses or corporations.

The Portland Trailblazers had 814 consecutive sellouts from 1977 through 1995.

bartleby said...

Dave,

The Warriors attendance streak you are referring to came during a period when they played in the smallest arena in the NBA (about 15,000). Although they did not sell out a much bigger building during their one season in San Jose, Warriors attendance was still up over the previous season in Oakland.

Attendance History

1999-00 509,172 65% 51.6%
1998-99 335,837 70% -32.9%
1997-98 500,286 64% -19.6%
1996-97 621,844 86% 0.9%
1995-96 616,025 100% 0.0%
1994-95 616,025 100% 0.0%
1993-94 616,025 100% 0.0%
1992-93 616,025 100% 0.0%

1996-97 - Attendance for the San Jose Arena, San Jose.
1998-99 - Attendance for 25 games due to NBA lockout.

You will also note that attendance went down significantly upon their return to Oakland from San Jose, notwithstanding the renovated arena.

Still, considering how miserable the team was, I'll give you that Warriors attendance in Oakland has been strong. I'll also give you that Raiders attendance has been decent considering the lousy deal foisted on fans upon their return from LA, miserable customer service, and other abuse. Attendance figures since the Raiders took over their ticket sales have been impressive considering they've only won six games in those two years.

But attendance for the A's has been fairly lousy over their history, especially considering the success of the team. Even in the three years (out of 40) constantly pointed to by the Oakland-only crowd as supposed evidence of support in Oakland, they did not break 3 million - despite repeated trips to the World Series.

Like it or not, Oakland really isn't a baseball town.