Monday, August 16, 2010

Renting out Dodger Stadium

According to the Times' Bill Shaikin, the Dodgers have been paying tens of millions of dollars of rent on their own land. This year's tab to use the property the club already owns? $14 million. So what is this figure, and what does it really mean? Well, first a technical detail, then a breakdown of the money:
In 2006, two years after purchasing the team, Frank McCourt divided the stadium property into three parcels and established Blue Land Co. to own two of them. Those two parcels, parking lots immediately surrounding the ballpark, serve as collateral for a $60-million loan, court records show.

The Dodgers pay rent to Blue Land, which is not involved in stadium operations.


[Dodgers CFO Peter Wilhelm] said Blue Land expects to allocate $5 million of this year's rental fees to McCourt, about $4.5 million to debt service and about $4 million to construction managers.

The money for construction is to go primarily to another McCourt entity, the John McCourt Co., that has two employees — Geoff Wharton, the Dodgers' chief operating officer, and his assistant.

The key factor here is that much of the financing the team has arranged caps direct payments to ownership at $5 million per year. This figure became important in the early stages of the divorce, as Frank pointed to restrictions on his income when arguing for a lower support obligation to Jamie. Payments from Blue Land to ownership, however, are outside the scope of the financing-related cap on ownership's take from the team.

So why rent? First, it's beneficial for tax purposes. It is usually deductible as a business expense. From a tax perspective, it is often better for businesses to rent or lease than it is for them to own property. Rent and lease payments are expenses, whereas property ownership is treated as a long-term asset. This dynamic is what leads to the very common sale/lease-back mechanism, in which one sells an asset and then leases it back. You get the benefits of ownership and renting.

I'm not sure that's what's going on here, but you can be certain that the tax, finance, and accounting benefits of making rent payments led to this arrangement. The issue, of course, is the true nature of the payments. Given that the rent is well above market price, and only about a third of the rent payment goes to servicing the debt encumbering the property in question, it sure appears that this is a (now) transparent way of moving money within the Enterprise in a way to make soft payments appear proper.

Several times throughout this saga, we've had a glimpse into the way ownership used the complexities of the Enterprise to its advantage. Whether it's payments outside the finance caps, keeping McCourt sons on the payroll, or classifying soft distributions as rent, it is clear that McCourt and Dodger lawyers and accountants are taking every advantage of the complex structure of the Enterprise. Such arrangements, while not at all uncommon, have certainly left a bad taste in fans' mouths.
To those of you who have contacted me about a small get-together in Los Angeles during my trip this week, I'll have something for you shortly.


  1. I can assure you that this practice is very common for any enterprise with assets. Legally avoiding taxes is not unusal. It's only because as fans we expect to see revenues to be put back into the team to make the team competitive. At some point it needs to be said that $100 million in payroll is a fair amount of money and should be enough to sponsor a fair effort. Now if we were competitive this discussion would be mute, but because of a multitude of reasons we're 10 games out and in 4th place. To much is being made of how the rich live and how they manage their money. At the end of the day the McCourts are doing what most successful business people do and that is manage their money to full extent of their legal limits. So lets get off the money trail and get down to the business of getting guys like Kemp to grow up and play ball !!

  2. exactly@anonymous & josh. This is just us getting a glimpse into the financial shenanigans of high net worth individuals. While it might leave a bad taste in the mouth of regular joes like us, this is how things get done.

    However, I disagree that the McCourts are doing all they can to help the Dodgers simply by maintaining a $100M payroll (anon, if I'm misinterpreting your intent here, I apologise,) the Dodgers do not have a $100M payroll, it's quite a bit short of that and on top of that, the Dodgers do not invest their money wisely as they ought to. Many have pointed out that the Dodgers do not take back salary during trade (instead giving up young, team controlled prospects/talents), that's one aspect where the team (and its owner) do not back up the "baseball people" by throwing in money to increase the payroll. At other times we've seen that the Dodgers' international presence at this point is almost non-existent, yet another example of the owners not providing the money to the baseball people. This is part of the reason why the McCourt's finances _are_ relevant.

  3. While it maybe that the McCourt payments were within the law, on the surface it seems that they were sure trying to skirt the spirit of the law. Also since the money gained in this transaction was apparently supposed to go towards the new development in the parking lot of Dodger Stadium and that has been put on hold, you agin have to ask yourself what was really happening with the funds.

    Did these rent payments make it easier for MCourt to potentially get a loan for the development? I think not. Best thing that can happen is getting a full airing of all of the fiancial dealings of McCourt at the trial, hopefully forcing him/Jamie to sell the franchise and get new ownership as soon as possible.

  4. I completely agree with you Greg! You've pretty much wrote exactly what I was thinking. After reading anonymous comments... he sounded like a mold! (from the Mccourt camp) It almost seemed as if I was listening to one of Frank 'snake oil saleman' Mccourt interviews. hmmmm makes me wonder?!