Tuesday, June 21, 2011

Mechanics.

---
In yesterday's piece, which ran at ESPNLosAngeles.com, I discussed certain Dodgers financing arrangements designed, among other reasons, to make an MLB forced takeover or sale of the club unpalatable. I summed up the basics in this paragraph:
Sources familiar with McCourt's strategy indicated Monday that significant sources of Dodgers revenue would not be available to Major League Baseball or another owner without McCourt's consent. These are said to include a $21 million annual lease obligation owed from the team to a McCourt entity for the club's use of the parking lots surrounding Dodger Stadium and any ticket revenue in excess of the $6-7 million per year of service on certain McCourt debt, according to the sources. This year's figures were not available, but the surplus cash after debt service exceeded $60 million in 2005. Both of these revenue streams are slated to stay with McCourt for at least 20 more years.
Let's tackle this stuff in a little greater depth. To begin with, note that the team and the land were sold to the McCourts as separate pieces in the context of a single transaction. My sources tell me baseball was not happy with this arrangement, but still reluctantly approved it. What happened next?


Frank held the land currently used for Dodger Stadium parking with a business entity with no direct relationship to the Dodgers. That entity flows up to other McCourt entities, but never back down to the Dodgers. Frank then caused the Dodgers to enter into a long-term lease under which the Dodgers owe the entity--Blue LandCo--$21 million annually for the use of the parking lots. This money does not go back into the team. This is illustrated in blue below:
































The green line represents the lease payments; the organizations are not connected on the original flowchart. So the upshot here is that, for at least the next two decades, the team owes a non-team, Frank McCourt-held company $21 million per year as rent on the parking lots. 


The tickets piece is less straightforward, but more significant. Frank caused the Dodgers to transfer the right to sell non-premium tickets to a non-Dodgers entity, simplified on the chart as Tickets. That entity then took out nine figures of debt secured by revenue from non-premium ticket sales. Service on that debt runs at about $6 to $7 million annually. This is represented in red below:
































As above, the green line represents a relationship between the Dodgers and, here, Tickets. There is no underlying black line. The Dodgers transferred the rights to sell non-premium tickets to that entity, although I do not understand the Dodgers to pay Tickets any money.


And here's where it gets interesting: Tickets is entitled to keep all non-premium ticket sale revenue beyond its $6-7 million annual debt service. In 2005 alone, the excess revenue above that debt service was more than $65 million. That's money from ticket sales that, unless Frank McCourt so decides, never gets to the Dodgers. And it is also a contractual relationship that, Frank's side will argue, baseball cannot modify.


The takeaway: Frank is essentially painting a picture that baseball, should it take over the Dodgers, would not have access to very significant revenue streams. The rest of baseball's owners would be footing a great load of the bills. A new owner, purchasing the Dodgers at some sort of forced sale, would have to also buy out Frank's contractual relationships above or run the franchise without them.


I don't know if these mechanisms were designed with this sort of scenario in mind. There are all kinds of valid reasons businesses allocate revenue in facially-illogical ways. It could well be that tax implications drove these decisions, or creditors preferred assets and liabilities arranged just so.


But it could also be that Frank McCourt always wanted it to be harder to make him go away than it is to let him stick around. I don't know if we're there yet. Only Bud Selig does, for sure, and he seems willing to go to 
the mat. It won't be pretty.
---

43 comments:

  1. "the team and the land were sold to the McCourts as separate pieces in the context of a single transaction."

    Can we assume that MLB's position will be that we gave it to the McCourts in a single transaction, so we'll take it away in a single transaction?

    ReplyDelete
  2. Well, the obvious solution would be for the new owner to build a new stadium(something that's needed anyway).

    ReplyDelete
  3. each day it becomes more and more clear--frank mccourt is the devil. i can't believe bud selig let this guy buy a mlb franchise.

    ReplyDelete
  4. "The Dodgers transferred the rights to sell non-premium tickets to that entity,"

    For Fair Market Value or as part of a fraud scheme? All intellectual Property has value and shold be transferred to a related party for value under IRC Sec 482.

    How was this not a violation of then existing bank covenants?

    How Did Bud allow this to happen?

    The annual rent also appears to be excessive and part of a fraud scheme.

    ReplyDelete
  5. Quote:
    "The annual rent also appears to be excessive and part of a fraud scheme."

    Yeah, right. Frank is committing fraud against himself.

    Who needs the comic pages when there is so much hilarity here?

    ReplyDelete
  6. You can call Frank the devil, but I prefer El Chupacabra (goatsucker). A legendary creature known for sucking the blood (money) out of livestock (Dodgers). El Chupacabra has only been sighted, and never captured or neutralized. Just like Frank.

    ReplyDelete
  7. The McCourt's are committing fraud against their business partners, the 29 other owners in MLB. The owners share a certain percentage of revenue from all the other teams' gross income. By splitting the revenue up into so many different entities the McCourt's are clearly denying their partners revenue that the partners are entitled to. That is how I suspect that a court will see Frank's games.

    ReplyDelete
  8. Seeing this Byzantine structure has me asking just what are Jamie and Frank fighting over with respect to the Dodgers? What does "getting the Dodgers actually mean? Access to future secured cash flows?

    ReplyDelete
  9. Is it possible to buy the team and then move it to a new stadium, perhaps as part of the sports complex they are trying to put together downtown? I hate to leave Dodger Stadium but if Frank is going to hold us all hostage maybe be should pack up and go

    ReplyDelete
  10. These transactions can and should be challenged in either bankruptcy court or in the marital dissolution proceedings as fraudulent conveyances. . . Frank set thing up in a very cute way. . . Jamie gets all the residential real estate (along with the mortgage obligations) and Frank gets the team (with the related entities under one umbrella) which he then proceeds to split up and fraudulently convey to himself and/or other entities he controls. . . . .

    Cute. . . . but a fraud on creditors unless (and this is very unlikely) there was fair consideration paid to the umbrella Dodger organization for these valuable assets.

    Again, given the principle that one's greatest strengths are also one's greatest weaknesses, Frank's little 'games' and manipulations are now going to be challenged. . . simply because no one is going to buy such a mess. . . . without more information.

    Frank arrogantly believes this financial complexity would buy him leverage and superior bargaining positioning. . . That only works if one has economic and (in this case political) staying power. . . Which Frank does not.

    When Janice Hahn's motion to have the City get behind the people of LA buying the Dodgers came up for a vote last week (it passed), only Councilman Ed Reyes (who represents the area where Dodger stadium is located) was prepared to carry Frank's 'water'. . . .

    Frank's lawyers better be careful about getting paid before they do a lot of work. . . Frank has nowhere to go but down. . . . If he tries to 'game' this situation, he will end up hanging himself. . . a prospect which should scare Jamie because he'll take her down with him. . . These fraudulent conveyances might impact her as well, given that the entire post-nup (pre-Dodger purchase) was intended to protect their assets from creditor claims (which may, or may not, be considered a fraudulent conveyance depending on the details of the transaction. . . What was the value of that which Frank supposedly gave up to Jamie versus the value of that which Jamie gave up to Frank? I doubt the values have a great deal of correlation. . .Just a guess.)

    But regardless, the Judge in the Dissolution action needs to get to the heart of these transactions. . . If Jamie's million-dollar lawyers don't do this for her, she risks going down with Frank. . . .

    Jamie waited too long (it would appear). . . For her, it is also a loss limitation situation as well. Hopefully, Jamie's 'imagination' is more in line with her 'ego'. . . We'll see.

    Meanwhile, with any kind of luck, each of the transactions described in this article will be undone and Frank is going to be repaying the marital estate a lot of money.

    Going forward, Frank's right to this future income is going to disappear. . . the people will insist on it. . . and if Jamie has any real moxie and wishes to preserve whatever is left of this 'mess', she'll insist on it also.

    It's time for both of them to come clean. . . .

    One does not own a 'quasi-public' asset and proceed to piss it away and treat it like one's personal piggy-bank without having to endure and confront serious consequences. . .

    The 'go-go' debt/leverage days where Frank made his money are over. . . Going forward, we need equity, not debt. . . In this case, the people owning the Dodgers (100,000 people at $10K per person is $1 Billion). For $1 Billion, Frank and Jamie will go away. . . . the City can become united, the people economically and politically empowered, and the poor and middle class actually be able to go to baseball games.

    Noel Weiss

    ReplyDelete
  11. Gee, only $10k per person? Where's my checkbook?

    ReplyDelete
  12. I say Frank takes it to his FJM entity in Montana and stays there for good.

    FJM - Frank, Jaime... Motherf*ckers

    ReplyDelete
  13. Whatever happened to the IRS investigation into how McCourt never reported the Dodgers revenue? After TMZ reported on this back on April, I've not heard another word on this. It seems to me being indicted for tax invasion would make McCourt quickly disappear.

    ReplyDelete
  14. Here's an article that should be sent to Bud Selig. http://itsaboutthemoney.net/archives/2011/06/21/commissioner-selig-frank-mccourt-must-go-a-petition/

    ReplyDelete
  15. The endgame is now clear - McCourt can no longer be a viable owner, but he can and will make it extremely difficult and expensive for MLB to make him go away. This has been at the heart of McCourt's business 'career': produce nothing, spend other people's money and lawyer up until the other side gets sick of you and pays you to just go away......his beloved sons must be so proud.

    ReplyDelete
  16. It's clear what Bud's position is going to be--the transactions that created these separate entities contained clauses that they were still subject to the terms and conditions of Major League Baseball's governing documents, which gives Bud the right to do with them whatever he wants.

    Whether or not a judge agrees in a different story, but traditionally the courts have given the Commissioner wide latitude to do what he wants.

    ReplyDelete
  17. MLB should move the Dodgers to Anaheim, build a new stadium in downtown LA and McCourt can keep his parking lot, will miss the stadium,..........if that is what it takes to get his hands off of the team

    ReplyDelete
  18. Uh-oh...this looks a bit nasty for the other parties involved. Frank McCourt's strategy is working. It seems pretty bad....

    ReplyDelete
  19. If its too messy to disentangle Frank from the Dodgers, then MLB needs to seize the franchise itself (regardless of the stadium, land, or ticket rights), dissolve / contract the franchise, and give a new franchise to LA. We can worry about the name of the franchise or where it will play later on.

    The worse part of the whole thing isn't even that Frank might somehow pull a rabbit out of his hat and keep control (though that's plenty bad) - its that whatever happens, by the time this thing has been appealed to every court in the country it will be 4 or 5 years, minimum. Lets just get this over with.

    ReplyDelete
  20. If Frank's structure is upheld, what does that do to the value of the part that Bud can force him to sell: a baseball team saddled with onerous obligations for 20 years?

    ReplyDelete
  21. I don't think Frank's moat holds up, and for the reasons Josh outlined previously: if this nonsense does stand, every owner will then pull the same stunt, and the commissioner's "best interest of baseball" powers will be immediately neutered.

    Judge Gordon's acceptance of the divorce settlement with the Fox TV deal can fairly be read as, "Get these people out of my courtroom!" I don't think it's especially compelling as augury for subsequent litigation.

    ReplyDelete
  22. Is it just me or is Frank arguing opposing points of view in different arenas? He's telling Jaime that he is the sole owner of the Dodgers, and that includes all related assets, while telling Selig that no, those other assets are NOT a part of the Dodgers. Am I missing something?

    ReplyDelete
  23. Given that the value to mccourt of the financial cash generating shellcos (shell companies) is contingent upon the value of the franchise (fan goodwill, announcers, winning team, marquee players which drive sales/tv/concessions/merchandising) MLB has an incentive to not maximize the "value" if the dodgers (no free agent signings, benign neglect) until McCourt is insolvent and illiquid (cash flow dries up from the shellcos). Add to that what the IRS may do it becomes bleaker. Question: how much is MLB willing to spend on the dodgers? Will the IRS go after McCourt personally or after his assets including the stadium and the shellcos? This is going to be even worse IMO.

    ReplyDelete
  24. So in the scenario where Frank's income stream comes from shellcos that require L.A. fans to pay him for parking and tickets, he would be even more hated than he is now. The so-called fan boycott won't end as long as significant revenue went to Frank.

    ReplyDelete
  25. Absolve the team? Move to Anaheim? Dodger Stadium needs to be replaced? Wow, these folks are even nuttier than Frank.

    ReplyDelete
  26. I think that most MLB teams have a structure much like we see above. The Brewers had something like 13 interrelated entities when Selig owned them. I don't see the related companies as a problem if Selig decides to take over the team as other teams do the same thing (at least I think so).

    ReplyDelete
  27. As far as building a new stadium, I'm sure Frank won't care. As long as he gets his 21 million per year as provided in the lease, of course. Just like your landlord doesn't care if you actually live in the apartment you rent.

    Lots of teams run shell corporations to move revenue around. Ever hear of a regional sports network?

    ReplyDelete
  28. Of course this was all designed this way. This is the same crap that Goldman Sachs et al crapped on America for years with credit default swaps, collateralized debt obligations, etc., for years.

    ReplyDelete
  29. If the Dodgers aren't playing in Dodger Stadium, then there's no parking revenue for Frank. I'm sure a smart lawyer can figure out an escape to get the Dodgers out of this stadium-lease nonsense...then have the Dodgers play their home games at the Colisium for a couple of seasons. The upside is to deny Frank a revenue stream, and basically wait him out until the choaks on his lawyer bills and his $30,000/month hotel bill.

    The downside is having to use the Colisium, but Dodger fans would probably be willing to endure the Colisium if it results in Frank's financial ruin. And now that a light rail station is at Expo & Fig, the parking and access issues may not be so bad.

    As far as the Dodger Stadium property, it's value as something other than where the Dodgers play would be negligible without zoning changes, land use entitlement approvals and related environmental clearances. Basically, major political approvals, which would be iffy at best, considering that Frank has pretty much declared war on the citizens of LA.

    ReplyDelete
  30. Btw, according to ESPN Fox doesn't want to play ball with McCourt if he goes to court to force the TV contract approval

    http://sports.espn.go.com/los-angeles/mlb/news/story?id=6696069

    The big problem here is that if McCourt misses the payroll I think all of the players could become free agents immediately if they so choose. So for the Dodgers to continue to have value they have to make payroll otherwise McCourt is liable to land in hot water with the season ticket holders (I could forsee an expensive class action lawsuit about the promise of Major League Baseball and not being able to come through because he missed payroll and all of his best players jumped ship).

    ReplyDelete
  31. Frank McCourt doesn't even have access to the Ticket Revenue and the Parking Revenue. The revenue is going to banks and private placement investors for the loans he acquired as he collateralized these assets.

    The money may go through the pipeline that Frank may control, and he may skimmed some money, but the revenue pretty all goes to those put up those loans, plus interest, which may not even be covered by the revenue, especially if parking and ticket sales are way down.

    I think the bigger problem isn't that Frank will control these shell companies if the Dodgers are sold, it is that Banks and Private Placement investors will control them after seizing them, and demand a higher price for them for any new prospective owner, much like what happened with the Texas Rangers went on the auction block.

    The parking lots and tickets sales may be in Frank's name, but they are so maxed out with loans, There is a reason why he can't get financing to run the club.

    ReplyDelete
  32. From what I've heard, the contract between McCourt and MLB stipulates that the land and these other assets that McCourt tried to divorce from the team are all able to be taken back by MLB. So if baseball tries to get it back, it, by the contract, can take it all back. Anyone more familiar with the situation know anything about this?

    ReplyDelete
  33. Great post, I enjoyed ready reading it, Keep posting good stuff like this.

    ReplyDelete
  34. Great post, I enjoyed ready reading it, Keep posting good stuff like this.

    ReplyDelete
  35. Amazing post! Thanks for sharing.

    ReplyDelete
  36. Excellent post. it's one in all the most effective post from different. it's a helpful and charming post. i would like to sharing this subject with a number of my shut friends. therefore thanks this post.Pradaxa Lawsuits

    ReplyDelete
  37. Thanks for very interesting post. I have a high regard for the valuable information you offer in your articles. I really believe you will do much better in the future. Paper Writing Services

    ReplyDelete
  38. It’s good stuff the following and also I have been searching for such information for a lot of times. Many thanks for discussing this information. undergraduate dissertation

    ReplyDelete