Arizona Coyotes being sold again (of course), could demand more subsidies (of course)

The saga of the Phoenix (now Arizona) Coyotes was one of the longest in recent sports history, and ended in 2013 with the city of Glendale agreeing to pay the team $15 million a year to stay put in town for just five more years. But at least it’s finally over, and now Coyotes fans, such that there are fans, can enjoy the Coyotes season in peace, such that there’s much to enjoywait, what now?

The city of Glendale is not sure what impact — if any — a sale of the majority stake in the Arizona Coyotes will have on a $225 million arena accord reached with hockey team’s owners last summer…

City officials are not sure yet if a change in Coyotes majority ownership would necessitate a new or amended arena subsidy.

Why on earth would Glendale have to kick in more money just because of the checks being made out to a different name? Phoenix Business Journal doesn’t say, but presumably it’s connected to the out clause in the Coyotes’ lease, which allows the team’s owner (whoever it is at the time) to break the lease and move the team in 2018 if they’ve lost more than $50 million over the previous five years.

The Coyotes say they lost $24 million last year, which would certainly put them on the path to lease breakage. But it’s not entirely clear that that entire loss is really loss. As David Shoalts of the Globe and Mail explains it:

The problem for the latest owners is the same as it was for all the previous owners – despite any claims to a successful first year, the Coyotes’ cash flow is not enough to service the franchise’s enormous debt. The team’s hockey-related revenue (HRR) for the 2013-14 season was said to be just $40-million, last among the NHL’s 30 clubs.

Gosbee and LeBlanc borrowed $120-million from Fortress Investment Group and $85-million from the NHL to finance the team and have some working capital left over. While the NHL loan is at favourable terms, one source pegs the interest rate for the Fortress loan at 10 per cent.

The New York Post, which first reported the $24 million loss figure, doesn’t indicate if this counts debt service. But if it does, it’s completely ridiculous: Just because the team’s owners took out a terrible loan (which is soaking up the entire $15 million in subsidies from Glendale to pay off) because they didn’t have enough cash to buy the team shouldn’t count against the franchise’s performance. And it certainly shouldn’t allow the Coyotes owners to cry poverty in order to demand more subsidies. (They would have to repay some of the subsidies to do so, but it’s not really about whether they’d use the out clause, but whether they’d threaten to.)

Anyway, let this be a reminder to city officials everywhere: Don’t sign lease clauses based on team profits and loss, because the teams can cook the books however they want. Maybe someone could just print up some nice plaques with Paul Beeston’s quote on it and send them around to city halls everywhere? The world will appreciate it.

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11 comments on “Arizona Coyotes being sold again (of course), could demand more subsidies (of course)

  1. When I was working in Economic Development we denied a subsidy on just these grounds. A machine parts broker with about 200 employees was cut out by their main clients when the recession caused their clients to look for cost savings. The very wealthy owners came begging the city and county for money to help make the business “sustainable”.

    Except if you actually looked at the financials the business was more or less sustainable with small cutbacks if you didn’t include the debt on the owners had incurred acquiring the business.

    Sadly 200 people lost their jobs, but you don’t pay down ownership debt with government subsidy. That is a path to bankrupting the government and is terrible terrible policy.

    Debt financed acquisitions are the devil. They create terrible incentives.

  2. If the number of fans at the games is anything to go by, the political downside for Glendale officials to telling the team to get lost (i.e. “You want to break the lease? By my guest!”) is next to non-existent. These decisionmakers are either total idiots or stand to profit personally. I don’t see any other way they could be throwing so much money at these owners.

  3. “Sadly 200 people lost their jobs…”

    Sounds like the office of Economic Development was doing a great job.

  4. Neil,

    It appears that City leaders were only responding to a silly question from the media.

    I don’t think this sale will mean additional subsidy demands. I think it will mean an influx of cash to the team’s player payroll, followed by a move if attendance stays low.

  5. “It appears that City leaders were only responding to a silly question from the media.”

    I sure hope so. Though even then, a more appropriate response would have been, “What? No. What a silly question.”

  6. On the Economic Development side, it might mean that, with a finite budget, decision makers chose to put the public’s money in longer term development projects than subsidizing a business owner’s interest payments.

    With all these debt-financed acquisitions, the interest rate is going to spike eventually and its no fun anymore–whether you own Manchester United or a tool-and-die shop. Subsidies only delay the inevitable.

  7. “whether you own Manchester United or a tool-and-die shop”

    If I’m not mistaken, I believe that was part of the reason for United’s listing on the NYSE—they took part of that money and paid down a PIK loan that had like a 15% interest rate on it. They also paid themselves a dividend for being such great club owners by getting suckers to buy non-voting, non-dividend-paying shares that amount to like 1% of the club.

    They also finished 7th last season and aren’t even in Europe.

  8. Juvenal:

    Fair point, but debt financing isn’t always bad. In fact, it is an integral part of most businesses (very few owners used all cash to start their businesses and continue to run them that way).

    The issue for me is twofold:

    1. You want to see the owner have some skin in the game. If the business is fully leveraged, there is no upside to helping. The “owner” doesn’t even really own it. That very much appears to be the case with Gosbee and Leblanc (the former is quite wealthy, btw, and could likely have bought the club with cash if he wanted to). They borrowed more than 100% of the purchase price.

    2. You want to see all expenses sitting at or near fair market rate. It isn’t the businesses fault if the owner loaned himself $150m at 17%. But if that level of investment was necessary for legitimate business reasons, the $150m might be acceptable… but not at anything over 6.5% let’s say. So that’s what you base the expense on.

    Everyone has their own POV (and you rightly considered the risk tax dollars were being used to cover), but in the example you quoted I would have considered covering the carrying costs of the loan (interest and fees only) for a short period in order to keep the business running. Either the owners can rejig their business and make it profitable in a year or two, or they can’t and it’s no longer sustainable.

    It is never the public’s duty to pay debts corporations willingly take on.

  9. Well, if the team (or owners) wanted the endorsement of this blog, then just ask the city for $200 million for a public/private partnership for an arena. At $201 million it’s just obscene. We know the next market is great…just ask the Mariners.

  10. yoyouma: I’ve read that three times and have no clue what you’re talking about. Mariners, wha?

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