Brooklyn Nets arena lost money in 2015, is probably no good for anything for anybody

Russian billionaire Mikhail Prokhorov, who already owned 80% of the Brooklyn Nets and 45% of the Barclays Center where they play, bought the remaining shares of those two items from developer Bruce Ratner over the holidays. (If I’m doing the math right, Prokhorov paid $285 million in cash, plus $344 million in promised future payments.) But the interesting part of the transaction, as uncovered by Atlantic Yards Report’s Norman Oder, is that the financial documents released then show that the Barclays Center is continuing to lose money:

The Barclays Center had a terrible year financially in the fiscal year ending June 2015. Net revenues plummeted, to less than half the total once projected, and the arena lost some $9 million in what was (roughly) its third year in operation…

The arena’s net operating income (NOI) fell well behind expectations, to $38 million, due to declines in event and related revenues, while operating expenses remained high.

We’ve heard this before, particularly two years ago when it was revealed that despite being one of the top-selling arenas in the U.S. in its first year, the Barclays Center was still barely breaking even after paying off its construction debt, thanks to high operating costs and discounts being offered to performers to lure them to Brooklyn instead of one of the New York area’s many other arenas. That seems to be even more the case now, and while the arrival of the Islanders provides more dates for 2015-16, that’s not necessarily a good thing: It also displaces nights that the arena could be rented out for concerts, and the arena’s weird rent deal with the Islanders (the arena pays team owner Charles Wang a flat negative rent, but keeps all ticket and other revenues) means that if ticket sales are slow, the arena could end up taking a loss on the NHL.

All of this means it’s a good time to wonder what the hell exactly Ratner and Prokhorov got out of this arena that has turned a large swath of Brooklyn upside down for more than a decade now. The purchase price on the last chunk of the arena valued it at slightly less than the construction cost, so Ratner’s not quite breaking even on the money he poured into the arena itself. (Yes, he got a pile of public subsidies, but those were in the form of discounted land and tax breaks, so not anything he can actually put in the bank now that he doesn’t own the building.) He also got the development rights to a bunch of land where he can erect apartment towers, but that isn’t going all too well either, though at least a couple of buildings are now close to completion.

Prokhorov, meanwhile, has put in somewhere around $1 billion in order to own a historically awful NBA franchise plus an arena that might just, if you squint, be able to break even. Of course, he might see this as a perfectly reasonable price to pay to be able to hang out with NBA players and do whatever the hell this is. He has more billions where that came from, anyway.

As for Brooklyn residents, we now have a terrible basketball team to watch, and a pretty decent hockey team, and a garish arena and some growing housing towers on a site that otherwise would probably have something similar anyway, given that pretty much every possible site in Brooklyn now has a giant apartment tower going up on it. And any revitalization effect on the surrounding neighborhood has been mixed at best: There’s a  Shake Shack and other new restaurants, certainly, but then, there were new restaurants opening in droves in that area even before the arena was planned; meanwhile, the site of the old Triangle Sports sporting goods store, which was cited as the harbinger of a land rush when its owners closed it and put the building up for sale, is still vacant almost four years later.

It’s probably too simplistic to say of the Brooklyn arena that everybody ended up a loser, but certainly there are no clear winners. I’m going to be spending some more time shortly digging into some of these questions so I can wrap up the final chapter of The Brooklyn Wars (which means, yes, there’s actually a publishing date visible at the end of the tunnel), at which point I can probably provide some firmer answers. But for now, man, was that an epic train wreck, or what?

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34 comments on “Brooklyn Nets arena lost money in 2015, is probably no good for anything for anybody

  1. OK, maybe that was too harsh.

    But the valid criticism is of Ratner’s TACTIC when building the arena, not the arena business itself. Ratner’s loaded the arena with as much debt as possible. And actually, even criticizing Ratner is weak. He’s a real estate guy, not a sports and/or arena guy.

    Here’s my point: Barclays Center is proof that arena business in large cities is strong, not weak.

  2. Ben, even if it did make that it is still a pretty bad ROI for the time, money and risk they have on this, granted it could be more a vanity project than about ROI

  3. Norman Oder plays double-standards on Barclays’ vs Chase sponsored Garden, who needed a tax break to keep from relocating in 1982 and refuse to give back.

    What’s all this Brooklyn stuff? We don’t see that for the Bronx Yankees or Queens Mets of the NJ Giants and Jets or the laughingstock Manhattan Knicks.

    Can’t play double-standards or it make you come off as not credible.
    And the New York Islanders attendance is going up with crowds on par or above Coliseum numbers with a horrible Sunday afternoon schedule for a team forever had Sat night games.

  4. Since when did Norman say anything at all about the Garden?

    As for the arena business being strong in large cities, sure it is. But it’s also not strong enough to justify a $1B price tag, which is what these latest figures show. Whether Ratner and Prokhorov paid for the arena in debt or cash is irrelevant — either way, they would have been far better off putting their money in a nice money market account. (Discounting the intangible value of getting to show NBA players how to sit on basketballs, obviously.)

  5. One thing to keep in mind is the value of the Nets. There’s no denying that being in Brooklyn has catapulted them up the ladder. Forbes had them in the bottom 5 of the league when they were in Newark and the swamp but now sit in the top 5. They will drop a few slots now that attendance and ticket sales are down but that still doesn’t stop the fact that the team is worth anywhere from $500 million to a billion more than it would be across the Hudson. That alone makes Prokhorov’s investment a worthwhile one, at least from a financial perspective.

  6. Ben,
    I’m not even sure by the standards of the arena and real estate businesses that anyone is doing well here (maybe Ratner, depending on how he paid himself). Unless Ratner’s plan was to redevelop the neighborhood by building an arena that would heavily subsidize touring acts, the overall development plan is in shambles.

    Might be fairer to say that this is the golden age of being an arena manager, but the jury may be out on being an arena builder in a difficult political climate.

  7. To respond to the first comment from Ben, please note that arena developer Bruce Ratner has long sought to frame the financial results as including financing expenses, to quote a May 2011 profile in the Real Deal:
    “He estimated the arena will generate annual net income of about $110 million to $120 million, cost $30 million to operate, and require about $45 million to $50 million a year to pay off financing, leaving the company with about $35 million a year in profit.”

  8. The RUMOR (and I emphasize rumor because its one of those I heard from a guy who heard from a guy who was at a roundtable with Ratner in Cleveland where Forest City is based) in Cleveland finance circles is that bringing a professional sports franchise to Brooklyn was Ratner’s way of getting approval to build all the other stuff he wanted. “you let me eminent domain all these blocks and put up these huge buildings in a neighborhood where there are no high rises and I’ll bring you a major league team which you haven’t had since the Dodgers left in 1957”. I don’t know if its true. I don’t know what the original projections were pre-financial crisis and what they wound up being after the bust. Its just what I heard so I figured I’d share.

  9. It says a lot when original investors all want out. They’re lucky the Russian mafia came in to save the deal in the first place.

  10. “All of this means it’s a good time to wonder what the hell exactly Ratner and Prokhorov got out of this arena that has turned a large swath of Brooklyn upside down for more than a decade now.”

    Gee, Prokhorov, a Russian oligarch with strong ties to the Kremlin who made his money in some shady privatization deals buys a bunch of assets in the US. I wonder why.

    Perhaps the same reason other Russian oligarchs and the deposed Prime Minister of Thailand have all bought British soccer clubs and other people of questionable financial legitimacy buy massive amounts of real estate. It’s a pretty established way to get a massive amount of money out of your home country really quick. At worst you go sit in a luxury suite and lose half your money on the court. Sure beats losing half of your head in less luxurious surroundings.

  11. That’s my belief as well — except that then Ratner dragged his feet on building the residential properties.

    It’s possible he just wanted to use the arena to get the land and then worry about what to do with it later, or though the housing would be a big money maker in 2003 but several years later decided it wasn’t right then. Either way, it doesn’t seem to have been all that well thought out.

  12. Scola:

    Exactly. The purchase, pretty well whatever the price, gives Mr. Prokhorov options he might not otherwise have as is thus invaluable. Who knows, he may one day become a US citizen (assuming he hasn’t already, of course… most countries like to wave pesky residence requirements for people who bring enough cash to spend and capital to invest).

  13. Neil: It is stating the obvious, but today is not forever. Ratner may be playing a longer game than we realize.

    I’m sure he would have preferred to develop immediately and sell condos like they were going out of style on 2003. But the fact that he didn’t get that done in 2003-2007 doesn’t prevent him from doing the same in 2020 or 2022, especially if he already has all approvals necessary to build but does not have any sort of time limit on same.

  14. This would be a great time to build out as much as possible, though, because it’s possible that the 421-a tax breaks for housing will disappear shortly. (Not likely, but possible.) That’s why every other developer in Brooklyn is breaking ground everywhere possible, so it’s odd that Ratner’s still stuck at only three buildings, though I suppose there may be overextension issues.

    Look, I’m not saying Ratner is a terrible businessman or anything. Just that’s instructive that his master plan appears to have been not much more than “promise to build an arena in order to achieve a land grab, and figure everything else out when we get there.”

  15. Yeah, fair enough. He wouldn’t be the first developer who’s projections turned out to be wildly inaccurate. I guess we’ll never know what his “actual” original expectations were… my bet would be significantly lower than the projections put forward.

  16. Neil: I happen to disagree with you about the 421 Tax breaks issue.
    Why? It is really moot. Most people really do not want “Affordable Housing in THEIR Neighborhood” ( why do you think more and more Communities are against De Blasio’s “Affordable Housing”?). People claim they do so they can look good, just do not put it in MY Neighborhood. Everyone knows that Fort Greene and North Brooklyn are not going back to where they were (especially when Projects like City Point are completed). All Ratner needs to do is sit on the Land because the probability is the Real Estate values will increase.

  17. You disagree that it’s more profitable to build housing when you can get tax breaks on top of collecting sky-high rents? Ratner has already agreed to build a certain percentage of his units as “affordable,” so it’s not like he would gain the ability to charge higher rents by turning down 421-a tax breaks.

  18. I disagree with the importance of 421 going forward. Because of various community oppositions and issues like “Prevailing Wages” it is basically dead at least for now. Another issue is De Blasio has shown himself to be another politician oblivious to New York ( he is a perfect example of “Two New York’s” not meeting or even listening to elected officials ( let alone average people)). We are seeing that with the Willets Point Mall and the City Council turning on him. The most important Real Estate issues are those that are NOT about 421. It’s ssues like rezoning to create more office space in mid town Manhattan, making Brooklyn a huge Tech Center, and what happens with 34th Street. Vornado assemblage, fate of MSG, new Penn Station, maybe even a deal to reopen the Gimbals Passageway ( something similar to the One Vanderbilt Deal) come to mind. Those issues will determine where New York will be going forward, not the strictly past tense 421.

  19. You’re confusing 421-a with de Blasio’s inclusionary zoning proposal, which are two separate things. And anyway, if 421-a really were “basically dead,” that would be even more reason for Ratner to try to break ground on as much as possible now, to grandfather in 421-a breaks, like everyone else in Brooklyn is doing.

  20. Both 421 and Exclusionary Housing are related to Tax Breaks for Developers in exchange for building “Affordable housing.” It is becoming obvious that neither are particularly popular right now. People who are smart know that Real Estate in certain areas will be more valuable in the future ( see Hudson Square and the Brooklyn Watchtower Properties). By the way that is what Ratner did with the Arena, found someone willing to buy, and unloaded it.

  21. A lot of things that penciled out in 2003-2006 didn’t work post crisis. Housing starts, household debt, consumer credit applications, etc are all still below pre-crisis levels. Also, Forest City has had some internal issues (squabbles among the Ratner kids and with their banks) and has been dumping assets all over the US in the last few years.

  22. The fatal flaw here is that you’re all believing that Ratner really spent $1 billion on the arena. My guess is that he spent around $650 million or whatever the original debt amount was.

    Many of you are also conflating Ratner’s public statements with reality. When trying to get financing or when selling to the Russian, it behooves Ratner to inflate projections. When making legal financial statements, it behooves Ratner to make the project look like a money loser.

    If we stick to the topic of ARENA FINANCING (which is why I’m here; not sure about some of you), the bottom line is that the Brooklyn arena is a sign of success and a source of optimism. (Which, when you think about it, should be manna from heaven to Neil and most of you. It’s a great argument that it’s now making more financial sense for teams to build their own arenas without taxpayer money.)

  23. Whether or not it makes financial sense for teams to build their own new arenas without taxpayer money doesn’t make one whit of difference to me. If it doesn’t, they just shouldn’t build them.

  24. In the runup to the Islanders announcement in October 2012, you and I had email exchanges and you insisted that it would never happen because Barclays needed the dates for concerts. But it happened anyway. Now you double down by still insisting that maybe the Islanders being there aren’t a good thing, because, you guessed it, they could have more concerts. You are implying that having two teams is blocking Barclays from getting the best concerts, never mind the fact that the Garden has two teams and during the next few months has booked Springsteen, Hall & Oates, AC/DC, Billy Joel’s monthly run and Fallout Boy. The idea that the Islanders are blocking concerts at Barclays is baloney, and you keep pushing it because you don’t want to admit that you were wrong 3.5 years ago. Also, Moody’s recently affirmed the rating on Barclays debt, and specifically cited the Islanders as a positive to their financial position. So why don’t you get over it?

  25. Oh, I’ll happily admit I was wrong about the Islanders not moving to Barclays. (I was also wrong in 2003 when I said they’d never build an arena on the site because they’d have to tear down a whole block of houses, and that would never happen.) I’m less convinced that Islanders games will be more lucrative than concert dates, but that’ll depend on how successful they are at selling tickets, not to mention how much the arena is cutting cheap deals with concert promoters to woo events away from the Garden and Prudential and the like.

  26. You Brooklyn transplants would’ve loved Atlantic and Flatbush in the 80’s: a big empty lot on the S/E corner, crackheads everywhere, street-level robberies…..Yea, it was sooooo much better before the BC

    And before you tell me that things had gotten better before the BC was built consider how much better the area will be if the crime does go up in NYC with an operating arena and the restaurants it supports in the area as opposed to empty lots or vacant commercial real estate.

  27. I actually lived a few blocks from the arena site in 1988, and while I remember the empty lot (though it wasn’t entirely empty — a friend of mine lived in one of the small houses on that block), it was a pretty safe neighborhood for that era. Whether it’s “better” now depends — it’s more pleasant, certainly, but also I could never afford to live there now, so it hardly matters.

    As for the arena bringing restaurants to the area, there were huge numbers of restaurants around there for years beforehand, and the number hasn’t gone up that much since the arena opened. Aside from the railyards, there hasn’t been a vacant lot within a mile of that corner in well over a decade.

  28. There aren’t enough high profile concerts to fill the 44 dates (plus more in playoffs) that the Islanders fill at Barclays. Moody’s recent report upgraded Barclays to a stable rating due to more revenue from the Islanders. Prokhorov has $9 mil (the supposed loss in fiscal year 2015) in his couch cushions. Neil and Norman Oder look ridiculous in their biased ramblings thinking the area would’ve been better off without Barclays Center there or that projections haven’t been met yet. The arena is stilll very new and most businesses lose money before they start eventually making it. Barclays purposely overpaid initially for big name concerts and the Nets payroll and events etc to get their name out there. Now the arena name is known, they have the Islanders and the years ahead will be profit as they’ve made adjustments. The financial numbers, jobs provided and quality of life is much better with Barclays Center there than without. We get it, you’re PO’d you lost due to eminent domain but it’s been over for a while so get over it. You constantly whining won’t change a thing.

  29. Arenas aren’t “most businesses” though. They need to be profitable early in their lifespans, before better and newer competition is built (and an expensive renovation is in order to remain competitive). That the BA is losing money this early in it’s lifespan is not a good sign.

    While Mr. Prokhorov certainly can ‘afford’ the present level of losses (and may be willing to fund operating losses indefinitely given the associated benefits he gets from owning the franchise/building), that really isn’t germane to the discussion about whether or not the arena is profitable or not… which it isn’t, judging by the financial statements released on “take out the trash day”.

    The discussions around whether or not the area is “better” with an arena than without is highly subjective. If you happen to like sports or concerts, having the facility in Brooklyn is probably a benefit to you (particularly if you don’t live too close). If you were evicted by Ratner’s eminent domain play and were not able to replace your residence with something of similar or better quality in a similar or better area with the money you received, you’ll probably always feel cheated.

  30. My sense is the ED evictees made out pretty well financially, actually — Ratner was throwing enough money around that paying off people to move wasn’t a big expense. I’m sure it’s no fun to be told you have to move when you don’t want to, but among all the winners and losers here, they’re not the ones I would feel the most sorry for.

  31. So the arena isn’t making enough income to cover expenses. We should all be reminded that those expenses do not include TAXES, something which will not be part of the operating expenses for a number of decades.

    Now why was it the government representatives of the citizens of this State allowed this to be built?

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