No, Warriors’ new arena doesn’t mean they don’t have to worry about the luxury tax

The Athletic is one of the latest new sports websites, and I wish them all the luck in the world, since more sports news (and more sports news jobs) can only be a good thing for those of us who cover this world. One thing I can’t do, though, is read The Athletic, because it has a hard paywall that doesn’t even allow a certain number of free articles a month, and they simply don’t run enough must-read stories for me to cough up $5 a month for a subscription.

So instead I’m reading (and linking to) this summary in The Big Lead of Tim Kawakami’s Athletic article about how the Golden State Warriors don’t have to worry about the $200 million luxury tax bill they’ll be hit with starting in 2019 for all their high-priced players, because hey, they’ve got a new arena:

According to Kawakami, the Chase Center will have “membership fees” of about $15,000-$20,000 per seat for season tickets, which get paid back without interest in 30 years. A Warriors official said that 79% of season ticketholders who have been pitched so far have agreed to pay them; additionally, most luxury suites are already sold, and Chase is paying about $20 million a year for the naming rights. Add in parking, concessions, actual ticket sales, and money from both local and national TV and even if the Warriors are paying $300 million a year for their players they are going to be just fine.

Two things: First off, yes, the Warriors owners are going to collect bucketloads of money from their new arena — if the above is correct, that’s somewhere in the neighborhood of $700 million just for seat licenses and naming rights alone. But they’re also going to have roughly a $1 billion construction bill for the new San Francisco arena, so most of that new revenue is already spoken for.

Secondly, Kawakami (or at least The Big Lead’s summary of Kawakami) fundamentally misunderstands the difference between fixed and marginal costs and revenues. Most of those new revenues — certainly the PSLs and the naming rights — the Warriors owners will be getting regardless of whether the Warriors are any good for much longer. So the decision they’ll be facing won’t be “do we have $200 million extra lying around to tithe to the NBA for having all the good players” — their owners have more than $2 billion in wealth between them, so cash on hand isn’t so much an issue — but rather “would we rather have another all-but-guaranteed ring, or would we rather have $200 million more this year?” (Previous Kawakami reporting showed that the Warriors bring in about $35 million a year in added revenues from each playoff run, which isn’t enough by itself to justify those crazy luxury tax expenses.) And that’s a tough call for even the most championship-hungry sports team owners, as witness the New York Yankees‘ scramble to get under MLB’s luxury-tax threshold.

So anyway, short version: Yes, the Warriors’ arena will bring in lots of money; no, it’s not all free money that the owners will happily spend on whatever bills come in under the door. Thanks to the crazy San Francisco market, it may well be the exception to the rule that most sports venues don’t even pay their own construction costs, but it’s not “an ATM machine” as this article claims, either.


9 comments on “No, Warriors’ new arena doesn’t mean they don’t have to worry about the luxury tax

  1. San Francisco has so badly needed a venue like this for decades that this one might actually appreciate in value over the next decade. Say it’s worth $1.5B 10 years from now; these owners look really smart if that happens.

    I do think this one will be busy 250+ nights a year. 250 is easy.

    A 79% buy rate for PSLs has to be close to a record. Good timing; they’re favored already to win another title, which helps a lot. If they were their historical 30 win team, might be different. My point being this is a pretty perfect confluence for them. I have to think Vivek Ranadive has to regret leaving that ownership group to own the Sacramento Kings; that looks like the booby-prize now.

    • 79% could mean they have asked 100 of the richest current season ticket holders and 79 have agreed.

      The venue may generate impressive revenues well into the future. However, if there’s one thing we know from past history, sports facilities do not appreciate in value (sometimes the land under them does enough to make the value of the building, over the long term, meaningless). In fact, most single or dual purpose specialty buildings are actually worth less than 20% of their construction cost within a year of opening.

      Question: Will the Warriors actually own the building? Or will it be owned by a separate corporation? I know which I would do if I had the good fortune to own the Warriors….

      If the latter, I think we can count on two things: The tenants will make tonnes of money. The building will, at best, break even… and most of the building’s retained revenue will be from concerts and shows.

      Most A list touring acts have figured out the pro sports model… they know just as well as the Yankees, Bengals or IOC and FIFA do how to offload all their costs on to the building owner/promoter while extracting maximum revenue from every fan entering the building.

      I listened to a radio program with a former pro sports GM who ‘obtained’ control of his team’s building completely, allowing him to book acts on non game nights and use the proceeds to prop up the money losing sports team. He said after he had finished paying all the costs of hosting the Rolling Stones world tour stop a few years ago, he ended up with less than $100k net out of a 3 night gig. The rest went to the tour promoter, and much of what s/he got probably went to the Stones themselves. Other top draws will use the same methods to harvest as much of the revenue they are generating at the facility, but perhaps the new arena in SF will make more than this one did.

      Even if they triple that earnings rate though, out of the 180 nights a year the building might be busy with non-Warrior games, that’s still only around $20m net.

      For anything other than sports, it takes a lot to generate a net profit of $25-30 per spectator at an event. And we haven’t even started on how the secondary market for tickets have syphoned money out of the system (often back to the primary tenant rather than the building owner)…

      • Like I say, though, SF doesn’t have a venue like this. Demand is going to be well outside normal values.

        Golden 1, by contrast, is going to hold about 100 events where tickets were sold to the public, including games. Hence my comment about Ranadive. He has to think about what he could have been a part of every day of his life.

        • Sure, I bet he thought about it when he was making the determination to buy the Kings.

          But there’s also an argument for owning 100% of something as opposed to being a partner (a bigger deal for rich guys who like to be “hands on”, which I think Mr. Ranadive has a history of doing.. even in kids’ sports IIRC). As the saying about ruling in hell v serving in heaven goes…

          It’s not like he is going to be poor because he bought the Kings. And who knows what the situation might be ten or twenty years from now.

          • I just had to look at their events calendar, and wow, what a busy venue.

            https://www.golden1center.com/events

            Faith Hill on July 22, then no more events until August 24. I’m not at all sure where the folks who said 180+ nights/year got this information. I did attend a charitable event there 6 weeks or so ago, but those raise $0 for the City. These events with 500 people just don’t count (and I like this charity a lot).

  2. I continue to think that the Warriors’ absurd record of success the last few years was all carefully planned in order to sell as many PSLs/luxury suites/etc. as possible — and that 79% number seems to suggest that they’re doing a good job so far (even if that’s 79% of the current ticketholders who have been pitched so far, who presumably were chosen as the most likely to accept). Expect perhaps one year of success in the new arena and then the team will be dismembered to maximize the owners’ profit.

    • They’re raising $700M of the $1B in construction costs on the sale of PSLs, though, so I don’t really think they’ll need to dismantle the team. If they were really out to maximize profits, they’d stay in Oracle. That yearly payment is cheap.

  3. I don’t think the Athletic is has any interest in creating more sports journalism jobs, just in taking the place of dying newspapers and taking their talent:

    https://www.nytimes.com/2017/10/23/sports/the-athletic-newspapers.html

    • Yeah, their plan seems to be “buy up all the talent, wait until all the other sports sites die, then enjoy our monopoly power to charge fans for subscriptions.” That would work better if the barriers to entry for starting a sports news site weren’t effectively zero.