Posted by John Vrooman on Tuesday, November 8, 2016 in National Football League.

Interview with HBO Real Sports 

HBO Package

 PSL’s:

Can you give me a quick background on the PSL’s vis-à-vis taxes. I have a sense (but not sure if I’m right) that a team sells these PSL’s  but then doesn’t pay any taxes on them because technically they’re PSL’s for a public entity. So if the 49ers have $100 million in revenue from PSL sales none of that goes to their bottom line for purposes of taxation.

You are correct. If PSLs are issued by a quasi-governmental stadium authority then they are in fact tax exempt, even though a PSL is essentially a down payment on a season ticket equal to present value of a season ticket discount through time (roughly 10 times the amount of the discount).

 The PSL loophole was first discovered in the original LA Rams extortion of 100 percent public funding for the relocation to St. Louis in 1995. The St. Louis Convention and Visitors and Commission (CVC) originally sold $78 million in tax-exempt PSLs.

 Ironically the League later collected $29 million tax as a relocation fee for the Rams with the implicit argument that the relocation fee amounted to the visiting team share VTS of the season-ticket discount. The CVC later sued the League claiming that the PSL payments were meant for the Rams and not the League. None of the PSL money was used for the funding of the !00 percent publically funded Edward Jones Dome (ne TWA Dome). The PSLs were instead used to buy out the Rams lease in Anaheim and a direct payment to the Rams.

 The previous instance of taxable PSLs occurred when the Carolina Panthers first sold $187 million in PSLs to every seat in Bank of America Stadium (ne Ericsson Stadium) in the 1995 NFL expansion. Because the team sold the PSLs directly they were taxed as ticket revenue and the Panthers netted $122 million in PSLs after tax. Needless to say, the rest of the NFL stadium PSL funding schemes followed the tax free gambit discovered in the St. Louis CVC scheme.

 Since the expansion relocation extortion game of 1995 about $2.7 billion in PSLs have been sold using the Stadium Authority PSL tax avoidance scheme providing an implicit tax shelter subsidy of about $1 billion.

1. Property Taxes

Most teams—including the Cowboys—are paying zero in property taxes for their stadiums. This becomes a problem for the purposes of school funding because this is land that could otherwise be generating income. So some counties, like Hamilton (Cincinnati) have to literally make payments in lieu of taxes, something that’s an added subsidy to the team.

Bingo, correct again. Even the private share of stadium costs is usually financed through a quasi-private business/ public subsidy scheme called “payments in lieu of taxes (PILOTs)”. In this case the team pays the tax-free interest on municipal bonds issued by the local government for private use as rent, instead of paying property taxes. As a result, the pilot tax avoidance scheme shifts about one–third of what outwardly seems to be private stadium funding costs to the general tax payer.  

 If the local government retains ownership of the stadium property and then leases the property and the stadium to the professional sports team, then the property is exempt from local property taxation. The private sports club would then make rent payments approximately equal to the forgone taxes that are not considered private use interest payments, but rather payments in lieu of paying taxes (pilots). As a result, the stadium bond issue would avoid the intent of Section 141 of the Internal Revenue Code and qualify as tax exempt when it was in effect designed for private use.

 The interest cost savings from tax-exempt bond financing is considerable, but due to the law of conservation of tax liability it is then passed on to the general taxpayer.

 This tax loophole is not just a specific advantage for the NFL. NYC issued about $1.313 billion in tax exempt bonds for the MLB New Yankee Stadium that the Yankees will retire with payments in lieu of taxes (pilots) of about $76 million per year. (4 percent over 30 years). Over the life of the bonds the tax-exempt interest cost savings for the Bombers could be as much as $500 million on a $1 billion “privately financed” New Yankee Stadium, which is unfortunately then passed on to general taxpayers.

 The New England Patriots are making Pilots of $2 million per season (50 percent less than forgone taxes) to Foxboro MA and the New York Jets and Giants are making Pilots of about $7.2 million to East Rutherford NJ.

 Since the 1995 NFL expansion into Charlotte and Jacksonville the NFL clubs have funded about half of the $15 billion in stadium development costs. If that $7.5 billion in outwardly private stadium expenses were funded through the PILOT income and property tax avoidance schemes, the tax savings for the NFL would be in the range of $3 billion ultimately borne by the general taxpayers.

________

*Municipal government bonds that are considered “private activity bonds” under section 141 of the Internal Revenue Code cannot qualify for tax-exempt muni status* Under Section 141 of the Code a bond issue is a private activity if either (1) the private loan financing test is met, or (2) the private business test is met. The private loan financing test is met if 5 percent of the proceeds are used to finance loans for private business. The private business tests are met if more than 10 percent of the proceeds are used in a private business, and more than 10 percent of the debt service on the bonds is derived from property used in a private business.

 

Currently, the NFL administers a G-4 (formerly G-3) loan program that provides the opportunity for teams to receive matching dollars on favorable terms from a league loan pool for investments the teams make in the renovation of their stadiums. The 49ers, Vikings and Falcons each received a G-4 loan of $200 million for their new stadiums and the Jets and Giants received the last G-3 loan for a combined $300 million to be used in MetLife Stadium.

 The NFL has created a virtual loan facility backed by the new $58.8 billion mega-TV deal through 2022. Stadium loans are made below prime and paid back with the visiting team share of club seat fees. All of the stadiums built since 1999 have used the G-3/4 loan program that has totaled $1.7 billion for stadiums costing $11.2 billion.

 The League Office is basically a clearing house for the redistribution of TV revenues and revenue sharing payments, but it is also shell to pay these execs and serve as a Big League credit facility to loan cheap G-3/4 money to the individual clubs to help finance their new venues. In the scheme of things this G-3 program which began in 1999 is actually a good thing because it allows the rest of the League to help fund the private share of stadium costs (the loans are repaid by the visitors share of club seat fees which they would have been paid anyway).

 So the League Office is a virtual $1.2 billion bank backed by the massive TV revenues, where 70 percent to 80 percent of the assets and liabilities of the League Office are loans receivables and notes payable.

 But the important point ultimately to be realized in this shell game is that the League Office consistently runs a negligible if not negative profit, and therefore it enjoyed no real net economic advantage to being tax exempt.

 It now appears all G-4 has been moved to NFL Ventures LLC (G-3 was discontinued in 2006), and that NFL Office is simply a pass through conduit for revenue sharing and distribution of national income including the mega TV deal of $160 million per club not including DirecTV and NFL Network (additional $44 million per club) which are located under the NFL Ventures umbrella.

Almost all accounting business is in effect being siphoned over to NFL Ventures and the NFL Office would have gradually atrophied in the long run anyway. The NFL has already moved its loan business to Ventures in 2006 for the same reason that MLB gave up the ghost of tax-exempt status in 2007.

The League has created a credit facility where the clubs can borrow at an even lower rate when their risk should require borrowing at a higher rate. Below is a graph and table of the AAA rates paid by the League and the LIBOR + 150 basis points paid by the clubs. This loan pass through creates an interest rate spread advantage of 300 bps to 400 bps for the individual clubs.  This may be tricky, but is consistent with accepted business practice and it has nothing to do with tax-exemption.

Also of interest is the interest rate inversion (long-term blue chip yields for AAA bonds  are normally higher than short term LIBOR yields) in 2006 and 2007 which precedes a recession in 2008. Inverted yield curves where the rates on 90-day Treasuries exceed 10-year bonds have predicted every recession since 1970. In this case the yield inversion would obviously reverse the clubs borrowing advantage and explain why the G-3 fund was abandoned in 2006 and then resumed as G-4 stadium fund in 2011 when the yield curve normalized.

 The NFL is apparently slowly abandoning its tax exempt status for economic reasons but this might also be a legal gambit. Recall that the NFL Defendants in the NFL players’ concussion case are actually the NFL Office and NFL Properties. So perhaps the real legal reason why the League Office exists is not economic at all.  It is simply a legal shell to protect the several and separate club owners who are hiding behind the NFL Shield to escape their liability

• The Subsidies NFL teams get are hundreds of times higher than the subsidies for almost any other companies in America

Even the most successful abusers of corporate welfare aren’t doing much better than getting about 1/10^th of 1% of yearly revenue from public entities (i.e. a company with $100 billion in yearly revenue is going to get, at most, $100 million in public subsidies). The NFL and its owners do about 100 times that. The Bengals do about $300 million a year in revenue and have a subsidy approaching $50 million—or more than 10%. The NFL broadly does about $12 billion a year in revenue and gets about $1 billion a year in subsidies.

When left to its own devices the NFL monopoly cartel charges half as many fans twice as much and pays half as many players half as much as they are worth. Venues are increasingly exclusive and luxuriously more opulent and expensive; media are increasingly siphoned from free-to-air to cable to satellite to digital; and regulated broadcasters are all losing money on exorbitant rights fees passed on to media consumers in the form of more and more expensive commercial and cable fees hidden away in bundles.

 Since the NFL venue revolution began in the 1995 expansion the League has leveraged if not extorted 50 percent public subsidies for over $15 billion in new exclusive venues. Ultimately the NFL has emerged as the most powerful sports league in the world but it is engaging in predictable classic monopoly/monopsony cartel take-it-or-leave-it extortion behavior. The true crime is that the NFL has itself become an out-of-control school-yard bully and nobody does anything about it, including the 32 owners now hiding behind the NFL shield.

 The NFL is a $12 billion league with self-projected revenues of $25 billion by 2027. The key to the NFL growth is their imposing monopoly cartel power over the TV networks and cable on the national level (because of Congressional antitrust exemption in Sports Broadcasting Act of 1961) and their own fans on the local level. When combined with an unrelenting monopsony (one buyer) over the players (who now receive less than half of the revenues) the NFL is a natural born sure thing.

 Over the last quarter century NFL franchise values have grown at a phenomenal compound rate of 11.5 percent. This is more than twice the rate of the most competitive rate available for the S&P 500. This is clear and compelling evidence of the stone cold and unregulated monopoly power of the NFL cartel.

1. You write: “depreciation tax shelters: how do you turn  a $30 million profit into a $30 million loss.”

So how is that done?

Here is that part of the full interview with the Atlanta Journal Constitution:

— What can MLB teams depreciate? Are there current rules governing depreciation and amortization that are unique to sports teams?

After 2004 Sports teams can depreciate tangible and intangible assets for fifteen years after acquisition of the club. Before 2004 Clubs could uniquely depreciate one half of the purchase price over 5 years (50/5 rule), but the law was changed in 2004 to put professional sports franchises uniformly under the same law as other businesses. So player salaries are treated as an expense twice: first as negative cash flow and second by treating the team roster as a depreciating asset.

 — In general, how important financially are these write-offs to the business of owning a pro sports franchise?

Depreciation tax shelters are critical in the land of the bottom line. Any good sports accountant can turn a $30 million profit into a $30 million loss with accepted accounting procedures. The revenue side of a club is fairly reliable but the cost side is full of loopholes and tax scams all consistent with the existing tax code.

1. You write: “Goldman Sachs’ job is to use, if not disguise, every public stadium funding tax shelter and loophole.”

How? And what does that mean?

Here is that part of the full interview with the LA Times:

 Goldman Sachs is simply providing an investment banking service for the clubs and the public entities that are seeking to attract the professional sports clubs. As a result, the investment banker is seeking the most economically efficient and politically expedient to advance the best interest of the sports franchise and the often misguided interest of local government. The taxpaying public is usually omitted from the process because of the economic failure of monopoly sports leagues extorting stadium concessions, and the political failure of small suburban governments competing with one other over public subsidy of sports venues.

 Consider the complexities of the recent public private deal for the 49ers Levis Stadium in Santa Clara as brokered by Goldman Sachs.  As reported in the SF Chronicle the deal between the monopoly take it or leave it 49ers and the easily manipulated local government of Santa Clara. Goldman Sachs job is to use, if not disguise every public funding tax shelter and loophole to the financial advantage of the  quasi-public sports franchise. Unfortunately due to the law of conservation of risk, the tax burden is passed through a quasi-public sports authority to be borne by the general taxpaying public.

 The function of GS in this deal was to find the optimal combination financial terms for the 49ers and the city of Santa Clara.  Notice how Santa Clara’s overtly public share does not change from $114 million but that $230 million of the 49ers share is shifted to the quasi-public Stadium Authority.

 In one respect the Stadium Authority’s $312 million personal seat license (PSL) share is properly treated as part of the 49ers’ contribution because PSL are equivalent to the present value of a foregone season ticket discount. (A non-discounted $1000 season ticket is financially equivalent to a $500 a season ticket with a $5000 PSL. The $5000 PSL is roughly the present value of the $500 discount over 20 years).

 Unfortunately for the general taxpaying public the PSL revenues are not taxable in this because they are issued by a quasi-public stadium authority. This is also true for all of the sponsorships and other team revenues funneled through the tax sheltered stadium authority. This is the contribution of the investment bankers at Goldman Sachs.

 So the purpose of GS in this ostensibly private stadium deal is to legally navigate the fine edges all of the tax shelters and loopholes that exist in the Internal Revenue Code.

Here’s an interview I gave Bloomberg on Goldman Sachs:

 I understand that Greg Carey of Goldman Sachs is considered by those who hire him as the guru of venue finance. If the discussion concerns private venue finance then perhaps this may be true, but if the matter concerns the shell game of quasi-public venue finance then he could also be considered a flim-flam man.

 Goldman Sachs has been very successful in representing the best interest of their satisfied clients which include quasi-public sports authorities. Unfortunately, the best interest of their many clients may not always be in the wider public interest. This would all be fine except that many of Goldman Sachs private clients have used public money to enhance their private interest, and the local sports authorities have made bogus something-for-nothing stadium deals with highly leveraged and powerful sports league cartels.

 The public subsidization of quasi-private sports venues can only be justified if those venues generate spinoffs to those taxpayers who do not directly benefit from the sports venues. These multiplier or spread effects that Mr. Carey calls velocity (while he is circling his arm in the air) are usually insignificant and zero-sum at best in the regional and metro economies. Multilplier effects are handy political tools used to convince the public that subsidization of private sports business will come back to them in roundabout spades regardless of their interest in sports.

 Unfortunately, in the regional economy the subsidization of sports venues is like pouring water from one bucket into another bucket and then pouring the bucket into the team owner’s swimming pool. Urban multipliers are myths for 3 reasons. First, entertainment expenditures are usually fixed and so the increase in spending at the sports venue comes at the expense of spending somewhere else in the urban economy and so stadium subsidies falsely prioritize sports at the expense of other items on the public agenda.

 Second, in order for the big bang for the public buck the money had s to be spent again and again in the local economy. In the real world the spending within a region leaks like a sieve and the secondary spending happens someplace else, and this makes the most optimistic urban multipliers close to 1 times the amount of subsidy. (So Mr. Carey should probably stop the “velocity” effect after one-half arm spin in the air.)

 Finally, the new venues have an economic architecture designed to capture all of the gains within the arena for the local club. As a result, there is little or no direct spending to start with, outside of the home team revenue stream. That is what Goldman Sachs gets paid to do and touting the venue as a magic catalytic converter is a patented self-promotion scheme. A sports venue has about the same net economic impact as a shopping mall and justifies about the same amount of public subsidization.

 The golden rule in venue finance is that the guys who benefit should be the same guys that pay: nothing more and nothing less. Goldman Sachs represents the guys that benefit and not necessarily the guys that pay, and they make their money off of the difference.

 V