# The Bottom Line on the NBA Finances

Arturo Galletti is the Co-editor and Director of Analytics for the Wages of Wins Network. He is an Electrical Engineer with General Electric on the lovely isle of Puerto Rico, where he keeps his production lines running by day and night (and weekends) and works on sport analysis with his free time.

## Damn it all,  the angel of Stern has struck, throwing gasoline on a fire, and so the season hangs by a thread. We really are so close to where we need to be to make it happen. I was not a happy camper, but I thought to myself: what else is a mathematically inclined and bored NBA fan left with? What is left for me but to wait?

Thankfully, inspiration struck (like a podcast you might say). What if I took a stab at laying out the finances of every team? Would that level the playing field enough to get this deal to happen? Then again, I might just make everything worse.

Let’s start with the gate & concessions. For that I needed a few pieces of information:

• Attendance numbers for the 2010-11 NBA Season
• Information on the average amount of money spent on concessions.  That study in particular comes up with something called:
• The Fan Cost Index™ which comprises the prices of:
• four (4) average-price tickets
• two (2) small draft beers
• four (4) small soft drinks
• four (4) regular-size hot dogs
• parking for one (1) car
• two (2) game programs

If I take the attendance figures (divided by four) and multiply them by the The Fan Cost Index™ I get:

The top five teams in the league (Lakers, Knicks, Bulls,  Heat, and Celtics) make three times as much money at the gate as the bottom two teams (Grizzlies and Pacers).  Thirteen teams make twice as much as the bottom two. A smart person might even ask: why only one team in New York (right Mikhail?). This is what the media refers to when they talk about small versus large markets, and this is before we get to the TV money (national and local) and all the other incomes.

Now comes the first tricky bit. You see, while the national tv money is easy to determine, the local tv money and the division of other income is harder to come by. Of course, like any good engineer, I figured out a good workaround:

That is the pricing for NBA tickets from the secondary ticket markets. This is publicly available data (The internet is a wonderful thing). Using that data as a guideline and what I know about the NBA’s finances I came up with this:

That is my estimate for each team’s Net Operating Income (NOI), or Basketball Related Income (BRI) as it’s become known, as well as team valuations. A couple of quick notes here:

• The share of the national TV contract is not quite split equally amongst the 3o teams. All 26 non-ABA teams get 1/30th of the money. The owners of the Spirits of St. Louis get a 1/28 th share (go here for full detail) and each former ABA team gets a 1/30th share minus a fourth of that Spirits share.
• I estimated Team valuations at 2.8 times the NOI (BRI) for each team. I am not including other assets such as stadia. For a fuller estimate go here. You’ll note that I am not that far off.

With the sharing from the national TV contract included, the previously noted disparity is somewhat reduced (the Lakers and Knicks only make 2.5 times as much money as the Pacers and T-Wolves, not 3 times :-)), but it’s not quite enough. The problem is that the gate and concessions for the larger market teams are on par with the total income for the small market teams. There can be no real parity until there is actual revenue sharing of the gate at least (the NFL has a 60/40 Home/Road split). A good source for more info on this is here.

That takes care of direct incomes, so let’s get to the bone of contention. Let’s talk player salaries. Again, I needed some sources of information:

• All salary data is from here. Thanks to ShamSports. I’ll do something fun with it later.
• Salary Cap/Luxury cap information from the inimitable Larry Coon.

Remember how everyone talks about the 57% Share of BRI for the Players?

That’s correct for the entire league. It’s incorrect for individual teams, and therein lies the problem. Twelve teams have player salaries at less than 57% of their BRI (including the Knicks, Bulls and Heat, yes those Heat, at less than 40% ). The other eighteen are not so lucky.  There are in fact four teams at 80% or greater.

Let’s add in expenses and get to what the league is claiming as their bottom line (backed by their tax returns). (Note: I used \$266 as the loss number since the closest I could find for a number was about \$300 million).

Those are the league’s claims — near as I can figure it — in technicolor. Add in playoff revenues and about 19 of those teams claimed losses on their tax returns.

There are two very important things missing:

• The Tax Break: the tax break in question is the Roster Depreciation Allowance (RDA -see here). To put it very simply, the RDA allows you to claim the value of your franchise as a loss in your books over a period of 15 years and in essence save 35% of that amount on your tax returns (this is known as the 15/100 Rule of Thumb [see here for more detail]). You can claim that loss on whatever schedule you like. You want to claim 90% in Year 5? Go right ahead. No loss claim in Year 11? Good for you. For this estimate, I’m assuming 1/15 th of the value of each franchise is available to be claimed and the value has to be multiplied by 1.35 (1 for the loss, .35 for the tax break).
• The increase in franchise value: The average value of an NBA franchise has increased 78% since 2000 (see page 26 of this report). I’m going to use 4% as my value increase number to be nice.

When I add those in we get:

That looks closer to the truth. I know that not every team is claiming the RDA, but that’s not the player’s fault.  The bottom five teams come out as losers for their owners on the bottom line. For the most part this is is a function of location (7 of the bottom 10 are in my list of franchises in overextended markets), which again is not the player’s fault.

Tomorrow we’ll get into how these numbers will look with the various deals being thrown around during the lockout. I hope you can wait that long!

-Arturo

Disclaimer: I do not have access to the NBA’s books. Everything in this article is put together from public statements or logical inferences. I do not claim to have this perfectly right. However, I do feel like I am in the ballpark. The sources I used are listed, please update me if there is a better location to get my data.