Author Topic: There's no excuse not to pay the luxury tax and here's why (Rockets sale):  (Read 715 times)

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Offline Roy H.

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Adam Wexler: #Rockets @tadbbrown announces owner Leslie Alexander is putting the team up for sale – via Twitter awexlerKPRC

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Jonathan Feigen: Forbes in February put a valuation on the Rockets at $1.65 billion. Alexander bought the team in 1993 for $85 million. – via Twitter Jonathan_Feigen

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Zach Lowe: People have been wondering which owner/group would cash out first after dramatic rise in team valuations over past 5-6 years. – via Twitter ZachLowe_NBA

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Micah Adams: Adjusted for inflation, Alexander bought Rockets for $144M. If it sells for $2.9B (plausible), he’ll have a 20-fold return on investment. – via Twitter MicahAdams13

We hear it constantly: owners shouldn't be expected to "lose" tens of millions of dollars on payroll. Dan Gilbert allegedly "lost" money during the Cavs championship season.

Nonsense. Beyond the fuzzy math of accounting in professional sports, there's the issue of the appreciation of franchise values. Leslie Alexander is going to make a $2 billion profit. Dan Gilbert has made several hundred million dollars off of Lebron. If a team refuses to pay tax, it's highly unlikely its due to financial hardship.





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Offline ETNCeltics

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If an owner doesn't plan to sell, a valuation isn't helping him that much. And there's no guarantee they can sell their team for a Forbes valuation, no guarantee the value will stay high, and no way to regain luxury tax paid if they aren't selling. These are successful business men, not fans playing with monopoly $$$.

Gilbert's team's value will decline when Lebron leaves. Would be stupid of him to pile more $$ into a team that won't be good enough.

Offline bellerephon

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It's a cash flow issue as well. The estimated value of the team is all well and good, but it is not cash in had. The lux tax has to be paid in cash out of the owners pockets. The Celts owners are millionaires not billionaires and that is real money to them, it's not reasonable to expect owners to pay lux tax unless the players they are retaining are putting the team at a championship level.

Offline Roy H.

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It's a cash flow issue as well. The estimated value of the team is all well and good, but it is not cash in had. The lux tax has to be paid in cash out of the owners pockets. The Celts owners are millionaires not billionaires and that is real money to them, it's not reasonable to expect owners to pay lux tax unless the players they are retaining are putting the team at a championship level.

The Celtics have appreciated almost $2 billion, and that's without counting their investment in CSN. They had $60+ million in operating income in 2016, $50+ million in 2015, etc. again, that's without factoring their ownership stake in ancillary businesses.

The idea that a team is unable to pay the tax when it has a franchise valuation of (very conservatively) $2.2 billion, and which annually profits in the tens of millions, is absurd.


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Offline greece666

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Roy I see your point.

IMO the problem with the lux tax is that the benefits for the owner are not clear.

Sure, he can do it if he 'loves' the team or out of respect for the fanbase, but in purely material terms it often seems like an investment of questionable value.

Offline Roy H.

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Roy I see your point.

IMO the problem with the lux tax is that the benefits for the owner are not clear.

Sure, he can do it if he 'loves' the team or out of respect for the fanbase, but in purely material terms it often seems like an investment of questionable value.

I understand that point, that it's just not "worth" it. I understand it from a value proposition, when adding a vet minimum guy can cost $7+ million in tax.

That's separate and apart from the idea that a team can't afford it, though. I think a lot of fans have bought into the idea that the luxury tax isn't sustainable, though. It's silly. The Celtics could lose the equivalent of $100 million per season for the next 20 years and still would be about even.


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Offline Surferdad

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It's a cash flow issue as well. The estimated value of the team is all well and good, but it is not cash in had. The lux tax has to be paid in cash out of the owners pockets. The Celts owners are millionaires not billionaires and that is real money to them, it's not reasonable to expect owners to pay lux tax unless the players they are retaining are putting the team at a championship level.

The Celtics have appreciated almost $2 billion, and that's without counting their investment in CSN. They had $60+ million in operating income in 2016, $50+ million in 2015, etc. again, that's without factoring their ownership stake in ancillary businesses.

The idea that a team is unable to pay the tax when it has a franchise valuation of (very conservatively) $2.2 billion, and which annually profits in the tens of millions, is absurd.
Again, team valuation is not the same thing as cash on hand.  I am no finance expert, but I would imagine the only way to use the team valuation without selling the team, would be to take out a line of credit against the value of the team.  This is effectively a loan with required payback.  Then I suppose the bank would have to be convinced that using this loan money to pay the luxury tax in order to assemble a team that is more competitive is a good investment.  They would have to be convinced that a deep playoff run and possibly a championship would bring in more revenues (more games, more concessions, more parking, whatever allied businesses they own which would improve).  This may be a risky proposition.  Remember those Knicks team under I.Thomas with a $90M payroll and that didn't win squat?  Bank are by nature somewhat conservative.

Offline Roy H.

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It's a cash flow issue as well. The estimated value of the team is all well and good, but it is not cash in had. The lux tax has to be paid in cash out of the owners pockets. The Celts owners are millionaires not billionaires and that is real money to them, it's not reasonable to expect owners to pay lux tax unless the players they are retaining are putting the team at a championship level.

The Celtics have appreciated almost $2 billion, and that's without counting their investment in CSN. They had $60+ million in operating income in 2016, $50+ million in 2015, etc. again, that's without factoring their ownership stake in ancillary businesses.

The idea that a team is unable to pay the tax when it has a franchise valuation of (very conservatively) $2.2 billion, and which annually profits in the tens of millions, is absurd.
Again, team valuation is not the same thing as cash on hand.  I am no finance expert, but I would imagine the only way to use the team valuation without selling the team, would be to take out a line of credit against the value of the team.  This is effectively a loan with required payback.  Then I suppose the bank would have to be convinced that using this loan money to pay the luxury tax in order to assemble a team that is more competitive is a good investment.  They would have to be convinced that a deep playoff run and possibly a championship would bring in more revenues (more games, more concessions, more parking, whatever allied businesses they own which would improve).  This may be a risky proposition.  Remember those Knicks team under I.Thomas with a $90M payroll and that didn't win squat?  Bank are by nature somewhat conservative.

The Celtics profited $110 million in 2015 and 2016, without even looking at creative accounting practices or CSN profit. That's without even taking that $2 billion appreciation into account.

Also, I suspect that when you offer up a $2 billion asset as collateral on a line of credit, the bank doesn't care a whole lot about what your plan for the money is.


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Offline ETNCeltics

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Some people just don't get that a valuation isn't income. These guys want income just like everyone else.

They made an estimated $50 million with a low salary. Next year they'll be into the tax with a higher payroll and that profit goes way down potentially. Only a sucker would be in a business where he takes all the risk, and yet highly paid employees make more $ than he does. Hence why only a handful of teams pay the tax each year. Most of these guys aren't in this business to sell, they and operate on a budget. Not real hard to understand.

Offline Roy H.

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Some people just don't get that a valuation isn't income. These guys want income just like everyone else.

They made an estimated $50 million with a low salary. Next year they'll be into the tax with a higher payroll and that profit goes way down potentially. Only a sucker would be in a business where he takes all the risk, and yet highly paid employees make more $ than he does. Hence why only a handful of teams pay the tax each year. Most of these guys aren't in this business to sell, they and operate on a budget. Not real hard to understand.

Right. A budget where they make enormous profits, and see their portfolio increase by a factor of 10x - 20x. The idea that ownership "can't afford" luxury tax is a myth.


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Offline Surferdad

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It's a cash flow issue as well. The estimated value of the team is all well and good, but it is not cash in had. The lux tax has to be paid in cash out of the owners pockets. The Celts owners are millionaires not billionaires and that is real money to them, it's not reasonable to expect owners to pay lux tax unless the players they are retaining are putting the team at a championship level.

The Celtics have appreciated almost $2 billion, and that's without counting their investment in CSN. They had $60+ million in operating income in 2016, $50+ million in 2015, etc. again, that's without factoring their ownership stake in ancillary businesses.

The idea that a team is unable to pay the tax when it has a franchise valuation of (very conservatively) $2.2 billion, and which annually profits in the tens of millions, is absurd.
Again, team valuation is not the same thing as cash on hand.  I am no finance expert, but I would imagine the only way to use the team valuation without selling the team, would be to take out a line of credit against the value of the team.  This is effectively a loan with required payback.  Then I suppose the bank would have to be convinced that using this loan money to pay the luxury tax in order to assemble a team that is more competitive is a good investment.  They would have to be convinced that a deep playoff run and possibly a championship would bring in more revenues (more games, more concessions, more parking, whatever allied businesses they own which would improve).  This may be a risky proposition.  Remember those Knicks team under I.Thomas with a $90M payroll and that didn't win squat?  Bank are by nature somewhat conservative.

The Celtics profited $110 million in 2015 and 2016, without even looking at creative accounting practices or CSN profit. That's without even taking that $2 billion appreciation into account.

Also, I suspect that when you offer up a $2 billion asset as collateral on a line of credit, the bank doesn't care a whole lot about what your plan for the money is.
Yeah, you're right, however like you said before that was over 2 years so only an average of $55 million each year.  Paying lux tax of say $10 million comes straight out of that bottom line.  Shareholders may not be happy with 20% loss in profit with no guarantee of getting it back via a deep playoff run.

I dunno, this finance stuff is way out of my league, just using intuition here.

Offline bellerephon

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It's not a question of whether they can afford it, it's a question of whether it's a good business decision or not. Like it or not profit matters, they are not running the team as a favor to the fans of Boston. The value of the team is a huge benefit to them and when they sell they will likely reap huge profits. But that is not cash in hand today. As businessmen they will measure cost vs reward. I do not doubt they would pay the lux tax if they thought it would be the difference between competing for a championship or not, but otherwise I can't blame them for deciding not to. Especially when the tax gets more onerous the longer you are over the lux tax line.
« Last Edit: July 17, 2017, 10:36:59 PM by bellerephon »

Offline eja117

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I admit I wish I had thought of this

Offline KGs Knee

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Yeah, owners that refuse to pay luxury tax are nothing more than cheapskates and liars. Screw them, get them out of sports ownership, they don't belong.

An owner that puts yearly profits above winning is a turd of an owner and should be forced to sell their team. Let them enjoy their billions in profit from the sale, but get them the hell out of the league.

Owners aren't what I am paying money to watch. I only care about the players, they deserve the vast majority of the money pouring into the league, not some jackass in a business suit.

Offline mctyson

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It's a cash flow issue as well. The estimated value of the team is all well and good, but it is not cash in had. The lux tax has to be paid in cash out of the owners pockets. The Celts owners are millionaires not billionaires and that is real money to them, it's not reasonable to expect owners to pay lux tax unless the players they are retaining are putting the team at a championship level.

The Celtics have appreciated almost $2 billion, and that's without counting their investment in CSN. They had $60+ million in operating income in 2016, $50+ million in 2015, etc. again, that's without factoring their ownership stake in ancillary businesses.

The idea that a team is unable to pay the tax when it has a franchise valuation of (very conservatively) $2.2 billion, and which annually profits in the tens of millions, is absurd.

First, the Celtics have paid and will again pay the tax, so I am not sure what your point is.

Second, you know very well that the Boston Celtics are not the Oklahoma City Thunder or Minnesota Timberwolves.  The Cs are appreciating in value AND are making profits.  I am not so sure all the other teams are.

This is basically a strawman you have constructed.

Now if you want to talk about taxpayer funded new stadiums... then you have a point.