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Report: How NBA owners turn profits into paper losses

Jul 2, 2011, 11:10 AM EDT

To match Interview NBA/STERN Reuters

UPDATE July 2, 11:10 am: We need to make you aware of some flaws in the accounting used by Deadspin (and repeated here) in their original post that was the basis of this one. However, I don not believe it changes the overall theme that completely legal and widely accepted general accounting principles allow an NBA team to inflate losses or even hide small profits, with the losses all being paper.

To the corrections. First, the loss on player contracts cited in this article of $25.1 million almost certainly was a buyout of Dikembe Mutombo. A legitimate loss to write off. That said, the RDA that allows owners to write off players depreciation is in place, legally allowed and used.

Also, the NBA does not include the amortization of losses on buildings in its figures. Finally, it should be noted the Nets owners at the time were forced to take out loans that year to cover the losses.

The examples used here turned out not to be ideal ones. But as anyone who has dealt with accounting like this before will tell you, there is a lot of way to move money around on paper — the Nets claimed losses of more than $100 million over a couple years, ESPN’s accountants looked at it and found closer to $24 million in actual losses. Still, those are actual losses, you understand the owners concerns about the financial system the game has been using. The point that one should be cautious with the claims of ownership about the size of the losses they incur remains valid, however. But we strive here to be accurate.

June 30, 2:36 pm: It simpler to explain cold fusion than to explain the finances of an NBA team.

But Deadspin has gotten its hands on the books of the New Jersey Nets — from 2003 to 2006, so they are not new — and while they are outdated they also shed some light on how accountants for teams can turn small profits from teams into losses on paper.

Which would allow someone like David Stern to talk with a straight face about how 22 of the 30 teams are losing money, when in fact what you and I would consider the real numbers tell a different story in a number of those cases.

Deadspin’s Tommy Crags explains how the Nets lost $27.6 million in 2004:

That’s not a real loss. That’s house money. The Nets didn’t have to write any checks for $25 million. What that $25 million represents is the amount by which Nets owners reduced their tax obligation under something called a roster depreciation allowance, or RDA.

Bear with me now. The RDA dates back to 1959, and was maybe Bill Veeck’s biggest hustle in a long lifetime of hustles. Veeck argued to the IRS that professional athletes, once they’ve been paid for, “waste away” like livestock. Therefore a sports team’s roster, like a farmer’s cattle or an office copy machine or a new Volvo, is a depreciable asset….

If we’re trying to arrive at some idea of how much money the Nets really made in 2004, we’ll need to do a little crude math. Knock out the $25.1 million RDA — a paper loss, remember — and add the $9.1 million in tax savings. Suddenly, that $27.6 million loss becomes a $6.6 million profit.

It gets more complex when teams are sold, as the Nets were, because the new owners get to write off part of the purchase price. Larry Coon does a good job explaining this over at ESPN. And then there are the other businesses tied to this an NBA team owner may also own — if he owns the building you can charge rent or not, do all sorts of things to move the money around on paper. There are countless other examples.

Nobody — not even the players — are arguing that some markets are not hurting and that the system does not need adjustments. It does. More than the players want to admit. Owners in the NBA should have a fair opportunity to turn a profit — but if you put a bad product out on the floor and do a poor job marketing, you should not be guaranteed a profit. Like any business, you should need to earn it.

What we’re saying here is don’t take the owners word on what they are losing as fact. It’s very complex and there are plenty of ways to hide profits on paper — all legally, under generally accepted accounting principles — and make things look worse than they are.

  1. nfl25 - Jun 30, 2011 at 3:34 PM

    i dont give a sh!t.

    They are allowed to make a profit. They own a damn nba team. And if all they made was 6mill, they basically did lose money. If you own an nba franchise u should be making a ton of money.

    They have to fix this and the players will have to give stuff up. But I do think they need to do rev sharing and force teams to spend close the salary cap. There is no point in rev sharing if teams will still be cheap and pocket the $$. #1 thing is NO guaranteed contracts

    • theghostofwillisreed - Jun 30, 2011 at 4:19 PM

      if i own an nba franchise and i am making money, why should i be forced to pick up the slack for a poorly run franchise in a city that never should have had a franchise to begin with? if you’re going to use that lame excuse, let’s get to the real crux of the issues. who put the gun to the owner’s head to make dumb owners to undeserving players. in my knicks’ case, see curry, eddy and houston, allan.

      if no guaranteed contracts was the cure for all ills then why is the nfl in the same place right now? oh that’s right, the small market owners don’t like the current revenue sharing agreement, know the large market owners won’t budge so they’ll get it from the players.

      • goforthanddie - Jun 30, 2011 at 4:42 PM

        Every NBA game requires two teams to play. The home team isn’t making a dime if there’s no visiting team, so why shouldn’t they share?
        I honestly think the big problem behind revenue-sharing is the owners don’t trust each other to be honest in their financial statements. Stern says 22 teams lost money; I’m calling Shenanigans on that. More owners would be looking to sell off unprofitable businesses if that were true. It’s just easier to take from the players than be honest with each other.
        Guaranteed contracts aren’t that bad, unless you’re Eddy Curry. He ate himself out of the league, yet still got paid. Teams do need a way to get out of that type of situation.

  2. goforthanddie - Jun 30, 2011 at 3:57 PM

    If 22/30 owners lost money, half of them would be looking to sell their teams.

    • chulodo - Jul 3, 2011 at 12:32 AM

      . . . except that given that if 22/30 owners lose money, few buyers there would be.

      <>

  3. whatagreatfootballmind - Jun 30, 2011 at 5:11 PM

    Just because 22 of 30 owners are losing money doesn’t necessarily mean they feel the loss. Look at Glen Taylor who owns the Timberwolves. He’s in Forbes top 150 with a net worth of 2.7 Billion. Losing 20 Million a year a still a lot, but its peanuts. most owners are in it for a hobby and something to do.

  4. thetooloftools - Jun 30, 2011 at 5:24 PM

    ATTENTION DONALD STERLING of the L.A. Clippers
    “Owners in the NBA should have a fair opportunity to turn a profit — but if you put a bad product out on the floor and do a poor job marketing, you should not be guaranteed a profit. Like any business, you should need to earn it”.

  5. bigtrav425 - Jun 30, 2011 at 6:03 PM

    When Anderson Varejo or someone like him is making what he is making..im pretty sure the owners are losing money

    • goforthanddie - Jun 30, 2011 at 6:13 PM

      They had to have the money to offer the contract in the first place.

    • whatagreatfootballmind - Jun 30, 2011 at 6:17 PM

      it’s pretty sad when your in the LA market and can’t turn a profit. In fact what sticks the dagger in a little more is when another team wants to move into your market (sacramento) to make the money your trying to make.

  6. whatagreatfootballmind - Jun 30, 2011 at 6:21 PM

    First of all, all these owners need to get their butts in a room and figure out revenue sharing. until the cuban’s, taylors, and sterling can figure out how to split the the billions of dollars the NBA makes, nothing is going to get done. Once these clowns figure out how to split billions, they need to figure out how to split the revenues with the players who don’t give a rats a** about trying because they are making ridicilous contracts that are guaranteed. once they get their contract sign, they don’t try, espically in the regular season and it really shows on the bad teams when they dont have a chance at the playoffs. ladies and gents… see you in 2012, if we are lucky,

  7. tashkalucy - Jun 30, 2011 at 6:47 PM

    This is noise.

    It’s all about players deciding to play with their buddies in a half-dozen glamour markets, and screw the rest of the league.

    Does the NBA continue to become MLB, or does it become the NBA where all teams can compete.

    • whatagreatfootballmind - Jun 30, 2011 at 8:24 PM

      That’s why they need a hard cap like the NFL or mostly hard cap like the NHL, where you need to be under at the start of the regular season, but can go over later in the year. But if they do, the amount they go over effects their cap the next season and makes it difficult to retain players when their contracts expire.

      • tashkalucy - Jun 30, 2011 at 9:22 PM

        It’s much more than the hard cap……

        The star players can go to big markets to play together and make up smaller salaries in endorsements.

        This will go on for at least a year.

  8. whatagreatfootballmind - Jun 30, 2011 at 9:56 PM

    very good point about it being more than the hard cap. but, with a hard cap, and the owners do want it significantly lower than what it was this year for the “cap.” if it is a hard cap, we wouldn’t see lebron, wade, and bosh all sign with miami. in theory, the could, but i don’t think any of them would be taking significantly less than they are making now, or would have been making if that was case. with a hard cap that is lower, so many teams are going to have to shed contracts to get to the cap. teams, like minnesota, who are barely at the cap basement, would be able to poach players from teams that are way over the cap.

  9. lostdupree - Jul 2, 2011 at 3:46 PM

    Uuuuggggghhhhhh Soooooo freaking frustrated…..

  10. smitheye - Jul 2, 2011 at 3:59 PM

    It’s called spell check you idiot. Some professional writer you are.

  11. downtowndanny - Jul 2, 2011 at 11:11 PM

    kyle korver said it best ” no business on earth is guaranteed to make a profit every year, so why should the league expect to?”

    • borderline1988 - Jul 3, 2011 at 8:57 AM

      And no business in the world should be forced to take losses if they don’t want to. They should be allowed to downsize (i.e. fire their players), shorten working hours (same idea), and generally not be at the mercy of a greedy union.

      The owners understand that it’s impossible to make profits every year. But more than half of the league is losing money. As was mentioned earlier in this blog, this trend will continue as all the stars pack up for the big, glamour cities, leaving other teams with no chance of competing or making money themselves.

      Kyle Korver is trying to compare NBA teams and their employees to any other business in the world. But let’s be honest – this is anything BUT any other business. For pete’s sake, Kyle Korver is being paid millions of dollars to shoot a ball for 3 hours X 82 games = 246 hours a year.

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