In yesterday's piece, which ran at ESPNLosAngeles.com, I discussed certain Dodgers financing arrangements designed, among other reasons, to make an MLB forced takeover or sale of the club unpalatable. I summed up the basics in this paragraph:
Sources familiar with McCourt's strategy indicated Monday that significant sources of Dodgers revenue would not be available to Major League Baseball or another owner without McCourt's consent. These are said to include a $21 million annual lease obligation owed from the team to a McCourt entity for the club's use of the parking lots surrounding Dodger Stadium and any ticket revenue in excess of the $6-7 million per year of service on certain McCourt debt, according to the sources. This year's figures were not available, but the surplus cash after debt service exceeded $60 million in 2005. Both of these revenue streams are slated to stay with McCourt for at least 20 more years.Let's tackle this stuff in a little greater depth. To begin with, note that the team and the land were sold to the McCourts as separate pieces in the context of a single transaction. My sources tell me baseball was not happy with this arrangement, but still reluctantly approved it. What happened next?
Frank held the land currently used for Dodger Stadium parking with a business entity with no direct relationship to the Dodgers. That entity flows up to other McCourt entities, but never back down to the Dodgers. Frank then caused the Dodgers to enter into a long-term lease under which the Dodgers owe the entity--Blue LandCo--$21 million annually for the use of the parking lots. This money does not go back into the team. This is illustrated in blue below:
The green line represents the lease payments; the organizations are not connected on the original flowchart. So the upshot here is that, for at least the next two decades, the team owes a non-team, Frank McCourt-held company $21 million per year as rent on the parking lots.
The tickets piece is less straightforward, but more significant. Frank caused the Dodgers to transfer the right to sell non-premium tickets to a non-Dodgers entity, simplified on the chart as Tickets. That entity then took out nine figures of debt secured by revenue from non-premium ticket sales. Service on that debt runs at about $6 to $7 million annually. This is represented in red below:
As above, the green line represents a relationship between the Dodgers and, here, Tickets. There is no underlying black line. The Dodgers transferred the rights to sell non-premium tickets to that entity, although I do not understand the Dodgers to pay Tickets any money.
And here's where it gets interesting: Tickets is entitled to keep all non-premium ticket sale revenue beyond its $6-7 million annual debt service. In 2005 alone, the excess revenue above that debt service was more than $65 million. That's money from ticket sales that, unless Frank McCourt so decides, never gets to the Dodgers. And it is also a contractual relationship that, Frank's side will argue, baseball cannot modify.
The takeaway: Frank is essentially painting a picture that baseball, should it take over the Dodgers, would not have access to very significant revenue streams. The rest of baseball's owners would be footing a great load of the bills. A new owner, purchasing the Dodgers at some sort of forced sale, would have to also buy out Frank's contractual relationships above or run the franchise without them.
I don't know if these mechanisms were designed with this sort of scenario in mind. There are all kinds of valid reasons businesses allocate revenue in facially-illogical ways. It could well be that tax implications drove these decisions, or creditors preferred assets and liabilities arranged just so.
But it could also be that Frank McCourt always wanted it to be harder to make him go away than it is to let him stick around. I don't know if we're there yet. Only Bud Selig does, for sure, and he seems willing to go to
the mat. It won't be pretty.