Tom Ricketts was recently on Chicago radio. During his interview, he confirmed what I suspected for a long time.
Ricketts stated that the way he budgets, he takes all the revenues, then deducts all the expenses, and what is left over can be used by the baseball operations (such as adding free agents).
However, Ricketts was speaking in a more big picture model as he said that some of the expenses were geared toward the Wrigley reconstruction costs.
As posted many times, the Cubs are a separate legal entity from the corporate owner of Wrigley Field proper. The Cubs are merely a tenant, who may fully or partially share Wrigley revenues (concessions). Parking lots are owned by another separate entity. So when Ricketts says gross revenue, it seems he means "all" affiliated revenues, minus "all" affiliated costs to get to a rainy day fund number.
This also confirms what we learned when Ricketts bought the team. His bankrolled father said that he would not put any more money into the franchise operations. In other words, the Cubs had to be self-sufficient with no new capital calls. (This was also a requirement in the Zell partnership deal, as the Tribune retains a 5% stake). So Ricketts was cornered into having to field large debt service, a massive Cubs payroll and declining attendance revenues.
With the lack of the WGN games on a new local televisions outlet, "gross" revenues are projected to be lower in 2015, which means lower possible payroll numbers for the Cubs team since Wrigley expansion costs are coming hard and fast this off-season. This is why the team accelerated the deposits on season ticket sales . . . there appears to be a cash flow issue with the team.
So the Cubs, as a baseball operation, is the cornered stepchild in the dinner line. It will be the last aspect of the sports entertainment complex to receive added funds.
November 8, 2014
November 7, 2014
HISTORY MAY REPEAT ITSELF
It is said that people who do not understand or know history, are bound to repeat it.
Rick Morrissey of the Sun Times wrote on the Joe Maddon hire:
Baker and Piniella have said they were not prepared for the oppressive atmosphere on the North Side, a heaviness brought on by a century of futility. Nothing can prepare a manager for that, so it will be interesting to see how the fun-loving Maddon approaches the massive expectations. Baker and Piniella balked at being thought of as the Cubs’ Messiah. To wink at the pressure, Maddon might want to show up for his introductory news conference in white tunic, brown cloak, sandals, fake beard, all-seeing glasses and say, “I have come to proclaim good news to the World Series poor.’’
Maddon is not Baker or Piniella, but one could argue that Baker and Piniella had a better resume prior to taking the helm than Maddon. Maddon may be a goofy free spirit, crazy loose player's manager, but Piniella was no wallflower and Baker was an old school players manager (letting the inmates run the locker room asylum). When Baker left on bad terms, he inferred the r-card as being a major problem in winning on the North Side. When Piniella quit, he admitted that the pressure of winning on the North Side was something he had not expected; it broke him. And Piniella had gone through the intense media circus of New York both as a player and a manager. Perhaps, the Cubs managerial position is a coach killer.
Maddon is aware that if his team could ever when the World Series for the Cubs, he would never have to buy a drink or meal in Chicago for the rest of his days. He would become the next Ditka, a revered local icon. Such is the embrace of the City with Big Shoulders: a crushing one.
No one wants Maddon to fail. But everyone has high expectations for his success, even though he has not managed one game for the Cubs. A divisional title in 2015 is a last call drunken bet at the local tavern. A championship by 2019 (when Maddon's deal is over) is a goal, but not a guarantee. GM Jed Hoyer admitted that the Plan is less than 50% complete, so the team still has a long, long way to go.
Rick Morrissey of the Sun Times wrote on the Joe Maddon hire:
Baker and Piniella have said they were not prepared for the oppressive atmosphere on the North Side, a heaviness brought on by a century of futility. Nothing can prepare a manager for that, so it will be interesting to see how the fun-loving Maddon approaches the massive expectations. Baker and Piniella balked at being thought of as the Cubs’ Messiah. To wink at the pressure, Maddon might want to show up for his introductory news conference in white tunic, brown cloak, sandals, fake beard, all-seeing glasses and say, “I have come to proclaim good news to the World Series poor.’’
Maddon is not Baker or Piniella, but one could argue that Baker and Piniella had a better resume prior to taking the helm than Maddon. Maddon may be a goofy free spirit, crazy loose player's manager, but Piniella was no wallflower and Baker was an old school players manager (letting the inmates run the locker room asylum). When Baker left on bad terms, he inferred the r-card as being a major problem in winning on the North Side. When Piniella quit, he admitted that the pressure of winning on the North Side was something he had not expected; it broke him. And Piniella had gone through the intense media circus of New York both as a player and a manager. Perhaps, the Cubs managerial position is a coach killer.
Maddon is aware that if his team could ever when the World Series for the Cubs, he would never have to buy a drink or meal in Chicago for the rest of his days. He would become the next Ditka, a revered local icon. Such is the embrace of the City with Big Shoulders: a crushing one.
No one wants Maddon to fail. But everyone has high expectations for his success, even though he has not managed one game for the Cubs. A divisional title in 2015 is a last call drunken bet at the local tavern. A championship by 2019 (when Maddon's deal is over) is a goal, but not a guarantee. GM Jed Hoyer admitted that the Plan is less than 50% complete, so the team still has a long, long way to go.
November 6, 2014
ARBITRATION FIGURES
MLBTR projects 2015 salaries the ten Cubs who can go to arbitration:
Cubs (10)
With Cot's having the Cubs 2015 payroll at $30.5 million, $25.5 in arbitration deals projects the Cubs 2015 major league payroll at approximately $56 million.
Cubs (10)
- John Baker (5.141) – $1.1MM
- Wesley Wright (5.105) – $2.0MM
- Chris Coghlan (4.148) – $1.4MM
- Luis Valbuena (4.148) – $3.1MM
- Justin Ruggiano (4.019) – $2.5MM
- Travis Wood (4.004) – $5.5MM
- Pedro Strop (3.156) – $2.4MM
- Jake Arrieta (3.145) – $4.1MM
- Felix Doubront (3.120) – $1.3MM
- Welington Castillo (3.009) – $2.1MM
With Cot's having the Cubs 2015 payroll at $30.5 million, $25.5 in arbitration deals projects the Cubs 2015 major league payroll at approximately $56 million.
November 5, 2014
ONE ON THE STOVE
MLB Trade Rumors starts the Hot Stove League with predictions on Chicago teams signing any of the Top 50 free agents.
MLBTR predicts the Cubs have the best shot to sign Jon Lester, Russell Martin, David Robertson, Justin Masterson and Jake Peavy.
For the White Sox, MLBTR predicts Victor Martinez, Colby Rasmus and Luke Gregorson.
This speculative exercise presupposes that the teams will actually have sufficient funds to acquire these free agents.
As for the Cubs, signing five free agents for 2015 season is a pipe dream. Ownership is not going to green light Theo Epstein spending $400 million in new player deals when the Ricketts are attempting to sell part of the team to raise cash for their real estate ventures.
Catcher Martin will decline a qualifying $15.3 million offer from the Pirates, which puts his price tag at $16 million/season in a long term deal. Do the Cubs then keep a more affordable Wellington Castillo, or trade him? Martin does not make a good fit for the Cubs. He probably makes more sense with the White Sox.
Ace starter Lester is the top FA, and he will command Kershaw money ($250 million). If the Cubs actually knew that their top prospects were really going to be quality major leagues (Alcantara, Baez, Soler, Bryant, Russell, Almora), then going "all in" for Lester would make some sense. There is no objective argument to pay a starter that kind of money if the jury is still out on whether the Plan will work (and considering the Cubs have no Plan B).
Relief pitcher Robertson is going to be the highest paid bullpen guy on the market, going to get at least a $50 million deal. The Cubs bullpen was not really the problem. On the other hand, the White Sox could use Robertson and Gregorson.
Masterson makes less sense now, since the Cubs re-signed Yoshi Wada for a one year, $4 million deal. The front office has acquired a group of middle of the road, change of scenery starters (Turner, Droubront) to fill out the spring rotation without signing a FA. Masterson makes more sense as a right handed starter in the middle of the Sox 2015 rotation.
Martinez, at 35, cannot catch very many games. He is a DH/1B candidate who wants a four year deal. He really does not help the Sox that much; finding a DH in the AL can be done in-house (Viecido). Rasmus was a touted prospect who has not met expectations. The Sox already have a solid CF (Eaton). Rasmus hit .225, 18 HR, 40 RBI, 0.9 WAR for the Blue Jays.
MLBTR predicts the Cubs have the best shot to sign Jon Lester, Russell Martin, David Robertson, Justin Masterson and Jake Peavy.
For the White Sox, MLBTR predicts Victor Martinez, Colby Rasmus and Luke Gregorson.
This speculative exercise presupposes that the teams will actually have sufficient funds to acquire these free agents.
As for the Cubs, signing five free agents for 2015 season is a pipe dream. Ownership is not going to green light Theo Epstein spending $400 million in new player deals when the Ricketts are attempting to sell part of the team to raise cash for their real estate ventures.
Catcher Martin will decline a qualifying $15.3 million offer from the Pirates, which puts his price tag at $16 million/season in a long term deal. Do the Cubs then keep a more affordable Wellington Castillo, or trade him? Martin does not make a good fit for the Cubs. He probably makes more sense with the White Sox.
Ace starter Lester is the top FA, and he will command Kershaw money ($250 million). If the Cubs actually knew that their top prospects were really going to be quality major leagues (Alcantara, Baez, Soler, Bryant, Russell, Almora), then going "all in" for Lester would make some sense. There is no objective argument to pay a starter that kind of money if the jury is still out on whether the Plan will work (and considering the Cubs have no Plan B).
Relief pitcher Robertson is going to be the highest paid bullpen guy on the market, going to get at least a $50 million deal. The Cubs bullpen was not really the problem. On the other hand, the White Sox could use Robertson and Gregorson.
Masterson makes less sense now, since the Cubs re-signed Yoshi Wada for a one year, $4 million deal. The front office has acquired a group of middle of the road, change of scenery starters (Turner, Droubront) to fill out the spring rotation without signing a FA. Masterson makes more sense as a right handed starter in the middle of the Sox 2015 rotation.
Martinez, at 35, cannot catch very many games. He is a DH/1B candidate who wants a four year deal. He really does not help the Sox that much; finding a DH in the AL can be done in-house (Viecido). Rasmus was a touted prospect who has not met expectations. The Sox already have a solid CF (Eaton). Rasmus hit .225, 18 HR, 40 RBI, 0.9 WAR for the Blue Jays.
November 4, 2014
NEW ERA
The hiring of Joe Maddon brings a "new era" to the club, according to many reporters.
Except, since Theo Epstein was hired, there was supposed to be a new "Cubs Way" in place. What that Cubs Way actually is, is vague.
We thought that Epstein was going to bring in sabermetric philosophies to the organization, but we know that all major league teams employ computer models, spreadsheets, computer models to prepare coaches and players for in-game decisions, strike zones and batter shifts.
We thought that Epstein had a history of evaluating and acquiring top talent. To date, the concentration on rebuilding the farm system has not given Epstein the blank check to spend on top tier free agents. The New Way was to operate like a small market team.
We thought that Epstein wrote a manual for players and coaches in the organization on how to develop and train the players at each level. We know that there were some rules, like a full 500 AB at Triple A, before a call up. We also were told that the new Cubs would stress quality at-bats, OBP. But last season, we saw a chorus line of free swinging, high strike out rate batters.
So what can a celebrity manager do to push the team to the promised land?
Objectively, probably not a whole lot.
The field manager's job is rather simple in baseball.
His first priority is to make out the daily line up card. This assumes that he can put each player into the best spot to succeed. This also assumes that the talent on the club fits the manager's personal philosophy on how to score runs. The Royals used a small ball mentality to create run scoring opportunities. Earl Weaver used to wait for the three run HR.
His second duty is to make sure his team is prepared to play. Baseball is a long season. Even though players are professionals, they still need to be prepared to play each game. This means in-season training on fundamentals, accountability and preparation. Some managers, like Dusty Baker, took a hands off approach and let each player do his own thing. Most managers rely upon their coaching staff to have one-on-one sessions with the players.
His most important in-game duty is to manage the pitching staff. In conjunction with his pitching and bench coaches, a manager who can economically use his rotation and bullpen efficiently is more likely to have success. The biggest fail for most managers is not managing starters properly. Since teams are now spending more money on pitching (and at high risk of injury), this is a key element that the front office is worried about each season.
At this point, we don't know if Maddon is going to manage any differently than Rick Renteria, Dale Sveum or Mike Quade, or other "name" managers like Dusty Baker or Lou Piniella. Maddon has a reputation for working well with young players (which is going to be the core of the Cubs teams for the next five years). But Chicago is a different media market from Tampa Bay. Fan expectations are much higher and intense. Media scrutiny is more glaring to an outsider. This new era may fold into the old eras.
What some long time Cubs fans heard at the Maddon press conference could be disturbing or odd. Maddon says that during a season, he wants to see less scouting. He wants to do less batting practice. His two rules are "hustle to first base" for batters, and pitchers working on their defense (fielding position and holding runners). He is not impressed with people first in and last out of the clubhouse. He does not expect to get to the ball park early, because he has a life outside baseball. He wants the players to have fun - - - it is a game. Don't let the pressure interfere with the experience of playing ball. He is a joker who wants a loose clubhouse.
That is fine and good, but in a locker room filled with rookies who need help achieving the final steps in their professional career, Maddon says just keep doing what got you to the bigs. But the majors is a lot different than the minors. Maddon will then rely on "an active coaching staff." Maddon thinks team meetings are worthless. He prefers one on one sessions with the coaches. One can think that Maddon is a "player's coach." The last Cubs "player coach" was Dusty Baker.
Jed Hoyer also remarked that the Cubs are not at 50% of their organizational plan. The front office will start to transition toward being competitive, but will not spend just to spend money. The message was clear to pull back real spending expectations from the rhetoric of Maddon, who thinks the team he saw for the first time will be a 2015 playoff contender. Of course a new hire will be optimistic about his new position and team. He called Wrigley Field "a magical place," but he has yet to see the new signage and the new fierce media attention.
Except, since Theo Epstein was hired, there was supposed to be a new "Cubs Way" in place. What that Cubs Way actually is, is vague.
We thought that Epstein was going to bring in sabermetric philosophies to the organization, but we know that all major league teams employ computer models, spreadsheets, computer models to prepare coaches and players for in-game decisions, strike zones and batter shifts.
We thought that Epstein had a history of evaluating and acquiring top talent. To date, the concentration on rebuilding the farm system has not given Epstein the blank check to spend on top tier free agents. The New Way was to operate like a small market team.
We thought that Epstein wrote a manual for players and coaches in the organization on how to develop and train the players at each level. We know that there were some rules, like a full 500 AB at Triple A, before a call up. We also were told that the new Cubs would stress quality at-bats, OBP. But last season, we saw a chorus line of free swinging, high strike out rate batters.
So what can a celebrity manager do to push the team to the promised land?
Objectively, probably not a whole lot.
The field manager's job is rather simple in baseball.
His first priority is to make out the daily line up card. This assumes that he can put each player into the best spot to succeed. This also assumes that the talent on the club fits the manager's personal philosophy on how to score runs. The Royals used a small ball mentality to create run scoring opportunities. Earl Weaver used to wait for the three run HR.
His second duty is to make sure his team is prepared to play. Baseball is a long season. Even though players are professionals, they still need to be prepared to play each game. This means in-season training on fundamentals, accountability and preparation. Some managers, like Dusty Baker, took a hands off approach and let each player do his own thing. Most managers rely upon their coaching staff to have one-on-one sessions with the players.
His most important in-game duty is to manage the pitching staff. In conjunction with his pitching and bench coaches, a manager who can economically use his rotation and bullpen efficiently is more likely to have success. The biggest fail for most managers is not managing starters properly. Since teams are now spending more money on pitching (and at high risk of injury), this is a key element that the front office is worried about each season.
At this point, we don't know if Maddon is going to manage any differently than Rick Renteria, Dale Sveum or Mike Quade, or other "name" managers like Dusty Baker or Lou Piniella. Maddon has a reputation for working well with young players (which is going to be the core of the Cubs teams for the next five years). But Chicago is a different media market from Tampa Bay. Fan expectations are much higher and intense. Media scrutiny is more glaring to an outsider. This new era may fold into the old eras.
What some long time Cubs fans heard at the Maddon press conference could be disturbing or odd. Maddon says that during a season, he wants to see less scouting. He wants to do less batting practice. His two rules are "hustle to first base" for batters, and pitchers working on their defense (fielding position and holding runners). He is not impressed with people first in and last out of the clubhouse. He does not expect to get to the ball park early, because he has a life outside baseball. He wants the players to have fun - - - it is a game. Don't let the pressure interfere with the experience of playing ball. He is a joker who wants a loose clubhouse.
That is fine and good, but in a locker room filled with rookies who need help achieving the final steps in their professional career, Maddon says just keep doing what got you to the bigs. But the majors is a lot different than the minors. Maddon will then rely on "an active coaching staff." Maddon thinks team meetings are worthless. He prefers one on one sessions with the coaches. One can think that Maddon is a "player's coach." The last Cubs "player coach" was Dusty Baker.
Jed Hoyer also remarked that the Cubs are not at 50% of their organizational plan. The front office will start to transition toward being competitive, but will not spend just to spend money. The message was clear to pull back real spending expectations from the rhetoric of Maddon, who thinks the team he saw for the first time will be a 2015 playoff contender. Of course a new hire will be optimistic about his new position and team. He called Wrigley Field "a magical place," but he has yet to see the new signage and the new fierce media attention.
November 3, 2014
SELLING OUT
There is more news than just the Joe Maddon hire.
In April, 2014, Sports Business Daily reported the Ricketts family is "exploring the idea of selling minority ownership shares" in the Cubs as a "way to help finance" the $500M Wrigley Field renovation. Patrick Mooney of CSNCHICAGO.com also reported a source said that those shares would be for a "non-controlling interest." The source added that the family "hasn’t made any final decisions yet."
On October 27, 2014 , Sports Business Daily reports the Cubs’ value, as speculated by business trade papers to be around $2 billion, calculates for the team’s "pending" sale of around 20 percent of the club to be around $400 million sources said, with that process expected to finish soon. Galatioto Sports Partners is managing the sale. GSP representatives declined to comment.
Citing an anonymous source, the Sports Business Journal reported that the franchise is worth $2 billion — more than double what the Ricketts family paid in 2009 — and that the sale of part of the team is "expected to finish soon."
Crain’s Chicago Business also wrote that Chicago Cubs are close to selling a 20 percent stake in the team said to be valued at around $300 million, a Cubs spokesman said.
Ricketts family spokesman Dennis Culloton said nothing "officially" has changed since April, when reports surfaced that Cubs ownership was considering selling a noncontrolling share of the franchise to one or more minority investors to help finance the team's $575 million Wrigley Field renovation and redevelopment plan.
Mr. Culloton did not dispute any element of the SBJ report, which said that New York-based Galatioto Sports Partners is "managing" the minority share sale. The financial advisory company has been a Ricketts family consultant in the past, including for the original $845 million purchase of the team. At the time, Forbes estimated the Cubs to be worth only $700 million.
Bringing in minority investors may be one part of a combination of Ricketts family assets used to finance the stadium renovation, adding to other sources like ad revenue from expanded ballpark signage and federal tax breaks that could come from getting Wrigley Field listed on the National Register of Historic Places.
At the same time, there are reports that the Ricketts are close to buying two rooftop businesses (possibly the ones most affected by the new outfield signs).
What does all mean?
Sam Zell employed a very structured way to sell the Cubs to avoid the Tribune reporting more than $700 million in capital gains. To sell the Chicago Cubs to the Ricketts family, but not trigger the Chicago Cubs built-in gain, the Tribune pulled a play from its tax play book that it had recently used to sell Newsday to Cablevision Systems, Inc: the tax structure is referred to as a “leveraged partnership."
In executing the leveraged partnership structure, a new limited liability company – Newco -- taxed as a partnership was formed, to which the Tribune contributed the Chicago Cubs and its associated business for a five-percent interest and the Ricketts family contributed $150 million in cash for a 95 percent interest. The Ricketts family had certain call rights and the right of first refusal with respect to the membership interest owned by the Tribune and the Tribune has certain rights to put the membership interest to Ricketts family. In addition, Newco borrowed $698.75 million and the Tribune guaranteed the repayment of the principal and interest of the loan. From the funds provided by the debt and the equity financing, a special distribution of $740 million was made to the Tribune.
Accountants said to avoid the triggering of the built in gain with respect to the Chicago Cubs assets, the planning employed by the Tribune depended upon avoiding the disguised rules. Under IRS Section 707(a)(2)(B), where there are related transfers of property or money to a partnership and transfers of property or money by the partnership to the partner and when viewed together these transfers are characterized as a sale or exchange, then such transfers will be treated as a sale or exchange. Under Reg. Section 1.707-3(c)(1), if within a two year period, a partner transfers property to a partnership and the partnership transfers money or other consideration to the partner, the transactions are presumed to be a sales of the property to the partnership unless the facts and circumstances clearly establish otherwise. Reg. section 1.707-5(b)(1) provides that, for purposes of Reg. Section 1.707-3(c), if a partner transfers property to a partnership and the partnership incurs a liability and all or portion of the proceeds of that liability are allocable under Reg. Section 1.163-8T to a transfer of money to the partner made within 90 days of incurring the liability, the transfer of money to the partner is taken into account only to the extent that the amount of money transferred exceeds the partner’s allocable share of the liability. Thus, if the partner’s allocable share of the liability equals or exceeds the amount of debt financed money conveyed to that partner within 90 days of incurring the debt, no amount of the money is treated as the proceeds of a disguised sale by the transferring partner. The guarantee of the debt from which the proceeds distributed to the Tribune came created a risk of loss in the Tribune so that the debt was allocated to the Tribune under Section 752. The guarantee of the liability by the Tribune provided it with an increased basis and allowed it to receive the special distribution of cash without any gain recognition.
The key to the success of the leveraged partnership technique is the guarantee of Newco’s debt. However, the I.R.S. could challenge the leveraged partnership technique on the grounds that:
The Ricketts agreed to be hogtied by massive debt and ownership lock up rules in order for the bankrupt Tribune Company to avoid capital gains. Walking on egg shells is still the prospect that the "minority sale" of Ricketts interest in the Cubs could trigger an IRS audit. This may be why the ownership structure has had to be kept in the status quo; and why the Ricketts cannot make contributions to the partnership because the Tribune would have to put in its 5%.
Beyond the tax implications of a minority sale, there is a structural element most people do not realize. Most people assume that the Cubs own the team, Wrigley Field, and the surrounding parking lots. But that is not true. As stated in the building commission proposals, the Cubs only own the team. Wrigley Field is owned by another legal entity. The Cubs are merely a tenant at Wrigley Field. The parking lots are owned by a different legal entity. So what is Ricketts really going to sell to minority investors? Just part of the team? Or associated stakes in the various other companies surrounding but legally distinct, from the franchise?
And selling a minority stake in the Cubs is not giving the Cubs team the money. Any proceeds from Ricketts selling their shares goes to the Ricketts, personally. So reports that this money is going to be used as capital to rebuild the Cubs or sign free agents is incorrect. Such a sale does not change the Cubs finances one bit. The Ricketts could use this new found cash to help pay for their new hotel complex investment, or to acquire the rooftop buildings. But again, that real estate development has nothing to do with the business operations of the Cubs.
The Cubs continue to appear to be a cash flow poor franchise. The loan covenants and restrictions caused by the Zell deal still haunt the club. Attendance revenue is still the key barometer to team spending, and that continues to go down. The lack of a local TV deal will also squeeze the gross revenue number in 2015, and may cause the bank some concern.
But it does start to give owners some return on their leveraged investment, or the very least, paying back Daddy Ricketts for his money put into the purchase.
In April, 2014, Sports Business Daily reported the Ricketts family is "exploring the idea of selling minority ownership shares" in the Cubs as a "way to help finance" the $500M Wrigley Field renovation. Patrick Mooney of CSNCHICAGO.com also reported a source said that those shares would be for a "non-controlling interest." The source added that the family "hasn’t made any final decisions yet."
On October 27, 2014 , Sports Business Daily reports the Cubs’ value, as speculated by business trade papers to be around $2 billion, calculates for the team’s "pending" sale of around 20 percent of the club to be around $400 million sources said, with that process expected to finish soon. Galatioto Sports Partners is managing the sale. GSP representatives declined to comment.
Citing an anonymous source, the Sports Business Journal reported that the franchise is worth $2 billion — more than double what the Ricketts family paid in 2009 — and that the sale of part of the team is "expected to finish soon."
Crain’s Chicago Business also wrote that Chicago Cubs are close to selling a 20 percent stake in the team said to be valued at around $300 million, a Cubs spokesman said.
Ricketts family spokesman Dennis Culloton said nothing "officially" has changed since April, when reports surfaced that Cubs ownership was considering selling a noncontrolling share of the franchise to one or more minority investors to help finance the team's $575 million Wrigley Field renovation and redevelopment plan.
Mr. Culloton did not dispute any element of the SBJ report, which said that New York-based Galatioto Sports Partners is "managing" the minority share sale. The financial advisory company has been a Ricketts family consultant in the past, including for the original $845 million purchase of the team. At the time, Forbes estimated the Cubs to be worth only $700 million.
Bringing in minority investors may be one part of a combination of Ricketts family assets used to finance the stadium renovation, adding to other sources like ad revenue from expanded ballpark signage and federal tax breaks that could come from getting Wrigley Field listed on the National Register of Historic Places.
At the same time, there are reports that the Ricketts are close to buying two rooftop businesses (possibly the ones most affected by the new outfield signs).
What does all mean?
Sam Zell employed a very structured way to sell the Cubs to avoid the Tribune reporting more than $700 million in capital gains. To sell the Chicago Cubs to the Ricketts family, but not trigger the Chicago Cubs built-in gain, the Tribune pulled a play from its tax play book that it had recently used to sell Newsday to Cablevision Systems, Inc: the tax structure is referred to as a “leveraged partnership."
In executing the leveraged partnership structure, a new limited liability company – Newco -- taxed as a partnership was formed, to which the Tribune contributed the Chicago Cubs and its associated business for a five-percent interest and the Ricketts family contributed $150 million in cash for a 95 percent interest. The Ricketts family had certain call rights and the right of first refusal with respect to the membership interest owned by the Tribune and the Tribune has certain rights to put the membership interest to Ricketts family. In addition, Newco borrowed $698.75 million and the Tribune guaranteed the repayment of the principal and interest of the loan. From the funds provided by the debt and the equity financing, a special distribution of $740 million was made to the Tribune.
Accountants said to avoid the triggering of the built in gain with respect to the Chicago Cubs assets, the planning employed by the Tribune depended upon avoiding the disguised rules. Under IRS Section 707(a)(2)(B), where there are related transfers of property or money to a partnership and transfers of property or money by the partnership to the partner and when viewed together these transfers are characterized as a sale or exchange, then such transfers will be treated as a sale or exchange. Under Reg. Section 1.707-3(c)(1), if within a two year period, a partner transfers property to a partnership and the partnership transfers money or other consideration to the partner, the transactions are presumed to be a sales of the property to the partnership unless the facts and circumstances clearly establish otherwise. Reg. section 1.707-5(b)(1) provides that, for purposes of Reg. Section 1.707-3(c), if a partner transfers property to a partnership and the partnership incurs a liability and all or portion of the proceeds of that liability are allocable under Reg. Section 1.163-8T to a transfer of money to the partner made within 90 days of incurring the liability, the transfer of money to the partner is taken into account only to the extent that the amount of money transferred exceeds the partner’s allocable share of the liability. Thus, if the partner’s allocable share of the liability equals or exceeds the amount of debt financed money conveyed to that partner within 90 days of incurring the debt, no amount of the money is treated as the proceeds of a disguised sale by the transferring partner. The guarantee of the debt from which the proceeds distributed to the Tribune came created a risk of loss in the Tribune so that the debt was allocated to the Tribune under Section 752. The guarantee of the liability by the Tribune provided it with an increased basis and allowed it to receive the special distribution of cash without any gain recognition.
The key to the success of the leveraged partnership technique is the guarantee of Newco’s debt. However, the I.R.S. could challenge the leveraged partnership technique on the grounds that:
- The guarantee should not be respected;
- The anti-abuse provisions of Reg. 1.701-2(a) should apply and
- The transaction should be recast in accordance with its substance as a sale.
The Ricketts agreed to be hogtied by massive debt and ownership lock up rules in order for the bankrupt Tribune Company to avoid capital gains. Walking on egg shells is still the prospect that the "minority sale" of Ricketts interest in the Cubs could trigger an IRS audit. This may be why the ownership structure has had to be kept in the status quo; and why the Ricketts cannot make contributions to the partnership because the Tribune would have to put in its 5%.
Beyond the tax implications of a minority sale, there is a structural element most people do not realize. Most people assume that the Cubs own the team, Wrigley Field, and the surrounding parking lots. But that is not true. As stated in the building commission proposals, the Cubs only own the team. Wrigley Field is owned by another legal entity. The Cubs are merely a tenant at Wrigley Field. The parking lots are owned by a different legal entity. So what is Ricketts really going to sell to minority investors? Just part of the team? Or associated stakes in the various other companies surrounding but legally distinct, from the franchise?
And selling a minority stake in the Cubs is not giving the Cubs team the money. Any proceeds from Ricketts selling their shares goes to the Ricketts, personally. So reports that this money is going to be used as capital to rebuild the Cubs or sign free agents is incorrect. Such a sale does not change the Cubs finances one bit. The Ricketts could use this new found cash to help pay for their new hotel complex investment, or to acquire the rooftop buildings. But again, that real estate development has nothing to do with the business operations of the Cubs.
The Cubs continue to appear to be a cash flow poor franchise. The loan covenants and restrictions caused by the Zell deal still haunt the club. Attendance revenue is still the key barometer to team spending, and that continues to go down. The lack of a local TV deal will also squeeze the gross revenue number in 2015, and may cause the bank some concern.
But it does start to give owners some return on their leveraged investment, or the very least, paying back Daddy Ricketts for his money put into the purchase.
November 1, 2014
TO MEASURE
How does one measure success in baseball?
Championships.
The SF Giants have won three World Series in five years. Some skeptics claim that the Giants were not "the best" team, wild card berths, etc. The bottom line is still the rings.
Victories.
Any team can boast about having a winning season. For some clubs, being over .500 is a "moral victory." It is enough to keep a team's fan base in excitement and expectation mode to continue to be a competitive team. It is enough to sell improvement if you are competitive series to series.
Individual Awards.
This is a participation trophy in the arena of team sports. Individual accomplishments are fine, so long as they support the ultimate fan goal: championships. A batting title champ or a Cy Young award winner are great, but it does not mean a deep play off run - - - the bitter taste in Detroit is the latest example.
So how do we measure Theo Epstein's first three years at the helm?
In the last three years, the Cubs have lost 286 games. That is an average of 95.33 losses per season.
It is nice to have respected drafts, and publications liking your revamped minor league system, but none of that really matters (it is all speculation) until you can get victories at the major league level.
Championships.
The SF Giants have won three World Series in five years. Some skeptics claim that the Giants were not "the best" team, wild card berths, etc. The bottom line is still the rings.
Victories.
Any team can boast about having a winning season. For some clubs, being over .500 is a "moral victory." It is enough to keep a team's fan base in excitement and expectation mode to continue to be a competitive team. It is enough to sell improvement if you are competitive series to series.
Individual Awards.
This is a participation trophy in the arena of team sports. Individual accomplishments are fine, so long as they support the ultimate fan goal: championships. A batting title champ or a Cy Young award winner are great, but it does not mean a deep play off run - - - the bitter taste in Detroit is the latest example.
So how do we measure Theo Epstein's first three years at the helm?
In the last three years, the Cubs have lost 286 games. That is an average of 95.33 losses per season.
It is nice to have respected drafts, and publications liking your revamped minor league system, but none of that really matters (it is all speculation) until you can get victories at the major league level.
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