Will Bucks Break Their Lease?
Why the new arena deal will not lock down the franchise in Milwaukee
The Legislature’s recent approval of an arena deal has Bucks fans cheering. Many believe a 30-year “clawback” clause requiring the Bucks to pay off remaining arena debt–if they try to leave early–will keep them in Milwaukee.
As a Bucks fan since 1968, I hope that’s true. But in reality, the finances of NBA basketball could make it easy for the team’s owners to move the franchise to a different city.
Fans viscerally experience victories and defeats. Franchise owners are also motivated by these emotions, but with an added, bottom-line incentive and with no home town loyalties. New principal owners–hedge-fund billionaires Wes Edens, Marc Lasry and Jamie Dinan—all live in Manhattan.
As hedge-fund operators, the Bucks owners specialize in acquiring “distressed assets,” the term Lasry used at the Bucks-sale press conference. Here’s the standard formula: Buy low. Improve value. Divest. Move on.
Being sports fans, Edens, Lasry and Dinan could indeed choose to own the Bucks long term. However, first and foremost they are ultra-savvy businessmen. Dallas Mavericks owner Mark Cuban told ESPN the sale of the Bucks for $550 million (really $450 million minus Herb Kohl’s pledge to spend $100 million on a new arena) was a “bargain,” based on a nine-year TV deal starting in 2016. The L.A. Clippers were recently sold for $2 billion. Forbes presently values the Bucks at $600 million—far below the league average of $1.1 billion per team. A new TV-rights deal for all NBA teams will yield a near-triple increase to $89 million a year. In other words, there are many potential bucks still to be realized from the Milwaukee Bucks.
With an arena deal, the Bucks are clearly on track to reach maximum resale value. The Bucks making it to the playoffs in 2015 also added value. Several coveted free-agents just signed for next season. Management is working hard to build interest and attendance. All according to the formula.
Add to that the arena naming-rights, which are estimated to gain the Bucks owners $120 million. Yes, the team agreed to pay for all maintenance costs of the arena, but in the facility’s early years that cost is likely to be low.
From a business perspective, the optimal time for current Bucks owners to cash out would be within five to ten years. Let’s assume the team’s performance continues improving, the fan base expands and income keeps rising. There will be no fiscal reason to sit on this asset indefinitely. A new arena will rapidly depreciate in value (as they all do) and require higher maintenance costs and the team’s play could certainly fluctuate. And future TV deals may level off, because cable customers are unlikely to absorb endless fee hikes.
Conservatively, let’s say a new owner pays $1.1 billion for the franchise in 2025 — the present average price. However, current Bucks owners would not have to require the team to stay here. That promise was only between Kohl and Edens/Lasry because of Kohl’s insistence.
What about the clawback clause in the public-funding deal? It offers some relief for taxpayers, but it basically defines known costs for breaking the arena lease/construction contract. Present and future owners would simply factor into a sale the remaining debt.
Here’s a ballpark tally of what Bucks owners would have to pay taxpayers if the team is sold and moves in 2025: Roughly half of the total principal borrowed by county and state–or $55 million—would be due. With prepayments and other costs, that could reach $60 million. Wisconsin Center District bonding of $93 million would still be outstanding, although ticket surcharges would have covered some accrued interest. Payback for city borrowing could be about $20 million. That’s around $173 million.
Perhaps I’m underestimating. Say they have to pay $200 million. That still gives them a $450 million gain from a $1.1 billion sale that involves the team leaving Milwaukee. That’s a nice return on investment.
The Bucks are also getting (mostly for free) about 30 acres of downtown Milwaukee real estate–a perk arranged by Milwaukee’s County Executive Chris Abele and Mayor Tom Barrett. All profits from selling or developing this appreciating real estate will be pure gravy for the shrewd billionaires.
What if new Bucks owners do move the team? As of 2025, taxpayers would have paid roughly $140 million in borrowing costs. Other asset giveaways to the Bucks will total at least $50 million. For that, we will have a tricked-out, 17,000-seat (but already-aging) arena for concerts and Marquette basketball games. The Wisconsin Center District would then need to manage and maintain it since the Bucks would be history.
It’s hard to gauge future arena costs to taxpayers minus an NBA anchor tenant. Some cities continue using arenas after a pro team’s departure, but they usually become white elephants.
Another potential white elephant will be the Bucks proposed “entertainment” mall. The Bucks hope to win over Milwaukee’s Common Council and build their block-long, multi-story bar-palooza on the site of a lucrative city-owned 4th and Highland Parking Structure. It’s anyone’s guess whether that project would be viable and if neighboring bars and restaurants will suffer in the process. But certainly the Live block’s central reason for being would disappear if the Bucks left town.
“Putting shovels in the ground” usually implies that a major business is establishing deep roots for generations to come. However, in today’s NBA, a franchise simply runs down an arbitrary 20-year (or less) arena time clock. Owners then demand a new and ever-changing list of “ancillary income streams” and upgrades from fans/citizens– or they threaten to leave town.
Let’s not delude ourselves that the current Bucks investors will treat their NBA franchise differently than any other “distressed asset.” Remember the formula? Buy low. Improve value. Divest. Move on.