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tom ricketts firing hendryIn light of yesterday’s extensive financial discussion, which emanated from uncomfortable comments made by President of Baseball Operations Theo Epstein about the baseball ops budget (and payroll being maxed out), I’ve spent the better part of the last 24 hours thinking about the Cubs’ financial situation. I’ve changed my thinking on one particular issue, and that change is going to guide some of my over-arching thoughts going forward. So I’d like to spell it all out for you.

Now, before we dig into that, there are some necessary preambles, because this is some seriously nuanced stuff. Among those preambles, I always feel the need to caveat: I know very little about the actual financial documents involved. There is always a chance that every conclusion I draw, however well intentioned, could be dead wrong upon a review of the private financial data. I’m here only to do the best I can with the information I have available to me.

You’ll recall that the genesis of this new wave of financial discussions was an investigative piece by Gordon Wittenmyer, published on Opening Day, in which he reported – among other things – that the Cubs’ payroll has been dropping like a rock under the Ricketts Family’s ownership because of the debt burden the family took on to purchase the Cubs and the associated debt instruments, which include all kinds of restrictive elements. Prior to Wittenmyer’s report, there was a casual and widespread belief that, although the Ricketts Family had taken on substantial debt to purchase the Cubs, that was merely a condition of the sale, which allowed the Tribune Company and Sam Zell to avoid substantial capital gains tax associated with the sale. Thus, there was no reason to be concerned about the debt or the related obligations interfering with the finances of the Cubs, because the Ricketts Family had plenty of money to pay cash for the team if they’d been able to. Wittenmyer’s report gave that belief some pause, but I remained skeptical, as I wrote at the time.

Separately, but relatedly, Theo Epstein’s comments this week about the baseball budget – comments which were arguably incompatible with things we’d heard previously from the front office – raised some concerns about the amount of Cubs revenues being made available to the baseball side, versus the amount being used, for example, to service the Ricketts Family’s debt. In that way, these issues are related: more debt = higher service payments = less money available for baseball operations.

So, harmonizing everything, there are two subtly separate but related financial questions out there: (1) Is the Ricketts Family crushed by a huge amount of debt they took on to purchase the Cubs, and that debt is governed by complicated instruments that prohibit the Cubs from spending freely for a considerable length of time? (2) Is the Ricketts Family using Cubs revenues to service their debt, thus reducing the money available to the Cubs organization?

In a recent Dave Kaplan piece, he actually touches on each question. To the first, he quotes an anonymous former purchase candidate about the purchase process:

Minimizing tax liability with debt financing was the No. 1 goal of Tribune Company management and Sam Zell in selling this asset. That alone made it a tough deal for many of the interested parties to handle. Add in the fact that the world markets were on fire so financing was very difficult to obtain at that time. Whoever was going to buy the Cubs — from Mark Cuban, to John Canning, to any of the other interested parties — was going to have to play under those rules. That narrowed the playing field quickly. Plus, do you really think that [MLB commissioner] Bud Selig, who is one of the smartest guys around, would have allowed the Cubs, a premier franchise, to be operating under a risky structure? No way.

That’s that, and largely dispenses with the first question. Whatever the crazy structure of the purchase, it wasn’t because the Ricketts Family couldn’t afford the purchase without so much debt. (More on that in Kaplan’s article.) And, whatever the crazy structure of the purchase, MLB is on board with it – and MLB has no interest in seeing the Cubs’ ability to be competitive crushed under the weight of a bad deal. So I have no worries about that.

As to the second question – whether debt service payments are coming out of Cubs revenue – Kaplan seems to offer an answer: “It also appears that the large debt service payments that the Cubs are responsible for have maxed out the money available for the rebuilding process that Epstein and Hoyer are in.” In other words, whether you characterize the debt as the Ricketts’ or the Cubs’, the financial burden of that debt is falling on the Cubs. That’s a real bummer.

It has been reported, and is generally accepted, that the loans to the Ricketts Family to purchase the Cubs came from a variety of sources, including banks, private investors, and a Ricketts Family Trust. We don’t know the amount of loans from each source, and, although I’m going to focus on the Family Trust, these points are generally applicable to any debt the Ricketts Family took on in order to purchase the Cubs. The Ricketts Family – not the Cubs – benefited from that debt because they (the Ricketts) now own the asset (the Cubs).

If it is true that the Ricketts Family Trust loaned the Ricketts Family some money to purchase the Cubs, and if that loan came with an interest rate attached, then I have some concerns. If the Ricketts are using Cubs revenues to service that particular debt (i.e., to make the required interest payments), they are merely taking Cubs revenues and making “interest payments” to themselves with it. Yes, technically, in this setup only “the Ricketts Family Trust” is receiving the Cubs revenues, but is that really a distinction worth making? The Ricketts Family, in this setup, is transferring Cubs revenues into their own pockets under the guise of “debt service.”

Now I want to be crystal clear about something: I do not have a problem with the Ricketts Family making money off of the Cubs. I am not saying that any of this setup – if I even understand it correctly, and there’s a pretty fair chance that I don’t (these things are complicated) – is wrong. It sounds creative, and I award two points for creativity.

The issue I have, and it’s the only issue I’ve ever had with this financial stuff, is the repeated statements that every dollar the Cubs bring in the door is being put back into the Cubs organization. If I understand the debt service payments correctly, I don’t think it’s fair for the Ricketts Family to, on the one hand, pocket these service payments from the Cubs, and, on the other hand, generate goodwill by saying things like, “Every dollar the Cubs make is put back into the organization.” Because whether or not that statement is technically true, based on a complicated series of transactions and entities, it is not genuine.

Again: I don’t blame/hate/curse/whatever the Ricketts Family for making some money off of their business. God bless, and Go America. I have to emphasize this as boldly as possible (twice), because this is a point on which I receive a lot of flak. Me not say Ricketts bad.

I just would like a little more transparency about this issue. Is every single dollar of Cubs revenue – after taxes – going back into the Cubs organization? Or is every single dollar of Cubs revenue – after taxes, Ricketts Family debt service, and whatever else – going back into the Cubs organization? Those are two very different things, and I just want to know what I’m looking at.*

I probably don’t have that right, and we might never know. But I’ve always thought of professional sports teams as a kind of public trust. Yes, you can make money off of the teams, but you also have to realize that you are doing so on the backs of a base of fanatics who desperately want to believe their teams are always moving in the right direction. It’s easier to believe that if we have faith in the ownership. And it’s easier to have faith in the ownership if we feel connected to them through transparency, openness, and shared passion.

In the end, I’m not mad at the Ricketts, and I don’t think they’ve really done anything wrong. But I’m disappointed that it’s taken this long to get to a place where I finally think I understand what it means to “put every dollar back in the organization.” It’s not what I thought it meant, but maybe that was my fault.

Pending a correction or clarification from the Ricketts Family, the weight of authority on this issue (including Epstein’s comments this week) leads me to the conclusion that, until the Ricketts Family debt is completely paid off, the amount of money available to the Cubs’ organization is going to be reduced by the amount of the debt service payments each year. Depending on your source, the debt service payments range from as low as $20 million to as much as $40 million annually. That’s a healthy chunk of change that the Cubs could otherwise be spending on, for example, a banner free agent.

Like I said. It’s a bummer. Then again, if this issue goes away as soon as the Cubs emerge from their rebuild – whether because revenues increase or because the Ricketts Family starts paying the debt service on their own – it’s not really a huge bummer. After all, not having that $20 to $40 million available right now is only an issue if there were free agents that Theo Epstein and Jed Hoyer wanted whom they could not sign. Maybe there weren’t any. And maybe when there are, the debt service issue will vanish. Here’s hoping.

*Subject to the caveat that MLB owners are prohibited by the league from making certain financial disclosures public. I’m certainly not asking for the Ricketts to turn over their books, nor do I think they should have to.

  • 1060Ivy

    A few more caveats to ponder:

    Will the $500 MM that Ricketts expects to outlay for Wrigley improvements also be included in future debt servicing commitments? Will be those outlays be governed by similar covenants as existing debt? (Basically, should Cub fans delay their expectations as to when the team’s payroll be increased till after these outlays have been paid off)

    Are salaries and other compensation to Ricketts family members on Cubs payroll included in the ‘all Cubs revenue will be spent on the Cubs’ mantra?

    • Pat

      Yes, the renovations will most likely largely be financed. It won’t be 500 million from the team though. The hotel should be a separate deal, of course that’s the one where the Ricketts have someone else sharing the costs.

  • bbmoney

    Great post.

    While it’s not necessarily an uplifting article for the Cubs current finances, this line made me smile in relation to making money off your business, “God bless, and Go America.” I completely agree the only thing I take issue with, as far as the Ricketts making money off the Cubs, are their public comments about putting every $ back into the team.

  • @Zorag

    Wouldn’t it be better to spend more on debt reduction now so more money is available when we make a run?

  • CubFan Paul

    I saw this coming the first year Ricketts lowered the payroll. I posted it here and was (and still) blasphemed.

    • TWC

      “I posted it here and was (and still) blasphemed.”

      You mean, “accused of blasphemy”, I assume.

      Of course, if you look at the past couple of years of comments on this site without the victim-prism over your eyes, you’ll see that many others have shared your worry from day 1 about Ricketts’ willingness to spend; but, that prolly won’t stoke your ego like the poor me/I told you so act.

      • CubFan Paul

        No. You shouldn’t assume.

    • MichiganGoat

      I humbly apologize and I bow to your ego and kiss the ring of your great insight o’wise won.

      Feel better?

      *** this goes for all the other I told you so comments, your ego is great and powerful o’great and powerful ones***

      • caryatid62

        “I’m wrong, but I still feel the need to shame people who disagreed with me, who in fact turned out to be correct.”

        Nobody’s happy about being right about this. It sucks. No reason to snipe about it.

        • MichiganGoat

          an apology and bow to you… good point

        • TWC

          Just because one might mock the hyperbolic inanity of someone’s unceasing argumentativeness about a subject, that does not make said person a standard bearer for the opposing viewpoint.

          “Nobody’s happy about being right about this.”

          Yeah, I’ll beg to differ with that. Just read the other comments on this article.

          • caryatid62

            “Just because one might mock the hyperbolic inanity of someone’s unceasing argumentativeness about a subject, that does not make said person a standard bearer for the opposing viewpoint.”

            Do you not see the irony of this statement?

            “Yeah, I’ll beg to differ with that. Just read the other comments on this article.”

            I don’t see more than 1 or maybe 2 comments in this entire thread that would even remotely be able to be classified as “gloating” or “happy” about this.

            • TWC

              “Do you not see the irony of this statement?”

              Uh, no. Did you not comprehend my comment?

              Say I’m a fan of rock music, and consider guitarists A, B, and C in my top 3 of all time. Let’s say my neighbor went on and on and on all the fracking time, getting in my face about how much better guitarist C was than all the rest. Eventually, due to his “unceasing argumentativeness”, I would be inclined to “mock the hyperbolic inanity” of his argument. Doing so doesn’t mean I was anti-guitarist C. It means his argumentativeness was wearisome, and I chose to dismiss it. (The analogy isn’t exact, I know, but it’s as close as I can do off the top of my head.)

              As to the latter, I think there are now (and, undoubtedly will be, as the day goes on) a fair number of smug comments about how folks knew all along that “Ricketts was cheap”.

              • Cubbie Blues

                Preach on brother, preach on.

              • caryatid62

                Except that your neighbor probably sees the situation as the following:

                “Say I’m a fan of rock music, and consider guitarists C, B, and A in my top 3 of all time. Let’s say my neighbor went on and on and on all the fracking time, getting in my face about how much better guitarist A was than all the rest. Eventually, due to his “unceasing argumentativeness”, I would be inclined to “mock the hyperbolic inanity” of his argument. Doing so doesn’t mean I was anti-guitarist A. It means his argumentativeness was wearisome, and I chose to dismiss it.”

                You’re critiquing the style, not the argument. And the “wearisome-ness” (I know that’s not a word) of one’s style is relative and not objectively quantifiable.

                You chose to engage in debates about the wealth of the Ricketts; your frustration with people going “on and on” about it is only because you chose to engage in the debate. Those people likely feel that you were as dogmatically attached to defending him as you felt they were to bashing him. It’s perception, not reality.

                And, ironically, by pre-emptively criticizing those who haven’t even “gloated” yet, you’ve basically just reignited the same argument that you claim to have made you weary.

              • When the Music’s Over

                Well, such is the aftermath of arguments. Someone almost always has to lose and someone always has to win. Depending on how friendly/unfriendly the arguments were, typically dictates how well/sore the parties take the victory/loss when the dust has settled.

                All that said, there is a lot of gang-up mentality and the claws more often than not do come out with the parties that have the numbers. What does that mean? When the minority parties end up being correct, they’re often not going to take that “win” in stride/silence. They’re going to push it in the face of the previously dickish majority.

          • caryatid62

            I should correct myself.

            I don’t see one single comment on this article that demonstrates an iota of excitement for being “right” about this. I think you’re reading something that’s not there.

    • http://www.bleachernation.com Brett

      If you laid all of this out three years ago with the level of detail that finally convinced me (which was, for me, the accumulation of years of reports, quotes, thoughts, analysis, etc.), then I apologize for not being convinced sooner. If, however, you threw out some generic thoughts and unsupported (even if ultimately correct) conclusions, I don’t really feel like I missed the boat. I need data/quotes/reports/analysis/etc. to make a conclusion on something that is so opaque and (necessarily) hidden from us.

      We can’t forget: there’s a lot that MLB owners are not permitted to discuss publicly.

      • lukers63

        What do you mean? You make your decisions based off of facts/data supporting your conclusion and not just at a whim and claim you are correct? How dare you!!! ;)

      • northsiders6

        Then how could you be so confident and need to be convinced one way or the other if you needed to collect years of reports, quotes, thoughts, analysis, etc.?

        • YourResidentJag

          Exactly, I’ve been accused many a time of rank hyperbolic speculation, and yet look how long it took for the fanbase to get the “coming out party” when it came to the financials of this team. It’s not like I or others arguing the positions have a background in finance. Even if we did, it’s not like the financials of the Cubs or any MLB team is easily accessible or digestible information. Unfortunately, for those of who feel the product of the team to be dealing with financial constrains, it was going to take years for this stuff to come to light.

      • When the Music’s Over

        Brett, you’re a class act in terms of how you defend your arguments. On the other hand, there are many here that aren’t. A level of nastiness and intellectual superiority often comes as an unnecessary byproduct of the argumentative methods that the majority use to discredit the dissenters. It’s like having the big stack of chips in poker. Because of this relationship, when the minority/small stack proves correct/wins, gloating and I told you so are more in order than when the majority wins. It’s just the nature of how things work.

  • Weber

    Going only on what you’ve presented here, I don’t have a problem with this. It seems like the family was prevented, due to the terms of the sale, from fully investing as equity owners and therefore also invested as creditors. It makes it feel a little funny that they’re paying back on debt owed to themselves, but you can’t skip these payments, no matter who they’re owed to.

    If they had just borrowed all the money from a bank would it make it any different?

    • Boogens

      Agreed, Weber. An issue that keeps running through my mind is that it seems like the Ricketts have presented the situation “we only borrowed money because that was a prerequisite of the Tribune”. That seems disingenuous at this point because if that really were true then why wouldn’t the Ricketts just tap into the captial that was never spent (because they instead borrowed it) to repay the “forced” debt? Then the revenue that is generated by the Cubs could just remain with the team to be reinvested.

  • Featherstone

    Leads me to wonder. Is there a FA in the next 2 years (That you actually think will hit FA) that would be worth breaking the bank for?

    • MichiganGoat

      Not really and that why I hope when that opportunity arises the payroll budget will shift but while we suck might as well pay down the debt.

  • pete

    Brett, I’m glad you wrote this because Kaplan’s article yesterday left me with a question about debt v. cash, which I may just not understand. The first paragraph of his article indicated the Ricketts wanted to use more cash in their purchase than they actually did but Zell had tax reasons for long-term debt to be used. However, once the purchase was made, was there a reason that the Ricketts could not have instantly (more or less) addressed the debt with whatever cash they ostensibly had on tap for a more cash based purchase? Did the use of more debt (as opposed to more cash) increase the purchase price? I have an MBA and I am lost on this.

    • Mak

      A few reasons off the top of my head: 1) complicated loan agreements (with banks, presumably) often include penalties for pre payment. 2) There is a fairly decent chance that the purchase agreement with Zell prohibited an immediate repayment, which could possibly allow the IRS to see through the leveraged purchase and come after Zell for cap gains tax.

      • pete

        Thanks. Is your alternative 2 that common of a clause?

        Also, it made me laugh because that reminded of the scene in The Jerk where Steve Martin’s butler’s wife was executed as a “substantial penalty for early withdrawal.”

        • mak

          Potentially. Zell had really just one goal in mind with this deal, to turn some profit out off an entity that was bleeding cash and virtually dead. So, I imagine the cap gains tax was a big issue. I’ve seen sellers do some pretty creative things to squeeze extra cash from tax savings in acquisitions.

    • MightyBear

      When you buy a c corporation (which I assume is what the Cubs are) you can classify the purchase as an asset sale or a stock sale for tax purposes. I assume the sale had to be classified as an asset sale. The more cash, the more assets you sold, the higher the tax liability. Its more complicated than that but that is the short answer.

    • cubzfan

      I am an MBA professor, so let me try to cloud things further. ; )

      I have seen elsewhere that the nature of the debt agreements were that the Cubs would be paying interest only on some of the debt for a few years until there was no longer a tax issue for the Tribune/Zell. In other words, the Ricketts could not use their cash to pay off the debt ahead of time because that would cause a tax problem for Zell. Do I know how that works? No. But others have shown that Forbes has assumed the Cubs have the same level of debt for a couple years now, so they must have some information that the Cubs are not paying it down yet.

      If this is correct, then the debt payments would not be affecting the major league payroll, as Brett has suggested above. I don’t know if it’s right or not, just pointing it out.

      • MightyBear

        It was probably an installment sale which for tax purposes is usually 5 years and has huge tax savings associated with it.

  • beerhelps

    I’m good unless Tom starts telling the manager who’s pitching what game of a double header like Loria did. Then we would have a serious problem.

  • Matt

    Good tough questions. This is certainly grounds for more intensive investigative journalism.

  • Jp3

    I think I’m going to throw up now. This reminds me of one of Lethal Weapon movies where Joe Pesci is explaining to detective Riggs and Murtaugh how money laundering works with loans and whatnot.

  • EvenBetterNewsV2.0

    I think we would have found this with any owner. The tricky way the deal was going to be put out there, didn’t allow for the incoming owner to do essentially what they wanted with the organization. Mainly due to all of the outside forces that control what the Cubs can and can’t do. On top of that, MLB had to find a group willing and able to take on a lot of the debt from previous owner on a team with horrible backloaded contracts, and a stadium in need of serious work. The owners wouldn’t be able to set up the schedule with games or concerts to maximize profits. They can’t do advertising in a way that would maximize the potential of Wrigley. This is their way to recoup their money they spent. I think it has been pretty obvious they had to pay themselves back. That is a chunk of change.

    Who is to say they recoup all of their money? I am sure when he interviewed Theo, he had to have this conversation. Hey, I have spent the last couple, and up to x amount of years paying myself this amount back. If you need it to benefit us, let me know. That would make the most sense to me.

  • Jon

    I don’t think its uncommon for buyers to use debt to finance these purchases. Forbes indicated that the cubs are at about 58% loan to value ($580M of debt) which doesn’t sound unreasonable.

    I had read previously that the Cubs income was about 32M. I’m assuming that figure is income before debt service since the debt service on $580M is pretty close to that amount and explains the situation in which we now find ourselves.

    The thing is, the debt service would have been the same as when Ricketts bought the team and we were spending much more on payroll. So revenue must be down since then if we are now in a position where we can only afford the payroll we currently have.

    I’d be curious to see the revenue figures for each year since he bought the team. Probably tells the story.

  • Cubbie Blues

    Brett, I’m fine with the debt service payments coming out of revenue, unless they are doing so to the Trust. This has long been (maybe the only) an issue in which I have disagreed with you. Unlike some accountants, I don’t think there is such a thing as “good” debt. The sooner the ownership can erase the debt the better for the team (to me at least).

    • Mak

      You don’t consider a loan at a below-market interest rate as good debt?

      • Cubbie Blues

        Nope. To me the borrower is slave to the lender. To not have to make those payments is money that is available for the team. The money garnered by “below-market” interest is only realized upon selling. I would prefer the Ricketts not to sell anytime soon.

        • mak

          What if I’m borrowing on 3% interest, and I have an investment that guarentees a 5% return on interest. Return isn’t only realized on sale, its realized on FVM,

          • bbmoney

            I agree with Mak. Other than there is really no such thing as a guaranteed return. It’s all a matter of risk vs reward, which is true of virtually everything in this world.

            • mak

              right — but there is definitely “good debt” in my mind.

              • bbmoney

                No argument from me there.

            • hansman1982

              Considering Ricketts’ background, I would argue that he should, easily, be able to make more than the rumored 3% he is paying.

              I used to be all on board him doing whatever; however, at first glance, it appears that he isn’t taking this difference and putting it into the Cubs. It could be the case that he is thinking even longer term than the next 5 years and sees that in years 6-30 he can do XYZ% more by taking the route we are now than if he took the money and put it into payroll.

              • Kyle

                I could be wrong, but I think that in order for the Tribune to keep the tax benefits, the buyer had to agree to not pay down the principle on the debt for a certain number of years? I think I remember that being a thing.

                • hansman1982

                  Probably, at best there is a pre-payment penalty. At worst, any extra funds paid to the debt is required to sit in a non-interest bearing escrow account to be paid out later.

                  If this is the case AND the Ricketts are “paying the loans down” that’d probably involve investing the money with certain “cash out” dates eyed in terms of risk.

              • bbmoney

                Well right If we’re talking about this case specifically I don’t really care what he can make by investing any extra cash he kept by financing more of the purchase. As a fan I want it ‘invested’ back in the team. I guess I was talking more in generalities.

                And yeah you’d think he could make more than 3% or whatever, but you never know and it can easily change from year to year, which isn’t ideal if we’re talking about fixed loan payments and a ‘somewhat’ fixed payroll cost. One bad investment year and he could in theory end up short of meeting his payroll obligations, etc. All part of the risk vs reward equation…liquidity.

                • hansman1982

                  Ya, I just hope that since we are coming into what should be “better” times (in terms of revenue vs. spending) that extra money should pay down debt (however the have to do that) so that in lean times they will, hopefully, either be debt free (and therefore could afford to take on debt) or in a position where extra money can be thrown at a player to fill a hole on a WS-likely team.

    • hansman1982

      “Unlike some accountants, I don’t think there is such a thing as “good” debt.”

      I, generally, agree with you to a point. I believe there are times to take on debt (buying a franchinse, fixing up the stadium they play in while increasing revenues) and then there are times to pay down debt (now that we have all the basic things we need).

      Now that we will have a “new” stadium, the frachise bought and increased revenues, now is that time, regardless of how the value will outpace the interest, etc… blah blah blah. The Cubs are about to enter a time where their revenues should be far outpacing the amount they can spend on free agents, paying down the debt with that extra money should be a priority.

  • MichiganGoat

    I’m trying to stay optimistic but if this is the reality it is concerning, and sadly this is what Rickett Hater Association of Fanatical Fans have been drooling for- this is the fuel their belly fire so desperately needs and that will really frustrate the hell out of this goat.

    I still trust that whatever is happening Ricketts first goal is to build a World Champion and hope that any limited payroll we have now will open up when the time or player is right. I could just be as simple as:
    “well we have all this extra cash that we shouldn’t use on overpriced players and we have this debt that needs to be paid down at some time, SO lets just put this extra money into that debt while we suck and both build the farm system and pay down debt so when we are ready we can spend again”
    Well that’s what I want to believe but I now do have concerns.

    Trust is a tricky business and as a fan that is all I can do right now… ***cue RHAFF (Rickett Hater Association of Fanatical Fans) telling me to boycott the team and shake my fist in disgust***

    • Cubbie Blues

      “***cue RHAFF (Rickett Hater Association of Fanatical Fans) telling me to boycott the team and shake my fist in disgust***”

      Nah, I think I’ll give them some money when the Reds come to town and catch a good game, buy some overpriced beer and if the mood hits even some merchandise (it will definitely hit I’m bringing three kids with me).

      • MichiganGoat

        I’d gladly join you there buddy

    • northsiders6

      Is it you who gets angered or upset when you are called a Theo Fanboy? I believe it has been pointed out that this sort of thing doesn’t add to the discussion in any way.

  • Mak

    Just from my own professional experience, although Ricketts Family Trust to Cubs is not exactly an intra-company agreement, it probably carries very favorable terms for the Cubs. I would expect the interest to be no higher than 1%. So I don’t know if they are really draining funds from the Cubs.

  • JulioZuleta

    I have absolutley no understanding of this kind of stuff. Let’s say the Cubs had the approx. $800M in cash to buy the team, but were forced to take $300M in loans…they still have that $300M cash sitting around somewhere, right? Does the debt come with some sort of percentage limit on how much they can spend? Is it just the interest on the debt that is eating up that much money?

    I guess I just don’t get why being forced to take on debt would really effect how much you can spend. Like I said, I know very little about this.

    Please, no one feel the need to answer in any really in-depth way. I’m sure this question could warrant a textbook-long answer.

    • JulioZuleta

      I guess the other part of my question would be, how long does something like this constrain you? (Probably no way of knowing without having more details).

      • mak

        Correct, until you see the agreement… the restrictions on spending or prepayment could expire next year for all we know (or not exist at all)

      • MichiganGoat

        Julio, that’s really at the heart of my question/concerns: How fluid is this constraint? Is it flexible based on team need? If its a fixed expense that will last for many years then I’m really nervous.

        • mak

          I would suspect that the Ricketts would not constrain themselves long term. That would be a terrible business decision. I suspect that the constraints are much lighter than some writers (Wittenmeyer) have led us to believe.

          Zell had leverage in this acquisition, but every buyer fights to preserve the right to run the business as they see fit. So I can’t imagine the cubs are restricted on payroll (vs revenue, or whatever formula) for very long.

    • mak

      The best guess, simplest way to answer is this: The loan agreements (with the banks) probably have covenants which restrict the amount the cubs can spend vs. how much they are taking in.

      • pete

        Clearly this sale would have had long-term effects on whomever the buyer would be. The only means to have more cash to spend (other than merely spending out of one’s own pocket) is from increasing total organization revenues. And ownership seems to have completely screwed the pooch on the plan that they brought with them to the purchase.

        To me, the most incredible part of all this is that it is like Zell reaching out of the grave to continue to screw the Cubs (I know he is alive but my wishes on that are changing daily).

    • Spriggs

      It’s a legitimate question. Presumably they would still have that money. Have they spent it on something else? If not, what stops them from reinvesting it in the Cubs.

  • Timmy

    Articles like this lead me to think that you should replace the entire Tribune sports section writing staff. Very well argued, evidence-based, and with the absolute _correct_ conclusion:

    “But I’ve always thought of professional sports teams as a kind of public trust. Yes, you can make money off of the teams, but you also have to realize that you are doing so on the backs of a base of fanatics who desperately want to believe their teams are always moving in the right direction.”

    I’ve been moaning about this for a few months now, because it’s the obvious Occam’s razor outcome. Cubs make “x” amount of money and only “y” goes into the team, leaving “z” left over. Where does it go? I had speculated that perhaps it went into a new yacht, but your piece on debt reduction is much more persuasive and probably accurate.

    I know they’re in this for profit, but ownership is indeed making the Cubs as a team poorer for years to come, on purpose. They want money off the top to pay for the team when they _already_ have the money in pocket and know that they’ll make their investment back in the mid-term. Unsportsmanlike, bad investment, and in bad faith. I’ll let Theo off the hook for now because he can only spend what he’s green-lighted. But it’s also his job to persuade ownership what it takes to finally win.

  • FFP

    “I don’t think it’s fair for the Ricketts Family to, on the one hand, pocket these service payments from the Cubs, and, on the other hand, generate goodwill by saying things like, ‘Every dollar the Cubs make is put back into the organization.’ ”
    Pretty clear stance here, Brett. I think I just earned a credit toward a law degree reading this piece. Thanks. Made the muddy water a bit more fathomable.

    Now I need another law course. This time on “a kind of public trust.” Would things, financial or public informational, be different if this were a football or soccer or anything else team? I mean does the baseball antitrust exemption keep us from seeing the numbers or anything?

    Councilor?

    • FFP

      Wow. in the seven minute it took for my to write my post nearly thirty others responded, too. Think there is a nerve struck here?

      • FFP

        *twenty

      • FFP

        and not “post” but “comment”
        (I need type faster or slower, I just can’t figure out which)

    • mak

      The antirust exemption/rules in sports have nothing to do with it. A private entity (be it a trust, partnership, etc.) does not have to file pubic financial statements. Only public companies, regulated by the SEC do.

      • FFP

        Makes sense. mak, thanks.

      • hansman1982

        Ya, the fact that the Ricketts have money in a trust doesn’t make a hill of beans difference (other than tax ramifications). As long as they don’t have 500 investors in this trust or in the Cubs, they are free to do whatever the hell they want and tell us whatever the hell they want.

      • MightyBear

        Private companies do have to file with the SEC if they have public debt. I assume some of this debt for the Cubs purchase is public. Has anybody done a search on the SEC website? There might be something there. Or the debt may have been from private institutions including the Ricketts trust. Maybe that’s why they lent the money to themselves.

        • bbmoney

          what kind of debt would they have that’s public? Did they issue bonds?

        • mak

          I’m almost certain that there is no public debt here — if nothing else, to avoid public filings. No professional sports teams file.

        • Rebuilding

          This kind of debt (the portion with the banks) is done through a Rule 144a private placement. No public filing is required unfortunately

  • butlerdawgs

    Jeez Brett, why do you keep picking on the Ricketts Family!?!?!!!!1!1

    • http://www.bleachernation.com Brett

      Think I did enough to ward those comments off?

      • MightyBear

        Boy I’d say – two bold comments in one article. That was plenty.

      • MichiganGoat

        Yes you did but haters will always look for reasons to hate some will complain you were too nice and in Ricky’s pocket book (ahh soft sweet warm cassssshhhh… sorry dreamed off for a second) and others will think you are just being a homer, but I think few can argue that you’re now an Official Rickett Hater. Great write up.

      • Timmy

        I have a theory that fantasy baseball has led to a class of sports fans that try to think like ownership instead of sportsmen (and sportswomen). So there will always be a group trying to vicariously live off of the assumed “power” of taking owners side over their _own_ interests as fans. But in general to answer your question — this post is far too responsible to not be persuasive.

      • http://www.justinjabs.com/blog/ justinjabs

        Unfortunately not. While glancing through Reddit today, I came across another “Gosh, this Bleacher Report article is so crappy” commenter on the Rizzo post. It’s a shame people don’t read beyond the headlines.

        Then the guy actually read the article, and I realized it was a lost cause one he said “his batting average isn’t going to go up … that’s what AVERAGES mean.” (paraphrasing)

        I don’t think I’m going to go on reddit anymore.

        • http://www.bleachernation.com Brett

          Ha. I just read that thread … all you can do is laugh. It’s a big, big world and not everyone is … thoughtful. My favorite part was when the guy put my name in quotes “Brett.” Am I theoretical?

          • TWC

            Dude must think that your real name is actually Ace. Like I do.

            • MichiganGoat

              Nah its not “Ace” its DUFFMAN

              • cjdubbya

                I thought his first name was Flexwell?

      • butlerdawgs

        just so everyone is clear, that was a joke.

        • butlerdawgs

          I did in fact read the post and found it to be quite the read. I have very little problems with what he is doing, but I do have a major problem with him saying that every dollar is going back into the organization

        • http://www.justinjabs.com/blog/ justinjabs

          Got it — usually the punctuation at the end helps convey the joking factor, but it is hard to tell sometimes. :)

          • butlerdawgs

            Yea my bad. Figured if I threw in some 1s that would throw it off. Go away for a little while and I lose touch. Things must have gotten pretty bad if that goes for a normal comment.

  • Kyle

    Having to pay $30m a year in debt service or whatever the real number is sucks.

    But right now, the plummetting attendance and resulting lost revenue should be two or three times as big of a problem for the bottom line, and I think this leak is awfully well-timed to try to distract people from that.

    Despite Kaplan’s attempt to use this as a smoking gun that absolves Ricketts of everything, there seem to me to be only a few interpretations, both of which lay some blame at Ricketts’ feat for the death spiral we’ve seen the last four years.

    If the debt structure was a poison pill that absolutely doomed the team for the next five years and no amount of good decision-making could have saved it, then all the prospective buyers who bailed out were the smart ones and Ricketts comes off looking like a patsy. This would go right alongside the Wrigley negotiations as a major business dealing in which he got completely pantsed by the other side.

    If the debt structure was a problem but a surmountable one, and Ricketts failed to surmount it, then some of the blame goes to him, despite Kaplan’s generous tongue-washing.

  • Hee Seop Chode

    I’m pretty shocked by all of the “I’m ok with this” comments.

    Really? You’re ok with a $100MM payroll for the forseeable future? I’m not!

    • baseballet

      I’m with you HSC. It might be defensible (although I don’t think so) if the low payrolls were part of some master plan whereby Ricketts was filling the piggy bank so that he could break it open and splurge next year. But now that we know that Theo has been spending every spare penny and that all he can afford to do is draw from the discard pile, then I’m not happy that the Ricketts family bought the team.
      On the blindingly bright side, I look forward to learning about all sorts of goods and services on the new 6000 sq ft Mumbo-jumbo-tron (once it takes the place of the non-informative skyline).

  • fester30

    Even if they could pay the debt with cash, interest rates are lower than inflation in many cases now, so it would make more sense not to if that was the case.

  • Jay

    I don’t know what 100mil payroll he’s talking about. Aside from Soriano, Marmol, Castro, and Jackson, no one on that team is making any real money (as far as major league salaries go). And there’s a bunch of kids and scrubs playing for close to the minimum.

  • nBouray

    Do you really trust Bud Selig’s signing off on this deal as proof that the Ricketts didn’t overextend themselves? Depending on your perspective, the L.A. Dodgers may be considered a premier franchise, and their ownership situation blew up last year.

  • Dustin S

    Excellent article, and unfortunately probably that is what is going on. The questions it leads to are whether the artificial budget constraints (I’ll call it that if it’s due to a service payment shell game) will continue beyond these first few years, and if the same approach will continue with the TV deals.

    If I were Ricketts I’d use the TiqIQ ticket price tracker to the right as a mini Cubs stock market indicator. Heck, I have an extra bleacher ticket for Monday’s game that won’t sell for enough to buy me a beer.

  • hansman1982

    I wonder how much Ricketts is to blame and how much Theo is to blame.

    According to Forbes, overall player spending increased or remained, relatively, flat for the first 2 seasons of the Ricketts tenure. Payroll, decreased, yes, but teams routinely have swings like that.

    I still think, believe, whatever, that there is a dollar range ($130-135M) that the payroll can sit at where the Ricketts would approve and they should still be able to make a few bucks. Looking at that dollar amount and the upcoming renovations/TV deal, Theo may have been more willing to trade “actual, pre-approved payroll dollars” from last year and this year with an understanding that it may free up additional dollars (above and beyond the amount given up) in the future.

    It’s not the Occam’s Razor explanation, but given the evidence, I think it is highly probable.

    • Kyle

      Except it involves Epstein directly lying when he said he spent all the money he had available to him and did *not* leave any spending on the table for the future.

      • hansman1982

        Not really, if Ricketts understands that Theo was planning on having a smaller payroll to begin with, the budget comes down with a $110M cap.

        Theo’s comments strike me as more of a “Reports show we have left $XY million on the table last year and the year before. We don’t have $XY million sitting in a bank account to openly spend this offseason and next because I was directly given $110M to spend on payroll, therefore I spent it.”

        Again, it isn’t the simplest explanation, but we are also dealing with guys who have experience handling incredibly complex multi-hundreds-of-millions/billions of dollar organizations.

        • Still Love the Cubs

          This is what I think in a nutshell. Nicely put Hans

        • Kyle

          Epstein has already said his payroll doesn’t get set that way. He gets an overall baseball ops budget and divides it accordingly.

  • caryatid62

    So Sveum is absolved because his roster is terrible, which would fall at the feet of the front office, who can’t be blamed because the money isn’t there, which would fall at the feet of the owner, who can’t be blamed because of the complicated manner in which the team was sold, which would fall at the feet of Sam Zell, who can’t be blamed because he was just trying to avoid paying taxes.

    I’m getting dizzy trying to figure out all the people who aren’t responsible for this terrible team who won’t be getting much better for the next two to three years.

    It’s fun to be a modern sports fan.

    • Timmy

      hah, nice.

    • Rebuilding

      Well said

    • OlderStyle

      post of the day.

  • Brad

    How about cut everyone but Castro, Shark and Rizzo. Bring up AAAA PLAYERS. Apply all profits to debt 2013-14. 2015, Almora, Soler, Baez, Viz, Vogel, Castro Rizzo, Rick Ankiel. What a great young core to build around and then we can buy quality free agents like 30-33 year olds who have logged 2000 innings.

    • TWC

      Rick Ankiel? Seriously? What the hell are you talking about?

      • Brad

        Haha, what a good laugh. It was funny, right? I mean Ankiel. Waiver wire hello. Astro MVP

  • MichiganGoat

    So can this all be Sam Zell’s fault? Could he really destroy a team for years after he maximized its value by overspending while at the same time under spending on the overall operations. Hey he’s not rich because he’s a nice guy – MERICA.

  • cubfanincardinalland

    Nice detailed article, but it is not all that complicated. One need merely read Theo Epstein comments, which for someone as calculating with his words as he is, are pretty radical. This is not a happy camper, and I hear that if things don’t change, he will move down the road. If you have told him two years ago he would have a cap of 100 mil on his 2013 payroll, zero chance he would have come to the Cubs. Hoyer as well.
    This is a massive problem for the team. For a team with revenues at a quarter of a billion dollars a year with 3 million in attendance, to have an on the field payroll of 100 mil. is obscene. Ricketts can sell the thing for all I care at this point, I wish he would if he can’t afford to put a reasonable payroll on the field. Simply absurd.

    • TWC

      “Nice detailed article, but it is not all that complicated.”

      Sure it’s not, kid. Sure it’s not.

      “… and I hear that if things don’t change, [Theo] will move down the road.”

      Your sources are undoubtedly as good as BetterNews’ and Die hard’s.

      • MichiganGoat

        Geez TWC be nice the sources obviously came from TFM’s 22 page DVD opus… you can’t argue with that- its based on video game. Geez buddy its so simple.

      • cubfanincardinalland

        Nice snarky reply, but pretty much everything I have been told by my source has been spot on for the past two years. Including the whole year long fiasco with the stadium rebuild, which is farther away from reality than ever, despite all the mayors and Ricketts happy happy press releases. He continues to tell me things are not going to end well.
        As far as Epstein, he is pissed. Was under the assumption he was going to have a big market payroll to work with, 150 mil. plus. Really wanted Anibel Sanchez, and couldn’t bid any higher, got stuck with Jackson instead. Wanted to go for Sean Burnett, not enough dough.
        Did anyone on here really expect a 100 million dollar payroll this year? It is ridiculous.

        • hansman1982

          Please, enlighten us as to what your source is saying to expect going forward…

        • mjhurdle

          I expected around a $100 million payroll this year.
          I also anticipated that the Wrigley renovations might take longer than expected.
          Does this mean i am officially a ‘source’? Or do i need to tell it to someone first so that they can repeat it and cite me, anonymously?
          If so, i am currently accepting applications to become the Front End Information Dispersion Specialist for my sourcing talents.

    • bbmoney

      I think this whole situation is quite complicated.

      • Timmy

        It’s definitely complicated, but it’s also clear that the owners have crossed the line from paying back debt to choking the team, forcing Theo to eat a lot of crap for having a substandard salary line and substandard talent. It’s being kicked down the pan to Coach Sveum, which is unfair. This is a top-down problem that needs to be rectified.

        • bbmoney

          I’m still not convinced any of that is clear. I’ll certainly concede it looks a lot more likely than it did even a couple months ago.

          There are still a whole lot of unknowns, and while Theo’s comments the other day were ugly, it’s tough to have a complete financial picture without having a lot more information. I mean I think Brett wrote a very fair, great piece above. But he’s still got qualifiers all over the place because he doesn’t have all the underlying information. It’s really just his best guess, which is fine, because no one but the Ricketts and their accountants know for sure.

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