theo epstein and tom rickettsWe’ve all had the questions at one time or another.

Why did the Chicago Cubs’ payroll fall off a cliff in 2012? Why is it going to be so far below $100 million this year? What are the Cubs doing with their money if their revenues are near the top of the league every year? Why aren’t the billionaire owners of the Cubs doing more to field a compelling product at the big league level? What are the supposed spending restrictions on the Cubs, and why are they all of a sudden an issue?

In short: Why are the Cubs being so cheap?

I heard the questions. Hell, I had some of them, too. For the most part, I found the available answers unsatisfying, and I grew tired of my own inability to offer a compelling and comprehensive explanation that addresses each of those questions. So I decided to start looking for answers.

For several months, I have immersed myself in the financial realities of the Chicago Cubs. That meant talking to Cubs officials, reviewing documents related to the bankruptcy of the Tribune Company, reviewing documents and published reports related to the sale and ownership structure of the Chicago Cubs, reviewing documents related to the IRS investigation of the sale, reviewing relevant financial statements, learning from finance and accounting experts with knowledge of MLB team operations, talking to legal/banking/transactional experts, and much more.

The finances of a private company will almost never be laid bare for the world to see, so I won’t pretend to have it all. I sought out the best information I could find in order to offer the most robust analysis I could. Further, although he wouldn’t comment on the record for this piece, the reporting here is consistent with conversations I have had with Tom Ricketts, as well as comments he’s made in other published reports.

And, at the end of the digging, it turns out we’ve already heard the answer to the big picture financial questions many times before.

“We have a baseball plan and we have a business plan and they’re timed to sync up with one another,” Chicago Cubs President of Baseball Operations Theo Epstein told the media nearly one year ago, as noted in this ESPN report.

At various times during his tenure as the top baseball man with the organization, Epstein has echoed this sentiment – that the business plan and the baseball plan are aligned in such a way as to harmonize almost perfectly if each side accomplishes their objectives.

There have always been two ways to think about those comments, but, until I started researching for this piece, I focused on only one way: the long-term baseball future implied by “the syncing”. That is to say, the Cubs are rebuilding their young core and scouting/player development, and that process will bear fruit in conjunction with the business plan providing significant infusions of new revenue (tied largely to the renovation of Wrigley Field and securing new broadcast rights deals).

But isn’t there another – now backward-looking – way that the baseball plan and business plan could be syncing up? That they were syncing up from the outset of the Epstein/Hoyer administration, or perhaps even earlier than that?

Let me put it another way: has payroll fallen in recent years solely because of, and wholly incidental to, the baseball plan? Once ownership and the new front office committed to a deep rebuild, payroll was going to fall as an organic byproduct of turning over contracts, focusing on young asset accumulation, and acknowledging that meandering around .500 wasn’t going to set the organization up for sustained success. The old way of doing things – which produced playoff teams in 2003, 2007 and 2008 – wasn’t going to work forever, if it was still working at all. Things had to change dramatically, and a drop in payroll was to be expected. 

So, is that it? Is that the entire financial story? Did the baseball rebuild necessarily require a paring back of payroll? Even if baseball operations were given a blank check to do anything they pleased, would they still have sat largely on the sidelines in their first three offseasons at the helm of the Cubs? Maybe. To optimize their asset-gathering strategy, particularly in a new-CBA era that restricts an organization’s ability to rapidly acquire impact young talent while also being a .500-ish team, maybe the front office would have proceeded precisely as they have, regardless of the money available to them. And, to be quite clear: I do firmly believe the baseball rebuilding plan has driven the bulk of the Cubs’ activities over the past few years.

But as I considered this idea that the “business plan” is syncing with the “baseball plan,” I started to wonder: is there also a business reason that this particular approach to baseball rebuilding is the most appropriate path for the present-day Chicago Cubs?

And after months of research, I believe the answer to that question is yes. Working in tandem with the baseball reasons for the rebuild proceeding the way it has, there are business reasons the Cubs have operated within certain financial parameters over the past few years. Just as the baseball plan revolves around building a foundation for sustained success and focusing available dollars on investments designed to provide long-term benefits, the business plan revolves around building a substantial and sustainable revenue base.

What does that have to do with the diminishing payroll of recent years? Well, it’s complicated. With the Chicago Cubs and success, it always is.

A Brief History of Chicago Cubs Payroll

For a number of years – the years relevant to the present day, anyway – the Chicago Cubs featured a competitive, but not upper echelon, payroll. With the surprise success of 2003, and the attendant increases in revenue, payroll rapidly ascended, and the team actually began the 2004 season with the sixth-highest payroll in baseball at $91.1 million. Payroll lingered at that level until the 2007-08 ramp-up, associated with a number of high-profile free agent signings, and concurrent with the Tribune Company’s multi-year effort to sell the Cubs.

Chicago Cubs payrolls from 2007 through 2013 (with MLB rank)*:

2007: $115,943,318 (5th)
2008: $130,508,691 (5th)
2009: $141,632,703 (3rd)
2010: $142,410,031 (4th)
2011: $140,608,942 (6th)
2012: $107,708,021 (10th)
2013: $100,859,265 (15th)

*(Figures culled from multiple sources indicating the actual final payrolls, based on figures released to all 30 teams by the Commissioner’s Office at the end of the year.)

Heading into 2014, the Cubs’ payroll projects to fall even further, perhaps as low as $85 million, which would place them among the 10 lowest payroll teams in baseball this year. The descent from the 2010 peak is striking, and it appears to have accelerated rapidly after the Cubs brought on board a new front office that began an aggressive rebuilding program.

But the descent coordinates not only with the import of a new front office and a new operations strategy, but also with the sale of the Cubs to the Ricketts Family. While that sale was finalized in advance of the 2010 season, the contractual commitments that came with the Tribune’s pre-sale spending ramp-up in 2007 and 2008 necessarily lingered for a couple years without a great deal of “new” spending. The big signings for the 2010 season? Marlon Byrd, at $5 million per year (9th highest paid player on the team), and John Grabow at $3.75 million per year (10th highest). The story in 2011 was the same, with Carlos Pena’s one-year, $10 million deal (spread over three fiscal years) the “big” new signing (6th highest salary on the team).

In other words, the big contracts driving the elevated payrolls in 2010 and 2011 were of the inherited variety, and the 2010 and 2011 payrolls were as reflective of “Tribune era” spending as “Ricketts era” spending.

Tom Ricketts called those pre-sale payrolls “unsustainable,” which most believed to be an accurate reflection of the Tribune Company’s aggressive increase in the payroll in the years leading up to the sale (a better team yields better attendance/ratings and, thus, better revenue – and, if you know you won’t be around to pay the bills for most of those contracts … ).

Even if the escalating payrolls of the late Tribune era were unsustainable, surely something more than $100 million is sustainable, right? Generally-speaking, MLB and the MLBPA like to see about 50% of revenue spent on payroll, and we’re fairly certain the Cubs are generating more than $200 million in revenue these days.

So, then. What gives? We already know many of the baseball reasons that some dollars have been shifted away from payroll: increased spending on operations, increased spending on the amateur side, etc. That’s all legitimate – and has been a success so far, from my perspective – and it’s a piece of the story. But what about the business side of the equation?

The “Sale” of the Chicago Cubs

Two very important things happened in 1981: I was born, and the Tribune Company purchased the Chicago Cubs for $20.5 million. As I grew as a living thing, the Tribune Company grew as the faceless owner of the Cubs franchise, shepherding it through cycles of competitiveness and putrescence, passion and disinterest, profitability and, well, more profitability. By the time the Tribune Company was confronted with the possibility of selling the franchise, its value clearly exceeded $800 million, even in a turbulent market.

Because of that tremendous appreciation, when the Tribune Company sold the Cubs as part of its bankruptcy in 2008/2009, there was expected to be a healthy tax bite associated with the deal, leaving less money for creditors and, ultimately, the owners of the eventual reformed company. Employing a strategy used in a previous media property sale, the Tribune Company utilized a leveraged partnership, instead of a true sale, to capture the asset value of the Chicago Cubs (and Wrigley Field, and 25% of Comcast SportsNet).

This was to be the structure of the deal regardless of who bought the team. If you wanted the Cubs, you were going to have to play by the Tribune Company’s rules.

In a leveraged partnership, a “seller” partners with a “buyer” to form a new entity, which takes on the assets and distributes cash to the “seller.” In its formation, the partnership takes on a great deal of debt, which is guaranteed by the seller. Doing so allows the “seller” to receive the cash distribution, and defer the taxes associated with the sale of the asset. In the Cubs/Tribune partnership, therefore, the Tribune Company insisted that the “buyer” be prepared to utilize a substantial amount of debt to complete the transaction – perhaps quite a bit more debt than the interested buyers might otherwise have preferred to take on, particularly in light of the credit market troubles at the time.

The actual late-2009 transaction was complicated, and having something of a background in large, corporate deals from a legal perspective, I can say for certain that some of the terms (and the financing) will never fully be known by the public. The essence of the deal, however, was this: each of the Tribune Company and the Ricketts Family would contribute money and assets to a new entity called Chicago Baseball Holdings, LLC, (“CBH”) as well as a handful of subsidiaries (for example, Wrigley Field Holdings, LLC). The Ricketts would contribute the cash, and the Tribune Company would contribute the Chicago Cubs and related assets. At the end of the transaction, the Ricketts Family owned 95% of CBH, the Tribune Company owned 5%, and the Tribune Company had received a cash distribution of $705 million.

This new partnership would own the Chicago Cubs for 10 years. After those 10 years – in late 2019 – the partnership could distribute the Chicago Cubs  and related assets, outright, to the Ricketts Family.

The Debt and the Required Service Payments

To provide the “money” part of the creation of the CBH entity, the Ricketts Family contributed $150 million in cash, CBH borrowed approximately $250 million from the Ricketts Family Trust, and CBH borrowed $425 million from various banks. The debt held by the Ricketts Family Trust, as you’d expect, is believed to be on terms favorable to the Cubs.

As for the Cubs’ bank debt, it has been modified in a handful of ways since the original transaction: $250 million in short-term bank debt was refinanced shortly after the sale, and the remaining $175 million was refinanced in late 2013. The $250 million, which was raised in private placements to institutional investors – think insurance companies, pension funds, etc. – matures at various points through January 2022In other words, since the original sale and borrowing, it is my understanding that the level of the Cubs’ debt has not decreased substantially, but the terms on the Cubs’ debt have likely improved slightly.

Why does any of this matter? Well, there are at least two reasons.

First, even the best debt comes with an interest expense. For the Cubs, that amounts to some $30 to $35 million per year in interest expense, or “debt service payments,” according to a Cubs source. That’s money that is not otherwise available for expenses like payroll. Because of the nature of the partnership with the Tribune Company, and because the partnership will own the Cubs entity through 2019, there isn’t really anything the Cubs or the Ricketts Family can do about the existence of debt service payments until then.

Second, the Chicago Cubs do not operate in a vacuum, and their indebtedness is watched carefully by the Commissioner’s Office, among whose duties it is to be sure that baseball teams are sufficiently solvent to continue operating without issue. It’s important to note that MLB was fully apprised of the nature of the Tribune Company/Ricketts Family/CBH transaction, and it would not have allowed the Cubs to be buried under a paralyzing level of debt.

But there are rules.

MLB’s Debt Service Rule and the Questionable Value of EBITDA

Because Major League Baseball teams do not operate in a vacuum, and because the viability and profitability of the league depends on the viability of each individual club (ably competing against every other club), the league has an interest in ensuring that teams don’t take on more debt than they can handle without remaining competitive. That’s why, as part of the Collective Bargaining Agreement, there is a rule that states:

No Club may maintain more Total Club Debt than can reasonably be supported by its EBITDA. A Club’s Total Club Debt cannot reasonably be supported by its EBITDA if Total Club Debt exceeds the product of that Club’s EBITDA during the most recent year multiplied by the EBITDA Multiplier applicable to that Club.

In other words, a team’s EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization – in a given year must be higher than its debt divided by a “multiplier” that is specified in the CBA. The rule makes sense because, very generally-speaking, EBITDA is a reflection of the kind of money a business is generating in a given year after regular expenses. If a business isn’t generating enough money each year to support its debt, financial peril could be right around the corner.

In essence, the Debt Service Rule forces MLB teams with debt to show “earnings” each year, whether they want “earnings” or not. Teams that violate the rule can face a wide range of “remedial measures,” imposed at the discretion of the Commissioner, particularly if they are not compliant for multiple consecutive years. Those remedial measures could include limitations on baseball operations, requiring MLB pre-approval for a number of operational decisions, imposing financial sanctions, suspending executives or owners, and even draft-related sanctions.

Prior to the 2012 CBA, the “multiplier” referenced in the rule was 10. That is to say, if a team was carrying $500 million in debt, it needed show only $50 million in annual EBITDA to satisfy the Debt Service Rule.

In the 2012 CBA, the multiplier dropped to 8.

Now, that same team with $500 million in debt is forced to show $62.5 million in earnings to satisfy the Debt Service Rule. More than $12 million could have just been removed from, for example, the baseball operations department’s budget. Turns out that 2012 CBA just keeps on twisting the knife, eh?

The Chicago Cubs currently carry $425 million in debt for purposes of the Debt Service Rule. Under the current CBA, $40 million of that debt is “excludable,” so we take it away before performing our EBITDA calculation. At $385 million and a multiplier of 8, the Cubs would have to show just about $48 million in EBITDA to comply with the Debt Service Rule. Under the previous CBA, with $40 million in debt excludable* and a multiplier of 10, the EBITDA requirement would have been just $38.5 million. In other words, from 2011 to 2012, the Cubs suddenly had to “find” an additional $10 million in earnings. Revenue growth can help, if it’s happening, but that could also mean a cut in expenses (payroll is but one example). Perhaps this is an additional factor to consider when observing the sharp decline in payroll between 2011 and 2012.

*(The prior CBA, passed in 2007, called for $36.5 million in excludable debt, increasing each year by the percentage growth in baseball’s revenue. By 2010/11, considering the growth in the industry, I suspect the excludable debt figure approached $40 million at least.)

Now, I don’t want to overstate the impact of the 2012 CBA and the Debt Service Rule. Because debt service payments come after EBITDA (that’s the “interest” part of “earnings before interest, taxes, depreciation, and amortization”), the Cubs were going to have significant “earnings” anyway in order to be able to make those service payments. But, if my calculations under the rule are correct, and if the Cubs’ debt service payments are in the $30 to $35 million range, there is still $10 to $15 million of “extra” EBITDA the Cubs have to show each year. 

If the Cubs are annually required to show such substantial “earnings,” how can we square the numbers here with the Ricketts’ repeated and very public pledge that the Cubs represent a closed system, where every dollar that comes in the door goes right back into the organization? Are they actually using this Debt Service Rule as a shield to grab some “earnings” and say, “sorry, everyone, MLB is making us take a profit”?

Nah. Here’s the thing about EBITDA: it’s a little flabby. That means there’s a great deal of discretion on what is included in it and what isn’t, and a company could show substantial EBITDA that doesn’t actually give a complete picture of what’s being spent in a given year.

How would this play out in the operation of a professional baseball team? I spoke with a finance and accounting expert who has worked with MLB teams (not the Cubs) on these very issues. He explained that it is common for MLB teams to show significant EBITDA, but not necessarily show significant (or any) profit. Further, EBITDA is designed to demonstrate the ongoing annual health of an operation, based on revenues and expenses – the kinds of things that repeat year after year. As the definition indicates, taxes and interest paid on debt are excluded, as are one-off expenses like infrastructure investments or equipment purchases. Baseball teams frequently spend post-EBITDA earnings, for lack of a better description, on these kinds of one-time investments.

In other words, simply because the Chicago Cubs show significant EBITDA in a given year, that doesn’t mean there is a significant profit being turned by the organization or pocketed by the owners.*

*(That large “operating income” figure Forbes has published regarding the Cubs – you know, the one to which some frequently point as evidence of the Cubs’ enormous profitability? Not so: Forbes defines “operating income” as EBITDA, not profit.)

Where could the earnings be going instead? Well, as I said, debt service is the big one. The Cubs also pay about $1.5 million annually in property taxes. Because the Cubs (and related entities) are structured as an LLC, the income tax obligations pass through, and are not associated with the Cubs entity. Throw in other one-time expenditures like the new facility in the Dominican Republic, the new office facilities near Wrigley Field, the custom software/analytics package from Bloomberg, the upgrades to minor league facilities, etc., and it’s not too difficult to imagine the Cubs using up all of those “earnings” in the last few years, and satisfying the Ricketts’ pledge to put every dollar that comes in the door back into the organization. And that’s to say nothing of the potential for building up funds to help finance the Wrigley renovation, or to keep some free agent powder dry for the next offseason.

For that reason, MLB’s Debt Service Rule functions only as a restriction on the dollars the Cubs might otherwise be able to allocate specifically to ongoing baseball operations (like payroll), rather than as a spending restriction on all things baseball. But, because of the current rebuild, it’s likely that a great deal of resources would have been shifted to other, one-time expenses anyway. Consistent with that thinking, Cubs sources downplay the impact of the Debt Service Rule on the Cubs’ financial situation.

Still, it’s a rule that must be followed, and, as long as the Cubs entity carries significant debt, it will remain a consideration as the Cubs determine the percentage of revenue that can be allocated to ongoing baseball operations.

Reducing the Debt, the IRS Audit, and Spending Out of Pocket

So, we’ve established that the Chicago Cubs’ debt is something of a restrictive element when it comes to spending. Can’t the Ricketts Family just get rid of the debt? Just pay it all off and be done with it?

No, not really. Remember the structure of the Tribune Company/Ricketts Family transaction involving the Cubs? The leveraged partnership? Here’s the thing about a leveraged partnership that is designed to defer taxable consequences: it can’t look like a sale that’s been dressed up as something else.

Indeed, there are “disguised sale” rules that govern these kinds of partnership transactions, and if it quacks too much like a sale, the IRS will pounce. I can only imagine that if the “buyer” in a leveraged partnership immediately paid off the debt – you know, the debt that made the whole partnership transaction not look like a sale – the deal would look fishy real quick. Further, the entire point of the leveraged partnership transaction was to defer the taxable consequences of the sale of the Chicago Cubs. Once the debt is paid off, by rule the deferral ends, and the taxes must be paid.

The partnership, which will own the Cubs through 2019, will also be carrying debt for that period. That, simply put, is that.

An interesting sub-wrinkle: Even when ostensibly following the letter of the law, a leveraged partnership can come under IRS scrutiny if it looks too much like a sale. And that’s exactly what happened last year with a Tribune Company transaction involving the formation of a leveraged partnership very similar to the Chicago Cubs transaction: the “sale” of Newsday to Cablevision, regarding which the IRS has already concluded there was a sale that should have resulted in the Tribune Company paying tax on gains back in 2008.

The IRS is also auditing the Tribune Company’s taxes for 2009, the year in which the Chicago Cubs’ “sale” took place, and that transaction is also being scrutinized. Presumably, the IRS will seek to treat the “sale” of the Chicago Cubs as a sale (no quotation marks) for tax purposes, as it did with Newsday, and the Tribune Company may wind up with a heavy tax bill when all is said and done.

Here’s where I’d love to say that, if the Tribune Company is forced to recognize the Chicago Cubs transaction as a sale and pay taxes accordingly – whether by edict or by negotiated settlement agreement – the constrictive partnership structure goes away, and the Ricketts Family is free to do as it pleases with the Cubs, including obliterating the team’s debt. Unfortunately, I can’t say that, because I’m simply not so sure that’s how things would proceed, given the complexities of the partnership and the debt. That said: it’s worth keeping tabs on the IRS investigation. If and when it finally comes to a resolution, some of these issues will likely be re-examined.

Circling back to the Cubs’ debt load. So if the existence of the massive debt is at least partly artificial, and if it isn’t within the Ricketts Family’s power to make it go away on their own, here comes the obvious question: why can’t the Ricketts Family just spend out of pocket to increase payroll until the debt is paid down?

Well, technically they could. It’s worth pointing out, however, that the ownership structure of the team (and, well, prudence) doesn’t make things quite as simple as “billionaires own the team, spend some money, damn it.”

Recall, the Chicago Cubs are owned by a partnership (Chicago Baseball Holdings, LLC) between Ricketts Acquisition, LLC (95%) and the Tribune Company (5%). Ricketts Acquisition, in turn, is 100% owned by the Joe and Marlene Ricketts Grandchildren’s Education Trust (the “Ricketts Family Trust”). The Ricketts Family Trust, which obviously does not exist solely to fund the Chicago Cubs, much as the fans may wish it so, is operated by RPTC, Inc. as Trustee. And RPTC’s President is Joe Ricketts, with attorney David Larson, and Tom, Pete, Todd and Laura Ricketts serving on the board. So, although there are interrelations between the persons running the Cubs and the entities on up the chain, those entities are distinct, serving different purposes. The Cubs are, in some ways, a self-contained – and, thus, self-reliant – entity.

Furthermore, to the extent the Ricketts Family – in whatever its corporate incarnation – desired to spend out of pocket on the Chicago Cubs, I’d expect them to do so in ways that would further the long-term baseball and business goals of the organization. For example, financing the renovation and development of Wrigley Field, as the Ricketts Family has pledged to do, is an investment that returns money to the organization every year, rather than a one-time free agent expense that guarantees nothing. From a purely selfish standpoint as a Cubs fan – one with a very long view – even I would rather the Ricketts opt for the former over the latter.

Of course, even if the Ricketts Family were in a position to spend lavishly out of pocket on payroll right now, it may not be the wisest strategy anyway …

The Rapidly Changing Value of Spending Big in Free Agency

You’ll forgive if the dive here isn’t particularly deep, as this is a subject that has been very well-travelled in recent months, and I don’t want to go too far beyond the scope of this article. But, suffice it to say: free agency has changed dramatically since the new CBA was enacted over the 2011/2012 offseason. With dramatic restrictions imposed on teams’ abilities to acquire amateur talent, and with league-wide revenues skyrocketing, two things have happened: (1) free agent prices have increased dramatically, and (2) the overall quality of the free agent talent pool has declined. As to the second item, the reason has never been more clear than this past offseason: thanks to big money and big revenue-sharing, every team, large or small market, can now afford to lock up its own stars into their 30s. Fewer and fewer big names are reaching free agency before they enter their decline phase, and, thus, fewer and fewer free agents have made sense for the Cubs in their current rebuild.

As we’ve discussed before, spending big in free agency to add incremental wins 72, 73, and 74 doesn’t make sense from a business or baseball perspective. That being the case, and the free agent market being what it is, the Cubs have been strongly disincentivized to spend big money in free agency while they rebuild. Payroll, then, has fallen even further than it might have otherwise if free agency were still a viable path to building a winner. The Cubs have never been – and will never be – an organization like the Yankees that can not only buy competitiveness on the open market, but can also afford to paper over the many, many mistakes that are inevitable under such an approach. And, frankly, I still wonder if the Yankee approach isn’t going to come home to roost over the next few years. Things are very different today than they were even ten years ago, and the baseball approach the Cubs have taken syncs even more clearly with the business approach in light of these market realities.

That is to say: spending big money now to try and prop up a 70-win team will get you nowhere fast. But if you want to win and continue winning once you’ve got a young core in place? Well, you better have a hell of a revenue base built up. Because keeping and augmenting that talent base grows more expensive every year. A baseball organization’s business plan is as important now as it ever has been.

And none of this is to say that spending in free agency during a rebuild is never a good idea, and/or that the financial restrictions made spending by the Cubs in the last few years impossible.

Indeed, we know that the $100 million-ish payroll level for the last three years is not entirely the product of business/MLB-related restrictions. For example, we know that the front office was given the ability to pursue guys like Yu Darvish, Yoenis Cespedes, Anibal Sanchez, Hyun-Jin Ryu, and Masahiro Tanaka, even though landing them would have increased payroll. Sure, the Cubs maybe didn’t have quite enough financial flexibility necessary to land those guys, but seriously pursuing them means that there was money there to be spent if baseball operations deemed it a good investment. The fact that the Cubs didn’t immediately replace all of that would-have-been payroll with other free agents suggests, at some level, the payroll is being dictated by baseball operations decisions.

The baseball operations men simply decided that putting that money toward other free agents – older, less impactful, more flawed, perhaps – was not a wise long-term strategy. Even without any financial restrictions, spending just to spend doesn’t make much sense. The financial restrictions simply make that fact all the more salient.

The Decline in Attendance and the Associated Revenue Bite

Although not directly tied to the sale of the team or the debt picture, an underdiscussed financial hurdle facing the Chicago Cubs in the last few years is the loss of revenue associated with rapidly falling attendance.

Per Baseball-Reference, attendance at Wrigley Field peaked in 2008, when the Cubs hosted 3,300,200 fans. Attendance dropped in each of the five consecutive years thereafter, falling to just 2,642,682 in 2013.

Consider that the average Cubs ticket price is just shy of $45, and the average ticket-going attendee spends about $15 on concessions. At $60 per lost head, the Cubs have dropped upwards of $39 million in annual revenue since 2008. The Cubs, you’ll note, also lose a great deal in concessions from the increasing number of no-shows in recent years. Those attendance figures are paid attendance, not actual attendance. The guy who doesn’t come to the park doesn’t buy a beer.

It’s important to point out that some of the attendance decline – maybe even most – is directly tied to the rebuilding plan, itself, creating a kind of vicious cycle of spending cuts, a lack of competitiveness, a drop in attendance, more spending cuts, etc. In other words, unlike a constrictive sale structure or an MLB rule or even the changing landscape of free agency, losing revenue due to falling attendance is largely an internally-driven problem. There is no boogeyman to blame on this one.

Still, noting this significant revenue bite provides important additional context for the falling payroll of the past few years. Further, whenever the Cubs decided to engage in the kind of deep, veteran-dealing, prospect-accumulating rebuild in which they’ve engaged, attendance was going to take a hit. Research indicates, as does the current experience of the Minnesota Twins (who have spent the sixth most money in free agency this year, but who are still facing dramatically falling ticket sales), that spending on big-money free agents to increase ticket sales doesn’t actually work. The only sure-fire way to drive attendance is to field a competitive team deep into the season. Once the Cubs decided to rebuild – a process long overdue – the attendance hit was coming. To my mind, the Ricketts Family’s willingness to take that hit and stick with the baseball and business plans should be a credit to their ownership, not a sword used against them.

Without a huge television contract or considerable in-stadium advertising, the Chicago Cubs are far more sensitive to attendance as a revenue stream than is your typical large-market team. This lost revenue is a significant part of the story when addressing payroll declines in recent years.

*(Similarly, one could discuss the failed attempt to secure public financing for the Wrigley Field renovation as a kind of revenue bite in the last few years. Because of the speculation required, I’m disinclined to discuss that angle in any hard-and-fast terms. Without getting into the politics of publicly-funded stadiums, suffice it to say: whatever money the Cubs would have received has to be replaced somehow.)

Hypothetical Financial Breakdown for a Given Season

Against this entire backdrop, I find it useful to provide context in the form of an example year in spending. If we examine the revenue and the expenses we’d expect to see for the Cubs in 2013, is it really true that everything’s being spent? That the financial restrictions are having an impact? That the baseball rebuilding approach is evident in the expense allocation?

To be clear: this is hypothetical in the sense that I have not reviewed the Cubs’ financial statements – nor has just about anyone outside of the organization. As a private company, the Cubs’ relevant financial documents simply aren’t going to be put out there for public consumption.

However, there are a number of elements of the Cubs’ 2013 financial year that are publicly known, and there are a number of elements about which we can make reasonable estimates based on external sources.* The purpose here is not to try and “guess” the Cubs’ actual financial figures, and you are advised not to use these numbers in that way. Instead, the purpose is to contextualize the above discussion against a set of revenues and expenses that are plausible, based on the information available to us.

*(For the purposes of this exercise, we are assuming that the Chicago Cubs, as an entity, are an entirely closed circuit. We are looking only at what the Chicago Cubs entity generated in revenue and what the Chicago Cubs entity laid out in expenses. Although I suspect that there is an interrelationship between the Cubs and other entities that could provide an even more complete picture here, the financial particulars of those relationships and entities is even more opaque to us than the Cubs’ finances. And the Cubs’ finances are pretty darn opaque as it is. There’s no sense in going too far afield here, and further diluting the value of this exercise.)

A meaningful discussion of the Cubs’ financial picture in 2013 can start in only one place: revenue.

While we don’t know the Cubs’ 2013 revenue for certain, we do have a few data points: (1) Business President Crane Kenney said at the Cubs Convention that the organization had the 5th highest revenue in baseball last year; (2) Forbes estimated 2012 Cubs revenues at $274 million (4th highest in baseball); and (3) Bloomberg estimated 2013 Cubs revenues at $320 million (4th highest in baseball).

Taken together, and for the purposes of this hypothetical exercise, it is reasonable to begin with a 2013 Chicago Cubs revenue of $300 million.

And, of course, the other side of the 2013 financial coin: expenses.

The operations of Major League Baseball teams are, in some respects, not all that dissimilar from that of large, corporate enterprises. Which is to say: they’ve got a lot of expenses you might not think about unless you saw them laid bare in front of you. Unfortunately for our purposes, the Cubs aren’t about to give me access to their financial statements, and MLB wouldn’t allow it even if the Cubs wanted to.

That said, a number of the Cubs’ expenses are relatively public – payroll, amateur spending, Wrigley Field upkeep, among them – and we can do a reasonable job surmising some of the other expenses based on a handful of MLB financial statements that were leaked in 2010 to Deadspin*: 2007 and 2008 Mariners financial statements, 2007 and 2008 Pirates, 2007 and 2008 Rays, 2008 and 2009 Marlins, 2008 and 2009 Angels, and 2008 and 2009 Rangers.

*(For a frame of reference on just how closely guarded these documents are, check out MLB’s reaction to the leak in 2010. Interested parties were pissed.)

To be sure, these statements are a bit dated, and the financial state of baseball has changed dramatically in the last four years. Further, and most importantly, these statements are for teams other than the Chicago Cubs. However, by examining overlaps among the organizations, and by viewing some of the expenses as a percentage of revenue (i.e., expenses that are likely to scale alongside the size of the business operation), we can do some mathematical gymnastics to approximate a range in which these expenses might fall for a team like the Cubs in 2013. Having 12 total statements from six teams of varying sizes and markets helps filter any outlying or idiosyncratic expenses.

Reviewing the 12 statements, we can see some consensus expense categories emerging, even if the teams label them differently: Payroll, Amateur Spending, Scouting and Player Development, Team Operations/Administration, Ballpark and Ticket Operations, Marketing, and Revenue Sharing.

We needn’t do too much estimating on payroll and amateur spending, as those are entirely particular to the given team, and we can find the 2013 figures for the Cubs. We know that the Cubs have an additional expense dedicated solely to maintaining Wrigley Field, so that’ll be an extra addition. Using those figures, as well estimates based on the 12 available statements, a hypothetical set of expenses for the Cubs in 2013 looks something like this:

Payroll: $101.9 million
Amateur Spending: $23.12 million*
Scouting and Player Development: About $20 million**
Team Operations/Administration: About $22 million***
Ballpark and Ticket Operations: About $18 million****
Marketing: About $30 million*****
Revenue Sharing: $36.65 million******
Wrigley Field Maintenance and Upkeep: About $12.5 million

TOTAL EXPENSES: About $264.17 million

*Approximately $10.72 million in international spending (including penalties), and approximately $11.4 million in draft spending (including penalties). Although Armando Rivero received a $3.1 million signing bonus, it is unlikely that it was entirely payable in 2013. I’ve estimated $1 million.

**This expense among the teams varied dramatically, which may be in part the way teams elect to characterize “scouting” and “player development” for expense purposes. As a percentage of revenue, the figures ranged from as low as 4.6% (2009 Angels, but listed as “scouting” only) to 15.9% (2008 Pirates, but listed as “player development” only). Given the recent emphasis on scouting and player development, including expanded hiring and equipment/software incorporation, I expect that the Cubs’ spending here is at the high end of the range. That said, even a 10% of revenue figure would yield a $30 million expense, which seems far too high given that the highest figure in any of the financial statements for scouting and player development is just over $20 million by the Rays, and that includes the operation of their farm teams (they were the only team to include that expense in this line item). That is all to say, estimating a figure higher than $20 million here simply seemed too high to be realistic.

***Generally, the teams’ operation/administration expense fell into the 16% to 19% of revenue range, with one team’s figure completely out of whack with the others. I’ll leave it to your imagination to figure out why the Marlins, at that time, had operation/administration expenses that were eating up more than 26% of revenue. The problem with using a percentage of revenue here is that you wind up with a figure in the $50 millions for the Cubs, when most of the raw figures fell in the ten-plus million range, and the absolute highest non-Marlins figure was under $22 million. For that reason, $22 million seems a reasonable estimate here, and may even be too high.

****The figures here generally fell between 5% and 7% of revenue, so I split the baby at 6% of revenue.

*****This appears to be a very idiosyncratic expense, with some teams spending as little as 5% of revenue on marketing and sales, and others approaching 15%. My gut says the Cubs of late are probably on the higher end of this spectrum, but I settled in the middle at 10% of revenue, given that the final figure would still be top among the financial statements reviewed.

******Given the seismic changes to the revenue-sharing system in the last few years, and the complexities of performing an accurate revenue-sharing calculation, I have adopted Bloomberg’s reported revenue-sharing figure for 2013, discounted for $300 million in revenue as opposed to $320 million.

Now then.

Although this is simply a hypothetical example, it is rooted in a realistic look at the Cubs’ financial picture in 2013, and I am instantly struck by how the final figures shake out. This calculation leaves about $36 million in “earnings,” based on EBITDA and on $300 million in revenue. As we explored above, to be in compliance with MLB’s Debt Service Rule, the Cubs must show about $48 million in annual EBITDA – all things considered, this is pretty close. Fudge a percentage here, shave an expense there, or maybe correct the revenue northward, and you can pretty easily get to that figure. In that way, it’s easy to see how the present baseball operations spending figure – including the payroll barely north of $100 million – is the necessary result of the restrictions imposed by an artificially-inflated debt load and MLB’s rules.

And what happens with those “earnings”? Well, as discussed generally above, these kinds of “earnings” are not synonymous with “profit”, as some have claimed, pointing to Forbes’ “operating income” figure for the Cubs in 2012. That figure, $32.1 million (pretty darn close to the hypothetical calculation above), is actually defined as “earnings before interest, taxes, depreciation and amortization.” Look familiar? Yeah, that’s EBITDA. In other words, that’s the amount the Cubs’ organization “earned” in 2012 before accounting for interest and tax expenses.

Turning back to our hypothetical 2013 figures, because of the corporate structure of the Cubs entity (it’s an LLC), I don’t see much tax impact here outside of property tax, which is only about $1.5 million. The more significant post-EBITDA expense, if you want to think of it that way, is the interest on the team’s debt, the payment of which is known as debt service. The Cubs’ debt service is about $30 to $35 million annually, so, once again, we’re seeing the numbers roughly lining up.*

*(That the Cubs’ EBITDA so closely mirrors the debt service payment is probably not a coincidence. Consider how and when EBITDA came in vogue: “EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt.” In other words, lenders to entities carrying large debt burdens wanted a calculation that demonstrated that the entity, after accounting for its typical, annual expenses, would have enough money left over to pay debt service. So, annual debt service matching EBITDA makes sense, and I wouldn’t be surprised to learn that the sometimes discussed loan covenants that are reportedly inhibiting Cubs spending mirror MLB’s Debt Service Rule. That is to say, everything “restricting” the Cubs is converging on the same data point: the Cubs need to have enough EBITDA to cover the debt service, which was always going to be an expense the Cubs had to pay anyway. And if the EBITDA largely matches the debt service, the exercise becomes largely academic, because money that goes out the door to service debt wasn’t going to be available to spend on annual expenses like payroll anyway.)

To the extent there are “earnings” beyond that which is needed to cover debt service, that money can be, and has been, used on capital expenditures (i.e., acquiring or improving physical property, like the new Dominican facility or the office facilities next to Wrigley Field) or other one-off expenses of a non-recurring nature (e.g., the acquisition/development of custom analytical technology with Bloomberg). That is to say, simply because the Chicago Cubs show “earnings” by EBITDA does not mean that there is “profit” going to the Cubs’ owners.

In the end, while this exercise in examining what the 2013 financial year may have looked like for the Cubs is hypothetical, it is instructive. Even at revenue levels that place the Cubs in the top five teams in baseball, the combination of debt service payments, MLB’s Debt Service rule, and Wrigley upkeep expenditures, among other things, leave only so much money for payroll for the Cubs right now. While that figure is elastic as expenses change and revenue increases, it’s not too hard, when breaking down the numbers, to see why payroll has trended down toward $100 million in the years after the Tribune Company unloaded the team.

The Future Revenue Picture, and the Syncing of Baseball and Business Plans

When considering the combination of debt service payments, MLB’s Debt Service Rule, and Wrigley Field upkeep expenses, there is anywhere from $45 to $60 million annually that is unavailable to the Cubs for baseball operations. And, to the extent revenues continue to feel the pinch of attendance declines, the pain associated with those unavailable funds is only going to become more acute. That’s a bummer.

But it’s not like these financial issues have gone unanticipated by the Cubs, and that’s why we’ve seen such a dramatic surge in their efforts to capitalize on all reasonable revenue opportunities, from in-park sponsorship deals to Spring Training facilities naming rights to new concessions deals. In the past few years, the Cubs have ramped up their business operations, increased hiring, and worked hard to generate every last dollar of revenue possible. In that way, the business side is operating not unlike the baseball side right now: pinned down by certain externally-created limitations, they are having to find every edge, every efficiency, to generate as much revenue as possible.

With that in mind, the Cubs are inclined to focus whatever discretionary money they have available on things that will return a long-term benefit, rather than a short-term patch. For example, the Ricketts Family plans to spend a huge amount of money on the renovation and development of Wrigley Field. Could those hundreds of millions of dollars have gone to funding a couple big-time player contracts? Sure. But, right now, the Cubs would rather spend money on something that returns revenue annually than spend significantly on aging free agents, where, once that money is spent and the player plays, the investment is gone. This is particularly true when spending big on aging free agents doesn’t align with the timing of the baseball plan anyway, and when the pool of available free agents is diminishing in quality.

Just as the baseball side will not make moves in the short term that do harm to the long-term plan of a sustainably and annually competitive team, the business side is focused on providing a long-term, sustainable flow of revenue. In the short-term, each of those plans can lead to some pain, as we’ve seen with the falling payroll figures and the (partially) attendant performance on the field.

In every sense of the phrase, the baseball plan and the business plan sync up.

If you’re going to be dealing with the short-term pain associated with a deep rebuild on the baseball side, and if you’re going to face a variety of financial restrictions at the same time anyway, you might as well focus both sides of your organization on the long-term. That means investing in the future on both the baseball and business sides. It means facing the reality of the financial restrictions, and aligning the best possible baseball rebuild with the years where payroll was probably going to have to be reduced anyway. It means putting your organization in the best possible position to be a behemoth at the end of the rebuild (and the end of the restrictions), repaying the fans many times over for the price the years of last place finishes imposed.

Presently, the long-term revenue picture for the Cubs is as bright as the long-term baseball picture. In addition to the many nearer-term revenue improvements on which the business side has focused in the early years of the Ricketts Family’s ownership, there are some big ticket items on the way:

  • When Wrigley Field is renovated and the development plan is complete, Cubs sources estimate that the final project will add upwards of $40 million in incremental revenue. Couple that with a natural drop in that onerous $15 million annual Wrigley upkeep expense, and this is a significant improvement. Should the renovation begin after this season, as is currently expected, these revenue benefits will likely phase in over the course of the next five years.
  • The Cubs’ television broadcast rights are currently split between WGN and CSN, with the rights to the WGN games available to the market after 2014, and the rights to the CSN games available after 2019. Some estimates project that the Cubs’ annual take in rights fees could increase by as much as $130 million. Even being conservative, an increase in the $70 to $80 million range appears to be a minimum. A portion of this revenue increase will kick in for the 2015 season, though the most dramatic changes will likely not come until after 2019.
  • When the Cubs return to a modestly competitive state, considering the history of the fan base, attendance is likely to swing upwards again. With a wave of top prospects arriving en masse as soon as 2015, an increase in ticket sales and attendance beginning in 2015 is not unreasonable to project. Even a modest increase – say, 200,000 – could result in a revenue bump of $12 to $13 million. If attendance climbs as the team’s competitiveness improves, that revenue figure will further increase.
  • As discussed extensively above, the Chicago Cubs will carry some considerable level of debt through at least 2019. To the extent the debt service payments and/or other restrictions related to the debt artificially limit the Cubs’ ability to spend revenue on the baseball side, those limitations may gradually ease over the course of the next five years. Understanding that there is $30 to $35 million in debt service currently paid annually, you can consider that figure extra revenue at some point in the near-term future, or perhaps by 2020, if the bulk of the debt is not paid down until 2019.

Taken together, it’s easy to see why the long-term business picture is a bright one, and why the Cubs are confident that their business plan will ably support the baseball plan. Future revenues have the potential to explode like a baseball kissing Javier Baez’s bat.

There are, of course, two caveats:

(1.) The bulk of the revenue increases won’t be hitting the books until 2019 or later. In other words, we may not see the organization’s vision and might fully realized for another five years. For a fan base that hangs on every day of the year, five years feels like an eternity; and

(2.) Any optimism that you would attach to these projections requires that you believe the Ricketts Family’s repeated pledge to put every dollar that comes in the door back into the organization. Increased revenues matter to fans only if that revenue translates into an improved baseball product. My research into the Chicago Cubs’ financial picture over the past four years has pretty clearly demonstrated that the Ricketts’ pledge has held up so far. For me, that buys enough trust that, when the revenues increase, so, too, will the spending (if not sooner). I understand the skeptical among you who need more proof. In time, the proof will come – one way or the other – as the baseball plan progresses, and the payroll money is either there, or it is not there, to support that plan.

At the end of this process, particularly after candid conversations with Cubs officials, and after examining the financial state of affairs within the context of the current rebuild, I am as confident about the long-term future of the Cubs organization as I’ve ever been. Has everything gone as smoothly as it could have? No. There have been player misses and political misses, and there’s only so much even the best front office can do about the cosmic dice rolls that come along with the game of baseball. In the near-term, anticipating another rough season at the big league level is never fun in March and April. So it is with the 2014 Chicago Cubs, and, about that, I am disappointed.

But is the baseball plan still proceeding effectively? Yes. And is the business plan supporting that baseball plan in a way that positions the Cubs organization for long-term success? Yes. The goal is not a slightly more interesting team in 2014. The goal is having the kind of organization that can be a playoff contender every single year. That’s a lofty aspiration – one that Cubs fans certainly deserve – and it will take time to come to fruition.

Knowing now what I do about the realities of the Chicago Cubs’ financial situation in the last few years, I can appreciate even further the timing of the deep baseball-side rebuild and the syncing of the business plan and the baseball plan. Pairing the artificial need to control spending with a rebuilding plan overseen by a top tier front office seems like a pretty savvy way to kill two birds with one stone.

Even if nobody wished they had to kill one of those birds in the first place.

  • mosconml

    You know Brett, sometimes I wish you’d provide some detailed analyses rather than just these fluff pieces all the time.

    (Nice work.)

  • md8232

    OK, it’s been over 2 hours already. Quit resting on your laurels and write something already!

    • Funn Dave

      Haha. I think he timed it for a day with no day game to give this story ample time for discussion.

  • Truely Blue

    Hi Brett, I concur with all the praise that you are receiving for this “in depth” article. Your attorney background shows. I had to read it in two parts as my eyes glazed over halfway through. PS: Are you available to do my 2013 tax report?

  • Indy57

    Really well done Brett. I had hoped either your or Aguello would do this analysis. You win;) For so many fans, the belief is that billionaires own these teams and that they have money to burn. The reality is that these are businesses (owned by billionaires) that have to produce a profit for reinvestment. Laying out the unique capital structure that the Ricketts and the FO work within is a revelation and explains the current and future investment so well. A really fine job, Brett! Impressive.

  • mjhurdle

    FOX Sports: MLB ‏@MLBONFOX 45m
    “I wouldn’t be shocked if the 2nd-half Cubs are actually a pretty good baseball team.”-@DCameronFG #SABRSchool

  • Indy57

    And by the way, you just put the Sullivans and Wittenmeyers to shame…as they should be.

    • YourResidentJag

      Well, maybe that’s true. Except they don’t write freelance. They write for an editor and that editor does decide the final content on all stories, including word restrictions. Sure, both guys could be smarter with their depth of analysis, but Brett’s article probably would be a series in the dailies.

  • YourResidentJag

    While I don’t always agree with your baseball positions, you do an outstanding job with the business, legal, and financial analysis surrounding the Cubs and have so for a quite a while now. Great job on the article.

  • mosconml

    Thoughts from this piece:

    – I’ve got to think Theo is both on board and not surprised by any of what’s happened so far, at the very least by any of ownership’s decision-making. He’s a smart guy, and if he was surprised by any of ownership’s decisions so far, I think it’d be an upset.

    – I wonder how many franchises are both profitable and successful on the field.

    – It’d be interesting to see attendance figures plotted against team wins. Players are sunk investments, but if you can put a calculation around a marginal win, there’s still the possibility that you turn a profit from signing a productive player.

    – Brett, any insight on the boosted revenues from playoff games? I’d assume that most of that is gravy for the team, no?

    • Brett

      On the playoffs: yes, huge revenue boost, but it also comes with a lot of added expenses. Still pretty nice net, though.

  • ssckelley

    Brett, now that you have raised the bar for blogging what is next?

    Oh, and we expect these types of quality blogs on marathon day.

  • Hee Seop Chode

    A few thoughts:

    * This is the first well compiled, well articulated attempt I’ve read to tell the financial story of the Cubs organization as it currently stands. I read it in one go, with great attentiveness. As others have said, probably your best work Brett.

    * The estimate of “some $30 to $35 million per year in interest expense, or “debt service payments,” according to a Cubs source.” didn’t sound right to me, so I did the math. If $250MM is short term debt, it is some form of an annually renewing revolver (otherwise it would be retired in 12 months or not be short term debt). $250MM * 2.00% (for well collateralized debt like this I’d imagine the rate to be lower) = $5MM annual interest payments. The $175MM, reportedly refinanced in 2013, would likely have a term matching the disolution of CBH in 2019. $175MM over 6 years at 2% interest would be $31.2MM a year. This adds up to about $36MM a year.

    * Debt principal payments are tentamount to distributions to the Ricket’s Family Trust. Using the figures above, the RFT stands to receive $27.7MM of equity to in the first year (2013), and an increased amount for each of the remaining 5 years.

    * 2019 is depressing! That’s so far away! 10 years is too much to ask for a rebuild. I don’t know a different or better path, but it seems possible.

    • Noah_I

      I don’t think you’re looking at 10 years for a rebuild, per se, but it could be 2019 before the Cubs can really blow the rest of the NL Central out of the water on spending. Remember, Theo Epstein said the Cubs were able to pay Tanaka $20 million a year, and the Cubs have $13 million going to Soriano this season. And, if the Cubs are able to get at least a somewhat better deal on the WGN games, that should add a not insignificant sum of money to revenues.

      If the Cubs feel like they can compete in 2015, I’d anticipate a payroll in the $110 to $115 million range, which is competitive with the Cardinals and Reds right now. As the other revenue sources start streaming in (and they should start coming in waves starting next season, first a smaller one with the WGN games deal, then a larger one with the stadium renovation, then a great big one when the debt issues go away in 2019 and there is the new deal on all the games), you could see the Cubs just be able to spend $40 to $50 million more than the rest of the NL Central.

      If the Cubs can maintain a quality farm system while also outspending the field by a large margin, good things should happen, and I think that’s clearly the end goal. But the Cubs will have to spend the first couple of years of this next run of competitiveness, presuming that happens, competing on essentially equal financial footing with the Cardinals.

      • Hee Seop Chode

        When I say 10 years, I mean begining with the tear down in 2009 (even if we didn’t know it had begun in 2010). Otherwise, yea, agree with everything you typed.

      • Pat

        2019 is the year they can start paying off the debt, so I’m not sure I’d look for a big increase in available funds that year. While they should have extra TV money starting, I’d assume a good chunk of that would go towards actually paying down the debt (to reduce debt service). With 675 million to pay down that could be a pretty big number going towards debt retirement – in addition to the debt service costs.

  • Blackhawks1963

    Crikey ! After reading all of this I feel the urge to gouge my eye out with a shrimp fork.

    My major takeaway? When the building strategy has hit the right inflection point, then spending to retain talent, trade for talent, and sign free agent talent will be a non-event.

  • Javier Bryant
    • Noah_I

      I’d be curious who the Cubs could get back from the Tigers for those two. I think getting either Porcello or Smyly, who Cubs fans seem to be floating as possible return is significantly overly optimistic, and the Tigers’ farm system behind Castellanos is not good. I don’t know enough about Robbie Ray, Jonathan Crawford or Jake Thompson to speculate on them as a possible return, but a Top 5 in any system guy sounds like more than I’d give up for Schierholtz and Barney.

  • Greenroom

    I was impressed with the entire piece, but my favorite:

    “Once the Cubs decided to rebuild – a process long overdue – the attendance hit was coming. To my mind, the Ricketts Family’s willingness to take that hit and stick with the baseball and business plans should be a credit to their ownership, not a sword used against them.”

    Great work, Brett.

  • DocShock88

    Excellent article Brett.

  • Brocktoon

    Great stuff Brett, putting the newspaper guys to shame

  • Stu

    A couple of points:

    1. The interest expense on Trust Loans are rather trivial. I know because I am a Trustee myself. Look at AFR (applicable federal rates) in the 3-9 year range. They are 1-2%.

    2. Even with a well thought out analysis by Brett, I become a little suspicious as the length and complexity drags out.

    3. So the upshot is what? The average Cubs fan should be happy to watch a bad team and pay high ticket prices until “we” are through this artificially created legal structure?

    Sounds like attendance might be going down a little faster than expected.

  • cavemancubbie

    Now I understand why Mark Cuban, ‘The Shark’, didn’t bite! Too many restrictions on running your business, MLB, the CBA and Chicago politics. It maybe a very long time until the Cubs are winners. My hats off to the Ricketts for taking the chance.

  • 5412

    Hi Brett,

    You out did yourself with this one. I would offer the following for everyone.

    1. I wrote about some of this last week. You have to trust Brett on this one. When he says things like “Cubs insiders”, he has the facts and is protecting his sources. I found the same thing, people were willing to be forthright and upfront. The reasons you could not quote them was a simple one. You saw all the backlash when the baseball figures were sneaked out in the past. Other owners would frown on the Cubs revealing too much.

    2. For those who think that Ricketts is lying and siphoning profits, I totally disagree. Here is the disconnect. There is a difference between profit and cash flow. Depreciation is an expense for accountants, but it only takes away cash in the year the asset was purchased. If you follow Brett’s line of thinking, the cash the team has generated has been put back into the team, just not the current player payroll.

    3. They bought the McDonald’s property across the street. They put $25 million into a new facility in the Dominican, they added 120 people to their front office. That is a good $5 million a year, plus the travel expenses for the scouts is a heck of a lot of money. While the numbers people complain about is the payroll for the team, let’s not forget the millions they laid out to sign guys like Solar and the other international free agents. They have already spent a fortune upgrading what they could without needing city approval.

    Brett, to me the bottom line is simple. Ricketts is not drawing a paycheck; instead he is using the available cash to reinvest in the team knowing that it will have a huge payoff as the value of the team increases. Guys like him don’t need the money, they have plenty.

    The Tribune sucked the money out of the team beyond belief and paid it to stockholders in dividends, or used it to pay creditors.

    Brett mentioned the Tribune paid $20.5 million for the team. When Dallas Green ran the club, he convinced the city to put in lights, and doubled attendance and TV revenue. They made $25 million the year they fired him. Imagine buying something and getting over 100% return on your invested capital. The Tribune fired him for philosophical reasons….hell they should have been promoting him to run the entire Tribune Company with that kind of performance.

    I have followed this team since 1944. This is the first time in my lifetime we have had an owner who is not sucking out money; but rather investing in the kind of things that will payoff with a consistent contender. In ten years friends in other cities will envy us, that is so unheard of in most professional sports it is amazing. Need proof, just look at the Bears or Blackhawks under old man Wirtz.

    I rest my case. Brett you did a hell of a job of presenting the facts clearly and protecting those who helped you.


  • baldtaxguy

    Enjoyed every word, very well done.

  • Jason P

    Fantastic stuff – I read every word. I have a much better understanding now of the Cubs financial situation than I did when I woke up this morning

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  • ame1908

    Really great work, Brett. Worth every minute I spent reading it – I feel quite a bit smarter!

    Keep up the great work.

  • MattM

    Brett, this was amazing work on your part! The breakdown was comprehensive and informative. I agree with everything here. My one question has to do with the Ricketts family’s ownership of 250 million of the Cubs’ debt.

    The 30-35 million in debt payments (no matter if the terms are favorable) has to include terms for repayment of the Ricketts loan. That would be the way in which the Rickett’s family would be getting payment back from the Cubs.

    That said your article lays bare exactly why Bud Selig needs to be investigated! Though the CBA lays out very specific guidelines for teams to ensure they do not hurt the baseball brand. Bud Selig allowed this sale to go through! With all of these terms and conditions actually showing that the sale would adversely affect the Cubs’ ability to be competitive it’s almost as if he WANTS the Cubs to fail!

  • DocPeterWimsey

    Wow, that was intense. They say never multiple explanations without necessity: well, that was necessity squared!

    I feel that I should take notes, but oi! where to start?!?

    • brainiac

      i agree, it synthesizes multiple arguments at once, and totally destroys that grantland fluff piece the other day that merely relied on advertisements for information. this is a rare piece of investigative sports journalism.

      just cause there are explanatory details doesn’t excuse the basic argument i’ve been making – that the team has elected to sacrifice many, many, many years for business interests over sports competition. it could have gone differently, and it should have gone better, and the duration is much too long and quite unprofessional.

      • Jason P

        “just cause there are explanatory details doesn’t excuse the basic argument i’ve been making – that the team has elected to sacrifice many, many, many years for business interests over sports competition.”

        This article completely destroys that argument. It’s not that they’ve *elected* to do things this way, it’s that the circumstances surrounding Ricketts’ purchase of the team *forced* things to be done this way.

        • hansman

          At this point, anyone who thinks that the Ricketts are being cheap or are opting a mid-market payroll over a big-market payroll just to line their pockets is just being a troll.

          It’s best to note who they are and just ignore.

        • blublud

          This is the one point where I agree with Brainiac. The Ricketts did agree to purchase this team under these circumstances, and they reserved every right to decline and never did. They saw a great business opportunity and they made a deal. Their trust is making money even if they aren’t individually. They did put business in front of competition. I don’t knock it, cause I would do the same. But the did choose business.

          • Jon

            I don’t think Selig should have approved the sale, and the terms of the sale piss me off on a personal level. Everyone wants to blame the financial problems in this country on welfare recepiants, when they should be pointing the fingers at billionaire tax cheats like Zell. I hope the audit nails him with a huge tax bill

            • Jason P

              I can’t blame a company for doing everything in their power to pay as little taxes as possible. The problem lies within the way-too-complicated tax code that contains loopholes like this one.

              • DocPeterWimsey

                That is a by-product of a complicated economic system. Indeed, it played a major role in US history. Joe Kennedy’s rise to political prominence in the FDR administration as the first head of the SEC was because Kennedy was renowned for figuring out loopholes in the tax system, and FDR’s team (FDR, himself, I think) figured that Kennedy would be the best one to figure out what the loopholes would be and then close them.

                Of course, it didn’t work entirely simply because laws take into account only what is and has been: new parameters constantly appear, and future laws combined with old ones create loopholes that didn’t exist before. This is an inevitable side-effect of an evolving complex system.

                Oh, and companies don’t skimp on taxes because tax-codes are complex: they skimp because they don’t want to pay them. It would take far less effort (but be much less profitable) to not seek out the loopholes.

          • Jason P

            He didn’t choose business over baseball because he never had the choice. And actually, he ended up getting neither because any “profits” he has been taking the past 2 seasons look to have been going towards paying the debt service payments or other things like the new Dominican facility. As far as we know (and because of this piece, we know considerably more than we did 24 hours ago) the trust isn’t making any money off the Cubs.

            Another point to consider: sure, Ricketts knew what he was getting into when he purchased the team, but if you look at it from a Cubs perspective, we were going to wind up in the same financial predicament we’re in now regardless of whether it was Ricketts or anyone else purchasing the team

            • blublud

              I didn’t say he chose profit, I said he chose business over baseball. By choosing to buy the business the way he did, knowing the product on the field would suffer, he chose business over baseball. However, I don’t blame him. I’m one of the people who feels like Ricketts don’t owe me shit. I’m pro business 99.9% of the time. He owes himself and his business. I could careless if he was making a Hundred Million a year, that’s what he should be trying to do. If I don’t like the losing or I get tired of it, I should go root for the Yankees or Cardinals or whoever. I trust him and I believe he has good intentions, so I not saying he is doing anything wrong, I’m just stating the fact, he chose business over competitive baseball, at least initially anyway.

              Part of the debt payment is going to the trust, so the trust is making money. Once again, good for the Ricketts. I certainly would by a team to break even or lose money, and no way would I put all the money back into the organization without first making a deposit into my account, so he’s better than me.

              • blublud

                I certainly *would*

                • blublud

                  I meant wouldn’t. Finally I got it right.

              • Jason P

                And what I’m saying is that you can’t choose option A over option B if you never had the opportunity to choose option B in the first place.

                It was the Tribune company that chose business over baseball for the Cubs. Whether it was Ricketts or Mark Cuban or whomever that ended up buying the team — it doesn’t matter because the decision was already made.

                • blublud

                  No, because they could have chosen not to purchase the Cubs under those circumstances. They made the choice to purchase because despite the circumstances, it was good business. None of this was possible without the Ricketts willingness to buy, and by a few accounts, the only ones willing to buy under those conditions.

                  • Jason P

                    There were at least 2 other bidders who would have bought under those conditions: Hercsh Klaff and a partnership between Marc Utay and Leo Hindery. Possibly 3 if you include Mark Cuban.

                    Yes, Ricketts could have chosen not to buy the team, but in terms of the overall financial picture, it wouldn’t have made a difference because the debt service payments were inevitable either way.

                    Braniac’s original comment was that the team elected to forego years of competitive baseball to make more money, which is absurd. That wasn’t Ricketts’ decision to make.

                    • brainiac

                      this is where there’s a major disconnect in old and new cubs fans.

                      most of the defenses of the ricketts based upon Brett’s article argue that they would have done the same thing to make money. then they say they couldn’t help the team because they didn’t have any money. then they say that this is a business and they have good business sense.

                      the many, many years of re-purposing business operations we have and are going to see has replaced team loyalty with C- community college business major loyalty.

                    • brainiac

                      the good thing is that we all at least agree, at this point, that the cubs have no intention of being a sports team for a long time. you can love it or leave it, and point to causative reasons. but in the end cubs baseball has been stocked with PR initiatives, outright lies, and financial mismanagement since the new ownership took over. it’s not a “plan”, it’s just business.

                    • Jason P

                      If by a long time you mean one year, then I agree.

          • half_full_beer_mug

            They wanted to own the Cubs, and this was probably their only chance.

            The Ricketts Trust is/was going to make the same amount of money (or more) if they loan money to the Cubs LLC, or muni bonds, or what ever else the trustees have been doing right up to the point where the kids wanted to be MLB owners. So why not help out a family member?

            • blublud

              Once again, I have no problem with it, just stating the fact.

  • Diehardthefirst

    If all of the parties or one of major creditors initiated bankruptcy proceedings I believe that this could free up cash to go after free agents

  • brainiac

    love it, love it, love it. this both supports a lot of what people have been predicting, while adding detail and insight that we hadn’t considered.

    the real question is this – when is espn or the trib going to pick up your contract?

    • brainiac

      seriously, the bozos at local papers can’t hit this level of analysis with a stick

  • Stogie

    The best thing for Cub fans would be if the Cricket TS’ sold the team. That probably won’t happen for 20 more yrs.

    We are in the same boat as the Royals/Rays/Pirates.

    • Stogie

      *Ricketts. Damn phone!

    • brainiac

      you got it, stogie

      • BT

        Astonishing. You would have thought the effort Brett put in might have had SOME effect.

        In one ear, out the other. Ricketts is still the bad guy.

        • Fishin Phil

          BT, you really didn’t expect otherwise from some folks, did you?

        • aaronb

          Brett’s article was an excellent piece of journalism. However it just confirms what many of us have suspected all along.

          Willfully structuring a deal in such a way that forces you to pay yourself profits. While taking that revenue right out of the organization IS bad for the on field product.

          Tom Ricketts didn’t have the money to buy the team. His father wasn’t willing to front more than what he did to get the kids started in the purchase.

          The purchase DIDN’T benefit the Cubs…The purchase helped the Ricketts family. And while I don’t fault a guy for making a buck. I can bemoan a guy buying up my favorite team and diverting it’s revenue back into his family trust.

          The Ricketts business model has been almost a mirror image of the Frank McCourt business model in LA.

          • brainiac

            100% right

            • brainiac

              “the plan” is for a new profit model, not for baseball. there is no “plan” in the way most superfans think. Brett diplomatically walks around such a straight forward point that many of us have been making for some time, but that’s the nuts and bolts.

              • BT

                Brett truthfully reports facts. You make things up in your mind. There is a difference. Kind of an important one. The fact you then imply he is walking around the nonsense you have created is simultaneously insulting and asinine, especially in light of the massive amount of work he did on this piece.

                He spend massive effort investigating and reporting, while you pull things from your fevered rectum, then you have the gall to imply HE is the one purposefully skirting contentious issues. Brainiac, for the most part I find your bleatings harmless, but this stuff is really pretty contemptible.

                • ssckelley

                  Very good comment, and the proof that Brett reports the facts is how he has handled reporting the Wrigley Field situation knowing it could jeopardize the advertising revenue he himself got from the rooftop owners.

              • aaronb

                Yes, and to add. The “Plan” has really been a propaganda campaign to paper over a huge diversion of revenue out of payroll. Under the guise of “developing a minor league system”.

                And the new CBA has just been extra cover for Ricketts to do so.

                • MattM

                  I don’t understand what you guys aren’t reading. Brett specifically states in the article that the Ricketts have to pay 30-35 million in debt payments every year and a big chunk of that payment HAS to go to their Trust because the Trust ownes 250 million of the DEBT!

                  They are getting paid! That’s not the jest of this piece though. The jest really is that Selig failed at his job to ensure teams are structured in a way that does not hurt the overall health baseball!

          • BT

            Ricketts didn’t structure the deal. The deal was structured by Zell, and was FORCED on Ricketts. It was not tailored to his pocketbook. It was an onerous deal that forced most investors to drop out. You guys are so blinded by hatred you are forming new narratives in your mind. It’s fairly amazing to behold.

            • brainiac

              you miss the bigger point every time, bt. the ricketts are flush. if they got a bad deal they take the hit at first and then recoup down the line. that’s what business takeovers do, unless they try layoffs. and that’s the route they took – baseball layoffs, just with players.

              they are paying themselves profits under the auspices of “loans”, about 35-40m a year according to Brett’s article. it sounds official but it’s profiteering. i’m sure it wasn’t an optimal business deal, but he’s decided to take it out of operations for what will be nearly a decade, instead of actually running a baseball franchise.

              • FullCountTommy

                You say they used layoffs, but they haven’t really cut spending on baseball operations, it’s just been reallocated. The IFA market, Dominican facility, front office expansion, the Bloomberg data package. They have cut the on the field payroll, but the fact of the matter is they have used this money to increase the infrastructure of the baseball operations, ensuring the future health of the organization.

                • aaronb

                  Those expenditures are a fraction of what is lost in payroll. Not even taking into account how much more each MLB team gets from media rights today, as opposed to 2009 when this sale was finalized.

              • BT

                I miss the bigger point every time? I’ve got you telling me the Rickett’s are flush, and Aaron telling me the Ricketts couldn’t afford the team. These are people lecturing me. Why don’t you two huddle, and get back to me?

                I’m with ssckelly. I don’t think you read the article. The damn thing was written for you specifically, and you either didn’t read it, didn’t understand it, or are prepared to ignore it. You’ve got your narrative, and nothing will dislodge you from it.

                • hansman

                  “You’ve got your narrative, and nothing will dislodge you from it.”

                  This. Just walk away. At this point, the only argument remains is that the Ricketts should be pumping $50M of their own dollars into the franchise every year to be competative, yet, I don’t know of any owners that do this on an ongoing basis (and I highly doubt any owner puts $50M into their club in any year).

                  • FullCountTommy

                    Exactly, aaron and braniac are in there own little world and nothing will change the stories they’ve made up in their heads. The only conclusion that I have come up with is that Tom Ricketts must have slept with their wives

                  • ssckelley

                    ^ This

                    Someone with a profile name “brainiac” is not going to admit they might be wrong even if you bitch slap them with the facts.

                    But I do the same thing with Blub….sometimes arguing with someone can just be friggin fun even when you know full well you have no shot at changing their mind.

                • aaronb

                  Joe Ricketts IS flush.

                  However Tom and the other kids aren’t/were not. They had very little personal wealth between them at the time of the sale.

                  • FullCountTommy

                    Joe Ricketts’ money is not the Cubs’ money so this is irrelevant

                    • MattM

                      Actually Full Count it is. Ricketts GAVE 250 million to the trust FOR the loan!

                    • FullCountTommy

                      Yes LOANED them the 250 million dollars, but the Cubs don’t have access to additional funds from Joe Ricketts whenever they please. Joe Ricketts’ bank account isn’t open for Cubs use

                • brainiac

                  you’re just resulting to clowning and name calling at this point. which, btw, i enjoy about blog arguments though i never employ those tactics.

                  the basic point is that the internal economy of scale of the club is focused on other components that aren’t baseball, and this is detracting from operations. then the PR division gives it a title, something like “the plan”, and gullible people angrily defend advertisements as though they’re facts.

                  how might the team make up operations costs? with investment. they refuse to invest in the actual team. it all goes into self-loan paybacks and assorted other elective operations. now watch bt turn into the hulk and smash again.

              • hansman

                “but he’s decided to take it out of operations for what will be nearly a decade”

                Apparently you didn’t read Brett’s article or just can’t comprehend it and everyone just needs to not pay attention to a damn word you are spewing about this.

                At this point, you’re being obtuse to be obtuse.

                • MattM

                  Hansman, can you please admit the part in which Brett states that 250 million dollars of loans is actually FROM the Ricketts family Trust right? And as such when the Cubs pay loan payments (30-35m) a big chunk is going back to the Trust which LOANED the Cubs the money.

                  Can you at least admit that?

                  • ssckelley

                    Don’t do it…’s a trap!!!!!!

                    • hansman

                      I can’t help myself.

                      MattM actually responded to one of my posts. It’d be insulting not to offer another response.

                  • hansman

                    Did I ever deny it?

                    Plus, Ricketts Family Trust =/= Ricketts Family. Think of it as the Ricketts owning a bank that loaned the money. The bank is only going to be concerned about 1 thing…it’s own solvency.

                    • brainiac

                      you’re taking both sides of the argument again, hansman

                    • hansman

                      Not really. I just understand that the Ricketts Family Trust isn’t there to just dole out money to folks willy-nilly. It either has to fit the mission of the trust (which, from the name I would assume would be for educational costs) or it has to make the trust money.

                      The trust isn’t going to just hand the money out to the Cubs and the Cubs couldn’t loan the money, thereby causing a need for a higher EBITDA and lower payrolls.

                      Also, the extra cash would upset the current ownership structure (if Ricketts puts in cash to a partnership, he’d have to receive something out, either more ownership, assets or a debt) which could throw the whole purchase agreement out the window.

                    • MattM

                      Hansman come on! You have to be smarter than this! It’s a known fact that Joe Ricketts created that trust to SPECIFICALLY LOAN money to the Cubs!

                      It’s not a bank it’s Joe Ricketts! The money is going directly back into his bank account.

                      So, just so we are all clear! Brett flat out shows in his piece that the Ricketts family IS in fact TAKING MONEY FROM THE CUBS! Part of the 35m for debt payments is going back to Joe Ricketts wallet! When I say Joe Ricketts I mean all of the Ricketts btw, bc he is the one with the money.

                      Since Joe Ricketts LOANED the Cubs money he owned debt in which the Cubs are obligated to pay! The family in the form of the trust IS directly taking money from the Cubs.

                      You cannot bs it any other way. It is laid out perfectly in this article!

                    • Patrick W.

                      Matt, I don’t think you understand this as well as you think you do.

                      Yes, the family basically borrowed $250MM from themselves and they will pay that back with interest… but that $250MM is going somewhere. It’s going to the Tribune in the form of a disbursement of funds. In exchange for that $250MM (and the rest of the borrowed money) the family got THE CUBS and WRIGLEY FIELD and 20% of CSN. It didn’t just go into the pocket of the Ricketts, it is going into the pocket of Sam Zell, et. al.

                      If you have a 401k, for example, you can borrow money from that for whatever reason you want, and pay yourself back (with interest) but you got whatever it is you wanted for that money you borrowed from yourself. That money you borrowed from yourself went to whomever you gave it to. How hard is that?

                    • blublud

                      Matt, I actually agree you. I also believe the trust was setup just to purchase the Cubs. The trust is definitely receiving payments. My question is, what is wrong with that?

                    • MattM

                      Patrick I’m pretty sure you don’t understand what is going on. The Cubs borrowed money from daddy Ricketts. Daddy Ricketts is the guy with the money. The Cubs now BEFORE spending money on the team have to pay a certain amount back to daddy Ricketts.

                      In this case Daddy Ricketts is directly taking money from the Cubs. He is both making money on the loan to the Cubs AND making money off of the value of the Cubs that his money bought!

                      The argument goes back to what we are saying! The Ricketts ARE in fact TAKING MONEY from the Cubs BEFORE any of it is spent on the Cubs (e.g. new players etc..).

                      What does that mean? Well, when Tommy boy says that the Ricketts family has TAKEN NO PROFIT from the Cubs he is in fact lying! They Ricketts are PROFITING on the loan to the Cubs, and are paying themselves first before spending any additional earnings.

                      Brett’s piece proves that they are doing exactly the OPPOSITE of what they say they are doing! BTW this is not a 401K, and that is not a good analogy.

                    • Patrick W.

                      Well, Matt, I can’t argue with you there. Mostly because you have no idea what you’re talking about.

                    • MattM

                      Patrick a better analogy is in fact what a venture capitalist would do! Mitt Romney ring a bell?

                      You buy a company and saddle it with massive amounts of debt (paying yourself off first) file bankruptcy and sell the pieces.

                      Do I think Ricketts is doing that? No. Do I think this looks an awfully lot like that? Yes!

                    • MattM

                      Actually, Patrick I don’t think you do in this case. Comparing taking out a loan from a 401K to buy a car is completely different than buying a company by LOANING the company money, and then charging interest from the company on the money YOU LOANED YOURSELF TO BUY THE COMPANY.

                      Those are two completely separate things!

                    • Patrick W.

                      Well I can’t have a conversation with somebody who says that last line you said. It’s okay that you don’t understand.

                    • blublud

                      Those are the exact same things.

                    • MattM

                      HAHA! Wow man! Anyone who compares purchasing an existing and profitable team with such a structure that it becomes unprofitable to a car purchase does not understand.

                      You should quit arguing because you don’t understand and that’s fine. Maybe use your 401K to buy a tv…..

                    • Patrick W.

                      Nope, it’s exactly the same.

                      A 401k is money that has been put away for the future that makes interest while you wait to take it out. A trust is money that has been put away for the future that makes interest while you wait to take it out.

                      A car is a thing. A company is a thing. Maybe I’m buying a vintage care that I’m going to restore and then it will be worth a lot more.

                      The Ricketts wanted to own the Cubs, the company that owned the Cubs said “only if we do it this way” and the Ricketts did it that way. The Ricketts borrowed money from several places, including themselves and then got the company in exchange. They are paying themselves back with interest, because the money isn’t in the trust anymore to make that interest. If they had left the money in the trust they would have made interest, they didn’t leave it there, they took it out, so they forfeited that interest and so they’re paying that interest back.

                      I’m guessing right now you’re slapping your forehead and saying “DOH!” now that you are reminded that the $250MM that was in the trust and making interest is no longer in the trust and making interest, it’s in the company and making interest, and that ain’t nothing akin to profit.

                    • MattM

                      Blu Blud, if by the same things you mean what Mitt Romney did to KB toys then yes, it is.

                      The difference is that the Ricketts are going to ride this company out the long hall to make them money and Romney would have already sold making a massive product and putting many people out of work….

                      With this they have saddled the Cubs with massive debt and are trying to use the Cubs to climb out of it AND pay them off.

                      That’s absolutely not how purchasing a company should work. It’s also the reason why Cuban wouldn’t do it…

                    • MattM

                      Patrick, how long had the trust existed and how much interest had it earned?

                      Oh, also….was it really created for educational purposes? Can you explain that?

                    • MattM

                      Patrick, have you ever created a business plan to get a business loan?

                    • Pat

                      “$250MM that was in the trust and making interest is no longer in the trust and making interest”

                      Except that straight interest rates have been virtually nothing since the team was bought (thanks QE), so they are most likely making much more than they would have risk-free without the terms of sale.

                    • Patrick W.

                      It’s immaterial how long the trust existed and how much interest it had earned or what it was actually created for.

                      The money, if left in the trust would have made interest. The money is not there to make interest. The money now belongs to the Tribune. That money has to go back to the trust, and it has to go back with interest, because if it had been in the trust it would have made interest.

                      It’s math.

                    • MattM

                      AND BOOOM!!! Thank you!!!!!

                      However, I don’t think this will matter….

                    • MattM

                      Wow Patrick….What do you do for a career? In most other things you seem quite knowledgeable yet here…….

                    • Patrick W.

                      I’m pretty comfortable with my knowledge here. It’s okay if you disagree. I think you’re missing that the money borrowed from the Ricketts Trust went to the Tribune, not the Ricketts, and that once gone from the Trust, it needed to be replaced. Straight interest rates have nothing to do with this. The Trust would not likely put that $250MM in a savings account after all. Hell stock in TD Ameritrade has gone up 63% in the last year.

                      I work for a major online retailer.

                    • MattM

                      Patrick, look through Forbes and check the dates on the Trust we are talking about. Also, it was not created to earn interest. It was created to itself get around certain additional tax issues. The Ricketts were using that to just get around taxes. The individuals on the board of the trust are Daddy Ricketts and his kiddies.

                      You are right in that the object of the trust is make them a profit. I definitely don’t disagree with that.

                      I take issue with their insistence that they are not taking any money from the Cubs.

                      To put it another way. If you bought a company. Would you put up only the minimal amount to satisfy equity then restructure the rest of your payment into a loan that hamstrings the business you bought? Oh then also force extra high yield loans on the business to boot?

                  • DocShock88

                    Unless my math fails me 250 million is only about 1/3 of the loan debt, so the larger chuck of that 30-35 million debt payment is going towards the other 450 million that was financed through other means than the Rickett’s Family Trust. So no a large chunk is not going back to the Rickett’s Family.

                    • MattM

                      1/3rd is a large chunk. About 12m per year…..

                    • MattM

                      Doc, also….if what all the reports say are true then the Ricketts in fact own the single largest piece of the debt meaning they are in fact getting the biggest cut of that 35m….

                    • Patrick W.

                      Well, we don’t know the terms of the loan.

                      If it’s a 30 year term, for example, then the interest annually would be 3.5% (roughly).

                    • Patrick W.

                      Wait, what?

                      “Ricketts in fact own the single largest piece of the debt meaning they are in fact getting the biggest cut of that 35m”

                      The Rickets own $250MM of $700MM, not $250MM of $450MM. They own $250MM, others own $450MM.

                      How are they getting a higher share of the payments on the debt than 35.7%? Sure, that’s the same percentage given to the banks and more than given to the part sold off to individual investors, but how is that germane?

                    • MattM

                      Patrick you are right we don’t know. Why even through out bogus numbers if you just admitted you don’t know.

                      We know that the Ricketts own 250 million in debt and the rest is 450 million. They own one third of the debt. The debt payment is 35m/year. From what I understand from back when it happened they structured the loan to match the terms of the others. They said they had to do this.

                      1/3rd of that payment is def going back to the trust.

                    • MattM

                      Wow Patrick….you are being dense right now.

                      So the Ricketts didn’t just get one loan from one place. That 450 million is made up of loans from MULTIPLE areas. If you own 10 million of the debt what is your share? If you own 50 million, 100 million.

                      The point is that they own the SINGLE largest chunk of the debt, and thus get the largest payout.

                    • Patrick W.

                      No Matt, I get your point, I just don’t understand what possible difference that makes to your increasingly difficult to follow argument.

                      You said: “1/3rd of that payment is def going back to the trust.”

                      That is a fact, and it may or may not mean anything.

                      Then you said: “The point is that they own the SINGLE largest chunk of the debt, and thus get the largest payout.”

                      That is also a fact, but it’s completely irrelevant. What possible difference does that make? Maybe I am dense, but I don’t get what that has to with anything.

                      You aren’t arguing that the Ricketts are getting MOST of the payment, just the biggest check. What does that change?

                    • MattM

                      Of course. With a 401k comparison I wouldn’t suppose it would be easy. I wasn’t talking to you when I said that I was talking to DocShock who said this: “So no a large chunk is not going back to the Rickett’s Family.”

                      My reply was to that, and in fact perfectly answered what he was saying.

                    • Patrick W.

                      No, Matt, you weren’t talking to me, you were talking to EVERYBODY!!!

                      But, yeah, your first reply to Doc was dead on, $12MM is a huge chunk. I just don’t understand (and you cannot seem to explain) why it’s important that it’s the single largest chunk.

                      DocShock, could you maybe ask for me why it’s important or relevant? Maybe then I can read an answer.

                    • MattM

                      Patrick your Columbo bs is wearing thin! I don’t care that you don’t find relevance in the second statement. What you believe to be relevant or not is beside the point. I stated a fact. That’s it. It’s fact you can’t argue with so now you just want to hit relevance.

                      Someone said 1/3 of the entire loan payout is not a huge chunk. I said it was and in fact that 1/3 gets the Ricketts Trust the biggest single loan payout. That’s also a fact.

                      I’m done arguing its relevance with you.

                      And to the point your 401k argument is a joke. You can’t compare because the rules of a 401K don’t allow the comparison.

                      By your flawed logic…If comparing it to the same set of events that happened with the Ricketts’ buy-in. What you are saying is that I want to buy a car for lets say 10k. I have 10k in hand. Instead of buying the car for 10k I immediately put that 10k into my 401k (which didn’t exist until I wanted the car) only to take it right back out as a loan to buy the car.

                      Do you see how stupid that is?

                    • Patrick W.

                      You’re leaving out the part where the guy selling me the car will only do it if we form a partnership in such a way as for him to avoid $5K in taxes.

                      I only bring up the relevance of what you said because you said it as if it bolstered your argument, and I’d like you to be able to bolster your argument.

                    • MattM

                      Patrick, what you are saying is ONLY true if they HAD to take on 700 million in debt. For the purposes of the tax code it doesn’t say anything about HAVING to leverage 80+ percent of the purchase…

                      I definitely don’t think that was what Zell was demanding either….

                    • MichiganGoat

                      Okay I’m not even going to try to thread my way through all the discussion on this but as far as borrow from a trust to buy something you already have the cash to buy is not that uncommon.

                      My family has a trust (dad got out of the tech bubble before it burst) and they have a trust set up to prevent taxes where possible (no I don’t know the specifics).

                      But when anyone in my family buys a car we borrow it from the trust and then pay the trust back and somehow through all that we build assets and save on taxes… so if my small family does it regularly to increase worth and save tax dollars I’m sure its much more common to borrow against yourself than some believe.

                      Again I don’t fully understand, I (and my family) just buy major assets through the trust.

                      Oh and if anybody want to forget about baseball for a second come visit me at and help me fight Multiple Sclerosis


                    • DocShock88

                      I apologize if I read your statement wrong but when I hear the terms big chunk I tend to think of that something being more than half. So I read that as more than half of the debt payment was going to the Ricketts Family Trust.

                    • MattM

                      I get the usual idea of a trust goat. the difference is that your trust had money in it that you borrowed. Like a 401K only you didn’t force yourself to pay interest right?

                      I get the save on taxes issue as well. What I don’t get is how the tax code allows something to be set up over night for the only purpose to buy one thing. Why would the IRS allow someone to save on taxes that way.

                      Secondly, you didn’t buy a business by “loaning” it money. You then didn’t force the business to have a collar around it’s neck (you loan and interest) hurting its operations.

                    • MattM

                      Doc I got you the first time, which is why I answered that way. I get that people have different definitions of “big chunk.”

                      In my mind taking over 30% of anything is a big chunk.

                    • MichiganGoat

                      No we pay interest, it’s a loan at a better rate than we can get… it’s also part of the tax shelter thing. If we borrow something there has to be an interest rate attached to it I think my car loan is like 0.25% but yes we pay interest. I don’t fully understand it but it something to do with protection of assets. No matter what happens to me the cats, houses, and such bought and owned by the trust are protected. Having ownership of something but not really having paper trail ownership is quite common when people have the money to build these shelters.

                  • MightyBear

                    MattM what do you do for a living? Because you have no idea what you’re talking about. Please don’t tell me you’re in corporate finance.

                    • MattM

                      Actually, I work in human resources for a massive agency.

                      I challenge any of you to tell me exactly how this is not like a leveraged buy-out. Don’t just use the fact that the Ricketts own 1/3rd of the high yield debt either.

                      In what other way is this not akin to a leveraged buy-out?

                    • Greenroom

                      Not you, MB. But this whole thread is pure gold.

                    • Patrick W.

                      Well, 1) it IS a leveraged partnership, but what does that have to do with anything? and 2) I’ll add the $150MM they paid in cash. Now we have $400MM of the $825MM paid.

                      So they didn’t actually use 100% of the purchased assets. In fact, the Tribune still owns 5% of the team, so they paid $825MM for 95% of the organization, which values the organization at $868MM so they leveraged 43% of the deal. Which would be perfectly normal for an average risk company, which I would argue the Cubs are a low risk company.

                    • MattM

                      Patrick you have to factor in their loan to the deal. If you add that it’s a HUGE amount of debt. It absolutely IS debt. I don’t get where you are saying that the 250 m they “borrowed” isn’t a part of that deal.

                      We don’t even know the terms of their loan. Favorable could mean 8 percent……

                    • Patrick W.

                      Matt, I thought it was your point that the $250MM wasn’t part of the deal. You said that the Ricketts owned $250MM of the debt. I thought by that you meant that the money came from the Ricketts. I guess I’m just too dumb to understand why you point out that the Ricketts are making all kinds of money off the $250MM.

                      You said “It’s a known fact that Joe Ricketts created that trust to SPECIFICALLY LOAN money to the Cubs!

                      It’s not a bank it’s Joe Ricketts! The money is going directly back into his bank account. ”

                      So yeah, if it’s going back into his bank account, and he fronted it, it means the Ricketts put in $400MM, right? Or no? Is that a positive to the Ricketts or a negative?

                    • MattM

                      Patrick, this is where I know that you don’t know what you are talking about.

                      Ricketts paid 150 million out-right to the Zell. They then took 250 million of the money they HAD (could have pulled it out of the bank and paid it to Zell) and “invested” the money in their bogus trust. They then used that money as a “loan” FORCING the Cubs to have to pay it off anyway! I wouldn’t be surprised if they used the same terms as the other loans.

                      They did not have to do that! They could have just paid the money as equity for the asset they were buying in to. From what I understand the 43% (the other loans) would have been enough to satisfy the terms of Zell’s demands.

                      Instead tack on another 12 million to the debt payout the Cubs have to make every year back to their Trust. This trust can be dissolved quite easily with the dissolution payments going back to their family. It was just used as a tax shelter. Otherwise Daddy Ricketts would have just loaned the 250m back to the Cubs and force the terms on the ball club.

                      You do realize what I am saying yes? Look at the timing of the Trust. It means that the Trust was created specifically for this purpose and that they had that equity in hand for the buy in. Instead, loaned it, which with this article shows that it additionally hurts the Cubs…

                    • Patrick W.

                      This is the crux of the whole thing right here, isn’t it?

                      “From what I understand the 43% (the other loans) would have been enough to satisfy the terms of Zell’s demands.”

                      How do you understand that to be the case?

                    • candyland07
                    • Patrick W.

                      Man I hope the IRS finds this to be a disguised purchase.

                    • MattM

                      I hope the IRS does too. A 500 million dollar hit to Zell wouldn’t hurt him much though (sucks).

                    • MattM

                      That 43% number was from way back when Zell was selling the Cubs. There was an article which talked about the stipulations for the sale. I remember thinking how weird it was that the Ricketts having already satisfied what was requested went the further step of their own loan.

                      I was on that stuff like glue back then because I was hoping Cuban would win it. After he bowed out there were also a few quotes from him talking about the weirdness of it all….

                  • MightyBear

                    A leveraged buyout is buying a stake in a company (usually stock) by using outside capital. The Ricketts FT didn’t by a stake in the Tribune company, they bought assets, the Cubs, Wrigley Field, Comcast %. That’s why the partnership was formed. If you sell assets out of a C corporation (Tribune), you get clocked taxwise. The capital gains on the assets are taxed as ordinary income and you have to recapture any depreciation taken on the assets. They formed a partnership with the main partner taking on the debt (Ricketss) and the minority partner getting a huge distribution. Brett outlines all this in the article.

                    • MattM

                      Yes but they used the Cubs to secure that debt, and thus saddled the Cubs and only the Cubs with task of paying that debt back. In addition they tacked on additional debt in the form of the trust to get their portion of the debt payout.

                      And just so we are clear….they technically haven’t BOUGHT anything per se. They bought IN TO the partnership, and the partnership owns those assets.

                • brainiac

                  hansman, you’re just in the argument to argue, which is why you’re a true cubs fan. as usual i still can’t figure out what position you’re taking, or if there’s a position at all.

            • aaronb

              It wasn’t forced on Ricketts. The same thing could have likely been structured with 100% of the financing coming from the Ricketts trust.

              • MightyBear

                The debt structure was part of the deal. It was to avoid taxes on the gain of the sale. The Ricketts FT could’ve taken on the entire note but that would be foolish from a business standpoint. Spread the risk around.

        • ssckelley

          BT, you realize it is unlikely that he even read the entire article? Think about why someone would use a profile name like brainiac in the first place.

  • Diehardthefirst

    N’Sync became popular by appealing to all audiences- appears Cubs trying to follow example- one way would be to extend Theo for 10 years so he has credibility when taking the team to the next level in dealing with Agents, other GMs, media, personnel and fans

    • MichiganGoat

      Wow comparing N’Sync to Theo & the Cubs… I’m speechless this is one of your best comments die hard

  • Stogie

    Baez, Olt should be in the Opening Day starting lineup. Baez will not be, not because he isn’t ready, but because they’re cheapskates. They care more about the service clock than getting the Cubs closer to relevance, or the fans for that matter. I’ve never been more disgusted with this team than now. I sorely miss the Tribune owning this team. At least they spent some money from time to time.

    • ssckelley

      Cheapskates? It is called good management. It is an extra year of control, Baez will still get paid.

      • mjhurdle

        not too mention that Baez is probably not 100% ready.

        • Diehardthefirst

          Nobody is ever 100% ready- throwing a novice in the deep end usually produces a swimmer

          • Jon

            Unless of course, they die

            • blublud

              Not that I agree Baez should be here on opening day, but if he dies, he probably never had the talent to survive anyway.

          • mjhurdle

            actually, throwing novices in the deep end usually results in dead novices, lawsuits, criminal charges, etc etc.

            • DocPeterWimsey

              But if we look at just the survivors, then it usually produces survivors. (A.k.a., survivorship bias strikes again….)

      • DocPeterWimsey

        Also, the issue of options can rear it’s ugly head. The Marlins have a couple of promising young pitchers who already are out of options in part because they brought them up early as cheap alternatives to established pitching. (Turner is one of them, and the Tigers did that to him, too.)

        That should be a concern here because, historically, guys like Baez with tremendous power but poor pitch recognition (Chris Davis is a recent example) yo-yo a bit between miLB and MLB: and that might mean that the team will be forced to make a decision one way or the other sooner than they would like to do.

        With Olt, I think that the issue might be showcasing Valbuena and/or Barney for trades: they have to play them to display them. If one gets traded before Opening Day, then I would be surprised if Olt is not with the Cubs on that day.

    • Sandberg

      Miss the Tribune? Spent money? You must have some very selective memory.

      Baez isn’t ready and it makes no sense to lose a year of control (nothing to do with money) in a lost season.

    • Drew7

      You should probably take a look at, oh, I don’t know…EVERY single other flippin’ team in MLB and see this is what happens with most elite prospects.

      • brainiac

        there is no “plan”. this has been echoed a few times and is worth echoing again, as you have here. there is only a business, its interests, and we can wait until 2018 or later until we’re permitted to root for sportsmanship again.

        • Jon

          What did Tyson say, everyone has a plan till they get punched in the mouth..
          They got punched in the mouth

          • blublud

            If recall, watching the Mayweather/Sugar Shane fight years ago, Sugar punch May in the mouth in the 3rd and woke up may(a sleeping giant, and never got another solid punch in.

            Maybe they got punch in the mouth, but they responed like a veteran fighter.

            • Jon

              They are still on the ground and the ref just counted 5…

        • blublud

          We can debate over WAR, Barney/Almora, who to draft, when a prospect should debut, who to sign, and yada yada on this site, but man you must have a miserable life. The business makes more money when the team is winning, so if thisowner was about making money, which he should be by the way, he would definitely want a winning product on the field. He’s missing out on close to 50 mil by not winning.

        • hansman

          So…either you didn’t read Brett’s article or you are being intentionally obtuse.

        • Drew7

          Troll, troll, troll your boat…

  • bagjick

    It would seem that the key is the ultimate TV deal that will occur in 2019/2020. It is difficult to predict the intangibles, will internet streaming be a reliable distribution method? Will federal laws regulate pay tv into a ala carte model? Will the cubs partner with a group besides the current distribution giant (comcast)? Etc, etc. At this point, comcast would have the inside edge on the partnership given that they can outbid and control price better…but that would change with reliable WiFi and new regulations. Thoughts???