How Miami Could Still Get Its Money from Jeffrey Loria
(Photo: Jared)
In 2009, the City of Miami and County of Miami-Dade agreed to pay for 75% of a new stadium for Jeffrey Loria’s Miami Marlins. The projected stadium cost was $645 million, so Miami and Miami-Dade — or, more technically, Miami and Miami-Dade taxpayers — agreed to cover up to $480 million of stadium-building costs, largely from from hotel taxes. (According to some reports, Miami and Miami-Dade ended up paying about $347 million.) Miami and Miami-Dade also agreed not to receive any of the money from the stadium at all. No money from ticket sales, no money for concessions or naming rights. All Miami and Miami-Dade got in return was a guarantee that, if Jeffrey Loria sold the team, they would get a percentage of the net sale proceeds.
In October 2017, Jeffrey Loria did sell the Miami Marlins — for $1.2 billion. Under the terms of that stadium deal, Miami and Miami-Dade are entitled to 5% of the net sale proceeds. So good news for Miami and Miami-Dade, right? Well, not this time: Loria has told them he actually lost money on the sale of the team. So despite that gaudy list price, Miami and Miami-Dade stand to get nothing at all.
On the surface, Loria’s claim seems pretty implausible. After all, he bought the then-Florida Marlins in 2002 for $158 million, $38 million of which was a loan from Major League Baseball. Even after accounting for paying back the loan, that’s still a difference of over a billion dollars. Remember, though, that according to the stadium deal, Miami and Miami Dade agreed to receive 5% of the net proceeds (i.e. profits), not gross proceeds (i.e. the sale price), in the event of a sale.
Jeffrey Loria’s lawyers and accountants prepared a summary that is supposed to explain how Loria lost money on the Marlins’ sale. According to that document, the gross proceeds of the sale – in other words, the money received before taxes and expenses are paid – was $1.128 billion. But Loria says that the Marlins had about $280 million in debt, taxes on the sale of $297 million, and $33 million paid to financial advisors who managed the sale. All in all, the summary says that Loria lost over $140 million on the sale.
Naturally, this has not been received well in Miami. Under the stadium contract, Miami has 30 days to decide how to respond to Loria’s claim of no profits, and some city officials are threatening a lawsuit against Loria. But the problem for Miami is precisely for what it would sue Loria, because a suit for money damages would have a lot of problems.
Here are three of them:
- Even if Miami and Miami-Dade were entitled to 5% of the whole $1.2 billion – and they aren’t entitled to even that much under the contract – they would still be receiving only $60 million. So even a best case scenario for Miami and Miami-Dade would end up with taxpayers getting about 12.5% of their investment back.
- The stadium contract also has an arbitration clause. An arbitration clause is language that says that disputes get resolved in arbitration and not a lawsuit. There are ways around that, but it’s possible that a lawsuit by Miami for money damages might not even be allowed in court.
- The single biggest question here is the accuracy of Loria’s listed value of the Marlins. The taxes are easily provable, and the transaction costs should all be supportable, as well. But the value of the franchise is more subjective, determined by appraisals and accountants. Miami and Miami-Dade would have to prove that the franchise is worth more than $940 million. In court, that’s what’s known as a “battle of the experts”: each side hires an expert witness (or multiple experts) who will testify to their opinion of the value of the franchise. Experts are expensive, which would just cost Miami taxpayers more money. And if the experts are equally credible, Miami loses, because the party who sues has to prove its case.
There are, in short, a number of unknowns that would accompany a lawsuit solely aimed at money damages. That’s probably why, when asked about taking legal action against Loria, Miami mayor Francis Suarez cited the need to “close this chapter” of Marlins history.
Suarez has a point. That said, there might be another option Miami and Miami-Dade could pursue here, and one which I think makes a lot of sense.
There are two main types of lawsuit. In the kind most people imagine, one person sues another person for money damages. But in a second, less-well-known kind, a person can sue another person in order to ask the court to order that person to do, or not do, a specific act. It’s called “equitable relief,” and there are many different kinds. One type of equitable relief I think the Marlins could pursue here is called an “accounting.”
An accounting is a special type of lawsuit in which the court orders the defendant to “account” (hence the name) for all monies spent on a given thing. Under Florida law, an accounting can be available in cases of complex business transactions, and the $1.2 billion sale of an MLB franchise would certainly qualify as a complex transaction. And in a case called Cassedy v. Alland Invs. Corp, the Florida Court of Appeal explained that, under Florida law, once a plaintiff proves a right to an accounting, it becomes the defendant’s responsibility to prove that he didn’t mishandle the money. Moreover, if the defendant didn’t keep accurate or detailed records, Florida law presumes the money was mishandled.
So if Miami brought an accounting case against Loria, theoretically the city could require him to back up all of his numbers in a way that would pass court muster. In essence, Loria would have to prove to the court’s satisfaction that he really did lose the monies he said he lost on the sale of the team and that his loss of the monies was reasonable. Otherwise, Miami and Miami-Dade could be entitled to money back.
Another reason an accounting suit makes more sense than a lawsuit for money damages is because, right now, $50 million of the sale proceeds is still sitting in an escrow account. At this point, Loria, the Jeter/Sherman group which bought the Marlins, Miami-Dade, and the financial advisors on the sale transaction, all have a right to claim some or all of those monies. Loria has already said that he’s entitled to receive that money, too, because he lost so much money on the sale. But a court in an accounting case can order escrowed funds frozen pending the outcome of the accounting, which means that there could be at least some money available to Miami and Miami-Dade if they win the case. It’s an option that probably wouldn’t be available in a lawsuit for only money damages.
Miami and Miami-Dade may ultimately decide to cut their losses and walk away. But this is one way they might be able to get some money back.
Sheryl Ring is a litigation attorney and General Counsel at Open Communities, a non-profit legal aid agency in the Chicago suburbs. You can reach her on twitter at @Ring_Sheryl. The opinions expressed here are solely the author's. This post is intended for informational purposes only and is not intended as legal advice.
Okay, help me out here. If he lost $610 million on fees/taxes/settling debts then 1.1 billion – 610 million is still way more than $158 million dollars. Why is the 5% amount not applied to this number?
Or is it because they are valuing the franchise at $940 million or something like that? Is this some kind of legalese that I can’t parse because I’m not a lawyer? It doesn’t make sense to me for some reason.
Here’s the accounting breakdown from Loria’s team:
Contract Price – $1.2B
Adjustments/Escrow ($71M)
Gross Proceeds = $1.13B
Less Agreement adjustments:
Assumed value of team: $940M
Transaction expense (Paying financial team): $33M
Income tax: $297M
Total Adjustments = $1.27B
Net proceeds ($141M)
(I took this from the summary link in the article above http://www.miamiherald.com/news/local/community/miami-dade/article198173034.html)
Wait, he gets to subtract out the value of the team from the sale price? What does “assumed value of team” even mean?
This is not adequately explained in this FG post or the Miami Herald article but the only way the calculations make sense is if Loria agreed to pay the City/County 5% of net profits based on the increased value of the franchise following the stadium deal.
We haven’t seen the agreement but I would guess that “net profit” is defined to mean “gross sales price, less (a) transaction expenses, purchase price adjustments, etc., (b) income taxes, and (c) the value of the franchise as of the effective date of the agreement.”
There is nothing inherently objectionable to this method of calculating net profit if that was the business deal agreed to between the parties. Certainly the attorneys for the City/County should have explained to their client the method of calculation. If the attorneys did so, the City/County is simply unhappy with the deal they agreed to. If the attorneys did not do so, the City/County should be pursuing a malpractice claim instead of legal action against Loria–assuming they used outside counsel.
Even if the method was explained to the City/County, two additional items are worth noting. First, failure to agree on the value of the franchise at the time of the agreement would be a major mistake–a practical guarantee of future litigation/arbitration. Second, the City/County still gets absolutely hosed under this method of calculation even if they only wanted to capture the increased value of the franchise. If Loria only pays on the proportionate increase, he should not get to deduct 100% of transaction costs, taxes, etc. in making that determination. Those costs are attributable to 100% of the gross sales price. In other words, Loria is only paying out after deducting, for example, his tax liability that was already “built in” to his investment at the time of the agreement.
Maybe I’m not reading your statement correctly, but I for one find it absolutely objectionable if he can sell for above the value of the team and then subtract that value from the sale price. That’s not losing money, that’s making money above and beyond that which he might have otherwise expected.
But…this is Loria. If it did go to court, I’d fully expect him to show up in a neck brace.
I can’t figure this out either, so hopefully someone with knowledge of this could speak to it. Take that number out and the net proceeds is a completely different story
It would have been too detailed to go into in the post, but I’ll see if I can clear things up. The stadium contract, as Surrealistic suggests, does indeed allow for Loria to include an “assumed value” of the franchise in determining net proceeds. However, how that number is determined is rather convoluted (Loria’s lawyers just did a number on the County), and includes factors like capital investments for team affiliates and an annual percentage increase, plus additional factors set forth in a separate stadium management agreement.
This is one of the reasons why an accounting action makes sense. Theoretically, Miami could require Loria to account for all of those factors. For example – what were those capital improvements? When were they paid? Were they commercially reasonable? Do the Marlins even have the right to claim them? And at the very least, Miami would have the leverage to freeze the escrow.
In other words, in an accounting, you can argue that Loria *inflated* the value of the franchise on the summary in order to pocket the money that should have gone to the City.
Thanks, just these two paragraphs alone shed great light on what’s going on.
In terms of these kinds of posts, there is no such thing as “too detailed”. Please, by all means, get as detailed as you can/want.
To me, “assumed value” would just mean be the price that was actually less the debt? End of the day, that’s what the value of those assets was on the open market.
Thanks everyone. This was driving me crazy.
The assumed value of the franchise at the time the stadium was constructed was 650 million. The stadium was expected to enhance the value of the franchise . Miami wanted a piece of that appreciation should the franchise be sold. The assumed value of the franchise without a new stadium at the time of the sale was 900+ million since there were 8% annual escalators built in to the agreement So the part of the sales price Miami gets 5 % on is roughly 300 million less expenses (supposedly debt, taxes, closing fees, etc) which apparently exceed 300 milion
https://youtu.be/bHL91HQzhuc
Great article, any legal action that can get Loria to open up his books should hopefully force him to settle with the city. A moral victory at least.
Would an accounting require Loria to “open the books” and make all the Marlins finances public knowledge? I would think MLB would be very keen to avoid that sort of situation. The players are already restless with the very cold hot stove and lack of big money being thrown around in free agency. Learning that at least one team (and by extension, likely many more) are much more profitable than they publicly let on would not make them any happier.
No. The books would likely be subject to a protective order making the documents confidential.
It’s possible but not likely that a judge would refuse to allow them to protected under such an order based on the public interest element here.
And if the dispute is subject to mandatory arbitration, then the docs won’t be public.
Love this.
Despite the Marlins (likely) not commenting on this, this should improve their public standing, should the Miami government choose to pursue this.
This is why when actors, directors, and writers negotiate for points from a film production, they always specify that it is the points off of the gross take. Hollywood accountants can make it look like the last Star Wars film lost money.
from the miami herald article:
twitter picture has assumed value of franchise as 939mil (and change)
the article also states:
The biggest deduction allowed under the county deal is the original value of the team. The contract valued the franchise at $250 million in 2008, and allowed Loria to increase that starting value by 8 percent each year.
so, how does 250 mil increased by 8% every year become 939? are they adding something to that number to make it 939?
this is why governments need to hire the BEST contract lawyers available. even if the up front cost is high, the repercussions are huge. you know Loria had the best when he was at the negotiating table… if you count on a county lawyer who doesn’t specialize in contracts to take care of things like this, you’re bound to get screwed.
Possibly an adjustment to declare value of players under contract below market value (or hell, AT market value if you’re going to try and get away with something).
How can you claim that the value of the asset being sold (the franchise) was a cost of the sale (of the franchise)? Under that methodology, no sale of an asset would ever be for a profit unless the premium being paid for it exceeded the taxes and transaction costs.
Torches and pitchforks?
The threat of an accounting might be the best leverage Miami has. I’m sure they would also like to see how much in the way of dividends and distributions to Loria and related entities were paid out, as clearly there would have been as much debt if Loria had retained it as capital.
Finally, though, this should be Exhibit A in anyone’s argument against taxpayer funded stadiums. Whether it’s $0 or $60M, the taxpayer got hosed.
Really the most important thing that could come out from this lawsuit would be if Loria had to openly declare all his expenses and how they are distributed. From that we could probably deduct how the cost structure of other teams is and whether the owners of small markets really have trouble or whether they just abuse revenue sharing and live on welfare.
Btw I’m neutral on this until I see the results. I could see teams abusing revenue sharing but I also teams underestimate the operating costs. Salaries are the biggest chunk but you also have to pay your minor league system ( they are paid like fast food restaurant workers but with 200 guys or so making 12k it is still like 2.5m) and while we all know baseball numbers guys are paid much worse than in normal economy it is still probably like at least 20 highly qualified stat people per team making 40k which adds up to another mill. Then you have to pay front office, scouts, draft pool (like 10m per year), international pool, training facilities…
Of course teams also have a lot Of revenue apart from live rate and tv contract (bam tech, revenue sharing, bobble heads and merchandise sale..) so I’m really curious were that comes out if he really has to disclose that.
Dave T has pointed out the Liberty Braves 10-K before. http://ir.libertymedia.com/secfiling.cfm?filingID=1558370-17-1148&CIK=1560385
Probably not as much detail as we’d like, but on page II-26, the Braves report losses of -$47M, -$38M, and -$61M on revenues of $250M, $243M, and $262M in the years 2014, 2015, and 2016. Their operating cash flows (page II-17) of -$84M, $45M, and $89M are much better than their operating income so they’re recognizing a lot of non-cash expenses like D&A.
I think probably only the top 12 or top 15 attendance teams make any money, so it pays to be good! I think baseball teams mainly appreciate in value because they are trophy assets not because they make a lot of money. That said, I agree that cities shouldn’t subsidize stadia with taxpayer money.
Recently, Mario Gabelli was quoted in Barron’s as projecting a $35 per share price (up from current $22)
Miami only gets 5% on the sale price less the assumed value. Per the agreement the assumed value at the time was something 600 + million with 8% annual escalators which at the time of the sale brought it to over 900 million. The actual sales price less the debt brought the price down to 800 million. This is the key point lost on people and the afticle does not clarify this and does nothing but muddy the water
The real question is if the debt can be deducted from the sales price. Need to see the actual agreement for that. If not then they could be on the hook for 10 million or so. Not going to change much for the city. Not that 60 million would either.
If you’re letting the sales price be reduced by the debt, shouldn’t that assumed value also be reduced by the debt?
this story never gets old. i feel like Loria’s memoir or tell-all biography will be entitled “How I took nominal investments and hosed Montreal, MLB, and Miami to retire in France and stare at my Renoir.”
Interesting post, but I’m at a loss as to why point 2 is dismissed without explanation. The city / county can simply pursue the contract claim via arbitration.
If that part of the agreement is as favorable to Loria as the rest of it then who knows who picks the arbiter of the dispute. I would assume it’s not set up in the best interest of the city.
Ehh, maybe, but then at some point you just have to say that the county/city’s attorneys were hopelessly incompetent and should either be sued for malpractice (if outside counsel) or fired (if staff).
It’s disappointing but not shocking to me if the county/city’s attorneys got outnegotiated and screwed up the franchise value appreciation language. It’s not boilerplate language, and it’s a fairly rare and wonderful thing to find an attorney who has a good understanding of corporate finance and accounting. Competent attorneys know the law, but realistically a client needs to be financially knowledgeable enough to make sure that financial definitions are correct unless it’s stock language being pulled off the shelf.
A big difference is that arbitration language in a contract, including procedures, IS boilerplate language being pulled off the shelf and also right in the wheelhouse of what attorneys are rightfully expected to understand.
Interesting. Apropos of nothing I am offering up the ‘Sonny L’ Fangraphs username for sale. It has an assumed value of $100,000 but I’ll sell it today for $5 and somehow write a $99,995 loss on to my taxes.
I can only hope this is a total misread of the law and not what I should have done when I sold my house.
Loria is a dirtbag anyway and probably knew from the beginning that Miami and Miami Dade would not get a decent return for the taxpayers investment. The lesson to be learned here is that taxpayers money shouldn’t be used to help billionaires afford their expensive hobbies!
The City/County wouldn’t bring a separate suit for an accounting.
They would just sue for breach of contract and then get all of the financial information in discovery to determine if the formula was followed correctly. Maybe they ask for an accounting as part of the suit if there’s a procedural benefit, but this is clearly a breach-of-contract case for money.
I agree, and I don’t see why the city/county wouldn’t just pursue that in arbitration if that’s the forum that’s required rather than a lawsuit (Ring’s second numbered point).
I understand that there are certain circumstances where plaintiffs don’t like arbitration, such as individuals who may have a class action claim or plaintiffs who think that the potential embarrassment of wide-ranging discovery with evidence presented in public court is leverage to force the defendant to settle.
This case strikes me as one where the plaintiff (city/county) should also be plenty happy with arbitration, however. It’s what should be a relatively straightforward contract dispute over a significant sum of money.
I tracked down what I think is the language for this provision, and it’s something of a mess, as Surrealistic Pillow and others have surmised. The actual detailed language looks to be on page 344 at this link – http://www.miamidade.gov/govaction/legistarfiles/MinMatters/Y2009/091009min.pdf – as part of the “Non-Relocation Agreement” that’s one of the main documents governing the Marlins Stadium deal. I will caveat that I’m not certain whether or not it’s the final language that was ultimately signed. It could be a draft document that subsequently changed, at least to some degree.
That said, here’s the relevant language:
” The increase in value shall be based on an assumed value of the franchise of $250,000,000 as of the date of the [Baseball Stadium Agreement], which assumed value shall be increased to give effect to any additional debt incurred by, or equity capital contributions made to the Team, Stadium Developer or Operator, including the capital contributions made to, or the debt incurred by, the Stadium Developer or the Team pursuant to the Construction Administration Agreement (net of distributions to any such Team owners) and an imputed increase in value of 8% per annum from the date of the BSA. “Net Proceeds” shall mean the fair market value of all proceeds received from the sale plus any indebtedness for borrowed money of the Team or any Team Affiliate assumed by the buyer in the sale, less (x) the assumed value of the franchise determined under the preceding sentence, (y) all transaction-related expenses and taxes payable by the Team Affiliates and/or their direct and indirect owners to unaffiliated third parties solely as a result of the sale, and (z) any liabilities or obligations retained by the Team (in the case of a sale of the franchise) and/or its direct or indirect owners relating to the Marlins or its affiliated businesses. ”
While I’m not an attorney, in a former job I read plenty of legal documents with financial definitions in them. My take is that the city/county and their lawyers/decision-makers did a terrible job if this language is in fact the final language in the document, or similar to it. I’ll point out the problems that I see in a separate comment(s) since this comment is already long enough.
So, what are problems that I see with this language and calculation from the city/county point of view?
(1) The deduction for “all transaction-related … taxes payable by the Team Affiliates and/or their direct and indirect owners to unaffiliated third parties solely as a result of the sale” clearly does, in fact, pick up all capital gains or other income taxes due on the appreciation of the team since Loria owned it, NOT just appreciation over and above the higher “assumed value” of the team. (Surrealistic Pillow made this point above, and it is a fairly big screw-up.)
To my mind, it’s a pretty big and readily foreseeable bust in this calculation that the city/county simply should have negotiated out of the agreement, as every other number involved in these calculations appears to be a pre-tax number. It’s likely to be pretty difficult to figure out the tax basis of Loria as an owner without digging into a lot of detailed tax records, and it would still be a number that is potentially subject to change over time.
The fairly easy negotiating position to take if the other side insisted on a deduction for taxes is to say, “No, we think it should clearly be pre-tax, there are all sorts of issues here with tax basis being lower than the assumed value for this calculation, but we’ll agree to 4% of the pre-tax appreciation in value rather than 5% of the after-tax to get to similar economics after taking into account taxes.”
(2) The deduction for “any liabilities or obligations retained by the Team (in the case of a sale of the franchise)” is sloppily worded in a team owner (i.e., Loria) friendly way. I think that the goal of this part of proviso (y) is to arrive at an equity value (as opposed to enterprise value) number by offsetting indebtedness assumed in the sale. It does not, however, mirror the indebtedness language. It’s what I’d call overall sloppy drafting because terms like “liabilities” are usually defined by reference to accounting standards (GAAP) to minimize ambiguity.
I don’t know if playing games with this ambiguity is part of Loria’s accounting. I could make a case, however, that every future contractual amount due to any Marlins player for future year is an “obligation” of the team in the sense of that ambiguously undefined term, even though these are not liabilities on a balance sheet under GAAP accounting, and thereby greatly reduce the “net proceeds” under this formula.
(3) The methodology for increasing the “assumed value” for capital contributions or debt incurred, net of distributions to Team owners, doesn’t appear to be informed very well by the reality of the many ways in which owners of closely-held companies can take out money. “Distributions” are one manner, but so are high salaries or payments through affiliated entities. I see what this language is trying to accomplish, and it’s not unreasonable in theory to include this concept. It requires, IMO, a fair bit more thought than it was given, however. Again, I don’t know if this methodology is relevant to how the accounting from Loria ended up, but there would seem to be scope to play games with it particularly by thinking about this provision years in advance.
Summing it up as a TLDR, here’s my take on what should have happened if you asked a finance or accounting professional with relevant experience and a good corporate attorney to work together on this language for the city/county:
(1) The first thought would be to see if this provision could simply cover a percent of the increase in enterprise value (broadly, debt plus equity of an entity, and therefore a value that’s independent of capital structure) of the Marlins and therefore be a simpler calculation. The provision as drafted is trying to cover equity value, which is more complicated to capture in a document because equity value does depend on capital structure (i.e., level of debt). Get rid of the provision about incurrence of additional debt or additional capital contributions. Instead, just agree to a starting point that has the $250 million assumed franchise value, adds on the team’s expected stadium debt, and then goes from there (with the 8% per annum increase if that’s the deal). That should make for a simpler agreement with less scope for numbers to be manipulated or ambiguously defined. I’d still probably tighten up a bit of the language about how to define “indebtedness” and “proceeds”, but generally it would just be a comparison of “proceeds received from the sale plus indebtedness assumed by the buyer or remaining with the team after a sale” to an assumed value that’s also a simpler calculation.
(2) If it is intended to reflect a comparison of equity value, which is what the agreement appears to try to cover, then it needs to include a lot more language with many more defined terms. Generally, the wording needs to be informed by a lot more thought about all of the ways that money can come into the team or leave the team.
(3) Under either scenario 1 or 2, get rid of the “after-tax” concept and stick with “pre-tax”. One could also get rid of third-party transaction expenses, though that one should be less of a monetary issue.