How to Make $750 Million, Cash Free

With most every other professional sport moving forward with a plan to resume play, baseball’s unsettled future sticks out like a sore thumb. Inevitably, battle lines have been drawn; the owners claim poverty and hardship, the players toe their pro-rata line while dangling various season lengths and inducements, and each side claims the other is intransigent and negotiating in bad faith (one side’s argument is much stronger than the other’s as far as that’s concerned).

One of the key arguments the owners have made is that their teams aren’t profit centers. It’s never couched in exactly those words, but that’s the primary gist of the argument. When Tom Ricketts spoke about the Cubs’ finances, he focused on a specific point: that the team isn’t hoarding cash.

“Most baseball owners don’t take money out of their team. They raise all the revenue they can from tickets and media rights, and they take out their expenses, and they give all the money left to their GM to spend,” he said, in regards to earlier comments by Scott Boras. Cardinals owner Bill DeWitt approached it from a different angle in discussing the team’s real estate expansion, saying “we don’t view (Ballpark Village) as a great profit opportunity.”

I find both of these quotes quite interesting, not for what they reveal, but rather for how precisely they are formulated. Ricketts focused on cash — dollars that flow from team coffers to owners’ bank accounts. DeWitt focused on the profitability of real estate ventures, profit being a notoriously nebulous concept.

Before going any further, I’ll note that both Ricketts and DeWitt are within their rights to posture heavily, or even lie in substance, with these statements. How productive that approach is (eh) and how well it sits with us (not very!) are questions worth considering, but they’re allowed. They’re not under oath, and they’re in no way required to open their books. Parties bluff and lie in negotiations all the time, and both of these statements are, at their core, negotiations with the players using the public as intermediary.

But let’s take them at their word. This seems to be the core issue the owners are asserting: they aren’t taking home any money from their teams, even in good times, so they can’t be expected to take a loss when times get tough. No cash when times are good, cash loss when there’s a recession; the math doesn’t add up. In almost every public statement, owners mention this exact sentiment.

Rather than scoff and declare shenanigans, I decided to abide by the exact letter of Ricketts’ and DeWitt’s statements and see how much non-cash profit I could make while running a theoretical team. Imagine this: I run a business that makes $1 billion in revenue and pays $550 million in total operating costs. Off the top, you might say that I’m running a business that makes $450 million in cash. Now, imagine instead that I bought the Salvator Mundi in an auction and displayed it in my boardroom. I now have zero cash remaining. You would be justified in saying, however, that I’m richer than if I had simply given that $550 million to charity, or spent it on increased operating costs.

Of course, that’s not the reality of the owners’ situation. They aren’t buying expensive art and stashing it in the home clubhouse. It’s simply an extreme example of why cash out is a poor measure of profitability. Rather than simply mention a fancy painting, let’s walk through a hypothetical example of what this could look like for a team, and why cash, or even the “profitability” of a specific venture, isn’t a great metric for financial gain.

In this hypothetical, I’m going to take over a generic team and run it for 10 years. The costs and revenues associated with baseball are all invented — this isn’t an attempt to work out the books of any particular team. Instead, I’ll abstract them, so that we can instead focus on the overall pattern rather than year-to-year weirdness. Let’s further stipulate that the team would, with no interference, clear a healthy pile of cash every year — after all, the point of this exercise is to transform a positive cash flow business into a flat cash flow business. Here are those initial inputs:

FanGraphs Fiddlers Year 1 Revenues
Year TV Revenue Gate Revenue League Revenue Player Outlay Other Costs Net
1 $50M $80M $50M -$90M -$40M $50M

Right away, we have a problem. The team needs to have no net cash at the end of the year to fulfill Ricketts’ statement. We can’t simply sweep it into a bank account held in the team name either; we’ll need to spend it on “expenses.” Let’s buy some real estate in the area around the stadium, considering that part of the team’s infrastructure, which Ricketts explicitly mentioned as part of expenses. That will allow us to generate future revenue by renting out that real estate (in practice, teams also own and operate commercial ventures on stadium-adjacent land, but we’ll leave it to rentals in this hypothetical).

While we’re at it, let’s take out some debt. $50 million only buys so much real estate, after all, and we’d like to go big. We’ll issue $500 million in bonds and use the proceeds, in conjunction with our profit, to buy $550 million worth of real estate. I’m going to use numerous simplifications here, so if you’re in the market for some financial minutiae, you’re in luck. The debt is perpetual, callable at par in any year, and pays a coupon of 3.5%. In practice, this means that every year we’ll pay interest equal to 3.5% of our debt burden, and we’ll also be able to pay down the debt with any cash on hand. This doesn’t mirror real-life bonds, but it’s close enough for our purposes; adding a debt stack, a yield curve, and a complicated waterfall of bond repayments and new issuance to cover old debts isn’t worth the extra complexity it costs.

Next, we need some assumptions for our real estate. We need to follow DeWitt’s rule; our real estate ventures can’t be a great opportunity for profit. To accomplish this, I’m assuming an arbitrary rental yield of 4%. That means that on our $550 million purchase, we can expect annual income of $22 million. Given that we’ll be paying 3.5% of $500 million, or $17.5 million, in debt servicing costs, we’re only clearing $4.5 million a year, or a 0.8% return on our $550 million in gross assets. That certainly qualifies as “not great” in my book.

Alright, with that first purchase down, let’s look at year two. Of note, the proceeds from a bond show as a positive (we took in $500 million) and buying real estate shows up as a negative (we paid $550 million):

FanGraphs Fiddlers Years 1-2 Revenue
Year TV Revenue Gate Revenue League Revenue Player Outlay Other Costs Debt Service Bond Proceeds Real Estate Rent Net
1 $50M $80M $50M -$90M -$40M $0 $500M -$550M $0 $0
2 $52.5M $84M $52.5M -$94.5M -$42M -$17.5M $0 $0 $22M $57M

All of our team-related costs and revenues increased by 5%, to approximate the appreciation in the value of live sports viewing over the past 10 years, as well as player and front office salary increases. Our debt costs and rental revenue are also in there. And dangit! We have $57 million in profit to put to work again to get back to our zero cash balance.

This time, I’m introducing a new investment. Real estate is all well and good, but I like having pretty things. This time, we’re putting that $57 million towards stadium improvements; a scoreboard, perhaps, or some new luxury boxes. I’m not here to come up with the specifics, just create a sketch. These improvements will create revenue, but we need to stick with DeWitt’s directive; they can’t be worth much. Let’s assume they generate the same 4% return as rental yield — not through rent, but rather through increased ticket prices, better concessions sales, or whatnot.

Next, it’s time to add a new table, net asset value. Thinking back to the painting example again, if my only asset was the Salvator Mundi, I’d have an asset worth $450 million, so my net asset value would be $450 million. If instead I had taken out a $450 million loan to buy it, I’d have a $450 million liability offsetting my asset, and a net $0 asset value. Here’s how that looks in Year 2 (these tables scroll):

FanGraphs Fiddlers Years 1-2 Revenue with Stadium Improvements
Year TV Revs Gate Revs League Revs Player Outlay Other Costs Debt Service Income From Bonds Real Estate Purchases Rent Stadium Improvements Improvement Income Net
1 $50M $80M $50M -$90M -$40M $0 $500M -$550M $0 $0 $0 $0
2 $52.5M $84M $52.5M -$94.5M -$42M -$17.5M $0 $0 $22M -$57M $0 $0

FanGraphs Fiddlers Asset Values
Year Real Estate Stadium Improvements Debt Balance Net Asset Value
1 $550M $0 -$500M $50M
2 $550M $57M -$500M $107M

You might notice, if you’re a financial nitpicker, that I’ve left out terms for depreciation and appreciation, not to mention amortization. A scoreboard that costs $100 million today won’t be worth $100 million in 20 years; most likely, it will be antiquated and worthless. On the other hand, $100 million of real estate today will likely be worth significantly more in the same 20 year span. I’m just treating both as zero rather than, again, adding complexity to the model without greatly improving its usefulness.

From there, I’m going to start going faster. In Year 3, our team starts making money on its stadium improvements and doubles down on improving the stadium. I put our entire net revenue, as well as the proceeds of a new $100 million bond sale, into stadium improvements. Now we’re cooking with gas:

FanGraphs Fiddlers Years 1-3 Revenues
Year TV Revs Gate Revs League Revs Player Outlay Other Costs Debt Service Income From Bonds Real Estate Purchases Rent Stadium Improvements Improvement Income Net
1 $50M $80M $50M -$90M -$40M $0 $500M -$550M $0 $0 $0 $0
2 $52.5M $84M $52.5M -$94.5M -$42M -$17.5M $0 $0 $22M -$57M $0 $0
3 $55.1M $88.2M $55.1M -$99.2M -$44.1M -$17.5M $100M $0 $22M -$161.9M $2.3M $0

FanGraphs Fiddlers Asset Values
Year Real Estate Stadium Improvements Debt Balance Net Asset Value
1 $550M $0 -$500M $50M
2 $550M $57M -$500M $107M
3 $550M $217.5M -$600M $167.5M

In Year 4, we’re still working on the stadium, though we’re also, just to show that it can be done in this stylized model, paying down some debt. Bond repayments, naturally, show up as a negative number — cash paid out. This will lower our debt burden for next year, freeing up money to plow back into improvements. We still have no net cash balance, but the net asset value of the club is starting to pile up:

FanGraphs Fiddlers Years 1-4 Revenues
Year TV Revs Gate Revs League Revs Player Outlay Other Costs Debt Service Income From Bonds Real Estate Purchases Rent Stadium Improvements Improvement Income Net
1 $50M $80M $50M -$90M -$40M $0 $500M -$550M $0 $0 $0 $0
2 $52.5M $84M $52.5M -$94.5M -$42M -$17.5M $0M $0 $22M -$57M $0 $0
3 $55.1M $88.2M $55.1M -$99.2M -$44.1M -$17.5M $100M $0 $22M -$161.9M $2.3M $0
4 $57.9M $92.6M $57.9M -$104.2M -$46.3M -$21M -$30M $0 $22M -$37.6M $8.7M $0

FanGraphs Fiddlers Asset Values
Year Real Estate Stadium Improvements Debt Balance Net Asset Value
1 $550M $0 -$500M $50M
2 $550M $57M -$500M $107M
3 $550M $217.5M -$600M $167.5M
4 $550M $255M -$570M $235M

In Year 5, it’s time for more real estate and more debt repayment. We have to keep doing something with our money — we can’t run a cash balance, after all. The asset value is increasing, always increasing:

FanGraphs Fiddlers Years 1-5 Revenues
Year TV Revs Gate Revs League Revs Player Outlay Other Costs Debt Service Income From Bonds Real Estate Purchases Rent Stadium Improvements Improvement Income Net
1 $50M $80M $50M -$90M -$40M $0 $500M -$550M $0 $0 $0 $0
2 $52.5M $84M $52.5M -$94.5M -$42M -$17.5M $0 $0 $22M -$57M $0 $0
3 $55.1M $88.2M $55.1M -$99.2M -$44.1M -$17.5M $100M $0 $22M -$161.9M $2.3M $0
4 $57.9M $92.6M $57.9M -$104.2M -$46.3M -$21M -$30M $0 $22M -$37.6M $8.7M $0
5 $60.8M $97.2M $60.8M -$109.4M -$48.6M -$20M -$20M -$53M $22M $0 $10.2M $0

FanGraphs Fiddlers Asset Values
Year Real Estate Stadium Improvements Debt Balance Net Asset Value
1 $550M $0 -$500M $50M
2 $550M $57M -$500M $107M
3 $550M $217.5M -$600M $167.5M
4 $550M $255M -$570M $235M
5 $603M $255M -$550M $308.1M

Years 6 through 10 are more of the same. I set an arbitrary goal of ending with as much money in stadium improvements as in real estate, which I accomplished by focusing heavily on stadium improvements over these years. You could achieve similar results by focusing more on real estate — I’m just a sucker for symmetry:

FanGraphs Fiddlers Years 1-10 Revenues
Year TV Revs Gate Revs League Revs Player Outlay Other Costs Debt Service Income From Bonds Real Estate Purchases Rent Stadium Improvements Improvement Income Net
1 $50M $80M $50M -$90M -$40M $0 $500M -$550M $0 $0 $0 $0
2 $52.5M $84M $52.5M -$94.5M -$42M -$17.5M $0 $0 $22M -$57M $0 $0
3 $55.1M $88.2M $55.1M -$99.2M -$44.1M -$17.5M $100M $0 $22M -$161.9M $2.3M $0
4 $57.9M $92.6M $57.9M -$104.2M -$46.3M -$21M -$30M $0 $22M -$37.6M $8.7M $0
5 $60.8M $97.2M $60.8M -$109.4M -$48.6M -$20M -$20M -$53M $22M $0 $10.2M $0
6 $63.8M $102.1M $63.8M -$114.9M -$51.1M -$19.3M $0 -$40M $24.1M -$38.9M $10.2M $0
7 $67M $107.2M $67M -$120.6M -$53.6M -$19.3M -$25M $0 $25.7M -$60.2M $11.8M $0
8 $70.4M $112.6M $70.4M -$126.6M -$56.3M -$18.4M $0 $0 $25.7M -$91.9M $14.2M $0
9 $73.9M $118.2M $73.9M -$133M -$59.1M -$18.4M $0 $0 $25.7M -$99.1M $17.8M $0
10 $77.6M $124.1M $77.6M -$139.6M -$62.1M -$18.4M $0 $0 $25.7M -$106.7M $21.8M $0

FanGraphs Fiddlers Asset Values
Year Real Estate Stadium Improvements Debt Balance Net Asset Value
1 $550M $0 -$500M $50M
2 $550M $57M -$500M $107M
3 $550M $217.5M -$600M $167.5M
4 $550M $255M -$570M $235M
5 $603M $255M -$550M $308.1M
6 $643M $293.9M -$550M $387M
7 $643M $354.2M -$525M $472.2M
8 $643M $446M -$525M $564.1M
9 $643M $545.1M -$525M $663.1M
10 $643M $651.8M -$525M $769.8M

After 10 years, the asset value of our team has increased by more than $750 million. This isn’t cash on hand; you couldn’t go down to the bank and withdraw that money. But it’s still economic gain; were we to sell the team, the value would go up because of these revenue-increasing improvements. In the case of the real estate, we could even sell it without selling the team — though that’s impossible for stadium improvements.

Imagine, if you will, that the team was worth $1 billion at the start of Year 1. Even if the underlying business (taking in TV rights and gate revenue and spending some of it to create entertainment) hasn’t changed at all, there’s an additional boatload of assets to sell to any prospective buyer — in my naive model, $762 million worth of extra assets. You can argue that this is an imperfect way of representing team sale price — and it is! But it’s fine for a sketch; no one would argue that putting $600 million into stadium improvements that increase local income and buying $600 million worth of real estate doesn’t increase the value of owning the team.

I’ve left aside all sorts of economic details. My treatment of depreciation and appreciation is ridiculous. My debt terms are silly. I’ve completely ignored stakes in RSN’s, which is one way many teams choose to receive compensation for their broadcast rights, but that work largely like real estate in this model. I’ve also left out tax subsidies teams might receive for real estate development. It’s an inexact science!

Still, we can say this much. At no point in these 10 years did this fictional team ever take in a cash profit. The bank account saying “FanGraphs Fiddlers” (it’s my team, I’ll name it what I want) has the exact same balance as always. Our real estate ventures weren’t “greatly profitable” — over 10 years, our $1.3 billion in accumulated real estate and stadium improvements have netted us only $142 million after the cost of debt. IRR isn’t a great way to look at this because we didn’t have $1.3 billion in assets for the entire 10 years, but no one would argue for that being a wildly profitable rate of return.

And yet — the team value has nearly doubled in the course of a decade. A new buyer would pay something like $1.75 billion for the team. That’s not money in our pocket, but it’s net worth — no different, aside from asset liquidity, than owning a stock that went up by 75%. Even if you don’t receive any dividends, you’re clearly making money on the deal.

Next, let’s COVID-19-adjust this situation. The season is cut to 82 games, gate revenue falls to zero, some renters can’t pay; you know the drill. Now we’re facing a cash shortfall:

FanGraphs Fiddlers Revenues (COVID-19)
Year TV Revs Gate Revs League Revs Player Outlay Other Costs Debt Service Income From Bonds Real Estate Purchases Rent Stadium Improvements Improvement Income Net
2020 $41.2M $0 $41.2M -$74.2M -$48.9m -$18.4M $0 $0 $12.9M $0 $0 -$46.1M

In this world, though, player contracts are absolute (on a pro-rata basis), and an 82-game season is unavoidable. We can’t run a negative cash balance — we’ll have to take out debt instead. Now our 11-year totals look like this:

FanGraphs Fiddlers Revenues (COVID-19 w/Debt)
Year TV Revs Gate Revs League Revs Player Outlay Other Costs Debt Service Income From Bonds Real Estate Purchases Rent Stadium Improvements Improvement Income Net
2020 $41.2M $0 $41.2M -$74.2M -$48.9m -$18.4M $46.1M $0 $12.9M $0 $0 $0

FanGraphs Fiddlers Asset Values (post-COVID)
Year Real Estate Stadium Improvements Debt Balance Net Asset Value
2020 $643M $651.8M -$571.1M $723.7M

There’s no denying it; the team lost money in 2020. From a rate of return perspective, though, and assuming the team was initially worth $1 billion dollars, all this means is that the rate of return on investment, over the entire span of 11 years, fell from 5.9% annualized to 5.1% annualized. The net accumulated asset value is still enormous.

If the owners are forced to honor player contracts, this is the likely outcome. It’s already happening, a little — Ricketts mentioned in his interview that every team has taken out debt this year. The owners are hoping to make that back in decreased salary costs, but even if they don’t, that doesn’t undo the last 10 years of accumulation, if my model roughly captures the reality of owning a team.

About that — I make no representation that this is an accurate picture of a team’s finances. I’ve purposefully left every detail vague and generic. I certainly don’t know any team whose finances match this exact picture. I’m not attempting to capture the inner workings of the Cubs or the Cardinals.

My point is merely this: when owners say things like “we don’t take any cash out” and “our investments aren’t a great profit source,” read those closely. Those statements sound like they mean, necessarily, that owners aren’t getting any richer. They’re not keeping anything for themselves! They’re making bad investments! That simply isn’t the case, however.

Maybe baseball teams are bad investments — though the rapidly increasing cost of one suggests that this isn’t the case. Maybe my model is goofy — it certainly has its fair share of blind spots. Maybe a look into a team’s complete books and records would show that the profit from ongoing operations is actually vanishingly small, though I’ve never seen any compelling evidence of that. Just remember — “making money” doesn’t just mean putting zeroes on your bank account or hundos under your pillow. There are plenty of ways for the rich to get richer without resorting to cold, hard cash.





Ben is a writer at FanGraphs. He can be found on Twitter @_Ben_Clemens.

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Excellent analysis. There’s a reason no owner wants to open their books. An analog is how multi-national corporations use transfer pricing to show little/no profit in different geographies.