Earlier this week, Sportico’s editor-in-chief Scott Soshnick reported that hedge fund titan Steve Cohen reached a deal to purchase the New York Mets at a $2.42 billion valuation (he’ll own 95% of the club, the Wilpon and Katz families will own 5%). Timing of the news didn’t set off any alarms: Cohen has been publicly in pursuit of team control since last December, and it’s well known the Wilpons want to avoid the $44 million debt payment owed on Citi Field in 2021 (never mind another season of nine-figure losses). But their urgency to sell the team before the end of the calendar year—and thus the decision to accept Cohen’s bid now (unlike A-Rod/J-Lo he could close quickly)—was driven, at least in part, by the tax implications tied to November’s election. Should Joe Biden win the presidency, the top long-term capital gains tax rate could rise from 20% to 39.6%—an increase that would cost the Wilpons an additional +/- $400 million. (Such legislation would need to pass through Congress, of course.) “Sellers definitely have an incentive to sell under a Trump [presidency],” said Murray Solomon (partner, EisnerAmper).
Our Take: In theory, knowing a team owner who wants to sell is financially incentivized to do so this year should give prospective buyers leverage in negotiations. But Robert Raiola (director of sports & entertainment, PKF O’Connor Davies) suggests the buy side might want to consider pushing a close before the end of 2020 too—particularly if they’re going to participate in the tax savings. It’s also possible that if the capital gains tax climbs by +/- 20%, team owners will want to offset their higher tax bill by getting a bigger return for the sale of their assets. As a result, the asking price for pro sports franchises could very well rise in 2021. For what it’s worth, Trump is seeking a 15% capital gains rate.
It’s unlikely there will be a flood of team sales before the end of the year; we’re simply running out of time, and these deals don’t happen quickly. (Timberwolves owner Glen Taylor is the only one in pro sports publicly known to be looking to sell.) But if Biden does become president and the gift and estate tax rate climbs to 45% as he’s proposed (up from 40%), turnover may be on the horizon. “The [additional] 5% would make estates more costly,” Solomon said. “The other big thing is that currently when someone dies and the estate tax is paid, the beneficiaries receive a step up in the tax basis for the fair market value [of the team on the date of the death]. This way if the beneficiaries sold the team, they would be able to recognize less gain. Under Biden’s plan, there is no step up—so the beneficiaries of the estate would step into the shoes of the deceased, essentially inheriting any built-in gain that would have to be recognized if they sold the team. [The prospective change in estate tax law] could [end up being] a reason for owners to sell as opposed to holding on [to the club] and having their beneficiaries pay much more in taxes in the future.”
Biden’s plan to bump the highest individual tax rate up to 39.6% (from 37%) will make the deductions new owners receive on the purchase of their teams “even more valuable,” Solomon said. The CPA explained, “Buying sports teams has been known as one of the last great tax shelters because when you buy a team, you get to write off virtually the whole purchase price over a 15-year period. The franchise itself, the players, season ticket holders—all of those intangibles are amortized over 15 years under tax law” (stadiums are amortized over 39 years). While the 2.6% increase is unlikely to be the catalyst for an investment in a pro sports team, if tax rates are climbing the benefits owners receive from buying the team (see: the +/- $1 billion Steve Ballmer got back thanks to a goodwill tax exemption) do gain importance.
Market Snapshot:
JohnWallStreet Index: 1,172.40 (-0.68%)
NASDAQ: 10,910.28 (-1.27%)
S&P: 3,357.01 (-0.84%)
DJI: 27,901.98 (-0.47%)
JSSI Biggest Movers (Sept. 17):
- PENN 73.00 (+7.60%)
- PBTHF 8.80 (-7.27%)
- BATRA 20.51 (-4.43%)