Players Get 50% of HRR. The Owners Also Get 50% of HRR…….Plus So Much More!!!

 

In my previous blogs we have now seen how in the next few seasons:

1. Players’ Compensation will be squeezed hard in contract negotiations during the rest of the current CBA,
2. Many Players will lose their roster spots or be squeezed out of the League entirely and replaced by younger, cheaper Players……the John Klinberg example, 

Now let’s see how the Owners have been doing financially since 2012 when the current CBA was signed. 

The Owners’ profits are not only derived from the 50/50 split of HRR with the Players.  The Owners have many more profit sources

In fact, if one looks at the big picture, the Owners’ 50% share of HRR is relatively insignificant. The Owners’ make their really big money from the rapid increase of franchise values, the tax shelter benefits of franchise ownership, and the profits from the Owners’ ancillary businesses which includes (but is not limited to) real estate development around the arena and profits derived from managing arena operations, not one penny of which is shared with the Players.  The reason Players lose out here is that although the Players’ split HRR with the Owners, the CBA’s definition of HRR is so extremely narrow that the Owners’ actual financial benefits of owning an NHL team greatly exceeds HRR growth.

Financial Impact of Reducing Players' Share of HRR from 75% to 50%

Prior to the imposition of Gary’s triple hard Salary Cap in 2006, total Players Compensation was somewhere between 70% and 75% of estimated HRR, and there was no salary cap.  Players’ Compensation is now fixed at 50% of HRR, not including additional deductions that will be necessary for Escrow Balance repayment, and HRR is very narrowly defined.  With ‘normal non-COVID’ HRR of roughly $5 billion, Players’ Compensation would be $3.75 billion prior to the hard cap era as compared with current ‘triple hard cap’ Players’ Compensation of $2.5 billion. This represents an annual transfer from Players’ to Owners of $1.25 billion per season, which is pure operating profit for the Owners.   But wait, that’s not all.  

Expansion Fees have Skyrocketed

The last NHL expansion prior to Las Vegas was in 2000, and the expansion fee was $80 million.  The NHL just recently collected $1.15 Billion for admitting Las Vegas ($500 million) and Seattle ($650 million).  Even though the right to earn expansion fees is one of the Owners’ financial benefits of franchise ownership, that windfall is excluded from the definition of HRR.   As such not one penny of those expansion fees are shared with Players.  And the value of an expansion franchise has gone from $80 million to $650 million……an increase of 812.5%. 

Value of Existing Franchises has Skyrocketed

Not only have expansion fees increased, but valuations for all existing franchises have also increased rapidly.  Forbes reported that the average NHL franchise value in 2012, at the beginning of the current CBA, was $240 million.  However, it has recently been reported that the current average NHL franchise value is now $934 million.  The increase in average franchise value, from $220 million to $934 million, represents growth of 424.5% during the last 10 years since the current CBA was signed. 

$1 Billion NHL COVID Insurance Claim excluded from HRR

During the first week of January, it came to light that the NHL has filed an insurance claim of $1 billion to indemnify the league for its COVID related losses.  However, the language of s. 51.1(b)(xi) of the current CBA specifically excludes insurance recoveries from the definition of HRR.  As such, even though the insurance recovery would represent revenue lost by the owners due to COVID, not one penny of a potential $1 billion insurance payout will be shared with the Players because the insurance recovery ‘exclusion’ in the CBA was not renegotiated by the NHLPA in the 2020 Memorandum of Understanding.

Tax Shelter Benefits of Owning a Sports Franchise....the Owners' Big Secret 

First, under current US tax law, owners of sports teams may deduct the cost of purchasing a team over 15 years from their taxable income.  Canada has a similar tax shelter. These deductions are known as amortization, and it is like taking depreciation deductions for the cost of physical assets.  However, in this ‘special case’ accelerated depreciation is allowed for intangible assets such as Player contracts. For example, from a tax accounting perspective, the new owner of the Penguins may deduct the $900 million cost from his taxable income (regardless of whether or not the source of his taxable income is related to NHL hockey) over the next 15 years….or $60 million per year of tax free income!! All while the value of the franchise keeps climbing.

Second, an Owner’s profit from the sale of a franchise is taxed at capital gains tax rates, and those rates are roughly one half of the income tax rates paid by salaried employees like NHL Players.  So when the Penguins were sold this season for roughly $900 million, the selling Owner(s) will also get a tax break worth hundreds of millions that ordinary people cannot enjoy. 

Now let’s see how the Players have been doing during that same period of time. 

For the season ended in June 2012, the Players’ share of HRR was $1.72 billion for 30 Teams.  However, the Players’ Share of HRR for the 21/22 season, even if the league manages to hit HRR of $4.8 billion, is only $2.4 billion for 32 Teams.  That is growth of only 30.8% for Players Compensation versus 424.5% growth for franchise values during the same period of time, and adjusted for the increase in the number of Teams from 30 to 32.  Franchise values have grown almost 14 times as fast as Player salaries in less than 10 years!!  No wonder the Owners refused to include their profits from franchise sales or expansion proceeds in the definition of HRR when the CBA was negotiated in 2012. 

Comparison of Owners' Franchise Value Growth versus Player Compensation Growth

Summary

Owners have benefitted from a massive increase in their franchise values; every penny of which is excluded from HRR. 

Owners have benefitted from receiving $1.15 billion in expansion fees over the last few years; also excluded from HRR.  

Owners enjoy the benefit of a new additional COVID credit facility of $1 billion arranged by the NHL in January 2021; a cash infusion that is also excluded from HRR.

Owners have the benefit of the NHL’s $1 billion COVID insurance claim; also excluded from HRR. 

In fact, the definition of HRR has never been changed since Gary’s triple hard cap era began in 2006. 

Owners earn profits from ancillary businesses related to owning an NHL franchise, including real estate development around the team’s arena and managing arena operations (often being paid annual multimillion dollar ‘arena management’ subsidies by the local governments that own the arenas); also excluded from HRR.  

Owners get massive tax shelter advantages from team purchases, and from team sales, that can be applied to all of the Owners’ taxable income, whether or not the source of those profits is in any way related to hockey.  

Players pay full income tax on their salaries like everyone else. 

So, one has to ask…….why do the Players choose to continue down this path, even though there have been multiple opportunities since 2006 to renegotiate the CBA, and in particular to negotiate amendments to the definition of HRR and Escrow? 

It’s clear that Gary’s current triple cap system, is rigged against the Players.  There is no equality.  There is no partnership.  

Why continue at all with a CBA if the NHLPA has been unable to win any financial concessions whatsoever from the Owners since 2006, such as the inclusion of gambling revenue in HRR?  Why continue at all with a system that is rigged in favour of the NHL, and the Players have no way to respond to the threat of an owners’ lockout because their careers are so short?

Next week we will look at some options the Players may wish to consider.

See you next week……..