ON A GRAY, misty April afternoon in San Francisco, Golden State Warriors CEO Rick Welts stands atop a parking garage overlooking the massive cavity that, in just over one year's time, will house the three-time NBA champions.
"I could come down here every day," Welts says, holding an oversized Warriors umbrella at the site of the Chase Center, the team's future arena, which is set to open next season.
That umbrella will come in handy as the dollars pour down in the coming years by virtue of owning this private facility, but not all of those dollars will come from basketball. Relying solely on traditional revenue streams would've made it impossible for even the NBA's premier superteam to claim such an expensive property. As much as Golden State will profit from the sale of fancy courtside lounges with proximity to a private wine cellar and the membership fees for the right to buy a season ticket, there simply won't be enough money coming from this arena, or any arena, to compensate for the overall costs.
That's why the Warriors, along with a number of other NBA franchises, are looking to tech giants, million-dollar condos and buzzy restaurants to offset the construction of new facilities, as well as the price of running a team in a league whose salary cap and infrastructural budgets are ballooning. Although the league's profitable broadcast deal that expires in 2025 helps cover much of those expenditures, there's no certainty that the next contract will be as lucrative as this one.
In other words: To be in the basketball business in 2018, a team can't simply be in the basketball business.
Once Welts is through marveling at the progress, he turns toward what will be the Chase Center gate house, where the emerging structures of two buildings that will hold 580,000 square feet of office space occupied by Uber are being constructed.
To compensate for the move and their exorbitant luxury tax bills, the Warriors sold off 45 percent of this San Francisco project to the ride-share company, as well as 10 percent to Alexandria Real Estate equities, a development company that's been active in the area. The Warriors then retained 45 percent ownership of that office space. Consequently, the most successful basketball team in the world will be collecting hefty rent checks for the foreseeable future from one of the most successful tech behemoths in the world.
As fond as team owners and executives have become in recent years of calling their beloved franchise a "technology company," or "media company" or "entertainment company," there's an increasingly popular tag being heard at board of governors' meetings:
The NBA is a real estate company.
"We are the new anchor store," says Atlanta Hawks CEO Steve Koonin.
A WARRIORS GAME at the Chase Center in 2019 will feel more like visiting an opera house than a basketball arena. The building will be perched over San Francisco Bay like a lighthouse. Fans will flow into a handsome plaza bathed in the reflection of the glass structure where, inside, Stephen Curry will perform his pregame aria as the bowl comes to life. The arena will be not only a monolith to Steph and the Warriors dynasty, but also to a city that has amassed unparalleled wealth and cachet over the past two decades.
For the Warriors, erecting this palace has been prohibitively expensive -- upward of $1.1 billion, according to Bay Area and league sources. There are municipalities in the United States that are still amenable to publicly subsidizing the construction of sports facilities for rich ownership groups, but San Francisco isn't one of them. The city's costs are too expensive, and its civic politics too suspicious of commercial development. The Warriors had to pay for this thing out of their own pocket, and they needed to find new ways to do it.
For decades, the NBA has derived the vast majority of its revenue from a few major buckets: broadcast revenue, tickets and suite sales, sponsorships, merchandise and licensing. That's changing.
"The economics don't make any sense if you don't have additional opportunities to drive revenue to justify putting a billion dollars to building one of these," says Welts, 65, who was inducted into the Naismith Basketball Hall of Fame in September.
Curry, Kevin Durant, Klay Thompson and Draymond Green might be the best show on hardwood, but a schedule of 41, 55 or even 100 home dates combined with a slate of marquee concerts and cultural events can't sufficiently balance the books, service the loans and maintain the building.
A team can raise private capital, recruit competent partners and structure its financing with the finesse of a pretty Golden State split-cut set in the half court -- and the Warriors have done all of the above -- but investors want to see a return on their money. Sources say that additional basketball-related income from the move into the new arena is projected to reach between $175 and $200 million annually over current numbers at Oracle Arena. But the Warriors could also be looking at a payroll of approximately $323 million in combined salary and luxury tax commitments if Durant and Thompson return -- and that's filling out the 2019-20 roster with five minimum-salary players.
So the organization is becoming a landlord to Uber and will also lease out 100,000 square feet consisting of 29 restaurant and retail spaces. Much of the income derived from the project will go to cover the debt, but the Warriors anticipate healthy earnings from their high-value real estate. And unlike the revenue generated inside the arena, these earnings don't have to be shared with players and the have-not franchises of the NBA.
"This is the foundation of our success for the next 40 years," Welts says. "Our core product will always be the Warriors and the thing people care most about, but flowing from that are going to be businesses that, [when] very carefully chosen, we can leverage the Warriors' success by doing more things."
ACROSS THE BAY Bridge and 85 miles up the road in Sacramento, a model condo boasts all of the accoutrements of present-day urban living: the midcentury seating in the open living space, appealing neutral veneers on the sleek cabinetry, the mosaic backsplash in the kitchen, the Viking appliances. Samples of smart bath finishes rest on a table to indulge the imagination of potential buyers at the Residences at the Sawyer. The entity that's selling these dream homes?
That would effectively be the Sacramento Kings.
Forty of the 45 units that cohabitate a newly constructed Kimpton boutique hotel have been purchased, including a 1,370-square-foot two-bedroom on the 14th floor in June for more than $1 million, according to public records. On a square-foot basis, this is one of the most expensive residential properties ever sold in California's capital. And on the receiving end of that sales contract is a holding company that belongs to the NBA team playing just across David J. Stern Walk at Golden 1 Center.
The Kings, a franchise that five years ago had one foot out the door to Seattle, have been undertaking one of the most aggressive real estate plays in professional sports. The deep-pocketed buyers of these condos -- along with the tenants who will occupy 150 mixed-income residential units a few blocks away and the approximately 250,000 square feet of retail space the Kings own in the district -- will be every bit as vital to the bottom line in Sacramento as the development of De'Aaron Fox, Marvin Bagley III and Buddy Hield.
In many respects, the deal constructed to pave the way for this development was not so much a vision as the product of a ticking time bomb. Then-NBA commissioner David Stern essentially presented the Kings' buyer group with an ultimatum: Build a new arena in three years' time, with an allowance of 60 days to figure out all the particulars. When the deal was consummated, the city of Sacramento provided approximately $250 million in subsidies -- about $220 million in cash, with land valued in the vicinity of $30 million.
According to multiple sources as well as commercial rental valuations in Sacramento, the Kings project to earn approximately $8 million annually in revenue on the retail and restaurant spaces, with another $2 million on the 100,000 of office space. The prospect of those proceeds doesn't come without serious risk. The Kings put up 90 percent of the equity, and the market in Sacramento -- which isn't San Francisco -- could suffer a downturn at any point. But it still represents a sizable return for a franchise that has lost money before revenue sharing in recent seasons, even with a relatively successful business operation.
"The franchise is a media company. It is a digital company. It holds a key to a demographic. And it's also an epicenter for real estate development." Former NBA commissioner David Stern
In addition to player payroll, which a few years ago crossed $100 million annually among most teams and continues to climb, teams over the past decade have been engaged in arms races to brandish the glitziest training facilities, the most sophisticated medical and performance programs and the deepest analytics departments.
"The price of maintaining teams goes up and up," says Kings owner Vivek Ranadive.
Much of that tab can be picked up by each team's share of the robust nine-year national broadcast deal the league is currently enjoying, but with plenty of franchises still finishing each season with significant losses and the entertainment marketplace more disruptive than ever, the prospect of finding new sources of income has never been more attractive.
"Teams have traditional revenue streams -- sponsorship, ticket sales, media rights and what you can generate inside your arena," says Koonin, the Hawks' CEO. "Those can grow over time, but real estate development can represent a hedge against future uncertainty in all of these revenue areas."
In addition to the chance that the next broadcast contract might not reach $24 billion territory again, there are other vagaries in the business. Future generations might be less charmed by the wonders of a 3-point barrage or a ferocious dunk than live esports or some other new pastime. And if they still enjoy basketball, they could prefer watching it in the comfort of their home, which is tricked out with a virtual reality system. Twenty years from now, rational people might find it unseemly that anyone ever dropped $25,000 on a pair of season tickets to watch live basketball.
In past years, other entities have reaped these benefits, as AEG does in Los Angeles with Staples Center and the adjacent LA Live complex. Tired of looking around and seeing others making money off the power of their brands, NBA teams have gone into acquisition mode.
"Real estate is a significant slice of the asset here," Ranadive said, adding that his franchise's value is likely to appreciate as the development around its home prospers.
For the Kings, the project was a no-brainer, even if the venture was charting unknown territory. The team leveraged its brand, combined it with the local enthusiasm for redevelopment and purchased the right to control the character of the adjacent area, from which it will profit, so long as the local economy continues to thrive.
"This arena and development are now part of a project much bigger than itself from a real estate perspective," said Ali Youssefi, the developer of the mixed-income, mixed-use project a few blocks away from the arena and minority owner of the Kings, earlier this year before he died of cancer at 35. "There's an ecosystem here that you want to see thrive, and that means you want to see a variety of uses that extend far beyond basketball and entertainment."
HAWKS OWNER TONY Ressler is among the new wave of NBA owners that includes the Warriors' Joe Lacob, Ranadive and the Milwaukee Bucks' group (which invested in its own multiuse development, which includes a new arena). These owners have a far more voracious appetite for risk than the family businesses that presided over the league for much of its existence. Combine that ambition with the ease with which developers have been able to secure cheap capital over the past decade, and you've got a recipe for the expansive pursuit of opportunities that extend far beyond the arena walls and broadcast airwaves.
That's why the Hawks are partnering with CIM Group on a proposed $5 billion, 12 million-square-foot, multiuse project that Koonin characterizes as an LA Live for Atlanta. A Hawks holding company would be a significant minority partner with an approximate share of between 30 and 40 percent. If the development is successful in its booming urban market, a franchise that has consistently finished in the red during its 50-year existence could handsomely balance the books with its investment.
"What you're seeing is a more entrepreneurial use of ownership," says former commissioner Stern. "The franchise is a media company. It is a digital company. It holds a key to a demographic. And it's also an epicenter for real estate development."
The Orlando Magic are another apt study in this pivot. The team, owned by the DeVos family since its formation in 1989, had largely behaved as a mom-and-pop operation during its first 15 years or so. Early last decade, the Magic started to envision their new downtown arena and were intrigued by the idea of including some mixed-use development.
But as the arena was being constructed, the recession hit. There were faint hopes that developers might step up when the economy began to recover, but none initially did. If the Magic wanted to realize some additional opportunities, they'd have to roll up their sleeves and assemble the right combination of partners and capital, even if the real estate business wasn't exactly a home game for this ownership group.
"This is the next wave that's come along in the past four to six years -- expand the portfolio of holdings," Magic CEO Alex Martins says.
Next year, construction is scheduled to begin on a complex that will include 200,000 square feet of office space, a high-rise hotel, 300 units of mixed residential housing, 100,000 square feet of retail space and a performance venue that will seat nearly 3,000. The Magic's piece of the overall development represents only 15 to 20 percent, but their participation was central to bringing the project to fruition.
"When you talk about equity in the project, we have the smallest piece," Martins says. "But it utilizes some of the brand equity of the Orlando Magic, and the Magic ownership owns the land itself."
BACK IN SAN FRANCISCO, Welts speaks in similar terms about the power of the team's brand to help get Golden State's massive deal executed. Although the Warriors are a veritable ATM for ownership right now, it's conceivable that someday soon an NBA team could generate as much revenue from a nontraditional source like real estate as it does from basketball. Modes of entertainment change with each generation, but city folk will always need spaces to live, work, eat and shop.
"Right now the basketball business is the most profitable thing we're doing, and it will always be our centerpiece," Welts says. "I think they could be equal, but I don't know that the real estate will dwarf the basketball business."
If teams are able to leverage those brands to make a fortune in the real estate business, how much do the players who are driving the value of those brands see? According to the current NBA collective bargaining agreement negotiated in 2016: zero. Real estate revenue falls outside the definition of basketball-related income (BRI).
"We think this revenue should be shared with the players," says Gary Arrick, the NBPA's chief financial officer. "Irrespective of what the current CBA says, it's a reasonable argument that the players should share in some fashion in all revenue generated by the game -- whether directly or indirectly. We are not arguing that the ownership isn't putting up the capital and taking the risk. But we would argue there should be some recognition of the players in these additional revenue streams, including real estate income streams, increase in franchise value, etc."
The owners also need to figure out how to share the money, if at all. Without a change to the rules, a profitable team might have to cut a check as part of the league's revenue sharing program to a team that's losing money in the arena, but earning a hefty sum on its real estate investments.
No team executive would comment on Arrick's position, or the potential for "money-losing" teams to collect cash in revenue sharing as they're making millions down the block. Speaking even in hypotheticals about future CBA negotiations is verboten. Yet each emphasized that while franchises are undoubtedly using the civic equity that comes with owning a beloved local team, real estate can be a dicey business. Not every multiuse, urban renewal project flourishes. The Hawks needn't look half a mile east to find Underground Atlanta, which has been a white elephant in the city for decades.
In the case of these developments, ownership and their partners are assuming all the financial risk. Should those gambles pay off, players will watch those same owners rake in a hefty income, just as they've witnessed the franchises they've bolstered with their talent and charisma soar in market value in the past decade. Historically, NBA owners and the players' association have argued about how to split BRI at the bargaining table. But at the next round of CBA negotiations, they could also battle over what constitutes BRI.
As LeBron James famously tweeted when he learned nearly six years ago that the struggling Kings sold for $525 million, "What the hell we have a [lockout] for. Get the hell out of here."
And in a certain sense, Steph is already lending his equity to the monumental project in San Francisco, even if he's not cutting a check to get in on the investment.
"Yes, the Warriors would probably love to have Steph as an investor if it were not prohibited by the CBA, but that right there is the point," Arrick says. "They wouldn't want him for his money, necessarily. They'd want him for his name. That's his value to the project."