Owning an MLB baseball team is like owning a mansion in a hot real estate market. You watch your valuation of your asset skyrocket — but nobody knows that you are mortgaged to the hilt. Per Michael Ozanian of CNBC, the Washington Nationals have the second highest debt load as a percentage of team value in the MLB, second only to the Miami Marlins who sit at 38 percent.
If Ozanian’s numbers are accurate, the Nationals are carrying approximately $550 million in debt. Ozanian also has the Nationals at the 4th lowest revenue of any team in baseball. Yes, 4th lowest. Only the White Sox, Tampa and Miami are lower. Those numbers support that the Nationals should be classified as a small market revenue team. This is why the Nationals are finally looking to sell the lucrative stadium naming rights and jersey patch sponsorships. They are hoping to increase attendance and win games to bring the fans back to the ballpark.
Remember, most teams got hammered in the COVID season and are carrying debt of $150 to $200 million. With varying borrowing rates, it is hard to tell what the interest costs are on $550 million in debt. The Braves are publicly traded, and they reported last year an interest expense of $38.8 million. Ozanian has their debt at $248 million, but as you dig into the financials, they are carrying debt on their commercial real estate outside the stadium for $392 million. That makes their effective interest rate around 6%. Suffice it to say that while the Nationals might be a little over breakeven in operating income, when you get to EBIDA, how can you make money with those debt payments? Using that 6% number, that is $33 million of interest expense per year for the Nationals if those numbers are accurate.
Here is MLB’s Debt Service Rule: Each MLB Club is subject to certain MLB imposed restrictions on its ability to incur indebtedness in amounts that exceed specified thresholds. In particular, each MLB Club is generally required to keep outstanding indebtedness minus a certain amount of excludable indebtedness at or below 8.0x available cash flow (or in the case of MLB Clubs which have a new stadium, at or below 12.0x available cash flow), with the amount of excludable indebtedness for fiscal years 2024 through 2026 set at $100 million. This is referred to as the Debt Service Rule. MLB Clubs must certify compliance with the Debt Service Rule annually and the failure of an MLB Club to comply during two consecutive fiscal years (the “Assessment Period”) may lead to certain remedial measures being imposed by the Commissioner of Baseball, including, but not limited to, prohibitions on the incurrence of additional indebtedness and repayment of outstanding indebtedness.
The Debt Service rule has come up before as has borrowing funds. It became public last year when the San Diego Padres had to borrow money. They had already cut payroll, and were making moves to raise cash flow.
A source tells us that the Nationals are in compliance with the debt service rule. The source also tells us that ownership is focused on raising revenues and paying down debt. But is it time to bite the bullet and sell just under 20 percent of the team to raise enough cash to pay down the debt? If the Lerners can get a valuation of $2.75 billion, they should be able to pay-off all of their debt and save themselves $30+ million a year in interest expense.
Could these revelations on the debt be a reason for not spending on long-term free agents? Principal owner Mark Lerner was never asked specifically about the financials on the team affecting their spending on players. But for anyone that runs a business, you can’t stay viable if you are losing large chunks of money every year. The debt load has risen for a reason. Coming up with a solution would make sense.
The Lerner ownership group’s main assets are in real estate, which includes a vast portfolio of commercial real estate. A headline in the Washington Business Journal, “Assessed value of D.C.’s top office buildings is crashing as volume of unoccupied space explodes” told you all you need to know about the sharp decline of commercial real estate in the D.C. area especially amidst the federal government declining their DC workforce that has the local economy shaking. The commercial real estate market can erode further.
All of this is the imperfect storm for the Lerners and their holdings. Since they are not publicly traded, most everything is a guess including their net worth. Forbes has them worth $5.5 billion, down from $6.4 billion in 2022. But do they have the liquidity to weather the storm?
The fans just want the team to spend their way into contention. They don’t really care about EBIDA or EBITDA or debt service rules. They want winning.
