NBA Kings Relocation — A Back of the Envelope Analysis

There is a lot of talk in Sacramento, and around the country in sports circles, about the desire of the Maloofs (owners of the Sacramento Kings NBA franchise) for either the local taxpayers to build them a new stadium, or moving the team to a new location. With this post, I intend to use the publicly available financial information to analyze the financial facts driving the Maloof’s agenda.   This will be a back of the envelope analysis based on publicly available information. Consequently, it is not intended to be an exact analysis, but a general idea of the numbers at work and how they impact the decision makers acts.

Team Economics

Forbes magazine publishes an annual analysis of all the NBA teams. This year (2011) the place the value of the King’s franchise at: $293 Million. This ranks them 24th in the list of 30 franchises. Often called a “small market team” because compared to places like Chicago, Los Angeles, New York, or Boston, there are comparatively fewer potential fans. Two other “small market teams”, are Portland and Salt Lake city, which are number 16 and 14 respectively on the valuation list. Since these are smilarly sized markets, it is worth noting that the difference between them and Sacramento is the other teams produce approximately $20 million more annually in gate revenue. That is to say, people who attend games at those facilities spend more money. The Oklahoma Thunder, (recently relocated from Seattle) made $44 million in gate revenue or approximately $20 million more than the Kings. Before moving to Oklahoma, the gate receipts in 2007 were $23 million. Pretty similar to the Kings current gate receipts of $23 million.
Given the above information, it is possible to put a value on a new stadium in the style of Oklahoma for the Kings. Such a stadium will result in $20 million more in gate receipts. Using a regression analysis on the Forbes data, I determined that each additional dollar in gate receipts added $4.7 dollars to the current value of the team. So, we get a result that looks like: $20,000,000 * 4.7 = $94,000,000. For the rest of the article we will round that number up to $100 million in additional value for the Kings with a new “NBA style” arena.
A new stadium is worth so much to an NBA team because they offer fans more activities within the compound. The Bleacher Report website says:

Orlando’s new building is hailed as the most technologically advanced sports arena on the continent. It boasts seven levels, amenities like bars, restaurants, stores and even a play area for kids. Each designed not only to keep fans happy but to improve the bottom line for the team and the city, which share some of the building revenue

With a cost of $480 million, one would hope. The Oklahoma Thunder play in a new arena that cost a mere $225 million, but still is able to generate the extra $20 million in gate receipts of a “NBA style” arena. For the rest of this article, we will use the $225 number to represent the price of a new arena for the Sacramento Kings.The actual price could be higher, but is unlikely to be lower. But is worth noting that the city’s preferred location, the redeveloped Sacramento Rail Yards, looks like the antithesis of the “NBA Style” arena. In fact, if the goal is to develop restaurants etc outside the stadium, it will in fact reduce the ability of the Kings to generate additional gate revenue.

Other Financial Factors Impacting this Analysis

This analysis assumes no external benefits from a new stadium.  In article entitled Sports, Jobs, & Taxes: Are New Stadiums Worth the Cost? the Brookings Institute reports:

Most spending inside a stadium is a substitute for other local recreational spending, such as movies and restaurants. Similarly, most tax collections inside a stadium are substitutes: as other entertainment businesses decline, tax collections from them fall.

Consequently, no outside benefits will be considered in this analysis, as they only represent the change in type of recreational spending and not new expenditures.

The Sacramento County Assessor currently lists the King’s stadium as valued at $56 million dollars and owned by the Kings.  Any scenario where the Kings relocate will include +56 million for them as the sale price of their existing facility.

Another factor impacting King’s relocation is the NBA’s relocation fee. When the Seattle Sonics moved to Oklahoma, they paid a $30 million dollar fee to the other NBA owners. It is reasonable to expect that if the Kings were to relocate, they would have to pay a similar fee.

A final factor impacting a King’s relocation is a loan from the City of Sacramento to the King’s of $68 Million dollars. This analysis will assume that the King’s will have to repay the $68 million if they relocate.

Game Theory Analysis of Kings Relocation

Game Theory offers an opportunity to explicate the decision over whether to relocate and whether the government subsidizes staying. The following decision tree shows the sequential decisions of the both the city (red) and the Kings (blue). The numbers to the right represent the “payoff” in monetary value.

Kings Game Theory Relocation Decision Tree
Kings Game Theory Relocation Decision Tree

With this tree, we can see that the best case for the Kings is that the city builds them a new stadium, garnering $100 million in extra value from the $20 million in annual additional gate receipts. Unfortunately, this is the worst case scenario for the city, since it costs them $226 million of for a new stadium.
We can look to Game Theory’s notion of a Dominant Strategy to determine what will happen.

Dominant Strategy for Kings Relocation Game
Dominant Strategy for Kings Relocation Game

This chart shows us that the Dominant Strategy (the one with the best outcomes for both players) is that the city shouldn’t build the Kings a new stadium and the Kings should move. With this strategy, the City gets $68 million from the Kings repaying their loan and the Kings get $58 million in value. The Kings value is: $100 (increased team value) – $30 (NBA relocation fee) – $68 (loan repayment) + $56 million (existing stadium sale).
But there is a problem with this approach. It doesn’t measure the benefit to the city of having a NBA team. While I wouldn’t want to underestimate the lamentation of fans (just see this movie about the Sonics), it isn’t possible to directly measure the psychic benefit to fans in this sort of analysis.

Keeping the Kings in Sacramento for the Least Amount of Money

One benefit from this analysis is that it allows a good look at the financial factors motivating the King’s decision to stay or go.  We can see that the most they can gain is $100 million from a new stadium, but that the most they can gain from moving is around $58 million.    While the numbers maybe a little off, clearly the benefit to the Kings is less than the cost of a new stadium.

One alternative approach would be to pay the Kings $60 million dollars directly in exchange for an agreement not to relocate for 20 years.  20 years appears to be about the amount of time they could be expected to stay in Sacramento based on current NBA stadium longevities.  In other words, a new stadium (for $225) is really just a 20 year agreement for the team not to relocate.    Since this analysis shows that the benefit of relocating is really only $58 million, a direct payment to the owners of the Kings of $58 million would be as good to them as a new stadium, and considerably cheaper than a $225 million stadium.

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