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August 1, 2004

The Evil Empire Strikes Back

Steinbrenner's Plan to Have Other Teams Buy Him a Stadium

by Neil deMause

If there's one thing George Steinbrenner has always been good at, it's hiding his money. Whether it's starting his own cable network to keep his broadcast revenue out of the reach of his fellow owners, as he did in 2002, or paying himself a "consulting fee" to negotiate his own cable contract, as he did in the 1980s, The Boss has always been at the cutting edge of creative accounting, helping him evade attempts by fellow owners to force him to share the bounty that comes from operating the most lucrative franchise in baseball.

With his recently revealed plan to build a new $750 million stadium in the Bronx, though, Steinbrenner may have hit upon the biggest scam of his life. If the early reports of the plan to tear down the House That Reggie Remodeled and replace it with a new one across the street are accurate, Steinbrenner looks to have figured out a way to build a new playpen for the Yankees, replete with extra luxury suites and food courts and all the other gewgaws that he's been slavering after for decades...and force baseball's other 29 teams to pay nearly half the cost.

(We now pause for Larry Lucchino's head to explode.)

Here's how it works. According to early press reports, the Yankees are offering to pay the entire $750 million cost of building a stadium in Macombs Dam Park, across 161st Street from Yankee Stadium. The existing ballpark would be demolished to make way for a parking garage (though the New York Times has reported that the design would retain "the ball field and the most recognizable elements of the structure," which is hard to picture). The city and state would kick in somewhere between $300 million and $450 million to build a new hotel and conference center, and obtain new parkland elsewhere in The Bronx to make up for the destruction of Macombs Dam Park.

The Yankees would foot the bill for the stadium itself, though, a remarkable turnaround from earlier plans to have the city kick in at least half of the cost. How will they do it? The explanation is buried in a tiny clause hidden deep within MLB's Basic Agreement. According to Article XXIV, Section a(5) of the 2002 collective bargaining agreement, teams must make revenue-sharing payments on all baseball revenue, but can deduct "the 'Stadium Operations Expenses' of each Club, as reported on an annual basis in the Club's FIQ [Financial Information Questionnaire]."

That's all it says. But according to baseball sources, teams have been quietly allowed to count stadium construction debt as "stadium operations expenses," thus claiming it as a deduction against revenue sharing.

A few moments with a calculator--and a copy of Andrew Zimbalist's May the Best Team Win, which lays out the details of the new revenue-sharing plan starting on page 99--reveals the impact of this clause on George Steinbrenner's stadium plans. The Yankees currently pay a marginal revenue-sharing rate of about 39% of local revenue. (Low-revenue teams, interestingly, pay an even higher marginal rate, which may help explain why teams like the Twins are seemingly so disinterested in such aspects of the business as, oh, selling tickets.) Taking a deduction for $40 million a year in stadium bond payments would thus earn the Yankees a $15.6 million-a-year write-off on their annual revenue-sharing obligations. Over time, about $300 million of the House That George Built would be paid for by the other 29 teams.

While that last sentence rattles around in the minds of Kansas City Royals fans, let's return to the Basic Agreement for a moment. Teams are required to share "aggregate operating revenues from baseball operations," but not from non-baseball operations. Any revenue that Steinbrenner derives from the publicly funded hotel and conference center, then--and to be fair, it's still unclear who would end up owning these facilities, for now--would be pure profit, squirreled away from the prying hands of his fellow MLB owners were it to go into Steinbrenner's pockets.

If it works--and it's worth noting that there's nothing stopping the other 29 teams from rewriting the revenue-sharing rules in the next CBA in 2006--it's a breathtaking ploy to build a stadium with other people's money, and reveals a huge loophole in baseball's revenue-sharing plan, which was designed specifically to keep the Yankees from doing stuff like this. It also helps explain some puzzling events in baseball of late.

Why the St. Louis Cardinals ownership, for example, abruptly shifted gears in 2003 and agreed to foot the bill for two-thirds of the costs of their new stadium themselves. The new revenue-sharing plan, it seems, hasn't only shifted the dynamics of the free-agent market, to the chagrin of the Brad Fullmers of the world. It's also reduced the effective cost for teams to pay for their own ballparks, since they're no longer just really expensive piles of luxury boxes but now, in essence, "tax shelters" as well. For an owner, paying only 60 cents on the dollar can be enough to take a money-losing stadium project and shift it into the black.

If you approach this as a taxpayer, it's great news. While as a fan I'm horrified at the prospect of one of only three remaining pre-war ballparks meeting the wrecker's ball just so that George Steinbrenner can build a 162-man starting rotation, as a New Yorker it's at least nice to know I wouldn't have to pay tax money for the privilege. (That $300 mil. or so for the hotel complex notwithstanding.) For baseball fans, though, the new stadium economics threatens to radically skew the incentives that guide owners' investment decisions, leading them to chase more and more elaborate entertainment complexes more aggressively than ever at the expense of focusing on actual baseball. (Does anyone really think John Henry, no matter his professed love for Fenway Park, will stand by and pay $10 million toward a Yankees stadium without trying for one of his own?) If you can write off a Ferris wheel but not a shortstop, which are you going to choose to invest in?

There's an awful lot we don't know about the Yankees' stadium plan: A formal announcement isn't expected for several months at least, and with 2005 a mayoral election year in New York, a lot could change between paper and poured concrete. In the meantime, though, it's becoming apparent that the world of baseball economics has changed, with unexpected and wide-ranging effects. If the wrecking ball falls on Yankee Stadium, it could be the end of an era in more ways than one.

Neil deMause is co-author of the book Field of Schemes, and runs the fieldofschemes.com Web site. He lives in Brooklyn with his partner Mindy, their son Jordan, and a circa-1986 Yankee Stadium bleacher seat. Neil can be reached at neil@demause.net.

Neil deMause is an author of Baseball Prospectus. 
Click here to see Neil's other articles. You can contact Neil by clicking here

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