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James van Riemsdyk #21 of the Toronto Maple Leafs is tripped up by Brandon Gormley #33 of the Arizona Coyotes for a penalty during the second period of the NHL game at Gila River Arena on November 4, 2014 in Glendale, Arizona. (Christian Petersen/Getty Images)
James van Riemsdyk #21 of the Toronto Maple Leafs is tripped up by Brandon Gormley #33 of the Arizona Coyotes for a penalty during the second period of the NHL game at Gila River Arena on November 4, 2014 in Glendale, Arizona. (Christian Petersen/Getty Images)

Arizona Coyotes owners pan for gold in river of red ink Add to ...

Given the Arizona Coyotes’ financial bleeding over the years, there are many who wonder why Andrew Barroway wants to buy a majority share of the NHL team.

The gold in this case and, no, it may not turn out to be fool’s gold, lies in the escape clause in the arena lease between the suburban city of Glendale and in some creative accounting that helps the Coyotes both qualify for the escape clause and maximize their return in the NHL’s revenue-sharing plan. That accounting could mean as much as $40-million (all currency U.S.) per year for the Coyotes, a handy sum for a team that once considered a loss of $20-million a good year.

Given those kinds of losses, the Coyotes will easily qualify for the escape clause, which gives their owners the right to move the team in five years if the cumulative losses in that period come to $50-million or more. The clock started ticking on the escape clause at the start of the 2013-14 season, when a group led by Canadian businessmen George Gosbee and Anthony LeBlanc bought the Coyotes from the NHL for $170-million. That leaves three years and eight months on the escape hatch, not bad if you need to get an arena built in another city.

When the pending sale of a controlling interest in the Coyotes to Barroway, a Philadelphia hedge fund manager, was announced, LeBlanc said the team was now valued at $305-million. This was in large part due to the NHL’s U.S. and Canadian television contracts, which are bringing in record revenues. It is not because the Coyotes are suddenly selling many thousands of tickets after years of empty seats, although those close to the team owners say sales in October, traditionally a slow month in most U.S. hockey markets, were the best in eight years.

Based on numbers posted on the City of Glendale’s web site, which track the city’s revenue from a $3 surcharge on Coyotes tickets for seven games (two pre-season and five regular-season) through Oct. 28, the average paid attendance is 9,585. The Coyotes' announced attendance is an average of 11,532 for those seven games, which indicates they gave away 1,947 tickets per game. Now imagine the value of the team if it moved to a city where the paid attendance might hit even a modest 14,000 per game and you can see why Barroway finds the Coyotes an attractive proposition.

At the same time, sources familiar with the Coyotes finances insist the team is in position to lose less than $10-million this season on an operating basis and actually break even in 2015-16. This is based on Barroway closing the sale, paying off the high-interest loans to erase the crippling debt-service costs, said to be $17-million per year, and refinancing under the NHL’s own low-interest credit facility.

However, making sure all of this happens requires NHL commissioner Gary Bettman to oversee a lot of creative accounting. The bottom line is that without corporate welfare payments from Glendale of $15-million per year in the form of a fee for managing the team’s arena and up to $25-million annually from the NHL’s revenue-sharing plan, the Coyotes would remain as the worst money-loser in the league and the prime candidate for a move.

Barroway declined to comment for this story. Bettman also declined to discuss the matter in detail and disputed some of the information. He did say in an e-mail message “the club will be stronger financially (but not for all of the reasons you said).” Gosbee did not respond to a request for comment and LeBlanc declined to be interviewed as well.

An explanation of the machinations needed to keep the Coyotes’ financial balls in the air must start with the annual cost of running an NHL franchise. Those familiar with the league’s finances say it is roughly a team’s player payroll plus $40-million, which in the Coyotes’ case comes to about $99-million.

Thanks to Glendale, a city of 250,000 that can ill afford it, and the richer NHL owners, who contribute the most to the league’s revenue-sharing plan, the Coyotes can count on $40-million before a puck is dropped, which is a nice leg up on their finances. Throw in another $15-million from other shared NHL revenue like the television contracts and merchandising and the Coyotes are more than halfway to breaking even before they’ve sold a ticket. But the remaining $44-million remains a challenge.

So far this season, it looks like the Coyotes will at least match the $20-million they made last season in ticket sales, which sources say was the lowest in the league. LeBlanc did score a new arena-naming rights deal that will bring in $3-million. Those close to the owners who talk about a loss of $10-million this season say revenue from ticket sales, local sponsorship and local TV has substantially improved. This is belied by Glendale’s published numbers on the ticket surcharge, which as the accompanying chart shows, are almost $41,000 behind the city’s budget projections, although only seven of 43 total games have been played.

But the $99-million cost of operating a franchise does not include its debt-service costs. Even if the $17-million in loan payments is reduced to less than $10-million, it is still a substantial expense.

Thus it is important to maintain a full share of the NHL’s revenue-sharing plan, estimated to be $25-million this season. Under the old collective agreement, qualifying teams had to hit sales and revenue targets or their share could be cut as much as 25 per cent. In the current agreement, a committee decides whether or not a team like the Coyotes should continue to receive a full share even if it doesn’t hit its targets.

So the $15-million from Glendale is recorded as revenue on the books of the company Gosbee and LeBlanc formed to manage the arena, not on the books of IceArizona, the company that owns the Coyotes. While that money eventually flows to IceArizona because it owns the arena manager, for perfectly legal accounting purposes the parent company can claim a larger loss on its hockey operations, which ratchets up the number for the escape clause. Just as important, it also means the $15-million is not recorded as hockey-related revenue, which has to be shared 50-50 with the players under the collective agreement.

This does three things: it helps speed up the cumulative losses on IceArizona to $50-million to kick in the escape clause, it bolsters Bettman’s argument to the revenue-sharing committee that the Coyotes need to maintain a full share, and if or when the Coyotes move, their owners can use the higher loss number to argue it could not be avoided.

This does not mean the Coyotes are a slam-dunk to move, since Bettman would rather see them stay for strategic reasons to do with television markets and division alignments. And if they do move and Barroway elects to keep the team rather than flip it, it may not be the easy score it seems.

When Gosbee and LeBlanc bought the team in 2013, a relocation fee was discussed. Bettman wanted to make it part of the sale agreement at a minimum of $60-million (what the Winnipeg Jets owners paid) but with the condition the fee would be based on the team’s new market. There was no ceiling on the fee, which meant it could run into hundreds of millions of dollars if a particularly desirable market was the target.

This never made it into the final purchase agreement, but Barroway needs to remember it will come up again.

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