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Volume 22 No. 32
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NBA tells Nets owner he must sell arena share

The NBA told Brooklyn Nets owner Mikhail Prokhorov in writing late last month that he is required to sell his share of the Barclays Center along with his intended sale of the team, according to multiple sources familiar with the communication.

It’s unclear if that path is the one Prokhorov is intending to take, but a source close to the owner said the directive is one that will complicate his sale of the team.

A source close to Mikhail Prokhorov says the directive would complicate any sale of the Nets.
Photo by: GETTY IMAGES
The NBA’s instruction stems from a league rule on sales that would require the same ratio of team and arena ownership the Russian billionaire assumed in 2010 be replicated if he sells. He owns 80 percent of the Nets and 45 percent of the arena. It is possible that the league could issue a waiver on that rule, but it could not be determined the likelihood of such a move.

Also at issue is the Nets’ lease. In the letter sent by the NBA, the league suggests that the team’s lease is subpar, and while one source said that term went too far, the source agreed that the lease is onerous for

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the team and a significant element of the team’s expenses.

The letter, which sources described and read in parts to SportsBusiness Journal, said the NBA would “not have approved the terms of the lease absent” the tie in to the arena. In other words, by owning part of the arena, even if Prokhorov may have a difficult lease, he is in part paying himself.

The NBA appears worried that by stripping the team from the arena ownership, the franchise would be saddled with a poor lease for the long term without recourse to arena cash flow.

A source close to Prokhorov did wonder if a sizable sales figure could alter the NBA thinking, “If he gets $2 billion just for the team, is the NBA really going to turn that down?”

The Nets/Barclays Center structure has been complicated for some time. Forest City Enterprises, which sold control of the team and arena to Prokhorov in 2010, still owns 20 percent of the team and 55 percent of the arena, but venue operations are led by the Nets’ group, along with AEG Facilities.

Last year, Forest City put its team stake on the market, but it recently pulled that parcel off, sources said, after potential buyers became uneasy with the team’s extravagant spending under Prokhorov.

Forest City also is shopping its majority interest in the arena, though one source said it has informally halted that process to await the team sale. That means for a buyer of the Nets, he or she would be acquiring a minority interest in an arena where it’s unclear who the long-term control partner will be. That circumstance may make a deal challenging.

Evercore Partners, which is representing both Prohkorov and Forest City in their sale efforts, declined to comment. The NBA also declined to comment.

Changing the lease terms to satisfy the NBA could help solve the issue, but that is likely untenable. Barclays Center has more than a half a billion dollars of debt, and the bond holders would have to approve a material change in one of the key pieces of collateral: the Nets’ lease. That, the sources said, is unlikely.

Meanwhile, Prokhorov, thought to face financial issues caused by Russia’s economic turmoil, could always decide to pull back on the sale or put a small stake of the team up instead. If he were to put a small slice up for sale, it would still, under the league rule, need to carry with it a part of the arena.

“It was unusual that you had somebody own controlling interest in the team and then have a minority interest in the arena — and the person who has control of the arena have a minority interest in the team. Even with the best intentions, there are different interests,” said Bob Caporale, chairman of Game Plan, which has advised on several NBA team sales. “Not only does it make sense [to package the arena and the team], but I don’t think you can sell a majority interest in the team unless you package it. It makes a lot more sense to have ownership be the same in the arena and the team.”

What Caporale described is the common paradigm in sports: own the venue and the content. There are also plenty of examples of teams as tenants in buildings. What makes the situation in Brooklyn so complicated is that the two parties have cross-ownership in each other’s assets — and each now has the desire to sell at the same time.