The Jeff Loria problem

Thank you to everyone for the well wishes this week as I am recovering from a bad case of bacterial pneumonia. 104.5 degree fevers are very scary, but doctors say I’ll survive to complain about my nemesis Jeff Loria long into the future.

For some time now, I’ve ranted about the Marlins’ ownership situation. Jeff Loria is a smart businessman and shrewd owner in a unique, fan-fueled market. He’s lining his pockets with the money of the few fans the Marlins have at the expense of what should be a very competitive franchise (see this “Why the Marlins Need Matt Holliday” post), while simultaneously bleeding Miami and Miami-Dade County, whose citizens are starving for work, dry for every tax dollar they can milk.

Late last week, Yahoo sportswriter Jeff Passan put some numbers behind the many problems we’ve noted about Loria (courtesy of a financial statement leak). As Passan points out:

On Page 34 of the documents, under the heading Note Y, is a transaction called “Management Fee.” A corporation named Double Play Company is listed as the Marlins’ managing general partner. The partner is paid a yearly sum. For the two years the documents cover, the fees were $2.6 million and $2.8 million. In 2009, the documents say, the fee was raised to $3.2 million.

Records from the Florida Division of Corporations show Double Play’s CEO is Jeffrey Loria. Its president is (Florida Marlins’ president) David Samson.

Of the six teams whose documents were leaked, only the Marlins have a management fee listed in their operating expenses.

As Passan also observes,

For years, the Marlins cried poverty. Loria threatened to move the team from Florida. Despite several sources claiming the Marlins raked in money—Forbes’ annual valuations for the Marlins have proven extremely close to reality, and Miami-area accountant Jorge Costales has written incisively about Marlins finances—the county commissioners voted in December 2007 to pay for more than three-quarters of the stadium due open in 2012.

The poor, poor Marlins had an operating profit of $48.9 million in 2008 and 2009, including $11.1 million last year, when they increased payroll and started paying off their stadium debt. Loria has already doubled his money on the Marlins—he bought the team for $158.5 million, including a $38.5 million interest-free loan, and it’s now worth $317 million, according to Forbes’ valuations—and the revenue streams from the new stadium should only increase that figure. A county hemorrhaging jobs funneled tax money to fund a stadium for a team with a reckless disregard for its community’s welfare.

The whole article by Passan is very revealing and a must-read from beginning to end.

I want to supplement Passan’s article with a few compiled numbers of my own, using Forbes’ estimates of the Marlins’ finances from 2002-2008 (Passan called these figures “extremely close to reality,” so I feel no need to personally skim through the leak financial documents for the Marlins at the moment). Below (click to enlarge), I compare the payroll numbers of the Marlins year to year and to “the league average.” Loria took over the team (in a shady Expos trade with Bud Selig) in 2003:

By comparison, here is a look at the Chicago Cubs franchise (click to enlarge):

As Kristi Dosh wrote here week, the time for transparency is now. It is essentially to the health, integrity and future of major league baseball.

I’m not a hippie who believes in free love and free baseball. As someone with an economics degree, I understand the importance of profit and profit motive in building talented organizations. However, this is not the case here. This is a case of excessive economic profit with no competitive stabilization.

In simplified terms, economic profit is the amount of money one can make in a given venture compared to the “next best alternative” (the opportunity cost). In the long run, firms enter and exit free markets and economic profits zero out. This is not to say that no profits are made. Rather, it means that on average, investment opportunities yield long-term annual returns that are not much in excess of risks and costs.

Baseball is a special case because it is a tight-knit oligopoly with 30 owners who choose who can get in and who cannot. For example, Mark Cuban, who likes to spend money, cannot have a team. Major league baseball is not a free market and hence there tends to be opportunity for economic profit. That would be okat with me if such “economic profit” weren’t so grossly in excess of the average rate of return in other industries (historically, for example, the stock market has an annual rate of return of approximately 8.5 percent). As noted above, Loria’s been able to more than double his money in less than seven years. The Rule of 72 pegs the stock market’s estimated “doubling rate” at about 8.5 years. A year and a half or so difference may not seem like much, but investments have compounding return rates, so every interest period truly matters when all is considered.

As should be obvious, something needs to be done, and something more than a move that saves face for Loria. He needs to be made an example of. Baseball is not a traditional business market, despite the trends towards teams with smarter business models. This is not the tech wars, not dueling computer manufactures, but rather a game of tradition watched and beloved by millions.

Jeffrey Gross is an attorney who periodically moonlights as a (fantasy) baseball analyst. He also responsibly enjoys tasty adult beverages. You can read about those adventures at his blog and/or follow him on Twitter @saBEERmetrics.
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The Rabbit
13 years ago

If I’m looking at the data correctly, poor, poor Mr. Loria has a return of approx. 9.75% for 7 years compounded daily on the asset. His ROI would be considerably higher, particularly if you factor in the value of the interest-free loan.
This is without including and compounding his share of the annual management fees.
Unless ego and the little male brain influence all your business decisions (See: Tom Hicks), it’s nearly impossible to lose money on this asset, even if you consider opportunity costs.
Note: As everyone knows, men have 2 brains and they can’t function at the same time grin

The return far exceeds any investment that has minimal risk.  The stock market is not without risk and the risk for team ownership would probably be closer to T-Bills due to the monopolistic nature of baseball franchises.

My heart bleeds for Loria (she says, sarcastically) but I really do feel sorry for the residents, taxpayers, and fans of the greater Miami area whose hard earned dollars are being confiscated to support this putz.

Jeffrey Gross
13 years ago

@The Rabbit:

Thank you for the link. I will check it out.

Kristi Dosh did some work on the matter here as well the other day:

I’ve been outcrying this whole situation for years now and I am glad that it is finally getting some press. I’m sure you recall what the Mariners ownership did a decade ago with Safe Co.?

Let me quote an old post of mine:
“The Mariners pigeon-holed Seattle into building them a new stadium a decade ago and are now forcing the taxpayers to pay for essential repairs to the stadium. I guess the city is going to get the last laugh, however, as they recently approved building a strip club next door. Maybe they’ll call it The Foul Pole (or Randy’s Johnson).”

As a law student, I read a case in which the King County taxpayers sued the Mariners. The basis of the argument is that they were getting so little in return for the money the mariners got that it was essentially a gift from the city (which would have been illegal). Of course (and rightfully so), the court threw out the case because it is not the job of the courts to inquire about the value of consideration. Nonetheless, it shows just how poorly these teams treat the places they pillage and plunder the coffers of

The Rabbit
13 years ago

Thanks for the link.
Before you were born (I’m almost old enough to be your grandmother), I was an elected officeholder.  I took it seriously and as an avid researcher, I read professional planners’ journals.
You won’t be surprised to learn that many studies show that corporations and developers plunder and pillage the taxpayers’ coffers, if they can get away with it.
Most elected officials are idiots and really believe that the temporary building trades jobs and longer term, no-benefits minimum wage jobs will more than make up the lost revenues offered in tax and other incentives.  What they neglect to factor is the long term infrastructure costs required to maintain the development, e.g., roads, police, water and sewer, etc. The costs are passed on to the taxpayers and the millionaires just deposit the checks. (So much for “free market”.)
When the incentives expire, many businesses take the opportunity to extort another municipality and move, leaving the taxpayers in debt.
Therefore, it’s certainly not suprising that MLB franchise owners follow the same business model.

Jeffrey Gross
13 years ago

@The Rabbit:

Oh yes! I completely forgot that the loan was INTEREST FREE. This whole situation is insane.

The Rabbit
13 years ago

Of course, it’s insane.  I’ve never understood why there’s never a public outcry against welfare for the rich…and I’m not a hippie who believes in free baseball. I’m a retired financial analyst who worked for a very well-known financial services company in the area of equity product development. 

BTW, if you didn’t see this today.
Title-How Losing Is A Profitable Game In Baseball