In April, 2014, Sports Business Daily reported the Ricketts family is "exploring the idea of selling minority ownership shares" in the Cubs as a "way to help finance" the $500M Wrigley Field renovation. Patrick Mooney of CSNCHICAGO.com also reported a source said that those shares would be for a "non-controlling interest." The source added that the family "hasn’t made any final decisions yet."
On October 27, 2014 , Sports Business Daily reports the Cubs’ value, as speculated by business trade papers to be around $2 billion, calculates for the team’s "pending" sale of around 20 percent of the club to be around $400 million sources said, with that process expected to finish soon. Galatioto Sports Partners is managing the sale. GSP representatives declined to comment.
Citing an anonymous source, the Sports Business Journal reported that the franchise is worth $2 billion — more than double what the Ricketts family paid in 2009 — and that the sale of part of the team is "expected to finish soon."
Crain’s Chicago Business also wrote that Chicago Cubs are close to selling a 20 percent stake in the team said to be valued at around $300 million, a Cubs spokesman said.
Ricketts family spokesman Dennis Culloton said nothing "officially" has changed since April, when reports surfaced that Cubs ownership was considering selling a noncontrolling share of the franchise to one or more minority investors to help finance the team's $575 million Wrigley Field renovation and redevelopment plan.
Mr. Culloton did not dispute any element of the SBJ report, which said that New York-based Galatioto Sports Partners is "managing" the minority share sale. The financial advisory company has been a Ricketts family consultant in the past, including for the original $845 million purchase of the team. At the time, Forbes estimated the Cubs to be worth only $700 million.
Bringing in minority investors may be one part of a combination of Ricketts family assets used to finance the stadium renovation, adding to other sources like ad revenue from expanded ballpark signage and federal tax breaks that could come from getting Wrigley Field listed on the National Register of Historic Places.
At the same time, there are reports that the Ricketts are close to buying two rooftop businesses (possibly the ones most affected by the new outfield signs).
What does all mean?
Sam Zell employed a very structured way to sell the Cubs to avoid the Tribune reporting more than $700 million in capital gains. To sell the Chicago Cubs to the Ricketts family, but not trigger the Chicago Cubs built-in gain, the Tribune pulled a play from its tax play book that it had recently used to sell Newsday to Cablevision Systems, Inc: the tax structure is referred to as a “leveraged partnership."
In executing the leveraged partnership structure, a new limited liability company – Newco -- taxed as a partnership was formed, to which the Tribune contributed the Chicago Cubs and its associated business for a five-percent interest and the Ricketts family contributed $150 million in cash for a 95 percent interest. The Ricketts family had certain call rights and the right of first refusal with respect to the membership interest owned by the Tribune and the Tribune has certain rights to put the membership interest to Ricketts family. In addition, Newco borrowed $698.75 million and the Tribune guaranteed the repayment of the principal and interest of the loan. From the funds provided by the debt and the equity financing, a special distribution of $740 million was made to the Tribune.
Accountants said to avoid the triggering of the built in gain with respect to the Chicago Cubs assets, the planning employed by the Tribune depended upon avoiding the disguised rules. Under IRS Section 707(a)(2)(B), where there are related transfers of property or money to a partnership and transfers of property or money by the partnership to the partner and when viewed together these transfers are characterized as a sale or exchange, then such transfers will be treated as a sale or exchange. Under Reg. Section 1.707-3(c)(1), if within a two year period, a partner transfers property to a partnership and the partnership transfers money or other consideration to the partner, the transactions are presumed to be a sales of the property to the partnership unless the facts and circumstances clearly establish otherwise. Reg. section 1.707-5(b)(1) provides that, for purposes of Reg. Section 1.707-3(c), if a partner transfers property to a partnership and the partnership incurs a liability and all or portion of the proceeds of that liability are allocable under Reg. Section 1.163-8T to a transfer of money to the partner made within 90 days of incurring the liability, the transfer of money to the partner is taken into account only to the extent that the amount of money transferred exceeds the partner’s allocable share of the liability. Thus, if the partner’s allocable share of the liability equals or exceeds the amount of debt financed money conveyed to that partner within 90 days of incurring the debt, no amount of the money is treated as the proceeds of a disguised sale by the transferring partner. The guarantee of the debt from which the proceeds distributed to the Tribune came created a risk of loss in the Tribune so that the debt was allocated to the Tribune under Section 752. The guarantee of the liability by the Tribune provided it with an increased basis and allowed it to receive the special distribution of cash without any gain recognition.
The key to the success of the leveraged partnership technique is the guarantee of Newco’s debt. However, the I.R.S. could challenge the leveraged partnership technique on the grounds that:
- The guarantee should not be respected;
- The anti-abuse provisions of Reg. 1.701-2(a) should apply and
- The transaction should be recast in accordance with its substance as a sale.
The Ricketts agreed to be hogtied by massive debt and ownership lock up rules in order for the bankrupt Tribune Company to avoid capital gains. Walking on egg shells is still the prospect that the "minority sale" of Ricketts interest in the Cubs could trigger an IRS audit. This may be why the ownership structure has had to be kept in the status quo; and why the Ricketts cannot make contributions to the partnership because the Tribune would have to put in its 5%.
Beyond the tax implications of a minority sale, there is a structural element most people do not realize. Most people assume that the Cubs own the team, Wrigley Field, and the surrounding parking lots. But that is not true. As stated in the building commission proposals, the Cubs only own the team. Wrigley Field is owned by another legal entity. The Cubs are merely a tenant at Wrigley Field. The parking lots are owned by a different legal entity. So what is Ricketts really going to sell to minority investors? Just part of the team? Or associated stakes in the various other companies surrounding but legally distinct, from the franchise?
And selling a minority stake in the Cubs is not giving the Cubs team the money. Any proceeds from Ricketts selling their shares goes to the Ricketts, personally. So reports that this money is going to be used as capital to rebuild the Cubs or sign free agents is incorrect. Such a sale does not change the Cubs finances one bit. The Ricketts could use this new found cash to help pay for their new hotel complex investment, or to acquire the rooftop buildings. But again, that real estate development has nothing to do with the business operations of the Cubs.
The Cubs continue to appear to be a cash flow poor franchise. The loan covenants and restrictions caused by the Zell deal still haunt the club. Attendance revenue is still the key barometer to team spending, and that continues to go down. The lack of a local TV deal will also squeeze the gross revenue number in 2015, and may cause the bank some concern.
But it does start to give owners some return on their leveraged investment, or the very least, paying back Daddy Ricketts for his money put into the purchase.
