Miami-Dade County

May 15, 2014

Why the Miami Heat’s big success has meant little profit for Miami-Dade County

LeBron James sent sales surging for the Heat. Not so for Dade’s profit-sharing deal, but stronger returns might be on the horizon if James stays.

The hottest player in basketball didn’t do much for Miami-Dade’s profit-sharing deal with the Miami Heat.

LeBron James helped create $90 million in surplus cash during his first three seasons playing for the Heat at the AmericanAirlines Arena. But the county received only one profit-sharing check during that time period. The amount: $257,134.12 — a fraction of 1 percent of the arena’s operating windfall between 2011 and 2013.

The payout in November 2013 marked the only time in 14 years that the arena’s recorded cash flow was high enough to require sharing dollars with Miami-Dade. That was thanks to the intricacies of a 1997 deal then-mayor Alex Penelas struck with owner Micky Arison to use private dollars for the $240 million project on a waterfront site that the county bought from Miami for $38 million.

And while the prospect of shared profits helped win political support for that agreement nearly 20 years ago, the lack of them is helping fuel Arison’s bid for a new deal with Miami-Dade.

The team is offering to end the profit-sharing arrangement in favor of donating about $1 million a year to the county’s parks department. Arison, the billionaire chairman of Carnival Corp., also is pledging to stay in the arena through 2040 in exchange for a richer subsidy package that in 2031 would more than double the $6.4 million that Miami-Dade currently pays the arena each year out of hotel taxes.

The current deal expires in 2030, and the one Arison proposed April 25 would cost Miami-Dade an additional $121 million — with the Heat paying about $26 million toward the parks and Miami-Dade sending the arena an average of $15 million a year in hotel taxes between 2031 and 2040. That’s on top of the $104 million the county would continue paying under the existing subsidy arrangement, according to a summary of the Heat’s proposed deal that the county’s finance department circulated to county commissioners late last month.

While new terms haven’t been revealed, sources close to Mayor Carlos Gimenez and Arison say the two have reached broad agreement on a modified deal that county officials said could be released in the coming days.

Gimenez said he won’t support giving Arison his requested $147 million subsidy package, but he said he’s ready to give up the profit-sharing agreement in favor of fixed dollars.

“Profit sharing hasn’t netted us much in 14 years,” he said. “I know I’d rather have the certainty of set payments.”

Is now the time for Miami-Dade to surrender its claim on future profits at the Heat’s home court? The original terms make it hard to forecast financial performance at the arena, since much depends not only on Miami’s often fickle relationship with sports teams but also how much the Heat opts to spend upgrading its home court each year.

A 2012 Inspector General’s report noted Heat lawyers wrote the original contracts, and the probe criticized Miami-Dade officials for not scrutinizing the Heat spending decisions that helped keep profit-sharing close to zero for more than a decade.

“The County has little idea about the underlying conditions and financial issues that, to date, have resulted in the Arena’s failure to generate sufficient [cash] that would have allowed the County to share in Arena profits,” the report stated, a year before the Heat cut its only profit-sharing check. “The County has yet to receive any portion of profits from the Arena, despite the fact that profit sharing was a major selling point for the approval of the Arena deal.”

A Miami Herald review of 14 years’ worth of arena financial reports on file with Miami-Dade shows the 19,600-seat facility might be better positioned to generate revenue in future years under the current deal.

The era of the “Three Kings” — named for James and fellow stars Dwyane Wade and Chris Bosh — has finally wiped out the past shortfalls that prevented profit-sharing as recently as 2011 and 2012. If not for a surge in Heat spending on arena upgrades last year, Miami-Dade would have collected millions from the team’s championship run in 2013. And the arena’s 1997 naming-rights deal with American Airlines resets in 2020, which could mean millions more to Miami-Dade, since the current $2.1 million annual payment is one of the lowest in the NBA.

“Nobody expected any real profits until the out years. Past years 17 or 18,” said Brian May, chief of staff to then-mayor Penelas when the existing deal was struck. May is now a leading County Hall lobbyist, currently representing the Miami Dolphins as that team pushes for its own stadium deal with Miami-Dade.

The deal that May helped negotiate gives Miami-Dade 40 percent of profits above $14 million, but yearly deductions wiped out almost all gains until now.

Heat executives say they don’t know whether Miami-Dade can do better in the profit-sharing arrangement past the current season, which is also the last one before James, Wade and Bosh are contractually free to leave for other teams. Front-office executives point to past plunges in ticket sales when the team lacked star players and championship hopes, and warned those slumps would be harder to weather with the mounting costs of an aging arena.

“If the roof leaks at the PAC, the county pays,” Eric Woolworth, the Heat’s president of business operations, said of the county-owned Adrienne Arsht Center for the Performing Arts. “If our roof leaks, we pay.”

With the Heat chasing its third consecutive championship and fans wondering if the Three Kings will return, the timing of Arison’s push for a new deal is getting extra attention. A renegotiated agreement with Miami-Dade now would insulate Arison from the political consequences of letting James leave for another NBA city this summer.

Gimenez came to office in part thanks to backlash against the 2009 Marlins Park agreement. Now he’s fielding requests for public help from the Miami Dolphins and soccer star David Beckham as well as Arison, whose estimated net worth approaches $6 billion.

The county’s current arena deal doesn’t expire for 16 years, and several people close to Gimenez said he privately resisted starting talks with the Heat, given how controversial stadium deals can be.

The Heat is pushing Gimenez aides to finalize the deal as quickly as possible, and launched a public campaign in support of the terms just as the NBA playoffs began. The Heat’s lobbying team conducted at least one telephone poll on the potential deal this week, numbers sure to be shared with commissioners facing reelection in August. The mayor’s spokesman said this week there was a chance an agreement could be finished in time for Tuesday’s county commission meeting.

“We’re working night and day to get this done,” said Mike Hernández, communications chief for Gimenez. “Are we optimistic we’ll have something? Yes.”

In an email to fans late last month, Arison described the proposed deal as significant for an NBA franchise that Forbes valued at nearly $800 million. He said the proposed agreement “provides cost certainty for the franchise, a necessity in this age of punitive NBA luxury taxes, and will allow us to more proactively plan for our future basketball spending and maintain our commitment to all of you to put the best possible product on the floor.”

For now, profit-sharing remains an uncertain cost for the Heat in future years — and a possible boon for Miami-Dade.

Here’s a look at the factors at play.


Profit-sharing only kicked in once during the Heat’s 14 years on the Miami waterfront. But arena revenues have easily covered operating expenses almost every year since 2001.

The current deal allows Arison to exclude a significant chunk of dollars from “arena revenue” under the profit-sharing terms with the county. Along with team profit centers like television rights and merchandise, the Heat side of the business retains 95 percent of sales from seats outside of suites, VIP lounges and the premium areas closest to the court. Sales of those regular seats — not counted as “arena revenue” — amounted to $67 million for the Heat in 2013. For comparison, that same year the “arena revenue,” which excludes the money from those cheaper seats, was $70 million.

Even with missing out on most Heat ticket sales, arena revenue on average exceeded expenses by $19 million a year since 2000, when a Jan. 2 win against the Orlando Magic marked the Heat’s debut in their new home. The cash profits (labeled “net cash flow” in the 1997 agreement) include the county’s yearly $6.4 million subsidy to the Heat.

With about $250 million in recorded net cash flow since 2000, how did the arena pay out less than $270,000 to Miami-Dade?

The main reason formed the heart of the 1997 deal: Arison’s willingness to finance construction of the county-owned arena without local dollars up front. He then would be paid back, with interest, out of arena profits that otherwise would be shared with Miami-Dade.

That installment payment on the Heat’s $213 million construction investment equaled $14 million last year.

That means the Heat essentially can deduct about $425 million from arena profits throughout the 30-year deal, with about half of it going to interest payments, according to the county’s repayment schedule. The final construction rebate arrives in late 2029, leaving 11 deduction-free years in Arison’s proposed lease extension if the profit-sharing arrangement were to remain.

That would remove the main barrier to profit-sharing during the first 14 years of the deal: Without the construction rebate in 2013, Miami-Dade would have received more than $5 million from the arena last year.


Aside from the construction rebate itself, the 1997 deal established another key mechanism that prevented Miami-Dade from collecting any arena profits through 2012.

Whenever cash flow isn’t high enough for the Heat to repay itself a full yearly construction rebate, the difference becomes an internal loan against future profits. In 2004, for example, the arena cleared $12 million in cash before deductions allowed under the 1997 deal. But that year’s construction rebate amounted to $14.1 million. The Heat is entitled to collect the roughly $2 million difference — plus interest — in future years.

Thanks to higher rebate obligations in the arena’s early years and mounting interest expense, the internal loan peaked at $48 million in 2005 — Shaquille O’Neal’s first season with the team. It took another seven years to wipe out the obligation, which included $29 million in interest charged on the shortfalls.

Wiping out the deficit probably wouldn’t have happened without James defecting from Cleveland in July 2010. His first year in Miami saw arena revenue spike 32 percent, to $63 million.

Within 24 months, James and the NBA championship his teammates claimed in 2012 generated enough arena profit to pay off all $27 million of the remaining deficit and still leave $6.1 million in surplus profits. That was still far below the $14 million bottom-line profit the Heat gets to retain each year under the 1997 deal, but also marked the first time the arena actually showed a surplus on its books.

Could the deficits return once the Three Kings era ends, and Miami notoriously fair-weather fans slip back to the weak attendance levels seen during the team’s rocky years?

In 2013, the arena’s cash flow hit $30 million, including the $6.4 million it collects from Miami-Dade and the $2 million it collects from a state subsidy. Even if the cash total plunged 45 percent, the spread still would have covered that year’s $14 million rebate obligation.

Heat executives warn against extending the arena’s current flush times into future years, particularly as maintenance expenses grow with the facility’s age.

“Let’s assume that this summer the three primary guys don’t opt out of their contracts. Say we have a good year and we write a check” to Miami-Dade, said Woolworth, the team’s business chief. That still leaves future seasons for players to bolt for other NBA cities and take millions in ticket revenue with them. “The business turns just like that,” said Sammy Schulman, the team’s CFO.

Woolworth said any surplus dollars the arena generated have been invested back into the franchise, which Forbes estimates generates about $30 million in operating income a year. “The county has taken more money out of the building in the last 14 years than we have,” Woolworth said.

Each year, the arena files two sets of financial statements: one dealing exclusively with the revenues and expenses that affect the county’s profit-sharing arrangement, the other a traditional financial statement offering a broader look at arena dollars. The traditional set of books shows the arena posting net losses through 2005, but recording profits of between $12 million and $17 million a year during the Three Kings era.

Woolworth said the arena deal’s fate will help Arison decide whether to spend the money needed to retain the Heat’s star line-up.

“We have some very big decisions to make in terms of keeping the team intact,” he said. “Some of that will take us out multiple years. We want to find out what some of our business expenses will be during that time period.”


Last year marked two milestones in the AmericanAirlines Arena’s finances. First, surplus dollars finally crossed the $14 million threshold needed for profit-sharing with Miami-Dade. Second, upgrade expenses that cut into those profits surged to record heights.

The Heat reported spending more than $8 million on capital improvements in 2013 — long-lasting or permanent upgrades at the arena. On average, the team spent slightly less than $3 million a year on capital improvements between 2000 and 2012, according to financial reports, so the 2013 tab was more than double the norm.

If the Heat had recorded an average year of upgrades in 2013, Miami-Dade’s first profit-sharing check would have been much higher last year: about $2.5 million.

Budget documents on file with Miami-Dade show more than $5 million went to expand the arena’s VIP restaurants and lounges, key profit centers for the operation. The Heat’s arena budget for the current season predicts upgrades of about $10 million. And an engineering study the team commissioned as part of its negotiations with Miami-Dade forecasts an average yearly capital budget of $8 million for the next 20 years.

Heat executives described the 10-year extension as crucial for giving Arison and his deputies, including son Nick, 32, the team’s CEO, the ability to map out improvements for nearly three decades. They point to the Heat’s former home in the since-demolished Miami Arena, which was abandoned by the team after a decade amid threats to move the franchise for a modern facility in Broward County.

“We don’t want to repeat the mistakes of the city of Miami,” Gimenez said. “Basically after 15 years [the old arena] was obsolete.”

The 2012 Inspector General’s report criticized Miami-Dade for not scrutinizing the Heat’s yearly operating and capital budgets, which county officials must approve. Given the expenditures’ central role in reducing potential county income, the report wondered why the Heat was left to run the arena with no oversight.

“The County’s hands-off approach to an operation that now generates revenues of more than $60 million a year is perplexing, especially an operation that has yet to produce significant profits to result in profit sharing by the County,” the reported stated.

Gimenez aides blamed the weak scrutiny on past administrations. A county official involved in the negotiations acknowledged the profit-sharing deal provides an incentive for the Heat to reinvest surplus dollars into the arena, since Miami-Dade would otherwise take 40 percent of the windfall. The new agreement is expected to include more provisions for monitoring the Heat’s contractual obligation to maintain a first-class facility.

Irwin Raij, a stadium-finance attorney at Foley & Lardner in Miami, said there’s no escaping higher facility costs for the arena, and that giving Arison a longer lease should put the team in a better financial position to tackle big upgrades. “Those extra 10 years provide a tremendous amount of stability to the franchise,” said Raij, who represented Major League Baseball in the Marlins deal. “They sound like they’re in the mode where they’re investing in the team, but they want to have stability on the business front to justify that investment.”

Heat executives point to an economic-impact study the team commissioned at the start of its renegotiation push that claimed $1.5 billion in benefits from the arena, including “valuations for civic pride” estimated at $3.7 million for Miami and $20.6 million for Miami-Dade.

“I think it would be hard to argue we haven’t been an incredible success story for Miami-Dade County,” Woolworth said. “If you compare photos of the area around our site when we broke ground with what it is now … we’ve accomplished what we set out to do.”

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