The article also reports that Capital Improvement Board officials are claiming the penalty the Pacers would have to pay is only $20 million dollars. Reportedly CIB officials are claiming that the Pacers have a right to an offset to that penalty by an amount the team, supposedly, borrowed to cover operating costs. After hearing that rumor I again reviewed the contract to see if there was something I missed.
Indeed there is a provision that talks about the CIB covering Pacer losses, but that provision is not an offset to the penalty. Rather it is one of several factors that must exist before the Early Termination provision can be exercised. Let me explain.
CONDITIONS THAT MUST BE MET BEFORE PACERS CAN EXERCISE EARLY TERMINATION PROVISION
Under the contract, in order for the Pacers to exercise the Early Termination provision, the team must:
1) Notify the NBA that it intends to relocate the Pacer franchise.
2) The Pacers have to notify the CIB w/i 30 days that the team has notified the NBA it intends to relocate.
3) The Pacers have incurred significant cash flow losses for the most recent year & project the team will lose money the next year
4) The Pacers project that the team will have a cumulative net cash flow from 7/1/97 to the final season of the contact that is less than the target cash flow.
5) the CIB does not within 60 days of the notice of intent to exercise the early termination provision, agree to subsidize the Pacers to cover losses received in the year following the exercise of the notice of early termination and the year after that.
6) Pacers plan to sell enough of its stock as to trigger the CIB's right of first refusal.
---Note: This is a sale of more than just a few shares. It's basically a sale of the majority of the Pacers stock so as to effectively be selling control of the team. The Simons family and Larry Bird are the sole shareholders.
Thus #5 is not an an offset to the early termination penalties. Rather it is part of the trigger that allows the Pacers to exercise the early termination option. The team still would have to pay the early termination penalties in the contract. Now let's taken an updated look at those penalties:
There are two ways of measuring the early termination penalties. We will call them Option A and Option B. Option A is based on the sale price of the team. In determining the penalty, you take the option that produces the lowest penalty.
This penalty is as follows:
Sales Price x Applicable Termination Rate + Unpaid Utilities Loan from MSA =
The applicable termination rate declines every year. (This is a table of percentages attached to the contract.) In 2009 it was 50%; in 2010 it dropped to 45%.
Assume the team sells for $250 million. The Option A calculation for 2010 (assuming the $250 mil sales price) is $250 mil x 45% = $112.50 million plus $25 million (estimated balance of CIB loan for unpaid utilities) = a penalty of $137.5 million.
To figure the penalty under Option B you take $50 million and add it to the "applicable scale amount." (That's a table attached to the contract.) That amount that declines every year. In 2009, the "applicable scale amount" was $92 million. In 2010, it declined to $80 million.
So the Option B penalty calculation for 2010 is $50 million + $80 million = $130 million.
To recap, Option A in 2010 produces a penalty of $137.50 million. (Assuming the $250 million sales price.) Option B produces a penalty of $130 million for 2010. Since you use the option which produces the lowest penalty, the penalty for the Pacers to move in 2010 (assuming the team can even meet all the requirements to exercise the Early Termination option) is $130 million.
One has to wonder why CIB officials like Paul Okeson insist on continually misrepresenting the terms of the Conseco Fieldhouse contract. CIB officials have actively dismissed published reports which suggest the penalties for the Simons to break the contract would be over $100 million and instead have proceeded with negotiations as if the Simons could just pick up the team and move with little or no consequences. Okeson and the CIB couldn't care less about what is best for the public. Their goal is to put millions more in taxpayer money in the pockets of the billionaire Simons family and they are more than willing to misrepresent the facts to the public in order to accomplish that task.