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NBA Expansion

How To Solve The NBA’s Current Financial Crisis

The NBA is absolutely bleeding right now. March estimates suggested a potential billion-dollar loss for the league based only on the coronavirus’ impact on this season. If the pandemic stretches on without a vaccine, billions more could be lost in future gate and television revenue.

The NBA’s financial infrastructure is not built to withstand a prolonged pandemic. Making it through this is going to require cash that the NBA may not have, or may not have the ability to generate through traditional means. Which brings us back to the league’s commitment to a 30-team model. If the NBA is willing to be flexible on the number of teams it puts on the floor, expansion could solve many of its short-term financial issues. With that in mind, let’s dive into everything you need to know about expansion both on and off of the court, starting with the enormous economic ramifications of adding new teams.

How does expansion work, and how much money could it raise?

The simplest way to view expansion, from an economic perspective, is to think of it as the sale of a team that does not exist yet. A buyer or a group of buyers purchases a team not from an existing owner, but from the league itself. As the league is nothing more than the 30 teams that make it up, the sale price is split evenly among those 30 teams, and because it is not considered basketball-related income, the teams keep every cent of that money for themselves. Players see none of it, and they have no say in whether or not the league can expand.

If the NBA is willing to be flexible on the number of teams it puts on the floor, expansion could solve many of its short-term financial issues

The price of an expansion team is not set in stone. Typically, it is slight inflation of the perceived value of a team in a similar market. The Charlotte Bobcats paid a $300 million expansion fee in 2004. Based purely on potential profit, this was a slight overpay. The Dallas Mavericks were sold for less than that at $285 million only four years earlier despite existing in a stronger market, and the Boston Celtics, one of the league’s crown jewels, fetched only $360 million in 2002.

Setting a market price in 2020 comes with some complications, though. Obviously the coronavirus pandemic’s impact on the global economy has been pronounced, but the complications surrounding expansion pricing extend further than that.

The last three teams that have changed hands were sold at market-shattering prices. The Los Angeles Clippers and Houston Rockets both sold for at least $2 billion, but perhaps more telling was the $850 million price that the Atlanta Hawks garnered in a relatively modest NBA market. Four years earlier, the Philadephia 76ers fetched only one-third of that price at $280 million with a nearly identical metro population and more concentrated wealth. Five years ago, the NBA was in the middle of a valuation boom, but television ratings have since declined and the pandemic has put the league in a vulnerable position. They certainly wouldn’t settle for those early-decade prices, but buyers wouldn’t be willing to pay the premium that Steve Ballmer (Clippers) and Tillman Fertitta (Rockets) did, either.

Even given the current economic state of the world, interest is so great that the league would likely draw hefty fees. While the $2 billion figure an anonymous owner gave The Athletic’s David Aldridge in 2017 is likely far-fetched, it is not a stretch to suggest $1.5 billion as a starting point. At that price, each team would get a $50 million payout to do with what they saw fit.

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