The Detroit Pistons have been losing money and have been borrowing cash to meet operating expenses — debt that will be assumed by new owner Tom Gores, sources familiar with the situation told Crain's.
How much the team has borrowed and how far it is in the red are unknown because those involved have declined to comment.
For some time, the National Basketball Association's team owners have said they are losing money, and the Pistons are said to be among the 19 franchises to borrow from the leaguewide $2.3 billion low-interest credit facility. The league caps borrowing against the facility at $125 million, and most of the teams that have tapped into it are thought to have taken up to the limit.
Like the article says, the NBA provides a line of credit to any team that wants to use it (and for any reason), using its collective status as a billion dollar organization to secure extremely low rates. Because the NBA doesn't specify how teams are allowed to spend the money, many teams do so simply to avoid moving money from other investments:
Team owners sometimes borrow from the low-interest leaguewide lending pool rather than use their own money, insiders say.
"It's a lot cheaper than putting in your own money," a source familiar with the situation told Crain's.
In a real world example that might apply to you and me, it's like making a big purchase on a 0% APR credit card and paying the minimum due every month. Why take cash out of a savings account to pay the bill and lose out on earning interest?
I'm sure the rate that NBA teams pay is greater than zero, but I'm also sure whatever investments their other money is tied up in is returning more than your typical money-market account. I don't doubt that the Pistons are operating in the red given Michigan's brutal economy, but I also don't think the Davidson family couldn't have covered the losses without borrowing, were it more financially prudent.
Crain's Detroit also reported another interesting fact:
Additionally, New York-based Citi Private Bank Sports Finance and Advisory was selected last year by current Pistons owner Karen Davidson to broker a sale of the franchise in part because it was willing to subsidize the team's operations.
"We were looking to see if the investment banker would finance the operation of the team," Joseph Aviv, co-managing partner of Bloomfield Hills-based Honigman Miller Schwartz and Cohn LLP, told the trade publication Michigan Lawyer's Weekly this month. He was part of the Honigman team retained by the estate of the William Davidson, who bequeathed the team to wife Karen Davidson after his March 2009 death.
Corporate finance couldn't be further from my wheelhouse so take my interpretation with a grain of salt, but perhaps this helps explains Joe Dumars' handcuffs. If the Pistons found an investment bank to foot the bill from last season, it might explain why the team was so determined not to take on a dime of extra salary -- you have to presume Davidson and Citi negotiated a ceiling of which the operating expenses wouldn't exceed.
I'm also curious if this was one of the reasons that Mike Ilitch was scared off after taking a look at the books. For years the Pistons were one of only a handful of NBA teams without any debt, largely due to the fact Bill Davidson paid for the construction (and renovation) of the Palace out of his pocket. If the team started borrowing money in recent years just because it could, it's no surprise that finding a new owner willing to take on that extra debt would be that much more difficult.