John Finkel’s 2020 novel “Hoops Heist” details the Seattle Supersonics’ dramatic relocation to Oklahoma City. Being from the Pacific Northwest, I have always been particularly interested in how and why the Sonics left a supportive fanbase, especially as they were on the brink of stardom with young pieces like Kevin Durant, Jeff Green, and Serge Ibaka, and the recently drafted Russell Westbrook. Upon completion of “Hoops Heist,” I learned that the franchise relocation didn’t have anything to do with fan support, but instead was about the reluctancy of the state legislature to approve a government-subsidized proposal to construct a new basketball stadium for the Sonics to play in (Finkel, 2020). Despite securing a $150 million commitment from Seattle-resident Steve Balmer, the state legislature refused to contribute any money to the construction of a new facility, which opened the door for new majority ownership group leader, Clay Bennett, to move the franchise to his hometown of Oklahoma City, OK.
In this article, I will address the inability of the Seattle Supersonics’ previous ownership group to secure capital funding for the development of an athletic facility. I will evaluate the financing and budgetary approaches the organization took. I will conclude the article by providing feasible financial alternatives that could assist in budgeting for a new basketball arena while defending my proposal using the SMART principle.
Literature Review
Financial issues are primary reason why a facility development project will succeed or fail (Aicher et al., 2016). But a successful project goes beyond securing the necessary capital, as an organization must have a fiscally responsible budget that reflects its priorities and possess the ability to meet organizational goals (Aicher et al., 2016). The various sources of capital funding, facility budgeting, and the types of events that a facility can host should be analyzed.
Capital Funding
The construction and renovation of sports facilities are capital projects that sport organizations at every level of competition are commonly faced with (Aicher et a., 2016). A capital project refers to those projects that are viewed as long-term investments that can increase an organization’s assets (Aicher et al., 2016). Upfront costs associated with the construction of a new facility or significant renovation of an existing facility include potential land acquisition, labors costs, and infrastructure development. Depending on the scope and hosts of a venue, these costs can be anywhere from millions to upwards of a billion dollars. For example, in 2008, Texas A&M University spent approximately $1,425,000 on the construction of a new athletic academic facility for its student-athletes (Covell & Barr, 2010). On the other hand, the renovation of Madison Square Garden to better suit the needs of the NBA’s New York Knicks and the NHL’s New York Rangers cost approximately $975 million (Aicher et al., 2016). Whether a project is costing thousands of dollars or hundreds of millions, capital projects typically require large amounts of up-front cash. This money can be raised in various ways, depending on the organization and project.
The first method to secure these funds is through equity finance. Equity is ownership interest in an organization, and includes the sale of stock, retained earnings, and gifts (Aicher et al., 2016). When shares of stocks are sold, the purchaser becomes a part owner of the organization (Aicher et al., 2016). The next method of equity finance is through retained earnings. According to Aicher, retained earnings is defined as, “Revenues generated by the sport organization that are reinvested to finance improvements and additions” (2016, p. 62). Using retained earnings boasts a significant advantage in facilty development, as the organization retains control of how funds are being used (Stewart, 2007). The next form of equity financing is through the procurement of gifts. Gifts are donations “provided to an organization to finance a project that is tax deductible” (Aicher et al., 2016, p. 63).
Sports organizations can also go into debt to procure the capital necessary to develop a facility. The first method is to borrow money in the form of a loan. Depending on the organization, the amount of money it is requesting, and the loaner, loans can feature differing interest rates, maturities, and payment provisions (Brown et al., 2010). Another form of debt financing is a bond. A bond is, “A debt security in which the issuer owes the bondholder a designated amount; payment, intertest, and maturity date details are provided” (Aicher et al., 2010, p. 65).
Lastly, sport organizations can also use contractually obligated income as collateral for debt. This process is known as securitization (Aicher et al., 2010). This contractually obligated income can include any income the organization is guaranteed to receive, such as revenue from media contracts and sponsorship agreements.
Facility Budgeting
The operating budget of an organization is one of the most important aspects of responsible financial management. An operating budget is the basic administration of the ongoing activities that are necessary to maintain the current capabilities of the organization to continue producing its core products and services to the customer base (Lalli, 2012). Depending on the facility and the level at which its hosts will compete, the operating expenses will greatly vary. For example, the operating costs of the Texas A&M University athletic academic facility mentioned earlier in this paper would be very different than the operating costs of Madison Square Garden.
According to Aicher, there are two basic approaches to budgeting for athletic facilities: incremental and zero-based budgeting (2016). Incremental budgeting is the system that has traditionally been used in sports facility programming, as is allows management to make allocation decisions based on the previous period’s actual revenues and expenses (Aicher et al., 2016). In zero-based budgeting, managers must review each and every line from the previous period’s budget on a regular basis to maximize budgetary efficiency and start from a zero amount (Aicher et al., 2016).
Event Planning
The types of events that a sports facility can host will have a major impact on the revenue it can expect to generate. Last week, I performed an PEST analysis of a proposed ice rink in Cedar City, UT, that was ultimately turned down, in part, because the city council did not see much reason behind the development of a single-use facility (Coombs, 2021). Because maximizing a facility can greatly increase the revenue a facility generates, organizations must be aware of the types of events its facility can execute during the planning phase. There are five main types of events that facility managers may have to host, including: mega-events, recurring events, traveling events, ancillary events, and community events (Aicher et al., 2016). Using the same comparison from earlier examples, Texas A&M cannot expect to host events with large numbers of attendees at its athletic academic facility, but Madison Square Garden can host professional basketball and hockey games, college basketball and hockey games and tournaments, concerts, political conventions, and more.
SMART Goals
SMART goals are an acronym used to describe the goals of an event, with letters of the acronym standing for specific, measurable, attainable, relevant, and time-based (Aicher et al., 2016). Specificity refers to the need for goals to be detailed and well-defined, removing any potential for ambiguity or confusion. Measurability refers to goals providing sufficient quantitative detail that allows for event managers to determine of the goal was achieved. Attainability means that goals must be realistic and achievable. Relevancy refers to goals correlating well with the nature of a particular event (Aicher et al., 2016). Time-based goals a time limit placed on them that allows the sufficient time for a goal to be completed, but also has a deadline that will indicated with the goal was completed or not. After all goals satisfy the SMART requirements, an event should be determined to be feasible or not. Event feasible refers to the “likelihood that an event can be executed at the desired level given the resources at the event organizer’s disposal” (Aicher et al., 2016, p. 88).
Seattle Supersonics and KeyArena
In 2001, Starbucks Coffee CEO Howard Schultz purchased the Seattle Supersonics for approximately $200 million (Finkle, 2020). After just five years of owning the team, Shultz claimed to have lost over $60 million due to the franchise playing in the antiquated KeyArena (Finkle, 2020). Schultz went to the Washington State Legislature to seek $220 million in funding to renovate and expand KeyArena. However, Schultz failed to reach an agreement with the legislature for the publicly funded project. This led Schultz to meet with various potential ownership groups before eventually selling majority ownership of the Supersonics to an ownership group from Oklahoma City, OK lead by Clay Bennett (Finkle, 2020). Selling the club to an ownership group from Oklahoma City was significant, as this group was responsible for the temporary relocation of the New Orleans Hornets to Oklahoma City brought on by the effects of Hurricane Katrina. Shortly after the franchise was purchased, the citizens of Seattle voted to pass an initiative that prohibited the use of tax dollars on sports arenas in the city unless it could be shown that the city would turn a profit on its investment (Finkle, 2020). Unable to secure funding to renovate KeyArena, which had been labeled unfit to continue hosting NBA games, the following year saw Bennett propose using tax money to pay for a brand-new arena in Renton, WA for approximately $500 million (Finkle, 2020). Ultimately, the proposal was turned down and Bennett ceased to procure funding from the state legislature. After failing to receive any public assistance for the renovation of KeyArena or the construction of a new sports facility, Bennett announced his intentions to relocate the franchise to Oklahoma City starting in the 2008-2009 NBA season. The City of Seattle eventually did attempt to block the relocation of the Supersonics, but a lease settlement between the mayor of Seattle and Clay Bennett was eventually reached, allowing the franchise to official relocate (Finkle, 2020).
The case of the Seattle Supersonics is one that was brought on by the reluctancy to use public funds to support a major athletic facility. For the average taxpayer, the 12,000-seat KeyArena was more than sufficient to host basketball games. But for the billionaires and multi-millionaires who own and operate professional sports franchises, KeyArena was more than 6,000 seats smaller than the average NBA arena and featured no exclusive dining or shopping experiences that could drive more revenue. It was also far less technologically advanced than the newer facilities being used by the city’s other professional sports franchises, the Seattle Mariners (MLB) and the Seattle Seahawks (NFL), which received abundant amounts of public funding. Ultimately, Clay Bennett and then-NBA Commissioner David Stern gave the City of Seattle an ultimatum: renovate KeyArena or build a satisfactory stadium or lose the franchise.
Eight years after the Supersonics were relocated, in 2016 the Seattle City Council rejected a new arena construction proposal, but announced the city would seek proposals to renovate and redevelop KeyArena into a viable NBA venue (Finkle, 2020). In September 2018, the Seattle City Council unanimously approved a $700 million renovation of KeyArena (Finkle, 2020). The construction costs eventually reached an estimated $1.15 billion by the time they were completed (Finkle, 2020). Amazon CEO Jeff Bezos purchased the naming rights, changing KeyArena to Climate Pledge Arena, which is now home to the city’s first NHL team, the Seattle Kraken. The renovations increased the consumer experiences by offering new dining options, shopping opportunities, and an entrance atrium (Finkle, 2020). It also increased seating capacity to 18,100, which is aligned with the current NBA standards.
Conclusion
For the City of Seattle to retain the Supersonics, a significant financial investment from the taxpayers was needed. In reading the details of this case study, there was a major disconnect between the Supersonics ownership groups and the community. For starters, Howard Schultz failed to be specific with his initial goal of securing $220 million for the renovation of KeyArena. The public was confused why this billionaire needed tax dollars to renovate an arena that most casual fans thought was an acceptable venue to play basketball in. Likewise, Schultz did not make it clear why KeyArena needed to offer additional dining and shopping experiences. The measurability of Schultz’s request was also brought into question, as he frequently cited losing $60 million over five years as the owner of the Supersonics, but failed to mention that the valuation of the franchise rose $150 million in that same time frame. I do believe that Schultz’s initial goal was attainable, however, as the City of Seattle had twice funded the construction of major sports arenas by passing a 0.1% sales tax increase (Finkle, 2020). Schultz’s request for $220 million of public funds proved to be highly irrelevant to voters, however, as citizens voted not only to deny the request, but to also prohibit any future use of city tax dollars on sports arenas. Schultz’s request also seemed to not be realistically attainable in the time frame he proposed, as he was quick to sell the franchise as soon as the city made it clear that it wasn’t interested in funding a renovation of the arena at that time. Ultimately, Schultz’s request was not feasible, as it was not sufficiently specific, measurable, relevant, or timely. There is hope for the City of Seattle, however, as NBC Sports recently reported that it is “almost a given” that the NBA will expand to 32 teams in the near future, with Las Vegas and Seattle being the locations of the new franchises (Wisniewski, 2021).
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Covell, D., & Barr, C. (2010). Managing intercollegiate athletics. Routledge.
Finkel, J. (2020). Hoops heist: Seattle, the Sonics, and how a stolen teams legacy gave rise to the
NBAs secret empire. Slow Grind Media.
Lalli, W. (2012). Handbook of budgeting. John Wiley & sons.
Stewart, B. (2007). Sport funding and finance. Elsevier.
Wisniewski, L. (2021, May 18). NBA could expand to 32 teams, Seattle ‘almost a given’.
Retrieved November 7, 2021, from https://www.nbcsports.com/northwest/nba-could-expand-32-teams-seattle-almost-given
Hayden Coombs 