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When the NBA returns, can the Utah Jazz afford to stay in win-now mode?

Will Utah have to change its team goals when faced with large reductions in revenue?

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Utah Jazz v Sacramento Kings Photo by Lachlan Cunningham/Getty Images

Over the past weekend, the NBA’s players were given some grim news from Adam Silver and the NBA’s front office. Shams Charania of The Athletic reported that on a call between players and the NBA front office that they anticipate that if the 2019-2020 NBA season resumes they do not anticipate any fans to be able to attend. From that call they estimated about 40% of the NBA’s revenues come from fans through the in game experience (gate sales, concessions, etc.). Adrian Wojnarowski in a report today said that many small market owners are worried that they’ll lose more than $20M in revenue sharing next season and are worried about the impact to competitive balance in the league. This kind of news should raise alarms for small-market fans, Utah Jazz fans especially.

The way Adam Silver phrased the way he has to choose a path to reopening the league wasn’t hopeful either citing that the NBA is having to decide between “a lot of bad options.” Many of those bad options have the calculus of the league having to forge a path forward without a vaccine for one year while admitting the league couldn’t open even if it wanted to right now. There are many reasons why it’s hard to return just on a health aspect. So today I want to ask the question, if the NBA is able to return in some form, what do those bad options look like for a team like the Utah Jazz?

Don’t worry, the Millers can’t sell the team

The Utah Jazz are held in a legacy trust that cannot be sold while Gail Miller is still alive and kicking. Furthermore, if a terribly awful event such as Gail Miller’s passing were to occur, the Utah Jazz would skip a generation as far as ownership goes. The team does not go to Gail’s immediate children and instead becomes the asset of her grandchildren. That’s good news for keeping professional basketball in Utah. Jazz fans do not have to worry about their team becoming the next “Will they move to Seattle” saga of the 21st century.

Another added benefit of the legacy trust is any profits generated by the Utah Jazz must stay in the trust. From pacoelcid’s article on the Dunk in 2017, “Gail has stated the trust will not provide any “material benefit to the family from the Jazz.” How much money existed in the trust from profits in 2017-2019 seasons. It is possibly that the Utah Jazz may have used those windfalls to take on Mike Conley’s contract, sign Bojan Bogdanovic, and sign Royce O’Neale to an extension. Utah did believe they had a contender on their hands at one point.

Even if the Jazz had some money laying in waiting from prior seasons, there is a highly unlikely chance there would be enough to cover the shortfall of 20 games and playoffs. Out of those remaining games, six regular season and all of the playoff games would have been nationally televised. That’s quite a bit of lost revenue right there.

While the legacy trust provides the benefits of keeping profits in-house and the Jazz organization in Utah, it does increase the level of difficulty in some unique ways for the Utah Jazz.

No ability to add large investors for infusions of cash

While Gail Miller would most likely never sell the team even if she had the ability to do so, there is a big possibility she would have done what the San Antonio Spurs just recently did. The Spurs sold a minority stake in their team to an undisclosed party. There were not details about to whom or for how much, but any amount would provide the ability to pay for a significant amount of costs in the upcoming season.

The Utah Jazz, for example, are worth $1.55B. If they were to sell a 5% minority stake in their team, they would generate $77.5M that could go a long way in keeping the lights on. That ability to generate revenue is not open to them due to the legacy trust.

Since that is not an option, Utah has to look elsewhere for money.

Estimating the Utah Jazz’s bottom line

Last season the average operating income (profit after costs) for NBA teams was $70M per team with average revenue set at $292M. According to Forbes, in 2018-19 the Utah Jazz generated $258M in revenue and had an operating income of $63M EBITDA. That puts estimated operating costs at $195M. Of that ~$195M, $111.7M of that was player salary. Which leaves $83.3M. Out of that $83.3M remainder, loan payments are also debited. As of last season, the Utah Jazz were estimated to have a 6% debt to value percentage. At a valuation of $1.55B, that would be about $93M, most likely the remnants of Utah’s $125M Credit Facility with U.S. Bank. That would account for ~$10.5M to the payment of the loan. In the end, that leaves the Jazz having an estimated operating cost of ~$72.8M.

The NBA is estimated to lose up to $1B pretty quickly with no play. That works out to $40M per team and that’s just for this season. That 40 million dollars would have wiped out two-thirds of Utah’s 2018-19 operating income so it stands to reason it probably wiped out a lot or all of their 2019-20 projecting operating income. It could be closer to all of their operating revenue as the Utah Jazz upped their payroll by $10M this year. Those losses are expected even if the NBA finds a way to play the postseason without fans. Steeper losses could be in play.

If the league is forced to play a 2020-21 season without fans they could see up to a 40% reduction in revenue. Such a hit could cost Utah at least $116.8M in revenue. If Utah made only 60% of their estimated revenue of their 2018-2019 season, they would only bring in $175 million for the entire season. The Jazz are already on the hook for $117 million in payroll alone next season for 12 players. If they were to re-sign Jordan Clarkson on a deal similar to his current contract, Utah would be at about $130M in salary. That’s before we account for a 1st round pick ($1.9) and a potential Mid Level Exception ($6M).

Reminder: The Utah Jazz receive all their revenue from car sales and entertainment. The latter is going to be patron-less for the next year, at least.

That puts Utah in a really tough situation. They made moves to win now by signing high priced veterans who aren’t getting any younger. Here is the estimated look at Utah’s balance sheet moving forward.

Utah Jazz Estimated Expenses & Revenue

2017/18 2018/19 2019/20 2020/21 - Estimated
2017/18 2018/19 2019/20 2020/21 - Estimated
$ 243,000,000.00 $ 259,000,000.00 $ 212,400,000.00 $ 148,400,000.00
$ 106,862,254.00 $ 113,144,016.00 $ 121,700,000.00 $ 138,770,000.00
$99,093,000.00 $101,869,000.00 $109,140,000.00 $115,000,000.00
$ 10,666,000.00 $ 10,666,000.00 $ 10,666,000.00 $ 10,666,000.00
$ 66,471,746.00 $ 72,189,984.00 $ 66,000,000.00 $ 66,000,000.00
$ 59,000,000.00 $ 63,000,000.00 $ 14,034,000.00 $ (67,036,000.00)
*2020/21 is estimated with Jordan Clarkson being re-signed, the Utah Jazz keeping their 1st round draft pick, and signing a Mid-Level Exception.

It’s intimidating to look at. While this is the worst case scenario which would require the league not finding a way to recoup any of their gate sales revenue, it’s one of the bad ideas in the fire that Adam Silver refers to. Utah could be looking at up to $67 million in losses to try to run a season without gate revenue. That type of loss is not made in a bubble. So would other NBA teams as well. Hitting the revenue Utah relies on from revenue sharing.

Next 2020/21 Season Consequences

Utah’s 2019-20 season failed to live up to the hype its offseason moves created. The Utah Jazz paid more per win this season and, with the drama right after Rudy Gobert’s positive coronavirus diagnosis, more for drama. The Utah Jazz organization, Donovan Mitchell, and Rudy Gobert are saying all the right things now about playing nice and focusing on winning whenever basketball returns. But what else are they going to say when the current season is still an option and the offseason is still a yet to be determined future date?

Even if Donovan Mitchell and Rudy Gobert are back to being on the same page. Utah could be looking at the 2020-21 season through the lens of extensions that will kick in during the 2021-22 season. But the value of those extensions swing wildly depending on how the NBA decides to cushion the blow of revenue from the fallout of the pandemic.

Depending on how much the salary cap is reduced for the 2021-22 season, Donovan Mitchell and Rudy Gobert will see a bigger decline in their potential earnings for their next contracts. While that may seem to be in the interest in the Utah Jazz, it actually isn’t.

In some scenarios it is estimated the salary cap of the NBA could be cut by 20%. The NBA was already working with a lower salary cap level because of the hit from the China-Daryl Morey fallout. Now an additional 20% loss would be devastating. Utah is already on the hook for $41 million that is going to Bogdanovic, Joe Ingles, and Royce O’Neale. If they sign Jordan Clarkson to a contract similar to the one he’s on now, they’re on the hook for $54 million. Now take a look at how much Rudy Gobert and Donovan Mitchell can make on a max contract. Donovan Mitchell can make up to 30% of the salary cap if he makes an All-NBA first team. Rudy Gobert can make up to 35% on a supermax contract. Look at what that does to Utah’s bottom line and this is without adding Jordan Clarkson’s contract, any additional MLE deals, and rookie deals.

*Bojan Bogdanovic, Joe Ingles, Royce O’Neale **Bogdanovic, Ingles, O’Neale + Mitchell, Gobert

At a 0% reduction, Utah is using $110 million of their $125 million in cap space for only 5 players if Gobert signs for only the 30% of the cap instead of the 35% he is able to sign for and Donovan signs at 25%. They’re at $122M if they both hit their top earning potential.

At a 20% reduction, it becomes catastrophic. With Mitchell and Gobert taking the lowest amount they are capable of making Utah is using $96 million of their $100M salary cap. If Gobert takes his 35% and Don stays at 25%, they’re at $101 million. At top earning, they’re making $106 million of $100 million. While that becomes a deal if the league bounces back, someone has to pay the bill now.

With those deals in place Utah still only has 5 players. Two of which—Joe Ingles and Bojan Bogdanovic—are on the wrong side of 30. Even in the best scenario, Utah is looking at a very tough outlook of building a contender. The value of having an All-Star like Donovan Mitchell on a rookie contract is gone.

This isn’t just about Rudy Gobert and Donovan Mitchell

Rudy Gobert and Donovan Mitchell say they have buried the hatchet and are looking at competing when they get back on the court. That’s awesome. But the bill is about to come due. Utah may have to split up their team. It won’t be due to drama in the locker room. It will be Utah trying to balance the books. This is not another Utah has to trade either Rudy Gobert or Donovan Mitchell piece. This is about Utah having to move their expensive contracts regardless of the name attached to them. Those players would include Bojan Bogdanovic, Mike Conley, Rudy Gobert, and Joe Ingles. If Utah does have to shed salary, I doubt they want to repeat the Paul Millsap and Al Jefferson offseason where they let both walk away for nothing.

The other not fun part about coming to grips about Utah’s upcoming shortfall in revenue is any trades made may not be looked at well in the future. They could very possibly be compared to the deals when the early Jazz franchise sold draft picks to keep the lights on. If Utah was to shed salary, there’s only one team in the entire NBA that has the ability to take on a lot of salary and provide Utah with relief. The New York Knicks.

The Knicks literally have become the oasis in a desert when it comes to salary cap relief. They have $46.2 million in player contracts that are either team option controlled or non-guaranteed. In addition to that $30.5 million. If you were an NBA franchise in dire straights looking to offload large salaries, they’re the perfect partner. But the trades are not going to be in Utah’s or any other team’s favor. Remember, the Knicks are selling flood insurance during a biblical flood.

If Utah were to make a trade they could unload Bojan Bogdanovic, Mike Conley, or Rudy Gobert to the Knicks for some cap relief, but the trade scenario wouldn’t yield the return that players of that caliber normally receive. Utah may be able to sneak away Mitchell Robinson and a 1st rounder for Rudy Gobert, but Utah would probably be sending a 1st rounder the other other way. Bojan Bogdanovic would probably only net Utah a future 1st and protected. Mike Conley may only give Utah back cap space and that’s it.

Fans playing the trade machine where Utah receives Andrew Wiggins and Golden State’s 1st rounder are forgetting that Utah would be on the hook for Wiggins contract until 2022-23. That makes a bad situation even worse because they would then have to pay for the salary of a potential 1st round pick with Wiggins salary WITH a Donovan Mitchell extension.

Back in March I wrote about how Justin Zanik looking at potential other jobs might have hinted at Utah’s contention window slamming closed after this season due to having to adjust to lagging revenue during this pandemic. Zanik and his boss Dennis Lindsey are facing the toughest task of their careers.

As the NBA gets closer to finding a way to resuming play they have to make a choice from a lot of bad options. Unfortunately, the Utah Jazz are no different. If the NBA does return to play out the playoffs, Utah Jazz fans should savor every minute of it. Once the NBA offseason arrives, Utah will transition from win-now mode to stay-afloat mode.