The Morning Report
San Diego news and info
you need to take on the day.
It’s the bitter end of a long era of the NFL being a pressing topic in this town. Yet with the corpse of the San Diego Chargers not two weeks cold, there was a glimmer of hope last weekend that they might rethink their relocation to Los Angeles. Under the header “Mover’s remorse in San Diego,” ESPN’s Adam Schefter reported that the NFL is “besides itself” and that owners are very upset with the Chargers’ move. Schefter’s source said the league wants the Chargers to move back to San Diego, but that nobody believes the possibility is realistic.
That story generated enough chatter to prompt a response this week from Chargers owner Dean Spanos. “That’s not even a consideration,” Spanos told the Orange County Register. “There’s no looking back. We’re moving forward.”
In between those reports, a column by Union-Tribune sports writer Mark Zeigler floated an alternate scenario: the Chargers returning to San Diego under new ownership, eventually.
Zeigler made a case that the Spanos family might soon be financially overextended by their move to Los Angeles. Zeigler’s calculations imply a difficult road ahead for the Chargers to become a financial success as a tenant of the Rams’ new stadium in Inglewood. He wrote:
Eventually, the lower net operational income intersects with the higher capitalization value. Eventually, reality trumps obstinance. Eventually, the Spanoses realize the stakes are too high at this poker table.
One option is an equity partner. But that requires someone handing over $500 million and letting Deano manage it, which might explain why there haven’t been any takers. The other option, maybe the best option, maybe the only option, becomes to cash out. To sell.
And here’s the key part: Their NFL brethren won’t discourage it.
Well, about that key part. The NFL has already discouraged it.
The league forced a number of stipulations and special provisions on the Rams, Chargers and Raiders during their three-way race for Los Angeles. One of them was an agreement to pay a “flip tax” on any sale of their franchises after moving to L.A.
Sports Business Journal’s Daniel Kaplan reported in 2015 that the league planned to impose the flip tax. Last January, Scott Reid of the Orange County Register confirmed that the fee was one of the NFL’s stipulations:
The league sent the three teams a new draft of requirements the clubs must sign this weekend to be considered for relocation. One of the requirements is a so-called flip back tax in which teams must agree to pay the NFL 20 percent of any revenue from the sale of a portion of the franchise after relocating to Los Angeles.
The league is charging the Rams and Chargers $650 million in relocation fees, paid in installments over 10 years. Last month the NFL granted the Chargers a debt waiver allowing them to pay that fee over a longer period. But if Spanos were to turn around and sell, he could cash out the increased value of his team in Los Angeles and leave the relocation fee payments to a new owner. The flip tax is meant to deter that.
League executives declined to discuss the flip tax, but Chargers special counsel Mark Fabiani provided an overview of the agreement via email. Fabiani wrote, “It’s fairly long and complicated” but that these are the basics:
• As a condition of accepting the league’s G-4 money, the relocating teams agree to a sales transfer fee.
• From now until the end of the 2020 season, the fee is 20 percent of the gross sale price.
• For the 2021-2025 seasons, the fee is 10 percent of the gross sale price.
• For the 2026-2035 seasons, the fee decreases by 1 percent each season such that no fee will be due after the 20th season.
The sales transfer fee does not apply to intra-family sales or transfers. It also does not apply to the resale of an equity interest on which the sales transfer fee has already been paid during the prior sale.
Finally, it does not apply to sales of up to 15 percent in equity interests, if the proceeds from the sale are devoted entirely to financing the new stadium.
In all respects, the flip tax — imposed on the teams as a condition of claiming the L.A. market — discourages the teams from selling a controlling share. The agreement lasts for 20 years, with the steepest penalties in the first 10. The $650 million relocation fees are paid to the league over those 10 years.
Another key change to internal NFL policy came in 2015 when the league voted to allow trusts to own teams, a significant shift that allows a family like the Spanoses avoid huge estate taxes when a team owner dies.
Spanos serves as chairman of the Chargers but owns just 15 percent of the team, along with his siblings Michael, Dea and Alexis, who also own 15 percent each. (George Pernicano’s estate owns 3 percent and Bill Fox 1 percent.) Family patriarch Alex Spanos and mother Faye still own the largest share of equity in the team with 36 percent. Alex Spanos is 93 years old and suffers from severe dementia.
Forbes estimated the net worth of the Spanos family collectively as $2.4 billion, with $2 billion of that being the perceived value of the Chargers. If Alex Spanos passed away and left equal portions of his share of the team to his children, they would then each own 24 percent. Dean Spanos’ portion of the team at its current value would be worth close to $500 million.
Besides the complicating issue of four siblings owning equal shares of the team, a crucial factor making a Chargers sale even more unlikely isn’t the flip tax or a league policy change. It’s that for Dean Spanos and his sons, running the Chargers is the family business. Just as his father did for him, Spanos hired his sons into the front office, and in 2015 he handed them day-to-day operations of the team. A.G. Spanos serves as president of business operations and John Spanos is president of football operations.
If the Spanos family sold the team, the new owner would likely not retain Dean Spanos’ sons. Their professional lives have been devoted to football. I have a hard time imagining, after all the struggles in San Diego and tumult of moving to Los Angeles, Dean Spanos deciding to cast himself and his sons out of the NFL.
In 2010, Fabiani said the team was looking to sell a minority share of the Chargers solely for estate planning purposes. Such a sale was never carried out and the problem of estate taxes for family-owned teams has since been addressed by the league.
I asked Fabiani if the Spanos family is currently shopping any portion of the team. His response: “No part of the team is being shopped by any member of the Spanos family; the Spanos family has absolutely no interest in selling any part of the franchise.”
The Chargers still haven’t physically or even legally left San Diego yet. They continue to operate from city-owned Chargers Park on Murphy Canyon Road and have said they plan to hold off-season training sessions there. The termination clause of their Qualcomm Stadium lease, which includes the headquarters, can be exercised at any time between Feb. 1 and May 1.
When they do leave, Dean Spanos says the Chargers aren’t coming back. The flip tax and other factors make it unlikely he’ll sell. Maybe they could have a change of heart and just … stay?
Yeah, I won’t hold my breath either.