Owning an NFL team is no longer a fantasy. The National Football League (the “NFL” or the “League”) voted to allow minority stakes to be sold to private equity firms (“PE”). However, according to NFL.com, “an executive from a private equity firm is not going to be sitting in the draft room choosing the next quarterback.” These deals will provide liquidity to NFL team owners that need cash, and PE funds will reap the benefits, including tax benefits, of owning one of the most exclusive assets in the world. This Memorandum addresses certain tax and other attributes of investments into NFL (and other professional sports) teams.
Summary of the NFL Vote
At the NFL owners’ meeting, the League voted to allowed certain PE firms to purchase up to 10% of the equity of a team. Each deal must provide for a minimum holding period of at least six years and represent at least a 3% equity stake in the team. The PE deals are non-voting and purely passive investments.
A PE firm may purchase stakes in multiple teams, with a maximum of six teams. PE firms with stakes in multiple teams are subject to information disclosure requirements.
The NFL has whitelisted the following PE managers for investments into the NFL: Arctos Partners, LP; Ares Management Corporation; Sixth Street; and a consortium group including Blackstone, Carlyle, CVC, Dynasty Equity and Ludis. In speaking with the media, Clark Hunt, the owner of the Kansas City Chiefs, indicated that this move may be a step to larger PE investments in NFL teams. While there may be only a few PE allowed to make minority NFL investments, this list could expand as can the rights and capacity for PE investments.
Non-whitelisted PE firms may be able to invest indirectly through access vehicles sponsored by whitelisted PE firms.
For NFL Teams, PE Offers Liquidity
Generally speaking, NFL teams are not regarded as cash-flowing assets. TV and streaming rights, usually a team’s largest source of revenue, pay out on an annual or lump sum basis. Sales of regular season tickets are partially shared by the League. Because of revenue sharing, smaller market teams, like Green Bay, get compensated in an equitable manner as to large market teams, like New York and Los Angeles. Much of a team’s revenue is not received until after the NFL season.
Teams need cash to pay their players, coaches and staff throughout the season and the year. PE deals will offer teams the cash to be able to manipulate player contracts or otherwise improve their organization, which may be improving facilities.
Players contracts are highly manipulable. Players are compensated in the form of signing bonus, base salary and incentives. The NFL has a salary floor and cap. This means that owners must spend a certain amount on player salaries but cannot exceed a ceiling each year. For salary cap purposes, signing bonuses are prorated over the life of the contract, base salary is taken into account during the season in which it is paid and incentives are included based on the likelihood of each incentive being reached. Teams need cash to manipulate player compensation and the salary cap, but doing so increases the team’s flexibility to construct a roster and their overall competitiveness.
Tax and Business Consideration of Owning an NFL Team
NFL teams are generally structured as pass-through entities that are treated as partnerships for US federal income tax purposes. Items of income and loss generally flow-through to the owners on an annual basis, as reflected on a Schedule K-1. As mentioned above, NFL teams are poor cash-flowing assets and can incur large losses in certain years. Losses from a partnership may be limited by passive activity rules, at risk limits and a partner’s basis in the partnership interest.
Investors in an NFL team may also be investors in other entities, and non-football revenues from other sources may be earned through other entities. Non-League revenues may include revenues from rent of non-football facilities or from non-football operations. As an example, Patriot Place is essentially a mall built outside Gillette Stadium, where the New England Patriots play. This was built and is owned by the Kraft family, which also owns the Patriots. The rent from restaurants and shops would be considered non-League revenue and not shared with the other owners. Likewise, revenue from concerts or other events would also be considered non-football revenue. Investors into an NFL team should consider whether their investment includes economic exposure to these other revenue streams.
If a PE fund is purchasing its minority stake from current owners (rather than a direct capital contribution), then the PE fund will get a basis step-up with respect to the assets owned by the team, including goodwill, if the team makes or has made a tax election under Section 754 of the Internal Revenue Code of 1986, as amended (the “Code”). Teams that have made the Section 754 election will allocate items of depreciation and amortization to a PE purchaser, which provide valuable tax benefits to the PE fund.
PE funds that own NFL teams may have state and local tax obligations as well as international tax considerations. An NFL team will have state tax filing and payment obligations in each state where it does business (i.e., where it plays home and away games as well as if it has an out of state practice facility). The NFL team may file state tax returns on a composite basis or will have made a pass-through entity tax election. These procedures generally cause state taxes to be paid at the entity level, but the PE fund may still have filing obligation in certain states.
Internationally, NFL teams play games in England, Mexico, Germany and for the first time this year, Brazil. This may cause the NFL team to file and pay taxes internationally. Tax treaties may provide some benefit to the players, but teams and ownership may still have international tax filing and payment obligations. Foreign taxes may be claimed as a credit against US federal income taxes on that income, subject to certain limitations.
The NFL prohibits direct ownership by pension fund and sovereign wealth funds, but will allow these investors to be investors in the PE funds that own NFL teams. Since an NFL team is an active business in the US, investors that are sensitive to unrelated business taxable income (“UBTI”) or effectively connected income (“ECI”) should structure their investments through blocker corporations.
Finally, PE funds should consider possible secondary transactions when investing into an NFL team. The NFL may impose restrictions on indirect ownership changes, which could impact secondary sales of PE fund interests. Further, any sales of interests in a PE fund or an NFL team would require certain tax certificates to establish no withholding tax under Code Section 1445 and 1446(f). For more information about these certificate and secondary sales, see our article: Tax Concerns with PE Secondary Sales.
