Tilman Fertitta sure looks like he’s having fun.
Photographer: Jin Lee/Bloomberg
Paying $2.2 billion for a National Basketball Association team with an operating income of $62.7 million a year, as Tilman Fertitta agreed to do earlier this week for the Houston Rockets, is a sign of great wealth, enthusiasm for the sport, and confidence that some future billionaire will eventually take the thing off your hands for a similar or higher price.
It is also, as several readers pointed out after I wrote about the deal, a transaction with some positive tax consequences. Since the passage of the American Jobs Creation Act of 2004, buyers of sports teams have been able to write off a big chunk (sometimes almost all) of the purchase price against the team's taxable income over 15 years. And because sports franchises these days are usually structured as limited liability companies or other pass-through entities whose earnings or losses flow through to owners' personal tax returns, this tax deduction can also be used to offset income from other sources.
This benefit is available to buyers of all kinds of businesses, but the remarkably high purchase prices of sports teams relative to the income they generate make it especially valuable to their owners.
Not to pick on Fertitta, who seems nicer than your average billionaire reality-TV star, but let's say his accountants and lawyers can justify treating $2 billion of that $2.2 billion purchase price as intangible assets (if a team owns its stadium or arena, the intangible percentage would be lower and the write-off rules more complicated, but the Rockets don't). It is these intangible assets that are subject to the 15-year amortization rule, so let's say they're amortized at a straight-line $133 million a year. That's enough to render exempt from taxation not only the Rockets' $62.7 million in operating earnings (as estimated by Forbes), but also another $70 million or so in earnings from Fertitta's restaurants, casinos and television show.