Tuesday, April 19, 2005

Are the Royals a Philanthropic Entity?

So over on my preferred Royal discussion board, we're debating the prospects of the latest "youth movement" to hit Kansas City (and "youth movement" is a misnomer, in my opinion, because it gives the impression that Royals are able to make a conscious choice between going young and building a team through free agency. They can't build a team through free agency). And someone points out that he heard somewhere that David Glass cannot profit from the sale of the Royals - that is, if he sells the team, any money earned over and above his original purchase price will be donated to charity.

I couldn't believe two things. First, I couldn't believe it was true. Why would any owner agree to such a deal? But then I found a Star article, and there it was in black-and-white: indeed, David Glass cannot make any money from the sale of the Royals. Now I couldn't believe I'd not heard about this until now.
Here's another little-known fact that would discourage the Glass family from dumping the team: Under terms of the succession plan and the Royals' purchase agreement, the Glass family cannot profit from the sale of the team.

“That is correct. If we were to sell the team, whatever profit is made would stay in Kansas City,” Glass said. “In other words, whatever the sale price is above what we purchased the team for, the profit would go directly to the Kansas City charities.”

It's obvious that was Ewing M. Kauffman's desire from the start: to discourage anyone from buying the Royals and selling them for a quick profit to another owner who might just shuttle the team elsewhere.

(By the way, the value of the Royals has increased from $96 million to $187 million since Glass bought the team, which is 99% due to the increased value of MLB as a whole, and has nothing to do with anything the Royals have done on their own.)

While I understand the civic motivation behind this proviso on its face, I find this to be disturbing. What are the unintended consequences of this provision? If David Glass doesn't have a financial incentive to build franchise value through investment in his team, how exactly does it help this franchise? Do any other baseball teams operate under the same or similar conditions? What do economists think about it? Or does it not matter at all?

I need to think about it this one. If anyone has any thoughts on the subject, or can provide some references to articles dealing with the issue, I'd appreciate hearing from you.


At 12:07 AM, Blogger Daniel said...

I really don't know what to think after hearing this news.

On the one hand, could it be that Glass was really being that benevolent? I would think that all but an idiot would realize that if you buy a team for x amount, after 10 years, you can sell it for more than you bought if for. Inflation, and common sense.

On the other hand, perhaps all this does is give Glass incentive to keep payroll low, making sure he loses as little as possible, or makes as much money as possible -- take your pick.

An enigma, wrapped in a conundrum to be sure.

At 8:59 AM, Blogger cfos said...

I have heard this before, too, and like you find it hard to believe. There has to be some sort of inflation or accrual factor in it - like 3-5% per year - that Glass would get as return on his investment prior to profit over and above that going to charity.

If not, then okaying the signing Juan Gonzalez was not the dumbest thing Glass has ever done.


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