Exclusive: Recent New Jersey Nets Books Reveal Huge Losses

The biggest battle in the NBA lockout right now might be the public relations battle. Are the losses the owners are claiming real or fictional?

New Jersey Nets logo at center court
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New Jersey Nets logo at center court

The tension mounted earlier this week when a New York Times blog post used Forbes numbers to say the league operated at a $183 million profit for the 2009-10 season, the last year where numbers are available.

The NBA fired back and disputed the numbers and a column in Forbes, of all places, said that in 2009-10 the league's 30 teams had an aggregate loss of $340 million that year.

Not many teams have balance sheets that are publicly available, but there is one team whose balance sheets anyone can view and it happens to be a team that at least claims to have lost a ton of money.

With that in mind, we were provided the financial statements of Nets Sports & Entertainment LLC, that included the finances of New Jersey Nets properties in 2009 and 2010 (through June 30). The team was owned through April of 2010, by Bruce Ratner, chairman and CEO of Forest City Ratner Companies.

If you go through the report, audited by PWC, and you understand how the NBA reported what was in this document to the Players Association, you will understand that it's not out of the realm of possibility that the league's owners were losing north of $300 million for years.

If you want to look at the entire document, you are welcome to click here, but for those who just want the quick breakdown of how this all works, just read on below. It should be noted that this doesn't necessarily include everything related to the basketball team, some of that information may also lie in other companies Ratner and his partners had overseen, including the real estate at Atlantic Yards in Brooklyn (Forest City Ratner) and their stake in the new Barclays Center (Brooklyn Arena Holding Co.).

I will use the 2008-09 season instead of the 2009-10 season because the transfer of ownership to Mikhail Prokhorov means that the 2009-10 season is three months short of a full year of financials.

For the 2008-09 season, the documents reflect that the Nets lost $77,227,184. That number is reached thanks to the team pulling in $78,783,677 in operating income, including $26 million in ticket sales and $32.5 million in total broadcast revenues. Operating expenses were $147 million, off mainly $66 million in salaries and $33.3 million in "amortization of intangible assets." When the team's $13.3 million interest expense is added, the Nets loss for the 08-09 season hits $77.2 million.

Now let's break it down for you. Assuming the operating income is accurate, there are three questionable line items within the operating expenses that are worth exploring. The most important is the $33.3 million amortization, since it's the largest number and often the number that the players union says is creative accounting.

So let's explain it first and then how it's reported. When a person buys a team, the price paid is distributed throughout various expense lines, the amortization line is one of those places. It's not voodoo accounting, it's actually part of generally accepted accounting practices. But the point is, that the NBA doesn't include that line item when it breaks out the losses to the union. So subtracting that number, the Nets loss that season, as the owners reported to the union, is probably closer to $44 million.

I said that there were two other numbers, which could be disputed. Let's look at those. The first one is depreciation, which in this sense is the allocation of costs distributed over a certain period of time. In this case, the reported depreciation by Nets Sports & Entertainment is $2,041,611.

The players association says that depreciation shouldn't be included in the losses. The owners say it absolutely should because it does reflect the cost of expenses that could be related to growing revenues. If the players get a certain percentage of revenues, the owners claim they should be responsible for some of the costs to get to those higher revenues.

The other disputed number is interest. The Nets for the 2008-09 season had $13,412,981 in interest. The players association again says that that shouldn't be included in the losses. With depreciation, the actual loss might not be taken in the year it is credited to. With interest, the ownership is actually writing a check. The players can argue they shouldn't share in this, but there's no debate that that is a real loss.

Finally, let's explore the bigger number. For the 2008-09 season, NBA owners told the players they lost a single-year record $370 million. Not only that, a record 24 teams lost that amount of money. Consider that amount of money an aggregate loss. Sources have told me that those 24 teams lost approximately $485 million, which leaves the six profiting teams with a net gain of $115 million.

So now take the Nets loss of $44 million that year. That means that the Nets share of the losses were nine percent of the total losses. If all teams used generally accepted accounting practices, is it possible that 23 other teams lost an average of $19.1 million that year? Of course it is.

Questions? Comments? SportsBiz@cnbc.com