Basketball CFO Takes His Shot at Real Estate

For Milwaukee Bucks finance chief Pat McDonough, it was "sink or swim" when he joined the team as it was embarking on a huge real estate developmen...
David McCannFebruary 14, 2019
Basketball CFO Takes His Shot at Real Estate

When is a sports-team CFO not a sports-team CFO? When he or she is attending to the team’s various other businesses.

In the past decade-plus it’s become a trend for sports franchises to spearhead real estate development in the area surrounding their stadium or arena, and to pursue other business paths. The most recent case in point: the NBA’s Milwaukee Bucks.

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The Bucks led the development of their new arena, Fiserv Forum, which opened last August. The building lies within a 30-acre district on land owned by the Bucks that is alive with new and upcoming developments.

A parking structure and a sports science and training center for the team were also developed by the Bucks. An affiliate entity, Head of the Herd Real Estate Development, built a new medical office building and the Entertainment Block, a public plaza where one restaurant opened in January and two others are slated to launch this spring.

The newly developed district “gets away from the idea of a stadium built on an island surrounded by a sea of parking lots, where people go just to a game or another event and that’s it,” says Bucks CFO Patrick McDonough.

50,000-plus people toured Fiserv Forum as part of its ribbon-cutting ceremony on Aug. 26, 2018.

Still to come is a second phase of construction on the Bucks-owned land that may include residences, a hotel, and commercial offices. “There are a lot of great opportunities to round out the ‘live-work-play’ mantra of a mixed-use development,” McDonough says.

The Bucks also run the Wisconsin Herd, their minor league basketball team; Bucks Gaming, a franchise in an NBA-led professional e-sports league based on the popular basketball video game NBA 2K; and the Milwaukee Bucks Foundation, which provides financial grants to projects in the areas of youth education, youth health and wellness, and community betterment.

McDonough came to the Bucks in 2014, along with a new ownership group, after spending 13 years in finance and accounting leadership posts with Madison Square Garden, owner of the New York Knicks NBA team and New York Rangers NHL team. There, his work was all about the Knicks. Before joining the Bucks, he had no real estate experience.

He recently spoke with CFO about his involvement in the real estate operations, the other businesses the organization is involved in, and running finance for a pro sports franchise. An edited version of the conversation follows.

You started your career with PricewaterhouseCoopers. How’d you get from a professional services firm into the sports business?

Fortunately for me, the office that hired me in the New York metro region happened to run the NBA’s salary-cap audit. That’s where they put me in my first year there. I stayed in that job for three years and got to know some people in the league. After those three years the Knicks had an opening right at the level of experience I had.

It was awesome. I was a huge Knicks fan.

What challenges do the diversity of the Bucks’ businesses present to you?

The biggest challenge is the diversity itself. Typically in this job you’re responsible for the operations of the team and in some cases the arena. MSG is a huge public company with lots of different business lines, but my experience was just on the team side.

More specifically, the challenge I faced was getting smart about real estate development, including the arena construction project. I had to learn about things like real estate financing and lease structures.

How’d you go about educating yourself?

It was sink or swim, so I swam. I reached out to some CFOs of other teams that I knew. Also, among the four people in our ownership group, some of them made their fortunes in real estate. They took us through Real Estate 101 and were patient with us as we got up to speed.

How did the team acquire all that real estate?

There were grand negotiations with the city, the county, and the state about the new arena. About 15 years ago a freeway spur was taken down in hopes of developing new downtown space, but there were environmental concerns and some underground work would have been necessary, and it just never happened. So, one part of the deal was getting ownership rights to that property from the county.

Another part was our agreement to pay for the cost of demolishing the old arena — the Bradley Center, which had been owned by the prior team ownership — in exchange for the land it sat upon.

How are you doing with prioritizing your time among all of your various activities?

The advantage I had coming in was that a knew a lot about the team side of things. I knew the team wasn’t going to be any more complicated than the Knicks. That allowed me to dedicate 80% of my time to the real estate side.

I understand that since you arrived the organization has expanded from 80 to 330 employees. Did the real estate business account for most of that?

No, the big growth was actually in sales, for both the team and the arena. The prior ownership ran a much smaller business. It was probably consistent with the previous generation of sports-team ownership, where it wasn’t their primary source of income and the ecosystem was smaller.

Our ownership viewed it from day one as an opportunity to transform a longstanding NBA franchise by aggressively marketing and selling like the team had never been marketed and sold before.

How do your revenue streams stack up? What’s the largest one?

If we’re talking local revenues, tickets are No. 1, and TV and sponsorships are about tied at No. 2. Next is food and beverage (F&B).

For the real estate, right now we’re looking at about a 10% return on equity. It’s pretty much the traditional model of construction financing and equity, and we’re getting what we think are some pretty good rents relative to the market, due to the attractiveness of our development.

Is there a correlation between the size of those revenue streams and what you’re most focused on?

Not really. For example, we just started the first year of our new local TV deal with Fox. We signed it in May, and leading up to that we spent a lot of time running scenarios and advising on that. It’s a great revenue stream, but it’s locked in for seven years, so we can pause on that.

What levers can the finance organization pull to influence revenue?

It’s about pricing — for tickets, for F&B, and our sponsorship rates — and working with the sales team to make sure we’re maximizing revenue through pricing and unit sales.

Patrick McDonough

We’ve increased prices pretty aggressively for the past couple of years, and it wasn’t rocket science. We looked back over the previous 16 years, and the Bucks’ ticket prices were basically the same for all of that time, while the league average had grown by 3% annually. There was a huge gap between our prices and the average NBA prices — not the high-end markets, just the average.

Pricing is part science but also part art. There’s no formula you can run to spit out what you should charge for Row 20, Seat 3.

But we have to price appropriately and responsibly. We had to consider how to implement increases over a few years to build to the right price point for Year 1 of the new arena, rather than turn people off with a punitive increase all at once. You need to be aware of your market and its price sensitivity.

The Bucks are having a great season on the court. Is there any way at all to draw a link between that and anything you guys on the finance and business side are doing?

It would be a loose link at best. We have nothing to do with acquiring the talent, the coaches and their plans and systems, or developing athletes.

But what the current ownership brought in was a best-in-class culture. Whether that’s in the basketball front office, finding the right type of players, or building that culture on the business side, where the attitude is that we don’t want to think or act like we’re 26th or 27th in the NBA market rankings.

We may never have the ticket sales that the Knicks or Golden State Warriors have, but we’re not going to accept being [near the bottom] in local revenues. Seeing significant growth and accomplishments on both the basketball and business sides at the same time is really cool.

There’s been an explosion in player salaries the past few years. Do you play any advisory role with respect to what the team can afford to pay and the financial effects on the organization?

We don’t opine on how much a guy is worth. We do work together with basketball operations to make sure that macro player salary assumptions flow through our financial projections, and that ownership sees that as they approve how much to spend on particular guys.

How is the Bucks Foundation funded?

There was initial seed money from our owners. We have an annual golf outing that a lot of Bucks sponsors are involved in. We do a 50/50 raffle at each home game that generates about $5,000 per game. And we have call-a-thons during away games seeking small donations for chances to win prizes.

Finally, tell us about Bucks Gaming.

It’s one of 17 teams that competed in the inaugural season of the NBA 2K League, a professional e-sports league co-founded by the NBA and Take-Two Interactive Software.

In NBA 2K, players create their own avatar. The best players have put in hundreds or thousands of hours of playing time. Last year there was a 30-day competition following which the highest-ranked players became eligible to be drafted by Bucks Gaming and the other teams. It’s not a hobby for those guys; it’s actually their profession.

It’s in a grass-roots exploratory stage right now. We can sell sponsorships locally, but the real play is to distribute the league far and wide through online gaming channels. So, the NBA is looking at how to capture the people who play NBA 2K and would be interested in viewing professional gaming, and at how to monetize that.

Photo credits:

Fiserv Arena: Courtesy of Milwaukee Bucks

Patrick McDonough: Copyright 2017 NBAE (photo by Gary Dineen/NBAE via Getty Images)