The $160 million agreement that extends the Indiana Pacers' Bankers Life Fieldhouse lease through at least the 2023-2024 season appears to pave the way for team owner Herb Simon to pass the reins to his eldest son, Stephen Simon.
A Capital Improvement Board presentation obtained by IBJ says the agreement lays out how events would unfold after the death of Herb Simon, now 79. At that point, the summary says, "We understand that Mr. Simon's heirs will take control of the team per his will and trust agreements."
The summary does not elaborate on terms of the succession, but Herb has said in interviews in recent years that he sees a central role for Stephen, 48. "At my age, we do plan for that eventuality," he told Indianapolis Monthly in 2012. "And I have a son, Stephen, who's interested in the team and has been involved with me, and we have a succession plan."
Stephen Simon, co-founder and managing partner of Simon Equity Partners LLC, lives outside San Francisco with his wife and three children. While Simon Equity is based in San Francisco, Stephen Simon also maintains an office at Parkwood Crossing in Indianapolis. He has worked for years with Herb on running the NBA franchise and serves on the team's board.
Efforts to reach Stephen Simon by phone and text Friday morning were unsuccessful. However, one of his friends, former Brightpoint Inc. CEO Bob Laikin, said Simon is well-suited for the role.
"Steve's disposition is very similar to Herb's," Laikin said. "He cares about the community. He cares about the environment. He's a fair businessman."
Laikin added: "I think he would be a fantastic steward and has been working with Herb on the day-to-day for the Pacers for many years. It is not like he's coming in without any background on how the organization runs. He has full knowledge of the workings of the Pacers because he has been at the table side-by-side with Herb for a decade."
Herb Simon has at least six other children, but sources close to the family say those children appear to have little desire to run the team, or would be too young to do so. At least two of the children—born to his third wife, Porntip "Bui" Simon—are school-age.
The sources said Bui also could become part-owner of the team upon his death. She lives in California.
Because of the spousal exemption, the Simon estate would not have to pay estate taxes on any portion of the team passed to his wife. Ownership interests passed to Stephen or his other children would be subject to estate taxes, which run at about 40 percent.
Forbes magazine recently valued the Pacers at $475 million, so the estate taxes could be considerable. But unlike for Indianapolis Colts owner Jim Irsay, Herb Simon’s main source of wealth is not his team ownership. Instead, he built his fortune through Simon Property Group Inc., where he was a co-founder. His estate would appear to have adequate resources to cover the estate taxes. Forbes this year estimated Herb Simon’s worth at $2.2 billion.
Team officials have told IBJ that Stephen became more involved in the franchise after Herb became sole owner by buying out his brother, Melvin, a short time before Melvin's death in 2009.
That buyout was funded partly by borrowing tens of millions of dollars—debt that might have to be paid off at Herb's death.
The CIB board presentation says that if, after Herb's death, the lender calls those loans, the Pacers must try for at least 60 days to find replacement financing, possibly enlisting CIB for assistance.
If CIB cannot line up financing after 15 months, the Pacers then could try to sell the team. If that happened, the presentation says, the city is entitled to "right of first offer.".
Observers consider such a scenario unlikely, given the Simon family's vast wealth.
CIB President Ann Lathrop said the NBA does not allow municipal ownership of teams. The "right of first offer" language would authorize CIB to line up a third party that actually would make the offer to buy the team.
NBA officials did not return calls seeking comment, but sources told IBJ that league executives had been very uncomfortable with the language allowing the city to become involved in the sale process.
“Frankly, the goals of the city and those of a team and the league aren’t always going to match up,” said Marc Ganis, president of Sportscorp Ltd., a Chicago sports consultancy. “The league wants to make sure its teams are doing first and foremost what’s best for the league.”
Terms of the agreement
Terms of the lease extension began to leak out late Thursday afternoon.
The 10-year pact, which includes up to three one-year-extensions, calls for the Pacers to create a separate entity to operate Bankers Life Fieldhouse. CIB would subsidize the new entity to the tune of at least $10.8 million per year.
That breaks down to $3.7 million for direct operating expenses and $7.1 million for "operating reimbursement" payments, according to the CIB board presentation. The $7.1 million figure would rise 3 percent each year over the course of the deal.
CIB also would provide $26.5 million for improvements to Bankers Life Fieldhouse's locker rooms, concession stands and video boards, and another $7 million for capital replacement items including new carpet. About half of those improvements would be completed in 2014.
CIB has been providing large annual subsidies to the Pacers since 2010, when it agreed to provide $33.5 million over three seasons to offset losses from operating the fieldhouse. Last year, CIB agreed to provide another $11 million under a one-year extension.
New costs for CIB
The deal will add to the financial burden for CIB just a few years after it extricated itself from financial trouble.
This year's CIB budget already was looking challenging, with a projected $33 million deficit.
Red ink is nothing new for CIB. Its deficit grew to nearly $50 million in 2009 before the quasi-governmental entity instituted a series of cost-cutting measures that led to a balanced budget in 2011.
CIB since has managed to build up its cash reserves to almost $50 million, which will enable it to at least start financing the deal with the Pacers, sources said.
Yet much of that could be wiped out from the loss the agency expects this year. The 2014 budget projects $152 million in expenses and $119 million in revenue.
The bulk of the loss is attributed to $13.5 million in repairs and maintenance to the Indiana Convention Center, an $11 million payment to the Pacers, and $10 million in improvements to the fieldhouse.
Most of CIB's revenue is generated through local taxes from hotel and motel, food and beverage, admissions and car-rental receipts. A Professional Sports Development Area also was established to capture state sales tax revenue from downtown venues, including the fieldhouse.
Total revenue from taxes this year is expected to top $93 million, CIB’s budget shows.
The Pacers deal comes at a time the city is struggling with unresolved revenue shortfalls and discussions about how to pay for a larger police force.
“The first thing I think it’s very important for people to understand is, these are not general tax dollars,” Ballard spokesman Marc Lotter said.
Monroe Gray, the City-County Council's Democratic majority leader, said he doesn’t believe statements about the economic impact of professional sports teams.
“How does that reach the people in the community outside the downtown area?” he said. He thinks the Pacers should pay a more meaningful rent for use of the fieldhouse.
Republican Councilor Bob Lutz, who, like Gray, is on the municipal corporations committee that approves CIB’s annual budget, said he doesn’t know enough about the latest deal to form an opinion.
The Pacers’ economic impact might make the subsidies worthwhile, he said. “It’s so nebulous. It’s almost like pulling on a string of spaghetti. It’s hard to know what the benefit is and what the cost."
Pacers and CIB officials have scheduled a press conference for 10:30 a.m. Monday to discuss the deal. It is expected to be approved at a CIB board meeting that afternoon.