Creative Financing Buys Ottawa Senators
GRAND RAPIDS — A Canadian limited partnership bought the Ottawa Senators last week and also gave the seller a decade to buy back the National Hockey League franchise. The sale was worth nearly $187 million in Canadian currency, which comes to roughly $116 million in U.S. dollars.
The transaction, which should get league approval in March, will not affect the business relationship the Grand Rapids Griffins has with Ottawa. The local American Hockey League club is in the third year of a player-affiliation agreement with the Senators.
“At this point in time the affiliation agreement has been done and the relationships are solid. I don’t know of any significant changes that are taking place there immediately, and so we continue with business as usual,” said Dan DeVos, majority owner of the Griffins.
But DeVos, whose company has holdings in Canada, did think it was a creative way to finance a professional sports team, and the first time he heard of this method being used.
“Some are publicly owned, as we know. But that is clearly a different thing,” he said. “I think it’s very creative. If it works and if the team stays there, I think it could be a great thing for everybody.”
The partnership is being managed by two Toronto-based investment firms, Triax Capital Holdings and Norfolk Capital Partners. Investors are being asked to buy shares in the Ottawa Senators Hockey Club (OSHC) 2001 Limited Partnership for $150,000 each, or $94,000 U.S. Over 1,300 shares will be sold and OSHC will own 100 percent of the franchise. But shareholders will not have a stake in the Corel Centre, the relatively new 18,500-seat arena that is home to the club.
The deal may be a way to save the nation’s four small-market NHL franchises. Ottawa, Calgary, Edmonton and Vancouver are struggling due to the weak exchange rate Canada’s dollar has with its American counterpart and from the lack of tax breaks that the country offers the businesses.
In contrast, the partnership gives investors a substantial tax break. Buyers will be able to write off 100 percent of the business’s future losses against their income from other sources. Shares are being marketed to Canadians who earn a minimum of $125,000 annually, because that is the earnings amount that marks the country’s highest tax bracket.
The deal also allows investors to finance part of their purchase. The agreement calls for a buyer to put up $28,000 Canadian in year one, $27,000 in year two, and the rest, including purchase fees, can be financed.
Seller Rod Bryden said the Senators lost between $40 million and $50 million Canadian in the last few years. And the red ink is expected to bleed for the immediate future, meaning investors can expect to share in some healthy write-offs.
Selling every share should bring in more than $203 million. The franchise will get about $186.6 million after expenses and commissions are deducted. All the shares are expected to be sold within six weeks.
Is it an attractive buy for an investor on this side of the border? That depends. Anyone thinking about buying a share should talk with their tax attorney to determine whether losses from a Canadian limited partnership can be deducted from American income. But what about an American investor who has holdings in Canada?
Charles M. Rotenberg, a tax attorney with Rasmussen Star Ruddy in Ottawa, told the Business Journal that the losses could be deductible from their Canadian source of income.
“However, some forms of investment income is taxable in Canada on the basis of a fixed percentage of the gross investment income,” said Rotenberg. “For example, interest is taxable by way of a withholding tax of 15 percent of the gross amount of interest. In such a situation, there would be no basis to deduct the losses.”
Bryden will continue to operate the franchise once OSHC takes ownership. Under the agreement, he has 10 years to buy back the Senators from the partnership. Three-quarters of the buy-back price has been fixed, but not made public, while 25 percent will be set at a fair market value.
The Ottawa Sun reported that Bryden said he intends to exercise his option, but not in the first year. Bryden has owned the Senators, considered by many to be a well-run organization, since 1993.