If We Build It, Fans Will Come Back: Minor League Baseball’s Bid for COVID-19 Funding

14 July 2020 Coronavirus Resource Center:Back to Business Blog
Authors: Nicole M. Marschean

In a news cycle dominated by labor negotiations between Major League Baseball (MLB) and the Major League Baseball Players Association (MLBPA), pressing Minor League Baseball (MiLB) issues have been relegated to a footnote.  Yet, by the close of 2020, MiLB and its 160 clubs with MLB affiliations will operate within an altered system after decades of the status quo.  On June 30, 2020, MiLB officially cancelled the 2020 season marking the first summer without minor league baseball since the league’s formation in 1901.   

On Deck 

The present day MiLB is the product of a relationship with MLB that has lasted for more than a century.  MLB and MiLB operate under the Professional Baseball Agreement (PBA), an agreement born from the sport’s rich history of competing professional leagues – two of which (American and National) formed the basis of the modern MLB.  The current structure, created in 1962, requires each MLB club to enter into a Player Development Contract (PDC) with an MiLB affiliate.  The PDC, memorialized in Major League Rule (MLR) 56, permits MLB to maintain this exclusive relationship with one affiliate at each minor league level (e.g., Triple-A, Double-A, etc.).  In fact, MLR 56 mandates negotiation periods for re-affiliation to enforce strictly this exclusivity.  MLB clubs can share an affiliation with an MiLB club.  However, this is typically for the lower-level MiLB clubs (e.g., Class A, Rookie League).  Additionally, an MLB club can seek approval from the MLB Commissioner to have more than one affiliate at a given minor league level.    

The PDC also establishes the division of financial responsibility between the leagues.  The MLB club is largely responsible for player costs such as draft bonuses, player salaries, coaching and medical personnel salaries, and travel related to the Major League Club (i.e., promotions, options back to the MiLB club, etc.).  The MiLB club is responsible for facility maintenance, providing uniforms, and travel to minor league games.  The two also have shared expenses such as equipment (MLB provides an invoice to the MiLB club for a portion of the expense) and meal expenses (paid for by the MiLB club with the amount set by the MLB club).  

Behind in the Count 

Even before COVID-19 outbreaks forced MLB, and by affiliation, MiLB operations, to shutter this March, MiLB was already on the path to the most significant changes the institution had seen in the last 30 years.  The cancellation of the MiLB season has all but confirmed that there will be changes, the only uncertainty is to what degree.  League President Pat O’Connor stated upon the season’s cancellation, “[i]t’s north of half (of MiLB teams) who could either have to sell (or go insolvent without government or other help).  This is the perfect storm.  There are many teams that are not liquid, not solvent.” 

Historically, the division of financial responsibilities has been a key area of PBA negotiation for MLB and MiLB.  The current PBA, set to expire at the end of the 2020 season, is expected to undergo its most substantial revision since 1990.  The most publicized aspect of MLB’s initial proposals is the transition of roughly 40 clubs to non-affiliated status.  This would result in about 25 percent fewer MiLB clubs.  The proposed clubs for non-affiliated status are all below the highest MiLB level, Triple-A, with the greatest concentration of clubs playing within MiLB’s lowest levels (e.g., Rookie League and Class A).  According to MLB, the criteria for identifying MiLB clubs for non-affiliation is focused on the ability of the club to provide facilities that meet MLB’s health and safety standards.  Given the current COVID-19 health restrictions, it is expected that these standards are likely to become even more stringent than those presented in MLB’s initial proposal during PBA renewal discussions.  

While MLB provided a list of recommended clubs for non-affiliation, this list is not set in stone.  Therefore, initial clubs designated for non-affiliation may ultimately be retained based on a club’s ability to demonstrate improvement or maintenance to its facility.  Moreover, non-affiliated clubs are not expected to completely dissolve, but instead would potentially form a “Dream League” – an MLB/MiLB-supported independent league.  

MiLB clubs at risk of non-affiliation may only have one avenue to control their fate – identifying and securing new sources of funding.  Presently, the economic and health repercussions of COVID-19 have already started to accelerate other areas considered in the initial PBA proposals.  The Amateur Player Draft was shortened from the usual forty (40) rounds to five (5) rounds in 2020 with MLB holding an option to shorten the 2021 Draft to 20 rounds (the proposal considered a reduction to 20-25 rounds beginning with the 2021 season).  The proposal also considered realignment of remaining MiLB clubs within each level to ensure that clubs compete in a more geographically compact area and that clubs are located in convenient locations for their respective MLB clubs.  Given early COVID-19 protocols for professional sports leagues, this realignment may be a necessity.  

Despite the PBA changes that are a near certainty in a post-COVID-19 world, this new landscape may also present untapped financial opportunities for MiLB clubs seeking necessary liquidity, including government funding.  

Full Count 

The clear wild card in MiLB’s future is a bill (H.R. 7023) introduced to Congress on May 27 that proposes additional funding specifically for sports facilities, museums, and community theatres.  Unsurprisingly, H.R. 7023 has sponsors that represent districts with MiLB clubs seemingly on the path to non-affiliation.  The Senate is expected to introduce similar legislation this summer.  

The bill, now sitting in the House Financial Services Committee, is intended to amend the CARES Act (15 U.S.C. § 9042) to include an additional $1 billion dollars of funding for community-owned and private businesses that in 2019 earned no more than $35 million dollars in revenue and maintain contractual obligations for lease, rent, or bond payments for publically-owned sports facilities, museums, and community theatres.  

The proposed loan program, if enacted, would be implemented under the same legislation that has created the Main Street Priority Loan Facility and the Main Street Expanded Loan Facility, which provide liquidity and relief funding to small and mid-sized businesses.  Payments on these loans would be deferred until its second year.  Clubs would be required to pay 2.31% of their loan’s principal amount during Years 2-14 with the remaining 70% of the loan due at the end of the 15-year term.  

To receive a loan under the program, an MiLB club with a publically-owned sports facility would be required to certify that current economic uncertainty makes the loan request necessary and that the club reasonably believes the positive economic impact generated by the use of the loan proceeds will exceed the loan amount.  The club would also be required to utilize the loan for the following expenses:

  • Facility rent, lease, or bond payments or other obligations, including property taxes; 
  • Utilities for use of the facility; 
  • Payroll, including health insurance premiums and other employee benefits, for employees whose employment is directly connected to services rendered at the facility and whose income does not exceed $100,000; 
  • Facility improvements agreed to by the Borrower and, if applicable, the entity or municipality with authority over the facility’s budget and operations; and
  • Other purposes which improve the infrastructure and/or project development surrounding the facility.

To put this in perspective, in the Sports Facility Reports (prepared by the National Sports Law Institute at Marquette University Law School), not a single MiLB club was reported to earn an annual revenue of $35 million dollars (one of H.R. 7023’s income thresholds).  Indeed, the highest reported annual revenue was $17 million dollars.  The largest revenue streams (tickets, concessions, and merchandise) are all driven by fan attendance.  Most MiLB clubs typically have an operating income between one and five million dollars with some clubs even operating in the red.  This being the case, the expectation is that all clubs would qualify for funding under H.R. 7023. 

This funding would provide considerable assistance in sustaining MiLB facility obligations.  For example, publically-owned facilities vary in construction and maintenance costs, however newer facilities have routinely cost between $40-50 million to build and maintain—representing significant ongoing financing liabilities for MiLB clubs.  All told, an allocation of $1 billion dollars would undoubtedly benefit clubs in need.  If every MiLB club applied for, and was granted funding, the average loan dispersed would be about $6.25 million dollars – a significant amount in relation to a cancelled season without a single fan in attendance.  

Protecting the Plate 

Realistically, the passage of H.R. 7023 might be one of few viable options for an MiLB club in need of liquidity.  However, some clubs have also pursued litigation to assist with the economic consequences of COVID-19.  In June, at least 15 MiLB clubs filed a federal lawsuit (Chattanooga Professional Baseball LLC et al. v. Philadelphia Indemnity Insurance, 2:20-cv-03032 (E.D.Pa)) against their respective insurers for denying claims under their business interruption insurance policies.  According to the complaint, the insurers denied the insurance claims on grounds that the clubs’ losses did not stem from the physical loss or damage to property and instead fall under the policies’ exclusion for “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease…”  COVID-19-related litigation is still in its infancy, and any such insurance litigation will turn on the specific terms of a particular policy.  With the official cancellation of the MiLB season, similar lawsuits are anticipated.  

As a practical matter, this litigation, especially with court system delays due to the coronavirus, may take time that some MiLB clubs do not have.  As discussed above, the new PBA is anticipated to trim the number of affiliated MiLB clubs by the 2021 season with some MiLB clubs already in dire financial straits due to the season’s cancellation.  The prospect of dedicated funding via the CARES Act, which has already granted, in short order, trillions of dollars in COVID-19-related loans to individuals and businesses, appears to offer a quick and significant source of funding if enacted into law.  

Importantly, the government funding is also an area upon which MLB and MiLB can likely agree.  If passed, H.R. 7023 will infuse funding into the cash-strapped MiLB system and not only help the clubs stay afloat regardless of the season’s cancellation, but  may even permit some clubs to update their facilities that do not currently meet MLB’s health standards and perhaps avoid impending non-affiliation status.  

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