Start With A Large Fortune

Nick Saban has a pretty good deal.  He gets paid $7.5 million per year for supervising a college recreation program in Alabama part of the year.  Imagine what they must be paying the professors who are directly working on the University of Alabama mission to –

…advance the intellectual and social condition of the people of the state, the nation and the world through the creation, translation and dissemination of knowledge with an emphasis on quality programs in the areas of teaching, research and service.

Apparently, that provides him with capital to invest in real estate deals, which those late-night commercials to the contrary notwithstanding, are hard work and very risky.  One thing that will definitely assure the possibility of making a small fortune in real estate is starting with a large fortune

The 2590 story is a tale of one GD thing after another ending in a bad debt write-off that the IRS sought to disallow.

One GD Thing After Another

Nick Saban was the real estate version of an angel investor loaning Spinosa $2 million to get the project started with site work and the like. Saban and Spinosa had met when Saban, then the coach of LSU, had been working on improving athlete graduation rates.  At the time of the loan, Saban was coaching the Miami Dolphins.  Saban had already invested in other deals with Spinosa.

Spinosa lined up construction financing from Keystone Bank in 2006.  The note to Saban was unsecured at 16% interest and due April 2007. Initially, Spinosa had planned to pay Saban out of the first disbursement of construction loan proceeds, but he was concerned about cost overruns.  He didn’t think it was that it was a major concern.

Of course, you and I have the benefit of hindsight and can see 2008 looming ominously over the whole affair, like in a movie set in 1941 and one of the characters casually mentions that it is December 5.

Then there were problems with the general contractor that needed to be straightened out. So in May 2007, Perkins Rowe executes a new note to Saban in the amount of $ $2,362,959 (remember that 16% interest) also at 16% and due June 1, 2008.

In late 2007, problems with the architectural plans were discovered.  Spinosa obtained a verbal commitment from Key Bank that they would refinance the $170 million in construction financing. There was plenty of equity. GO zone bonds were to finance the project’s completion.

Saban Gets Out – Mostly

Saban was kept informed and visited the site. He did not want to just let his note ride, but it was not convenient for Spinosa to come up with cash at the time.  He offered Saban five options.

Saban picked the one behind door number three, an interest in another property by getting a stake in 2590 Associates LLC to be owned by an LLC called TLS which was just himself and his wife.  TLS contributed a promissory note from Park Rowe for a 15 percent stake in 2590 Associates LLC.

Park Rowe had issued a new promissory note in the amount of $2,926,692 to Saban, which was endorsed to TLS and contributed to 2590.

The Deduction

The further misadventures of Park Rowe, which actually did get built are a little beyond the scope of this piece, but you might find them interesting.  In the end, as it relates to the Spinosa represented interests it ends in a 2011 bankruptcy, which got pretty ugly.

The 2011 partnership return of 2590 wrote the note off as a bad debt.  For some unknown reason, it listed Saban as the partner rather than TLS.  Without that, this story would probably not have broken into the sports press.  Conceivably it would have been left to me and Lew Taishoff.

What Was The IRS Position?

The IRS position was that the loan was actually a capital interest in Park Rowe. In terms of a big balance sheet in the sky analysis, it is hard to see the government coming out much ahead on the deal, but that was their story and they were sticking with it.

The Decision

There is a thirteen-factor analysis as to whether something is bona fide debt.

 (1) the names given to the certificates evidencing the indebtedness, (2) a fixed maturity date, (3) the source of repayment, (4) a legally enforceable right of repayment, (5) the creditor’s right to participate in the debtor’s management, (6) the subordination of the obligation to other debts, (7) the intent of the parties, (8) the debtor’s capitalization and use of the funds, (9) the identity of interest between creditor and stockholder, (10) the payment of interest, (11) the corporation’s ability to obtain loans from outside lending institutions, (12) the extent to which the advance was used to acquire capital assets, and (13) the failure of the debtor to repay on the due date or to seek a postponement.

The IRS admitted that there was a bona fide debt to Saban, but argued that the transfer to 2590 somehow transformed it.

There was also an extended discussion of the year of worthlessness with the IRS arguing that the note was already worthless in 2008.  Tax Court ruled that 2011 was a very good year for the deduction.

How Did Saban End Up?

Saban sold his interest in 2590 for between $2.8 and $2.9 million in 2015.  Reading between the lines, you get a sense that Spinosa was looking out for him.  That would significantly lower the stakes in the Tax Court litigation to a timing difference and income versus ordinary on roughly $450,000. Back of the envelope, I make it less than $100,000 in tax.

It Got A Little Distorted

As the story went to the sportswriters it got a little distorted like this one by Brad Crawford.

The United States Tax Court ruled Thursday that Saban will claim a bad-debt deduction the IRS tried to block worth approximately $2 million

As I read the decision, it was a deduction at the partnership level of about $2.9 million which would likely make Saban’s share a bit less than $450,000.  I know what you are thinking, Brad probably thought that 704(c) was coming into play, but actually, the credit to Saban’s capital account was the same as the basis in the note.  Hopefully, Tony Nitti will take a look and opine.

I really should not be uncharitable, but ever since the big error I made about Rafalca, the Romney dancing horse, I have endeavored to get the sports parts of my tax stories correct.  It is really challenging as I know a lot less about sports than the average American male.  SuperBowl LIII is coming on as I am writing this and as usual, I feel guilty for watching only one football game every year – kind of like a Catholic who only goes to Mass at Christmas and Easter.

About Nick Saban

As it happens I know somebody who is currently attending the University of Alabama.  I reached out to him to find out why a Tax Court decision that marginally affected Saban would seem like a story to the sports press.  He wrote me:

In Tuscaloosa, sororities will sometimes paint signs on their window proclaiming that Nick Saban, a 5’6″ 67 year old man, is the sexiest person alive. For reference, I’ve never seen any player treated the same.

So I guess it is not surprising that a Tax Court decision that marginally involves him can generate interest.