Islanders’ pact gives team a Barclays opt-out after 3 seasons

The Islanders could leave the Barclays Center after just three seasons in Brooklyn if the team triggers an opt-out clause in its license agreement, according to a summary of the pact obtained by Newsday.

The summary also reveals an approximate six-month window for the two sides to renegotiate the 25-year license agreement and mandates “good-faith discussions” from both sides before either can opt out.

The details of the opt-out clause come from a six-page summary of the Islanders’ agreement with Barclays Center. The document was included in the arena’s 1,000-page plan to refinance the municipal bonds that were sold a decade ago to build the arena. Barclays Center is refinancing the debt from those bonds because of historically low interest rates, saving it $90 million, according to a Bloomberg report in August.

Newsday reported in April that both sides had the ability to opt out of the deal and that the Islanders could leave Barclays Center after the fourth year. That information was based on multiple sources who had read the license agreement. But the six-page summary provides a more detailed and complete picture of the team’s contractual relationship with Barclays Center.

The documents also detail the contractual differences between the Islanders and Brooklyn Nets, which play home games at Barclays Center as well. The Nets get “priority” over the Islanders regarding scheduling home games, and they also have the ability to play as many as two home games at an alternate site.

The Islanders are required to play all of their games at Barclays Center. The 2013 lease between Nassau County and Bruce Ratner to renovate Nassau Coliseum included a clause that calls for the Islanders to play six games each season at their former home. If those games aren’t played, Ratner’s Nassau Events Center would owe the county an additional $1 million in rent.

When contacted about the Islanders’ contract stating the team has to play all of its home games at Barclays, a spokesman for Nassau County Executive Edward Mangano said, “We refer you to the contract between Nassau County and Nassau Events Center.”

A spokeswoman for Ratner’s Forest City Enterprises Inc. declined to comment.

The Islanders’ deal with Barclays Center is not considered favorable for the team in the long-term, experts said, because the arena gets the bulk of the gameday revenue, while the Islanders’ guaranteed take-home payment increases only by 1.5 percent each year.

The summary outlines the process involved in triggering the opt-out. After the Islanders finish their second season in Brooklyn, the two sides have until Jan. 1, 2018, to renegotiate the terms of the current deal. If no new deal is reached, the two sides can stay with the current deal or choose to opt out. Each side would have until Jan. 30, 2018, to deliver an opt-out notice in writing.

If the Islanders decide to opt out, the team can choose to leave at the end of either its third or fourth season. If Barclays triggers the opt-out, the Islanders would have to leave after the fourth season. The team just completed its first season in Brooklyn in May.

The opt-out clause can be triggered only if the two sides have engaged in “good-faith discussions” during the renegotiation window, according to the license agreement.

In June, Newsday reported that new Islanders owners Jon Ledecky and Scott Malkin have been in talks to build a new arena either next to Citi Field or at Belmont Park. Ledecky and Malkin took over control of the Islanders from Charles Wang on July 1.

National Hockey League deputy commissioner Bill Daly, who previously said the Islanders have given no indication that the move to Brooklyn “is or will be temporary,” said the opt-out clause is not a surprise to the league.

“Were we aware of the provisions of the agreement? Yes,” Daly said earlier this week. “Does it change anything we or the parties have said publicly on the subject? No.”

Daly deferred any further questions about the opt-out clause specifics to the team and arena. Neither the Islanders, Ledecky nor Wang returned messages seeking comment for this story. A Barclays Center spokesman declined to comment.

Ledecky said on Monday at a memorial for former Islanders coach Al Arbour that Barclays Center would be the Islanders’ home “for years to come.” But he declined to specify if it would remain the team’s home in the years after the opt-out date. “I’m not the predictor of the future,” he said.

“What this opt-out clause does is allow some time for the Islanders to re-evaluate what their economic circumstances are right now,” said Robert Boland, director of the sports administration program at Ohio University.

Experts who have read the documents obtained by Newsday said an Islanders’ search for a new arena could be complicated by the language in the license agreement that says an opt-out has to be preceded by “good-faith discussions” to renegotiate their deal.

“From my reading of the agreement, the requirement for good-faith discussions would be satisfied if the Isles scheduled several ‘sit downs’ with Barclays and had some exchange of proposals during the bargaining window,” Boland said.

One New York sports executive said this requirement could present timing complications for the Islanders if they decide to move. The person said the Islanders can’t agree to an arena deal now and still fulfill the “good-faith discussions” clause.

“It might be difficult for an agreement on a new arena somewhere else would truly be reached before the end of the next hockey season,” Boland said, “especially given all the potential devils hiding in the details of building in Queens or at Belmont.”

A new arena at either location would require financing, design, land and impact assessment before construction could even begin. That creates a scenario in which the window to have an arena ready if the Islanders leave Barclays will be limited. Experts said they could negotiate a short-term extension with Barclays or bide time at a temporary home. Most recently, the Brooklyn Nets spent two seasons at Newark’s Prudential Center while awaiting Barclays Center’s opening. Potential options for a temporary Islanders home in the metropolitan area would be Madison Square Garden, Prudential Center in Newark and possibly the renovated Nassau Coliseum, though any decision would need approval by the National Hockey League.

Sports business experts are not surprised that Ledecky and Malkin may be interested in pursuing other options because their revenue growth possibilities are limited at Barclays.

Among the financial considerations included in the current deal:

• The Islanders pay Barclays Center an annual license fee of $2 million and reimburse the arena an unspecified amount for the operating cost of the arena for game days.
• Barclays Center pays the Islanders an annual fee of $53.5 million, which increases by 1.5 percent each year. The documents say this amount can be reduced by non-game-day operating costs charged to the Islanders.
• Barclays Center receives all revenue from preseason and regular-season tickets, luxury boxes, concessions, advertising, marketing and radio rights until the total reaches $53.5 million. For every dollar over that amount, the Islanders get 70 percent and Barclays Center receives 30 percent.
• The Islanders get playoff revenue from tickets, single-game luxury boxes and postseason-specific advertising.

This type of setup is unusual for a professional sports team, experts said. Multiple sports executives and sports business experts said they know of no other sports team among the four major sports that has a deal similar to the Islanders’ in which the arena, acting as the landlord, has control over items such as ticket prices, marketing and even the team’s website. The deal was designed to provide the Islanders short-term financial stability with the $53.5 million annual fee that didn’t exist at Nassau Coliseum but also give the team an exit strategy.

“Charles Wang wanted to keep his options open, but at the same time he wanted to have the best short-term plan that he could, and Bruce Ratner wanted to have another tenant for another 45-plus dates a year,” said Andrew Zimbalist, sports economics professor at Smith College. “That’s the way in which the sides came together, and that’s why the deal is fragile for the longer term.”

According to the documents, the addition of the Islanders had a positive impact on the arena’s bottom line.

Barclays Center’ overall revenue rose to $176 million last year from $113 million in 2014-15, which it attributes to the addition of the Islanders. The team generated about $13.5 million of the arena’s $69.7 million in sponsorships and suites, up from $56.6 million a year earlier. Concession sales also benefited, jumping to $14.7 million from $9.2 million.

The deal between the Islanders and Barclays Center was made by Wang and Barclays Center developer Bruce Ratner and announced in October 2012, three years before the Islanders’ Nassau Coliseum lease expired.

Wang is now an Islanders minority owner, having sold an 85-percent share to Malkin and Ledecky. And Brooklyn Nets owner Mikhail Prokhorov purchased Barclays Center from Ratner’s Forest City Enterprises Inc. in December.

By Jim Baumbach

jim.baumbach@newsday.com

Jim Baumbach is an award-winning investigative reporter at Newsday, where he has worked since 1998. He spent two decades in the sports department, where he covered every professional team and league, including events such as the Super Bowl and World Series.