What a record sale means for the Rockets' future and other owners
— -- What implications will Tuesday's news that the Houston Rockets have been sold to local billionaire Tilman Fertitta for a reported $2.2 billion, per ESPN's Adrian Wojnarowski, have for both the Rockets and the rest of the NBA?
Fertitta's willingness to pay longtime owner Les Alexander the highest price ever for an NBA team suggests franchise values continue to, well, skyrocket. But with Houston headed for the luxury tax if the team is able to re-sign newly acquired All-Star guard Chris Paul as a free agent next summer, might the $2.2 billion price tag only be the beginning for Fertitta?
Another record NBA sale
When Steve Ballmer paid $2 billion for the LA Clippers in 2014 in the wake of former owner Donald Sterling being banned from the NBA, it was easy to dismiss the price as an outlier. The hurried nature of the sale encouraged Ballmer to bid high in order to beat his competition, and the Clippers are in one of the NBA's premier markets.
It's harder to find any such caveats for the price Fertitta paid for the Rockets. Yes, Houston is a strong market for the NBA, with the area (including the city and surrounding suburbs) placing eighth in the most recent Nielsen rankings of local market size. Houston is the biggest metropolitan area with just three teams in the traditional big four sports (NBA, MLB, NFL and NHL).
Still, for a team outside the top three markets to fetch north of $2 billion -- and $550 million more than Forbes magazine's 2017 valuation, which put the Rockets eighth in the league -- suggests that the average NBA franchise might be worth closer to $1.5 billion than $1 billion at this point.
NBA ownership groups have generally been content to ride out the appreciation in their franchises' values. After a flurry of sales in 2010 and 2011 ahead of the league's most recent lockout, no team has changed majority ownership since the Atlanta Hawks in 2015 -- another sale, like the Clippers, that came under duress rather than because the majority owner wanted to cash in on the value of his team.
The $2.2 billion Alexander got for the Rockets might encourage other owners to begin exploring the market for a possible sale. After all, there is some risk that current valuations are based in a bubble in the value of television rights for sports at the local and national level, a bubble that could eventually burst and cause a correction in values.
Sales price only the beginning
Even after paying a record price to buy the team, Fertitta better keep his checkbook open. The Rockets are unique among franchises to change hands in how stable their organization is, both on and off the court. While most owners seek to strip down management and the roster ahead of a sale, Alexander committed to recent extensions for general manager Daryl Morey ( who signed on through 2021-22 in June) and MVP runner-up James Harden (whose four-year extension, signed in July, locks him up through the 2022-23 season).
Of course, any owner would likely want to keep Morey and Harden, key figures in Houston winning at least 54 games three of the last four seasons. (The exception was a big one, as the Rockets went a disappointing 41-41 in 2015-16.) After adding Paul via trade, Houston has the chance to emerge as the greatest threat to the Golden State Warriors. Our projections based on ESPN's real plus-minus have the Rockets as the second-best team in the NBA this season behind Golden State.
At the same time, Houston's roster could soon become very expensive. If the Rockets re-sign Paul for his maximum salary next season, they'll be committing an estimated $80 million or so in annual salary to their All-Star backcourt over the course of Harden's extension, which kicks in during the 2019-20 season. Add in new contracts for starting center Clint Capela (who can become a restricted free agent next summer if he doesn't agree to an extension before the start of the upcoming regular season) and starting small forward Trevor Ariza (an unrestricted free agent next summer) and Houston could pay the luxury tax beginning in 2018-19.
By the following year, with Harden's salary jumping an estimated $7.4 million, the Rockets could be deep in the tax. Let's say conservatively that Capela and Ariza make a combined $20 million in 2019-20. That would give Houston nearly $150 million committed to 12 players, putting the Rockets almost $20 million over the projected tax line and translating to a tax bill of more than $40 million.
Morey has proven adept at managing his team's finances so as to maintain flexibility. It's possible at some point Houston may be able to get from under the final season or two of the contract for starting power forward Ryan Anderson, which pays him $20-plus million in 2018-19 and 2019-20, to ease the burden.
But no amount of creativity can entirely work around paying two players a combined three-quarters of the team's salary cap. So Fertitta must be prepared to pay the luxury tax in order to keep the Rockets' core intact.
Alexander's legacy
As he departs NBA ownership, it's worth considering the legacy Alexander leaves. For fans in Houston, that surely begins with the pair of championships the Rockets won during the first two years Alexander owned the team. While Houston has yet to return to the heights of Alexander's first two years of ownership, the team has been consistently successful, winning 56.9 percent of games and reaching 50 wins nine times in Alexander's 24 seasons. (The Rockets also won at a 50-win pace during the lockout-shortened 1998-99 season.)
More than anything, however, Alexander may ultimately be remembered for his instrumental role in accelerating the acceptance of statistical analysis in the NBA. His decision in 2006 to hire Morey, then a relatively anonymous member of the Boston Celtics' front office, was far ahead of the curve. At a time when the majority of NBA teams employed no full-time statistical analysts, the Rockets under Morey had a team of them and have continued to remain at the leading edge.
Given the influence of Michael Lewis' bestselling "Moneyball" on NBA owners and the rapid growth in data available to teams over the past 15 years, it's likely they would have embraced statistical analysis at some point. Still, Alexander's bold decision to hire Morey -- and the success the franchise subsequently enjoyed -- made it easier for other franchises to follow in Houston's footsteps. And that legacy could outshine any number of wins and losses.
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