Owning an MLB baseball team can be like owning a mansion in a hot real estate market. You watch the valuation of your asset skyrocket — but nobody knows that you are mortgaged to the hilt. Per Michael Ozanian of CNBC, the Washington Nationals have the second highest debt load as a percentage of team value in the MLB, second only to the Miami Marlins who sit at 38 percent.

We spoke with Ozanian, and he is confident in his numbers at the time of publishing his article for CNBC. He has reached out to bankers and credit rating agencies for debt numbers, and other third parties who have knowledge of the situation.

Going with Ozanian’s numbers, the Nationals are carrying approximately $550 million in debt. Ozanian also has the Nationals at the 4th lowest revenue of any team in baseball. Yes, 4th lowest. Only the White Sox, Tampa and Miami are lower. Low revenue and high debt is a poor combination. That also makes bankers nervous. Those numbers support that the Nationals should be classified as a small-market revenue team. This is why the Nationals are finally looking to sell the lucrative stadium naming rights and jersey patch sponsorships. They are hoping to increase attendance and win games to bring the fans back to the ballpark.

There is something called a bidirectional relationship in spending more on player payroll should technically increase the attendance. Many analysts believe that more wins will increase attendance. Spend more to win more to increase attendance. Spending more does not always translate to more wins. Look at the Mets in the past few years for that jolt of reality. But it is about building a positive message to the fan base. At least the perception will do that, and that is where a good marketing plan is essential in that process. In the movie Field of Dreams, they said, “If you build it, they will come.” That is a growth strategy. Build a better product, and sales go up.

Bottomline here is that the Lerner ownership group must take on the blame for the stagnation of revenue that has affected the lack of spending on long-term players. The ownership group makes key decisions, and sets the budget to give to the baseball people for new player payroll. It is all inter-related. While principal owner Mark Lerner says that his general manager Mike Rizzo can spend — what Lerner left out is that Rizzo can only spend to the budget per a source. That is restrictive. There is no blank checkbook here. And because the business side of the building isn’t doing enough, the baseball side suffers. Lerner’s speeches to the fans are disingenuous. Most have read between the lines and felt duped this offseason since there were growing expectations that at least one top free agent would be signed.

The Nationals could climb rapidly in revenue if they could hit on the four pillars that teams rely on from attendance driven revenue, local TV rights (MASN), stadium naming rights, and corporate sponsorships. While the TV money saw a nearly $15 million decline from 2023, the entire regional sports network landscape is not what it was 10-years ago. On top of that, the Nationals did not take advantage of offers for stadium naming rights in the past when they first publicly announced their intentions in 2016. Per sources, the Nats had offers for stadium naming rights that would have netted them around $15 million in new revenue per year. Multiply that by 9 and that is $135 million of money that was never captured — water under the bridge now. On top of that, where was/is the push to market the team better? The Nationals are in the bottom half of attendance once again in MLB. The total marketing effort is not producing enough results.

What a source told us that if the business side of the Nationals does not show marked improvement that changes would be coming. In fact, Mike Carney, has the title of Chief Revenue Officer. Revenue is in his title and per CNBC, revenue has declined three years in a row when most teams are seeing increases. While the MASN contract is part of the issue, what about the rest? What is Chief Marketing Officer, Kimberly Bolt, doing to make the team look better off the field? Right now, Carney has a lot on his plate with leading the charge on getting contracts for the stadium naming rights as well as getting a sponsorship patch on the team’s jerseys, and the Nationals are the only team in the MLB without one of those lucrative deals in place.

Remember, most teams got hammered in the COVID season while they played in empty stadiums. All teams added to their borrowings in that period. Currently, most teams are carrying debt of $150 to $200 million per CNBC. With varying borrowing rates, it is hard to tell what the interest costs are on the Nats’ $550 million in debt. The Braves are publicly traded, and they reported last year an interest expense of $38.8 million. Ozanian has their debt at $248 million, but as you dig into the financials, they are carrying debt on their commercial real estate outside the stadium for $392 million. That makes their effective interest rate around 6%. Using that 6% number on $550 million in debt would equate to $33 million of interest expense per year for the Nationals if those numbers are accurate.

We asked a source how the Nats’ debt grew to these levels. The number started with the financed portion of the original purchase of the team plus capital improvements to Nationals Park. From there, the debt grew with shortfalls in cashflow caused by MASN non-payments, the COVID period with no attendance, and general cashlow shortages. It certainly has added up over nearly two decades.

Suffice it to say that while the Nationals are turning a profit on operating income given their low payrolls, when you get to EBIDA to subtract for interest expense and depreciation, how can you make money with those debt payments?

Here is MLB’s Debt Service Rule: Each MLB Club is subject to certain MLB imposed restrictions on its ability to incur indebtedness in amounts that exceed specified thresholds. In particular, each MLB Club is generally required to keep outstanding indebtedness minus a certain amount of excludable indebtedness at or below 8.0x available cash flow (or in the case of MLB Clubs which have a new stadium, at or below 12.0x available cash flow), with the amount of excludable indebtedness for fiscal years 2024 through 2026 set at $100 million. This is referred to as the Debt Service Rule. MLB Clubs must certify compliance with the Debt Service Rule annually and the failure of an MLB Club to comply during two consecutive fiscal years (the “Assessment Period”) may lead to certain remedial measures being imposed by the Commissioner of Baseball, including, but not limited to, prohibitions on the incurrence of additional indebtedness and repayment of outstanding indebtedness.

The Debt Service rule and borrowing from third parties has come up before. It became public last year when the San Diego Padres reportedly had to borrow money. They had already cut payroll, and were making moves to raise cash flow. It does happen yet rarely becomes public.

A source tells us that the Nationals are in compliance with the debt service rule. The source also tells us that ownership is focused on raising revenues and paying down debt. But is it time to bite the bullet and sell just under 20 percent of the team to raise enough cash to pay down the debt? If the Lerners can get a valuation of $2.75 billion for the purpose of selling a minority interest in the team, they should be able to pay-off all of their debt and save themselves $30+ million a year in interest expense.

Could these revelations on the debt be a reason for not spending on long-term free agents? Principal owner Mark Lerner was never asked specifically about the financials on the team affecting their spending on players. But for anyone that runs a business, you can’t stay viable if you are losing large chunks of money every year. The debt load has risen for a reason. Coming up with a solution would make sense.

The Lerner ownership group’s main assets are in real estate, which includes a vast portfolio of commercial real estate. A headline in the Washington Business Journal, “Assessed value of D.C.’s top office buildings is crashing as volume of unoccupied space explodes” told you all you need to know about the sharp decline of commercial real estate in the D.C. area especially amidst the federal government declining their DC workforce that has the local economy shaking. The commercial real estate market can erode further.

All of this is the imperfect storm for the Lerners and their holdings. Since they are not publicly traded, most everything is a guess including their net worth. Forbes has them worth $5.5 billion, down from $6.4 billion in 2022. But do they have the liquidity to weather the storm?

One source, who did not have inside information, had an alternative theory that part of that debt was incurred waiting for a windfall payment from MASN on money held up in the courts. We reached out for any confirmation of this and received no answer on this theory. Was there a windfall payment actually made after the latest legal maneuvers were resolved? If that did happen, we could see debt paid down, right?

The fans just want the team to spend their way into contention. They don’t really care about EBIDA or EBITDA or debt service rules. They want winning.