Real Madrid face questions over unexplained costs of €122 million

Real Madrid have declined to explain why 20 per cent of its costs are unaccounted for in the club’s most recent financial results, posing questions about compliance with financial control regulations.

A Telegraph Sport investigation into the most successful club in European football has revealed that around €135 million in payments was directed into a sub-category of “other operating expenses” in the latest results, published in October, of which €122 million is unexplained.

The club has refused to respond to questions on the issue – including the specific allegation that the expenses are indeed, in whole or in part, repayments on a deal with a US financier for the sale of future marketing income. The first of these deals, signed with the private equity group Providence in the 2017-2018 financial year, gave the club cash in return for the sale of future income streams and since then the deal has been extended in terms of length and value.

The sums earned from the sale of an unspecified percentage of future sponsorship revenue, which the club said was renewed in 2019-2020, were booked in Real’s accounts as revenue rather than debt. The club has never explained in detail how that commitment is paid back to Providence or how much is paid every year.

There is no suggestion that the deal with Providence is illegal, although there are questions over whether it is compliant with Uefa financial controls.

There are major advantages in such a deal structure, even if money simply comes in from up-front cash payments to cover budget shortfalls and then goes out of the club in repayments to the same third party. It means that the up-front cash is not regarded as a loan under financial fair play considerations and contributes to establishing a higher headline revenue figure – critical in the calculation of salary caps.

However, there are serious questions as to whether clubs should be permitted to book the sale of future revenues as marketing income rather than debt. Especially in an era when others, such as nation-state owned clubs such as Manchester City, are coming under intense scrutiny as to the validity or otherwise of their commercial income.

The Spanish tax authorities regard this kind of payment to any entity for a share of future income as a financing deal which means it is treated, for tax purposes, as debt. The deal with Providence was originally described by Real as a “participation account” and then in its most recent results as an “unincorporated joint venture agreement”.

The Telegraph has analysed comparable European rivals of Real and none have such large undefined payments in their financial results in any similar additional expenses category.

Before the club’s financing deal was agreed with Providence, Real was obliged to borrow in the short-term to meet salary costs in the 2014-2015, 2015-2016 and 2016-2017 seasons. They borrowed between €72 million and €82 million in each of the three years but since the deal with Providence those short-term loans have no longer been necessary.

In the most recent Deloitte Money League, the industry-standard index that ranks clubs by their revenue, Real were second in Europe only to Manchester City. Real reported a total revenue of €713.8 million for that financial year in question.

The salary budgets for Liga clubs are calculated as a percentage of revenue, and Uefa is moving towards a similar financial model whereby spending is set as a percentage of revenue.

In a separate development, Madrid’s short-term finances were significantly bolstered last summer by €360 million from the sale of 30 per cent of revenue over 20 years from their remodelled Bernabeu stadium. That was a deal with the US investor Sixth Street that has been drawn down by the club in two tranches. The first payment of €316 million for the 2021-2022 season meant the club avoided a loss of around €300 million. A further €44 million will be booked as profit for the 2022-2023 season.

Real have declined to answer specific questions about the nature of all but €13.6 million of the €135 million in payments made via its “other operating expenses” sub-category in the club’s financial results for the year ending June 30, 2022. That €13.6 million is the means-tested payment to Spain’s Liga that all its 20 members must make for central costs. Rather than be deducted at source from central broadcast income it is made to the clubs and then paid back, an arrangement that maximises the clubs’ top-line revenue figures even if the cash does not stay in those respective businesses for long.

The Spanish Liga administration did not respond to the same set of questions about Real’s finances that were posed to the club. Uefa, the European governing body that regulates financial cost controls, declined to comment on the issue.

Although Real signed the English talent Jude Bellingham this summer, one of Europe’s most sought-after players, in a deal with Borussia Dortmund worth up to €134 million, the club has been a fading power in the transfer market in recent years. The club’s president Florentino Perez has been a longstanding critic of the power of nation state-owned clubs and remains the driving force behind the European Super League rebellion.

While Real have registered an interest this summer in a number of leading strikers to replace Karim Benzema, so far their only signing in that regard has been their former academy boy Joselu – once of Stoke City – who has come on loan from relegated Espanyol. They have been interested in Harry Kane. Most recently there have been reports of interest renewed once more in Kylian Mbappe, a long-term Real target who currently is out of contract in France next summer and in a stand-off with his current club.

While Real have reassured its members that it is in a strong financial position, in recent years it has only stayed marginally in profit. It has done that in part through player sales, its financing deal with Providence, and more recently that €360 million sale of future rights, known colloquially in Spain as a “palanca”, or financial “lever”. The €800 million financing deal for the newly renovated Bernabeu is an additional cost, with payments spread over 25 years up to 2049.

The question of Real’s rapidly growing “other operating expenses” sub-category, itself located in the accounts within the headline “other operating expenses” category, remains unexplained by the club. There is no detail forthcoming despite a rise in payments in that sub-category of 800 per cent over five years. This has come against the backdrop of revenue growth for the club of just six per cent over the same period, as well as encompassing two years of Covid-19 when revenue fell sharply.

Of Real’s total €672 million revenue in 2017, €17 million — three per cent — was budgeted for the “other operating expenses” sub-category. It jumped to €46 million the following year and has risen every year bar one since then. Even as Real’s revenue has suffered through the Covid-19 era so the payments in the “other operating expenses” sub-category have risen. In 2021 payments through that sub-category were 12 per cent of total revenue, €77 million, and then climbed again to €135 million, or 20 per cent of total revenue, in the most recent financial results.

The issue of transparency was raised by Real itself this year when it said in a statement in March that it had “deep concern” about Barcelona’s conduct in the affair over payments to companies registered to the former referee official Jose Maria Enriquez Negreira. Barcelona sold €700 million of future revenue streams last summer, including a total of 25 per cent of Liga television revenues for the next 25 years to Sixth Street. It is understood the US investor paid a €500 million up-front fee.