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February 28, 2012
Kings arena plan: Better than a kick in the head, but how much?
Sacramento Mayor Kevin Johnson, the Kings owners the Maloof brothers, and the NBA announced yesterday that after a weekend of marathon talks, they'd agreed on a "tentative deal" for a new arena — what most of the rest of the world would call a "plan," since it still needs to actually be voted on by the city council and the county board, not to mention have a bunch of unanswered questions nailed down. And the plan is ... nobody's saying, not until Thursday, just five days before the council will have to vote.
What details have emerged, though, are of a fiendishly complex funding scheme with oodles of revenue streams headed this way and that, such that it's hard to figure out exactly who's paying for what. Let's give it a shot, though:
- Of the estimated $387 million arena cost, the city would put in the largest share: anywhere from $200 million to $250 million. This may be from the leasing of rights to future parking revenue at city-owned lots as previously planned — something that could raise anywhere from $100 million to $200 million — or could mean selling bonds against future parking and hotel-tax revenue, which could raise more money but would bring with it the risk of shortfalls in paying off the bonds. Other possibilities: new cell phone tower leases or revenues from electronic billboards outside the arena. The city would also own the building, which presumably means the Kings would be excused from paying property tax, which they currently pay on their existing team-owned arena.
- The Maloofs would put in $75 million in cash (at least partly raised by selling the site of their current arena), plus $75 million in "arena-related revenue," which looks to be from a ticket surcharge of anywhere from 3 to 5% (a pretty big spread) that would go directly into the city's general fund to make up for part of the $9 million a year in future parking revenues that would disappear from the city treasury. Ticket surcharges are generally considered to be a legit team expense — if the market will bear $50 for a ticket, then a 5% surcharge means the team can only get away with charging $47.62 as a face value — but this would actually be a surcharge on tickets to all events, not just Kings games, meaning much of it would actually fall on...
- AEG, which is now offering to kick in $60 million for the rights to run the arena, including collecting money from rock concerts and the like on nights the Kings are off. Exactly what share of the revenues they'd share with the city or the Kings isn't clear, but past history shows they drive a hard bargain in these matters.
That's a plan, certainly, but one with so many ifs and maybes that I'd hate to have to be a member of the Sacramento countil voting on it in just one week. Among other things, the rest of the $9 million in lost future parking revenue is supposed to be paid off by the ever-popular "other sources," including a cut of future parking revenue on arena event nights — something that you'd think the companies bidding to lease the parking lots would want for themselves if they're going to pay top dollar. And there's no agreement on who'd pay for cost overruns, though there's talk of trying to find an arena builder who would agree to pay for overruns in exchange for getting to keep any savings if it comes in under budget.
At first glance, at least, this looks like it could be a marginally better deal for the city than what was being discussed a week ago, if only because of that ticket surcharge that would help make up for the lost parking money. That's a huge "could be," though — if, for example, the ticket surcharge was achieved in exchange for the city agreeing to share parking proceeds with the Kings, and this cuts into how much money the city can get for its future parking rights, we're right back where we started. And most important, without knowing who'll be getting what share of arena revenue, it's impossible to say who'd be getting a return on their investment and who'd be getting the short end of the stick.
None of this, naturally, stopped Mayor Johnson from exclaiming, "It's game over! Sacramento deserves to win, and this is our chance to win. I'm so emotional, I can't even articulate it." After spending a weekend locked in a room with David Stern, KJ is understandably ready to celebrate, even if only being let out of the room. But while this may be game over as far as this round of negotiations go, it promises to be only the first game of a long, grueling Sacramento arena season.
Well, I'm one of the geeks that emails my Council rep (maybe once every 3 weeks), and it's interesting to see that now they're at least considering one of my ideas: Don't enter the parking concession agreement at all. Sell bonds against future revenues instead.
If they sell $200M in bonds instead, the debt service would be maybe $20M/year over 30 years (about $600M total). In contrast, the parking concession would have cost them $2.5B over 50 years. You tell me which is cheaper.
The new framework also calls for the City to continue to own the parking rights for event-nights. In essence, they're telling the would-be parking bidders that they can have the least-profitable part of the parking hours, and we're keeping the most-profitable part. That simply MUST depress the value of the bids they'll receive. Raising $200M that way was always very speculative, and now that seems impossible.
Just what will they be voting on next Tuesday anyway? I'm not sure they're sure. If it's a vote to further develop the term sheets, I guess I'm okay with that, believe it or not. But to what end? More negotiations? Next Tuesday, they'll pass something by a 6-3 vote, and then they'll start working.
And then, in September, the EIR comes out. "Well, here we go again." (The traffic congestion in the proposed location is already pretty terrible.)
Posted by MikeM on February 28, 2012 11:39 AM
From what I've seen of the City Council, they are very reluctant to vote on big issues- especially a term sheet presented to them a few days before the March 6 meeting. KJ's other pet project, the strong mayor initiative is another example. The Council debated this for years only to put a charter review commission on the ballot. I could see the Council sending the term sheet back to the Mayor and City Manager for more information.
Even the Councilmember who represents the current arena, and incidentally the railyards, and a close ally of KJ is not a certain yes vote and she seems to go along with all things KJ. She wants to make sure that the site of the current arena get's redeveloped.
The more I think about it- the Council is going to punt next Tuesday but yes, we need to know, and THEY need to know what they are voting on.
Posted by jjo on February 28, 2012 12:18 PM
Realistically speaking, how much is a cell phone tower lease going for these days?
I work downtown, and have 5 bars already. Is there a demand for more cellular service in Downtown Sacramento?
In the suburb where I live, sure, we don't have great coverage. But cell service downtown is never an issue.
Posted by MikeM on February 28, 2012 02:52 PM
We need more smart phone service so my phone could get blown up with pro-arena propaganda.
Posted by jjo916 on February 28, 2012 05:20 PM
"Of the estimated $387 million arena cost, the city would put in the largest share..."
Well, there's your problem right there.
Posted by Keith on February 28, 2012 07:01 PM
Not necessarily. Arenas aren't football stadiums. They do have value for their communities beyond the primary tenant and are far more likely to be profitable for their cities. KC being a good example of that.
Posted by Dan on February 28, 2012 08:33 PM
"...fiendishly complex funding scheme with oodles of revenue streams headed this way and that, such that it's hard to figure out exactly who's paying for what..."
in the real world this is called a SHELL GAME and the taxpayers are the dupe.
Posted by Paul W on February 28, 2012 09:17 PM
And I assume if we are the dupe, then you'd rather lose the team, the possibility of a new arena, and any revenues whatsoever. I mean come on! An arena is a GOOD thing for Sacramento. I'd rather pay the extra penny on the dollar for everything I spend in the city than to watch it lose MORE jobs due to the closed minded people in this city that would rather sit on their hands and refuse change.
You have to ACT to progress.
Posted by jon on February 28, 2012 09:42 PM
@Jon, this is a good thing for Sacramento? If you actually did any research, you would find out that this is entertainment money. It would be spent somewhere else in Sacramento, somehow. Arenas and sports teams benefit the community as much as casinos do, which is not at all. They don't really provide that many great middle-class jobs. Whatever corporation or media outlet is feeding you this information is lying to you about the economic benefit these arenas provide. It's been debunked by several economists.
Look at it this way: do malls and Wal-Mart think it makes good business sense to tear down their buildings and build new ones all the time? In the end, it's a mall, and it serves a purpose, and that is to shop. Building a new one doesn't make people spend more. Anything can be renovated to accommodate a new venture. However, private corporations are always eager to build new headquarters, factories and yes, stadiums, when the local taxpayers are dumb enough to give them money to do so. This has to stop. It baffles me how Republicans could even support nonsense like this. It makes them look like hypocrites.
Posted by Roger C. on February 28, 2012 09:55 PM
Dan: Last I checked, Kansas City was paying $13.8 million a year in arena debt payments and getting $1.8 million a year in arena revenues. (It's all in the link in the third bullet point above.) Are you sure you want to hold them up as a city profiting from an arena?
Posted by Neil deMause on February 28, 2012 10:06 PM
@Neil, it's so sad, they built the arena thinking teams would come, and they've all but virtually been ignored. It's worrisome. How much longer will it be until the pro sports powers decide that arena isn't modern enough?
I have no idea why cities keep playing these games. They just can't win.
Posted by Roger C. on February 28, 2012 10:26 PM
The problem in K.C. isn't so much that they haven't gotten an NBA or NHL team - the arena is doing just fine without them, since musical acts and the like are actually willing to pay rent, unlike sports teams. The problem is that AEG demanded such a mammoth share of the revenues in exchange for running the place, there's no way K.C. could make back its money even if the place were full 365 days a year.
Posted by Neil deMause on February 28, 2012 10:37 PM
The cornerstone of all this is that KJ keeps assuring us that the parking concession will make the City $200M-$255M -- but then they keep adding conditions that are placing downward pressure on the bids. The two conditions:
1) To raise money for the arena, the City will retain event-night revenues. These are to be split between the Maloofs and the City (as backfill). What this means is that for the 225 most-lucrative nights of the year, the parking operator won't see a dime.
2) The County will open 1,500 spots on event-nights. The proposed rate for those spots is $15.
Both of these place considerable downward pressure on the bids. With these new conditions, I wouldn't be surprised at all if some of the 11 companies simply drop out of the bidding completely.
This is leading to rumblings that perhaps they won't enter into a parking concession at all -- that instead, there will be bonds to be paid off with future revenue.
www.sacbee.com/2012/02/28/4296121/elation-now-big-votes-next.html
The city, as arena owner, would provide the lion's share of the project costs, somewhere between $200 million and $250 million, said the source. Most of the city's share would come from a still-evolving plan to wring millions in upfront cash from the city's parking operations.
The city has spent months studying a plan to privatize those assets by leasing them to an investor. A source familiar with the issue said the city also is looking at a different model that would involving borrowing against future parking and hotel-tax revenue, although a private parking operator might still be brought in.
Posted by MikeM on February 28, 2012 10:58 PM
"Both of these place considerable downward pressure on the bids. With these new conditions, I wouldn't be surprised at all if some of the 11 companies simply drop out of the bidding completely."
You don't add both, only the first one. Think about it: if the private parking company is getting zero event night revenues on their entire deal, then how do the County lots even count as a second condition there? The private company isn't even getting revenues at that time, if condition #1 you mention is already there. At that point, doesn't really matter that someone else is if they aren't getting any as is.
Posted by John on February 28, 2012 11:09 PM
JON - like most sports fans, you have a blind spot regarding "your" team.
it blinds you to realities that you would howl about if the same sweetheart deals that sports franchises get were given to other businesses that threaten to move from a city - and take far more full-time good-paying ($35k+) jobs with them.
btw - sports franchises employ more part-time workers making just above the minimum than than full-time and there's several months off to boot!
with the levees in the delta one good jolt away from giving way, those extra pennies would be better spent on long-term projects that employ may more at good wages and the entire community can benefit - no just the maloof's and the politicians.
it's a matter of realistic priorities, not just the sports fan/customer's ego.
No, John, you add both, because the lots the County just added ADD to the parking inventory. And they add a lot in the immediate vicinity of the proposed arena.
So you give the parking concessionaire more competition, and prevent it from operating during the most lucrative hours.
These are separate items, not one in the same.
Posted by MikeM on February 29, 2012 05:44 PM
No, John, you add both, because the lots the County just added ADD to the parking inventory. And they add a lot in the immediate vicinity of the proposed arena.
So you give the parking concessionaire more competition, and prevent it from operating during the most lucrative hours.
These are separate items, not one in the same.
Posted by MikeM on February 29, 2012 05:45 PM
Okay, Neil, how'd that happen?
Grr.
Sorry.
Posted by MikeM on February 29, 2012 05:46 PM
Paul and Mike
My comment had nothing to do with blind spots, merely if to raise money for the arena by having the City retain event-night revenues, the parking operator won't see a dime of the event-night revenues. At that point, it doesn't matter whether the City sees revenues from event-nights at the County spots, the parking company is already not seeing any revenues from that night at all. No competition on the County lots because ... well they aren't seeing revenue at those hours to begin with. It doesn't add to the parking inventory in competition with the Private Company if the Private Company is seeing no parking revenue for event nights. Therego, not adding to competing parking inventory. So, I have no idea what to tell you guys. If the private company doesn't get event night revenues, again no clue why the County thing factors in.
Posted by John on February 29, 2012 08:03 PM
The news from Sac as of Wednesday evening is that the city is now on the hook for $255M, and the potential cost of the stadium has already increased from $387M (announced on Sunday) to $391M today. (www.tinyurl.com/255mdeal)
This story has only gotten worse as we learn more about the deal, as is the case for _every_ single 'deal' that has come through a closed process.
I'm at least glad of one thing: if Neil ever decides to come up with another edition of Field of Schemes, he and Joanna will have no shortage of new and outrageous examples of sports owners fleecing the public to support their private businesses.
@Amy, I really hope this deal isn't final. Is it, or does it still have to pass political muster?
Posted by Roger C. on February 29, 2012 10:09 PM
So why else would they try to jam it through council in 5 days? It's another bad deal.
No, the City will provide $255M + $67M in new bonds. Sounds exactly like they're paying for 1/3 of it.
www.sacbee.com/2012/02/29/4301659/sacramento-to-contribute-255-million.html
Absolutely amazing.
Posted by MikeM on March 1, 2012 02:20 AM
Roger, they have their 5 votes. Done deal.
I think this passes with few -- if any -- changes on March 6. They'll review it for 5 days, then move forward.
I bet this gets at least 6 votes. In fact, earlier this week, 6 Council members were with KJ to announce this. That sounds a lot like 7-2 to me.
Posted by MikeM on March 1, 2012 03:01 AM
MikeM, you think the City Council is going to roll over and make this easy for KJ? I think this Council is going to make some demands- particularly on the $9 million hole and probably a demand for more time to review this. There's a lot of moving parts here and I can't see the Council moving this along without any tweaks. They'll move it along- but with tweaks.
Posted by jjo916 on March 1, 2012 03:14 AM