Kings and AEG like the looks of new Sacramento chance
03/05/2012 12:00 AM
12/18/2012 12:09 AM
Sacramentans are divided on whether their city should spend $255 million in public money on a new sports arena.
But as far as the Sacramento Kings and arena operator Anschutz Entertainment Group are concerned, the verdict is in: The arena should be a moneymaker.
AEG could make $5.7 million in annual profit running the building, according to a projection released last week by the city. The deal is so promising for AEG, in fact, that it chipped in another $9 million last Monday without getting anything in return, according to a source familiar with the negotiations but not authorized to discuss them.
"AEG is prepared to make a bet on Sacramento," chief executive Tim Leiweke told Mayor Kevin Johnson that morning, the source said.
AEG officials were unavailable for comment, but other parties said Leiweke's pledge effectively clinched the deal following three days of talks at the NBA All-Star Game in Orlando, Fla. The Los Angeles company's commitment totals nearly $59 million.
The Kings like the deal, too, even though they would forgo some revenue streams they control at Power Balance Pavilion. The new arena could breathe life into a struggling franchise with the NBA's lowest player payroll.
"We're going to have a new building; we'll be able to attract players," said co-owner George Maloof.
"Sometimes you have to take chances," said Maloof, whose family is putting $73.25 million into the arena. "And we think this is worth taking."
It's far from a done deal. The City Council will vote Tuesday on whether to accept the "term sheet" hashed out with AEG, the Kings and developer team ICON/Taylor. While the term sheet is nonbinding, the vote is a crucial test.
The city stands to make $1 million in annual profit from the arena, though it's not exactly a windfall. The cash would help compensate the general fund for revenue lost after the city works a deal to pull upfront cash out of its parking garages – the linchpin of its share of the project.
The arena would cost $391 million and open in 2015.
AEG and the Kings are wagering that Sacramento offers significant upside despite 10.9 percent unemployment and other economic woes. They think they can extract enough dollars from the market to make it work for both sides.
"There's enough money to go around," said E.J. Narcise of Team Services LLC, a Maryland firm that brokers sponsorships for sports teams.
Narcise and others say AEG would pull in a lot more advertising revenue at the arena than the Maloofs have sold at Power Balance Pavilion. AEG would split most of the ad dollars 50-50 with the Kings.
The arena itself would be far bigger than Power Balance, providing additional concourse and lounge space on which to plaster corporate logos. The sheer allure of a new building could draw more dollars, too.
One of the Kings' top corporate partners, Thunder Valley Casino, might increase its sponsorship beyond the current $1 million a year, said spokesman Doug Elmets.
Much of AEG's profit could come from events other than Kings games. It's a core strength for the company, which runs arenas from Stockholm to Sydney and is the second-largest U.S. concert promoter. AEG produces tours for stars such as Paul McCartney and Justin Bieber.
"They know what they can bring into that building (in Sacramento)," Narcise said.
Power Balance Pavilion has been severely underperforming in recent years. Just 149,000 tickets were sold for non-sports events last year. That was a 48 percent drop from the peak in 2005, according to Pollstar magazine.
AEG is expected to turn that around. Even some experts who believe the city is making a bad deal say AEG's participation is a big plus.
"If AEG is going to fill up the building, this thing could break even," said Stanford University economist Roger Noll, a critic of public subsidies for sports facilities.
So if it works well for AEG, what's in it for the Kings?
NBA officials spent hours in Orlando convincing the Maloofs that the new arena would help them financially, according to the source. In particular, the NBA said the Kings would do better on this deal than if they had moved to Anaheim last spring, as planned.
In Anaheim, the Kings would have been junior tenants to the Ducks, the National Hockey League team team owned by the Honda Center arena's operator. They would have surrendered more revenue to the Ducks than they would to AEG under Sacramento's proposal.
Take naming rights – the cash received from selling the arena name to a sponsor: The Kings would have gotten one-third of the naming-rights revenue in Anaheim. At the new Sacramento arena, they would split those dollars 50-50 with AEG.
And the naming rights would surely work out better at the new arena than they have at Power Balance.
A maker of sports wristbands, Power Balance paid the Kings only $700,000 before filing for bankruptcy protection. Its new owner walked away from the contract, although the Kings are trying to cut a deal with the company. In the meantime, the Power Balance name remains on the arena.
Contrast that sad state with the prospects at a new arena. Narcise said naming rights could go for $6 million a year. That's far more than Power Balance would have paid if it hadn't gone to bankruptcy court.
Even with AEG taking half, the Kings come out ahead.
Narcise said the company that puts its name on the Sacramento arena will capture some of the good will associated with the team's decision to stay in town.
"You as a partner have the opportunity to come in and ride that wave," Narcise said.
The Maloofs' acceptance of the deal shows how the business of sports has changed in just a few years.
In 2006, before the recession, the Maloofs walked away from an arena proposal that would have given them the revenue from all arena events, including parking, concessions and advertising. The Sacramento city-county proposal went to voters anyway – it had to, because it required a sales tax increase – and was soundly defeated.
This time around, the Maloofs are leaving whole chunks of revenue to AEG.
That's fairly typical now. In tough economic times, to get arenas built, teams are giving up some of the revenue streams they once commanded, said Dennis Howard, a sports-business expert at the University of Oregon.
Teams realize "they're not going to control the Ice Capades and the circus," Narcise said.
"This is still a good deal (for the Kings) but this is not as if they didn't make concessions," he added.
It didn't hurt that the NBA was prodding the Kings to stay in Sacramento – and may be quietly helping the team financially to make it happen.
After Johnson got his pledge of additional cash from AEG last Monday, the mayor stepped back into the negotiating room in Orlando and relayed the news to the Maloofs and NBA Commissioner David Stern.
The city and the Kings were still about $5 million apart. Stern got up and stood behind where the Maloof brothers were sitting.
"The Maloofs are good for the rest of it, and we'll be behind them," Stern said, according to two sources who have knowledge of the talks but aren't authorized to speak.
It's not clear what assistance the NBA will provide. Stern told reporters the league will "be as supportive as we could possibly be."
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