Sacramento explores parking-revenue options for arena

03/09/2012 12:00 AM

03/11/2012 1:26 PM

Sacramento's plan to build a new sports arena amounts to a giant wager that people will keep coming downtown to work, shop, live – and, above all – park their cars.

The city expects to get the private sector to pay $230 million upfront for the right to future revenue from downtown parking garages. The $230 million would represent most of the city's $255 million contribution to the new arena for the Sacramento Kings.

Where it gets really complicated is this: Who gets hurt if the parking revenue falls short? The city, the private sector, or both?

The still-evolving arrangement could be structured any number of ways, and the city will have to decide how much of a gamble it's willing to take in hopes of maximizing its income.

"It's a trade-off; there's no right answer," said Stephen Goldsmith, a former mayor of Indianapolis who teaches public policy at Harvard University. "The more risk you take, the more reward you get."

There are no guarantees. Parking in Sacramento is a business like any other, subject to economic ups and downs.

In the past three years, amid layoffs and "Furlough Fridays," the city's income from parking operations actually fell by around 10 percent, to just under $9 million. Advocates for the new arena say the recent downturn in parking revenue has been a blip in a longer upward trend – a product of the brutal recession and slow recovery.

"That's a reflection of the economy, not the desirability or the future potential of downtown," said Mike Heller, developer of central city projects like the MARRS retail complex and the East End Lofts. "We're in an economic malaise that's affecting everybody's pocketbook, but that's temporary."

The long-term trends are favorable, according to a recent consultant's report.

Walker Parking Consultants, in a report to the city last fall, predicted the central city would add 5,000 jobs and another 3,000 housing units by 2020. Walker said parking revenue would likely grow 30 percent by 2021.

Some developers say the upturn is beginning already. The 32-unit Maydestone Apartments near Memorial Auditorium has nearly filled up since opening last fall.

"They're getting snapped up," said Bay Miry of D&S Development. "It's doing very well; it's exceeded our lease-up expectations."

If the arena spurred new development nearby, that could also boost parking revenue at city garages.

Michael Ault, head of the Downtown Sacramento Partnership, said news that the city had struck a tentative deal with the Kings for a new downtown arena has brought interest from out-of-town developers and real estate brokers.

"People are asking for information. They're hearing that Sacramento is not just talking about an arena but is doing something," Ault said. "Over the last two weeks, we've heard from several brokers from the Bay Area, L.A., wherever. A big portion of what this arena brings is an opportunity for new development."

The arena is far from a done deal, even though the City Council gave the project a crucial push Tuesday night. The council voted 7-2 to accept a nonbinding financial "term sheet" with the Kings and other parties, and to direct city staff to proceed with the parking proposal.

For now, staffers are wrestling with several possible business models for turning the city's parking garages into $230 million in upfront cash.

"They carry a range of risks, depending on how they're structured," said Assistant City Manager John Dangberg. "Each of them has a variation."

He said the city will spend the next two months talking with its 11 qualified bidders about different financing structures.

"I'm really confident we can come up with $230 million," said City Treasurer Russ Fehr. "But the exact structure today? There's just too much work to be done."

One possibility that seems to be gaining support among members of the City Council would involve creation of a nonprofit corporation to borrow against future parking revenue.

This model would likely give the city more control over rate increases and treatment of employees. It would also give the city additional cash flow if the parking revenue is greater than needed to repay the bonds.

But if the cash flow was too low to maintain debt payments, the city could be in a jam. It might not be legally obligated to make good on the debt – but could feel compelled to do so in order to keep the city's bond rating from falling.

Despite the risk, some on the council seem to be warming up to the idea, including Darrell Fong.

"There are some risks, there are some gains," said Fong, who has been an arena skeptic but voted "yes" on Tuesday. The nonprofit plan "may get it down to terms that are acceptable," he said as he announced his vote.

The idea of borrowing against future revenue isn't new; the approach has been used by governments for years to raise quick cash. Under former Gov. Arnold Schwarzenegger, the state raised $6 billion by borrowing against future revenue from a court settlement with the tobacco industry.

Sacramento set up a nonprofit organization to borrow millions toward construction of the Sheraton Grand Hotel in the late 1990s. The city wound up selling the hotel at a tidy profit, and Dangberg told council members "we want to see if we can replicate that model."

Fong said this structure would be much better for the city than a "concession" model that's also under consideration.

Under that approach, the city would simply lease the parking garages to private investors for as much as 50 years. The city would likely cede much of its control to the private operator and probably forfeit any profit if revenue from the garages exceeded expectations, although that would be subject to negotiation.

Anxiety about that model can be summed up in one word: Chicago. That city leased its parking meters in 2008 for nearly $1.2 billion. The deal blew up in Chicago's face for a variety of reasons, including an inspector general's report that concluded the meters were really worth at least $2.1 billion.

"They didn't price it appropriately," said Kim Rueben, an expert on municipal finance with the Public Policy Institute of California.

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