January 27, 2013

The Public Eye: If Kings leave, what about owners' huge debt to city?

With the news last week that the Sacramento Kings may be sold and moved to Seattle, residents and city officials found themselves facing an old fear: Would team owners dare skip town on the controversial 15-year-old loan from the city when they leave?

With the news last week that the Sacramento Kings may be sold and moved to Seattle, residents and city officials found themselves facing an old fear: Would team owners dare skip town on the controversial 15-year-old loan from the city when they leave?

The team owes $64 million. According to city officials, the day the moving trucks pull onto Interstate 5 headed north, team owners must pay that amount plus a $13 million prepayment penalty – $77 million in all.

"There is no way somebody is buying our team and moving it without making good on that loan," Sacramento Mayor Kevin Johnson vowed last week.

It's uncertain, however, if the team's prospective owners would agree.

The National Basketball Association's board of governors is expected to vote in April on the tentative deal announced last week by the Maloof family, the team owners, to sell to a Seattle investment group that includes Microsoft's chief executive and members of the Nordstrom family.

In an 11th-hour effort to keep the Kings in town, Johnson is talking with several California billionaires about making a rival bid for the team and presenting it to the NBA owners.

The city issued the loan to the Kings under duress in 1997. Then-team owner Jim Thomas told City Hall he would move the Kings if Sacramento didn't help him restructure his finances to improve his cash flow here.

After two weeks of negotiations, the city agreed to sell $73 million in bonds to private investors, and to lend that money to the Kings. The city also floated a second, smaller bridge loan from its own accounts.

The team has since paid the smaller loan in full, and is paying $5 million to $6 million to the city annually on the larger loan. The city forwards those funds to the private bondholders, mainly retirement funds, banks, and large private investors. The team has never missed a payment, city officials said.

Two years ago, when officials discovered the Maloofs were negotiating to move to Anaheim, Sacramento fired off several adamant public letters demanding the Maloofs acknowledge their obligation to pay the loan balance in full immediately.

The Maloofs responded angrily, saying they had no intention of defaulting. But they refused to put that in writing.

Thomas Joo, a contracts law expert at the University of California, Davis, who reviewed the loan documents at The Bee's request, said the contract appears to leave open for debate the Kings' options for how to make good on their debt if the team leaves town.

The Kings put up as collateral Sleep Train Arena, its 83-acre property, and a $25 million stake in the team. UCD's Joo said the Kings could conceivably try to settle the loan by offering some cash and forfeiting the arena.

Assistant City Manager John Dangberg last week said he is confident the new team owners would pay off the balance of the loan in full. City officials have said they believe the NBA would not want the negative publicity of being accused of leaving the city in the lurch.

Once it paid off the loan, the Seattle group likely would own Sleep Train Arena, city officials said. The group could opt to continue hosting concerts, circuses, ice shows and other sporting events, or it could try to redevelop the site. A spokesman with the Seattle group declined comment.

Although the arena has been dismissed as outdated by NBA standards, the building has "good bones," an arena architect, William Crockett, told The Bee after touring it two years ago. "I could see this building in use for many decades to come."

Sacramento city officials said it's too early to know what scenario will play out, but point out that if the team were to default, the city is not legally obligated to tap into its general fund to help pay bondholders.

The city or a trustee could sell the arena and use proceeds to pay some of the bonds, along with the $25 million collateral payment from the team.

The city also could try operating the arena and using profits to pay the bondholders. A number of cities, including Seattle and Kansas City, own and operate arenas without a major league team as tenant, booking concerts, ice shows, circuses, college and other sports, and other events.

Seattle and Kansas City say their arenas are moneymakers. But Deborah Daoust, spokeswoman for KeyArena in Seattle, said it took three years after the SuperSonics team left in 2008 before the city began making money from arena events, and profits remain small.

Mayor Johnson said last week he still wants to build a new arena downtown, whether or not the Kings stay.

It's uncertain whether that will pencil out, though. A city study last year concluded a new arena would be hard to finance without a major league team. Johnson rekindled the idea last week, saying recent talks with potential investors and arena operators has made him more optimistic it can be done.

"Folks clearly believe a downtown arena makes good economic sense," he said. "They feel the economics make sense even if for some strange reason we didn't have an NBA team."

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