City, investors reach $448 million deal for arena at Downtown Plaza

03/24/2013 12:00 AM

09/18/2013 12:13 PM

Sacramento officials announced Saturday they have reached a deal for the largest redevelopment project in city history – a $447.7 million arena at the Downtown Plaza, with up to 1.5 million square feet of offices, housing, stores and a high-rise hotel.

The public-private partnership agreement, announced in nine rapid-fire tweets by Mayor Kevin Johnson, puts the city on track to make a last-minute pitch to NBA officials in New York in two weeks to keep the Sacramento Kings from leaving town for Seattle.

It would require the city to commit $258 million in value, or 58 percent of the arena cost. Of that, $212 million would come from selling bonds backed by future revenues from city downtown parking garages. The city's contribution is the same as it was in last year's aborted project to build an arena at the downtown railyard.

The city also agreed to give the private development group the city's empty 100-acre plot next to Sleep Train Arena in North Natomas, as well as six other city properties, five of them adjacent to or near the downtown arena site. In total, the city properties have been valued at $38 million, according to city officials.

The agreement calls for the private development team to contribute $190 million to building the arena. That team is made of up investment billionaire Ron Burkle, 24 Hour Fitness founder Mark Mastrov and Vivek Ranadive, a Silicon Valley entrepreneur.

The city would own the arena; the private group would operate it and be responsible for its ongoing upkeep. The city would be guaranteed a minimum of $1 million in arena revenues annually, with bump-ups if arena revenues hit certain levels.

Representatives of the private group did not respond to The Bee's requests for comment Saturday evening.

The complex deal, which sets a September 2016 date for opening the new arena, also involves a 5 percent surcharge on tickets for two years at Sleep Train Arena, and continuing for the 35-year term of the lease at the new arena.

An exact site for the new arena has not been determined. City officials say it should take up about two-thirds of the existing plaza site. They said they expect Macy's to remain.

City officials said they also agreed to give the developers the 3,700 city-owned parking spots beneath Downtown Plaza. About 1,000 of those will be demolished by construction. Once an arena is built, city officials say, the private group has indicated it needs to control the remaining 2,700 spots for premium parking at arena events, and for use with other development on the site.

The news of the deal broke just after 3 p.m. when the mayor hit the Twittersphere with a series of jubilant tweets, noting that the deal avoids new taxes, protects the city on an existing $70 million loan to the Kings and involves "no net impact on the general fund."

"I'm pumped!!" Johnson wrote. "Ron Burkle and I officially closed the deal a few minutes ago."

The 18-page preliminary term sheet is nonbinding. It was sent to City Council members Saturday afternoon and published on the city's website at 7:30 p.m.

City Manager John Shirey wouldn't comment on why the deal took an extra two days to complete beyond the original timetable he set.

"It's done. This is a good deal for the city. It's fair to both parties."

City Councilman Allen Warren said much of the past two days was spent structuring the deal to make sure the city would retain the $9 million a year in parking profits it currently gets.

A series of major hurdles lie ahead for the Johnson-led effort, starting this Tuesday. Shirey said he will ask the council to approve the term sheet that night. That would allow the city to pitch its plan April 3 to the NBA in New York.

Representatives of Seattle also will be in New York that day, detailing their existing agreement – signed last month – to buy the team from the Maloof family and build an arena of their own in Seattle.

The league's 30-member board of governors is scheduled to cast a yes or no vote April 18 on the Seattle sale. If it votes no, the Maloofs could entertain the Burkle-Mastrov-Ranadive group's offer to buy the team.

Last year's arena proposal at the railyard was approved by the City Council on a 7-2 vote before the project was abandoned by the Maloofs.

But the rushed nature of the new deal and planned Tuesday night vote has caused concerns among some residents and at least one councilman.

Newly elected Councilman Steve Hansen, who represents the downtown area, said he is not comfortable voting on such short notice.

"I don't think there is sufficient time for the council and public to review this and vote on it Tuesday," Hansen said. "I don't think that is practical. The public deserves the time to review this – at least four to five days."

Several city residents have made the same argument during recent community forums on the arena issue.

City officials say the deal is better for the city in several key aspects compared to last year's failed effort involving the Maloofs.

Unlike that deal, the private partnership group would shoulder the burden for getting the arena built and handling potential cost overruns.

"That is a much cleaner deal for the city," Shirey said. "You can't put that in dollar terms."

Also different: The city would contribute land, and it would be up to the private development group to sell or build on that property. Last year, the city was on the hook to sell the properties to generate cash for the deal.

Councilman Steve Cohn said the deal looks strong, particularly the prospect of hundreds of millions of dollars in new investment surrounding the arena.

"We're likely to get $1 billion of development; then the $258 million investment is pretty good," he said.

The deal, in concept, echoes the mayor's and city manager's contention that the project is as much about encouraging economic development downtown as it is about keeping the Kings.

"This is about a whole lot more than basketball, or just an entertainment and sports center," Assistant City Manager John Dangberg said. "It's also about reviving the core of downtown and the core of the region."

While plans are still sketchy, the private group could build a hotel, 600 units of residential housing, 300,000 square feet of retail and 475,000 square feet of office space.

The deal terms obligate the city to give the private group the entitlements to those projects. Notably, though, it does not set a time frame for developing those properties.

The proceeds from the parking assets are about $16 million lower than the city had envisioned last year. Officials said that is the level they felt comfortable committing to, based on a series of recent analyses of the parking asset value.

Mortgaging the parking assets would put the city on the hook for millions of dollars in debt each year. But city officials said they are convinced there will be plenty of cash available to repay lenders. To help make the bonds more creditworthy, the city is using roughly $20 million a year in hotel tax revenue as a potential cushion, officials said.

Shirey and Dangberg said the deal also "backfills" the $9 million a year the city's general fund currently gets in profit from its parking operations. The backfill will include $3.7 million from the 5 percent surcharge on all tickets sold at the new arena, including non-Kings events.

The deal also calls for the city's existing $70 million loan to the Kings to be refinanced. The new ownership group would make payments on the new loan.

KEY ARENA DEAL POINTS

City will contribute $258 million toward the $448 million arena at Downtown Plaza. Group including Ron Burkle, Mark Mastrov and Vivek Ranadive will contribute the rest.

City's share will include $212 million from borrowing against parking revenues, $38 million in land donations, $5 million in leftover proceeds from Sheraton Grand development and more.

City will "backfill" $9 million in annual parking profits with $3.7 million in ticket surcharges, $3.6 million in parking revenue (including revenue during events), $1 million in city's guaranteed share of arena profits, and more.

Burkle group intends to redevelop 1.5 million square feet of property at Downtown Plaza besides the arena, including a hotel, retail, office and residential.

Exact location within Downtown Plaza still not known.

Existing Kings debt to city would be refinanced; 5 percent surcharge will be imposed on events at Sleep Train Arena to reduce debt.

Kings would commit to 35 years at new arena.

Call The Bee's Tony Bizjak, (916) 321-1059. Follow him on Twitter @tonybizjak.

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