Sacramento arena deal relies on bonds backed by parking revenue
03/25/2013 12:00 AM
09/18/2013 12:13 PM
Sacramento would create a bit of history if it can spin its downtown parking garages and meters into cash to buy a new home for the Kings.
The city's financing plan for an arena at Downtown Plaza, unveiled late Saturday, has little precedent. Only a handful of U.S. cities have done what Sacramento is contemplating, with decidedly mixed results.
Chicago raised more than $1 billion from its parking garages and meters, but it has generated complaints that private investors profited at the city's expense.
Cincinnati's plan to raise $92 million from its parking operation has been put on hold after irate citizens got a court order blocking it.
Sacramento officials, however, insist they have minimized the city's financial risk – while laying the groundwork for a downtown renaissance that would spread well beyond the footprint of the proposed new arena.
"It's kind of tricky, but we're really proud of it," said City Treasurer Russ Fehr. "All the profit comes back to the city instead of investors. It has a lot of features to mitigate risk."
The city says it can raise $212 million by setting up a nonprofit corporation to borrow against future revenue generated by its downtown garages. That would represent the bulk of the city's $258 million contribution to the new $447.7 million arena proposed by billionaire Ron Burkle and two other investors trying to keep the Kings from moving to Seattle.
Most of the rest of the city's share would come from giving the Burkle group parcels of city land worth an estimated $38 million. Burkle could sell the property or develop it himself – a pattern similar to the deal he struck to build a new arena in 2010 for his hockey team, the Pittsburgh Penguins.
Despite the creation of the nonprofit entity, borrowing against the parking revenue would put the city on the hook ultimately for repaying lenders, Fehr said.
To sell the bonds, "we're going to have to stand behind it," he said.
But he and other city officials said they're confident the garages, meters and parking tickets would generate more than enough cash – roughly $32 million a year in gross revenue – to make the debt payments. About $20 million in annual hotel tax revenue would be used as a backstop to increase lenders' comfort levels.
In many ways, repaying the debt would depend on people coming to Kings games and other events at the arena.
The financing model assumes annual attendance of about 1.4 million a year, said Assistant City Manager John Dangberg.
That's higher than current attendance levels at Sleep Train Arena, but in line with what the aging building used to draw when the Kings were successful and there was a stronger lineup of concerts and other events, city officials said. "It's conservative," Dangberg said.
But not without some risk, said Jeff Michael, a University of the Pacific economist who reviewed the proposal for The Bee.
"Whether the parking revenues are going to be enough there's a lot of speculation in that," Michael said.
Overall, though, Michael said the plan is superior to the railyard arena proposal scuttled by the Maloofs last year. He said the risk profile seems to have been reduced. And putting the arena at Downtown Plaza, in the heart of the city, has more upside.
"It has the potential to do more for the city," he said. "It's a better deal than last year."
Dennis Howard, a stadium-finance expert at the University of Oregon, said the city's proposed contribution – 58 percent of the total – is slightly lower than the average NBA arena deal over the past eight years.
It is also less than the 65 percent the city was putting into an arena proposal last year.
"If you're looking historically the most recent Sacramento proposal is very fair," Howard said.
While nonbinding, the plan needs approval of the City Council, which plans to vote on it Tuesday night. A similar plan for an arena at the railyard won council approval 7-2 last March, although the project was later rejected by the Maloof family, the Kings' majority owners.
If the council approves the new plan, it will be submitted to the NBA.
A committee of owners will meet in New York on April 3 to scrutinize Sacramento's proposal alongside the offer the Maloofs have accepted to sell the team to a group in Seattle.
The Seattle plan calls for a $490 million arena, with as much as $200 million in public funding. A final vote by NBA owners is set for April 18 or 19.
If the NBA sides with Sacramento, and the team is sold to Burkle and his partners Vivek Ranadive and Mark Mastrov, the onus would then be on Sacramento to deliver on the plan.
Fehr said the only significant financial risk would come in the early years, because the city is still paying about $4.7 million a year to repay debts on some of its garages.
To minimize that risk, Fehr said the bonds would be interest-only, with no principal payments, until much of that existing debt comes off the books in 2022.
In later years, as parking revenue grows, "surplus revenues return to the city," Fehr said.
City officials said they used a somewhat similar process – borrowing against future revenue – to successfully finance construction of the Sheraton Grand hotel.
The exact details of the financing won't be known for months. The city must conduct environmental reviews and sign a definitive development contract before it can sell the bonds.
"We've got a year before this project gets financed," Dangberg said. "There's a lot more work to be done."
City officials go to great lengths to contrast their approach with Chicago's. That city turned its garages and meters over to the control of private investors. The plan backfired when rates soared, and the city's inspector general declared that the city sold the assets too cheaply.
More recently, the investors, led by Morgan Stanley, charged that the city owed them $200 million for allowing a competing garage to be built near one of theirs.
"We view the whole deal as part of the Wall Street circus that comes to your town," said Clint Krislov, a Chicago lawyer who is suing the city over the privatization plan. "While you're watching the show, they're draining the public."
The Chicago experience has been so painful that it's frightened officials in other cities, including Pittsburgh and Los Angeles, from entering into similar projects.
In Cincinnati, a taxpayer group has at least temporarily blocked implementation of a City Council-approved plan to raise $92 million from the city's parking operations. Taxpayer groups have blasted it as a giveaway to private interests.
A year ago, while drawing up plans for the arena at the railyard, Sacramento contemplated a Chicago-style financing model and even took bids from more than a dozen private investors.
But the city quickly steered away from that approach and decided to keep the assets in the public's hands. "Rather than let somebody else make a lot of money from that asset, we should do it ourselves," Dangberg said.
Meter rates are likely to rise, but not by much, officials say.
Sacramento's parking operation generates $9 million a year in profit – money that would flow to lenders once the bonds are sold. But officials have a plan to "backfill" that sum and keep the budget intact.
Much of it would come from ticket surcharges, a slice of parking revenue and a minimum of $1 million in arena profits guaranteed to the city.
Even with the general fund made whole, arena opponents complained at community forums last week that the city shouldn't use public funds to subsidize projects for billionaires.
City Manager John Shirey said the public subsidy is necessary "to make it attractive" to the investors.
The Burkle group is contemplating a massive overhaul of the Downtown Plaza site, going beyond the arena to build a hotel, office and retail space and 600 units of residential housing. It could revitalize what is a dying mall.
Outside the mall site, the city would contribute hundreds of acres to the Burkle group, including five parcels in the downtown area.
It's a blueprint somewhat similar to what Burkle drew up in Pittsburgh. As part of his 2007 deal for a new hockey arena for the Penguins, he was given $15 million in credits toward buying 28 acres of vacant land near the new building.
The land is believed to be worth around $15 million, meaning the land would be free once Burkle exercises his rights.
The $15 million bridged a funding gap that was threatening to kill the arena deal and drive the Penguins to Kansas City, where Burkle was talking to city officials about relocating the team.
It also brought Pittsburgh a developer in Burkle who is dedicated to building a mixed-used project on "a sea of parking lots" in a neglected part of downtown, said Yarone Zober, chief of staff to Mayor Luke Ravenstahl.
So far Burkle has developed a hotel. He has 10 years to exercise his rights on the remaining land.
A glance at the new lead investor in the city's bid to keep the Kings in Sacramento.
55 years old
Founder, chairman and CEO, TIBCO Software Inc. in Palo Alto
Limited partner and vice chairman, Golden State Warriors.
Raised in Mumbai, India, moved to U.S. as teenager, attended MIT and Harvard.
Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.
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