March 31, 2013

Will Sacramento's downtown grow in the whales' wake?

The campaign to keep the Kings in Sacramento has developed into a larger civic plan, with some of California's richest business leaders promising to inject money and energy into the neglected heart of the capital city.

The campaign to keep the Kings in Sacramento has developed into a larger civic plan, with some of California's richest business leaders promising to inject money and energy into the neglected heart of the capital city.

Now the question is: Can they keep that promise?

City officials say they see the so-called whales as white knights who will dramatically remake downtown by buying the Kings, building an arena at the Downtown Plaza site and surrounding it with offices, retail, housing and a hotel.

"This is every city's dream to have this many investors with this much capital behind them with this much interest in investing in our city and our downtown specifically," City Manager John Shirey told The Bee.

Skeptics, though, wonder if the whales can deliver after reaping financial gifts from a city desperate to solve many problems at once – a struggling downtown, high unemployment and the potential of losing its only major-league sports franchise.

Neil deMause, author of the book "Field of Schemes," which argues against public financing of arenas, said the whales would find so much money hard to resist.

"Any billionaire would take notice when you wave (hundreds of millions) under their nose," said deMause, referring to the arena financing subsidy Sacramento is offering.

The deal is contingent on the investor group and the city winning their battle with Seattle over the Kings. The Kings' current owners, the Maloof family, have signed a deal to sell the team to a Seattle group. That deal is scheduled to be voted on by NBA owners on April 18 or 19. Mayor Kevin Johnson and the investor group will go to New York on Wednesday to pitch their case – as will Seattle representatives.

Whale migration

That group comes straight out of a California Who's Who business list.

Ron Burkle of Beverly Hills: A grocery magnate and real estate investor who owns the Pittsburgh Penguins hockey team.

Mark Mastrov of the East Bay: Founded 24 Hour Fitness, credited with revolutionizing the fitness industry.

Vivek Ranadive, a Silicon Valley entrepreneur and author: Co-owner of the Golden State Warriors group, and CEO and founder of Tibco Software Inc.

The Jacobs family of San Diego: Runs Qualcomm, a Fortune 500 technology company.

They have largely allowed others to speak about their intentions. They didn't appear at the City Council meeting last week when the council voted 7-2 to approve a term sheet for a downtown arena.

In the term sheet, they make a few promises about what they will do if the NBA approves their bid to buy the Kings.

The group will keep the Kings in Sacramento for at least 35 years. They will spend at least $190 million to construct a new arena. They will pay the city at least $1 million each year, and will forward proceeds from a 5 percent arena ticket surcharge to the city. The city also is likely to see a boost in property and sales taxes from the site and surrounding blocks, once the arena is built.

Everything else is an open question.

What will the investors do with 185 acres in Natomas, the area that the Kings will vacate once a downtown arena is built? Will they develop another 65 acres that the city is handing over as part of the deal, or will they sell it, or sit on it for years? Will they ask the city to pay for more infrastructure improvements once the arena is close to completion?

Whatever their plans, the whales didn't come cheap.

The city agreed to put about $220 million in bond proceeds and cash toward building the arena, lowering the costs to investors. This is backed by future parking revenues and, if funding falls short, hotel tax revenues.

The city also will help the investors erect digital signs worth millions of dollars near highways. And the city will give them about 3,700 parking spaces under Downtown Plaza for at least 35 years. About 1,000 of those parking spaces will be destroyed during arena construction. City officials have not estimated the value of the remaining spots over time, but parking studies suggest it is in the tens of millions of dollars.

"It's a huge number," said Craig Powell, head of Eye on Sacramento, a grass-roots watchdog group.

Powell also noted that the city could be forced to spend more in other areas. An environmental review, for example, could require traffic improvements. Whether that happens is "literally the $100 million question," he said.

Undeveloped proposals

Just as important is what the developers will do with $38 million worth of land the city is giving them.

That land includes about 5 acres downtown, 100 acres near Natomas and 60 acres near the Haggin Oaks Golf Course. Real estate experts say that land will appreciate in value, especially if an arena is built.

The term sheet puts no requirement on developers for the Natomas site which, along with the adjacent 85-acre Sleep Train Arena site, would become a major hole in the center of Natomas when the arena there is abandoned or knocked down.

City Councilwoman Angelique Ashby has been adamant that any downtown arena plan include a simultaneous planning process for redevelopment of the Natomas site. Natomas residents have talked about housing, higher education and medical facilities, and green technology development.

But the site is subject to a federal flood moratorium that now prevents development. There is no timetable for the moratorium to be lifted.

Darius Anderson, a member of the investor group trying to buy the Kings, has vowed to work with Ashby and Natomas residents to come up with a plan.

The downtown parcels also come with no strings attached. They include prime real estate – albeit with a troubled past.

Several projects, for example, have been proposed for a single-acre parcel at Eighth and K – most recently housing and retail. They have come and gone for lack of money. Currently, it's a large hole in the ground.

Lot X at the entrance to Capitol Mall just north of Crocker Park is seen as a key development site – once considered for an aquarium – but the city and local developers have never been able to cobble together funding.

City officials say they believe the deep-pocketed outsiders will succeed where locals failed. They already have signed the country's foremost arena architectural firm. "We have incredible strength in this investment group," Assistant City Manager John Dangberg said.

What the private investment group will build around the arena on the Downtown Plaza site is uncertain. The term sheet simply states that the city will work with the whales "to allow up to" 1.5 million square feet of development on the Downtown Plaza site – development that "may include" offices, retail, housing and a hotel.

City leaders said they tried to pin down developers on specific plans and timetables.

"We asked about those things, but that wasn't something they wanted to commit to," said Shirey, the city manager. "We didn't feel it was essential for the deal. Frankly it was such a surprise and benefit to us that they would even consider investing in building an additional 1.5 million square feet."

Thomas Callahan, president of PKF Consulting in San Francisco, said he does not see a market for a new hotel in downtown Sacramento, at least not without a city subsidy, for another three to five years.

Investing beyond a team

Despite the costs and lack of specific plans, several of the city's power brokers have expressed faith that the investors will help make Sacramento a better place.

"For those (in their group) wanting to make this as much a real estate deal as acquiring a sports franchise, they need to invest in property (development) to get some return," Shirey said.

The state defunded redevelopment agencies last year, eliminating the tens of millions of dollars the city once used annually to help entice developers to build hotels, stimulate investment and create affordable housing. In its place, the city has turned to leveraging its parking fund.

"In that respect, it is a replacement for redevelopment," Shirey said. But he warned of the limitations.

"We can only do it once," he said. "And it doesn't help other parts of the city."

David Taylor, Sacramento's top downtown developer, thinks the deal is a smart move by the city. It replaces a big problem, the dying Downtown Plaza, with a positive, a major project that will attract crowds and induce more nearby development.

"I really think this is the best and biggest (project) that will be in front of them for quite some time," he said. "You have to invest your money as quickly as you can, and in as big a way as you can, for it to have a high impact. This project does that."

Although the investors have said little about their plans, Anderson, a part-owner of Downtown Plaza, along with JMA Ventures, told the council last week they are coming to Sacramento with serious intent to invest for the long term.

"The owners are ecstatic to be involved," he said. "Everybody has looked at this marketplace and analyzed the demographics."

One whale, Vivek Ranadive, did speak to The Bee last week, saying he and the other investors see Sacramento as an important market, a city that deserves to keep its team.

"I felt this was an opportunity to do something that was significant," Ranadive said. "I believe without a sports team, it is hard for cities to thrive. Given the opportunity to partner to keep this great franchise in this great city, I felt I had to do that. I am very excited at the possibilities. You have an amazing fan base."


The term sheet between the city of Sacramento and developers to build a new arena contains explicit promises from both sides. Here's a selection:

The city promises to

Provide $220 million in direct funding to arena construction, mostly from future parking revenues.

Provide $38 million worth of land – roughly 165 acres, including 100 acres in Natomas – to the developers as a further contribution to the arena project.

Turn over control of 3,700 parking spaces to developers at the arena site for at least 35 years. About 1,000 of those spots will be destroyed during construction; the rest will provide revenue to the investors.

Help the developers erect six digital signs, including three digital signs on city property.

Work to modify zoning to allow investors to develop 1.5 million square feet of property near the arena.

The developers promise to

Provide at least $190 million in funding to arena construction.

Levy a 5 percent surcharge on tickets to arena events, with the proceeds going to the city.

Share at least $1 million in profits with the city each year.

Pay for any arena construction cost overruns, arena repairs and upgrades.

Keep the Kings in Sacramento for at least 35 years.

Make a reasonable effort to build up to 1.5 million square feet of retail, offices, housing and a hotel on Downtown Plaza site.

Make a reasonable effort to build on sites donated by the city or sell those sites to other developers

Call The Bee's Phillip Reese, (916) 321-1137.

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