How big will Sacramento's subsidy be for a Kings arena?

05/03/2013 12:00 AM

10/01/2014 2:11 PM

If Sacramento builds a new downtown arena for the Kings, how much will the public wind up paying for it? The answer: It depends on who's counting.

Sacramento city officials say the term sheet they recently negotiated with the prospective arena developers puts the city investment at $258 million – about 58 percent of the building's estimated $448 million cost.

A review of the deal, however, suggests the public's share could arguably be viewed in the $290 million range. Arena critics, who are seeking a public vote on the project, say it's really more like $334 million.

Sacramento attorney Patrick Soluri, part of a group challenging the downtown arena plan, accuses the city of "concealing the subsidy involved."

Soluri and attorney Jeffrey Anderson say they plan to participate in a petition drive to try to force the city to take the deal to a public vote.

City officials defend the $258 million figure and the analysis behind it, saying critics overestimate some numbers, take others out of context, and fail to acknowledge how the arena and nearby downtown development will produce more money for the city in the long run.

They note that the arena term sheet guarantees the city an annual payment of at least $1 million for 35 years – even if the arena loses money – and more if certain profit benchmarks are met.

"We want a transformative project like this that bolsters investment downtown," said John Dangberg, assistant city manager.

The debate over arena financing is sure to intensify if the NBA board of governors votes May 15 to keep the team in Sacramento. The Kings would be the anchor tenant in a new arena.

At the core of the city's arena plan is $212 million that it would borrow against future parking fees from its downtown garages and meters. The city would own the arena.

The disagreement over the size of the subsidy revolves mainly around several other city assets included in the package being offered to developers: parking spaces, land for digital billboards and seven city properties.

One point of contention is the parking underneath Downtown Plaza. The city would allow the arena developers to manage and collect fees for 2,700 parking spots remaining after arena construction, which could be used as premium parking for events and for other new development at the site.

But the city is not including any value for the parking in its tally of subsidies.

In a report last month, the Eye on Sacramento watchdog group called the lack of a dollar value for the parking spots a key omission. The report, written by Craig Powell and Dennis Neufeld, contends the underground parking could be worth $58 million.

Garage repairs needed

Dangberg acknowledged the city did not include the value of foregone future revenue from the Plaza garage, but he argued critics overestimate that value.

Dangberg said city consultants analyzed the garage and decided the spaces were worth $10 million, based on how much the city could have borrowed against them as part of the arena financing plan.

That figure is based, in part, on an analysis that indicates the garage requires about $36 million in upgrades – to be paid by the arena developers – over the next 35 years.

"They take responsibility for that capital expenditure," Dangberg said.

Dangberg said the arena deal could, in fact, provide new money to the city from those parking spaces. Now lightly used, the Downtown Plaza garage would become a prime parking spot with an arena, generating higher prices. And the city could get a piece of that revenue under a profit-sharing agreement with the arena developers.

If that happens, Dangberg argued, "we aren't (really) giving all of that $10 million up."

Critics of the city's arena plan also cite its offer of at least three city parcels to arena developers to build digital billboards. The city would collect only nominal rent. Critics say the city should include the amount of rent it would be potentially giving up.

Advertising conglomerate Clear Channel Communications pays the city $180,000 a year for each of the digital billboards it now operates in the city, said Clear Channel consultant Doug Elmets. Based on the value of that contract, the city could be giving up a total of $540,000 a year in revenue by donating rights to three digital signs to the developers.

Clear Channel contends it's entitled to the locations the city has promised the arena developers, based on its 2009 contract with the city, Elmets said. "The hope is this will be all resolved in a positive manner."

City officials said they did not include those rents in the amount the city is putting into the deal because the city is not collecting rents on those sites, and may or may not be in the future.

"We looked at that as an opportunity cost, not a subsidy," Dangberg said. "We are not writing a check or handing money over to them. We are just giving them a right to do something on our land, and charging nominal rent."

A 'ripple effect' predicted

Finally, arena critics contend the city undervalued its seven properties because they will greatly increase in worth as the economy recovers.

Soluri also pointed out that, in its haste to nail down a deal, the city relied on a broker's estimate for the value of the properties, rather than a more thorough appraisal.

Dangberg, however, said critics are missing the point. The city wants to put its land in the hands of people who can develop it, which will revitalize downtown and produce higher property taxes for the city.

Dangberg acknowledged the city hurried to assign values to the properties, but said they were calculated by one of the nation's leading commercial brokerage firms, CBRE, which has been reviewing the city's land portfolio for several years.

David Jarrette of Jarrette Co. LLC, a longtime land appraisal firm based in Grass Valley, said a "broker opinion of value" isn't nearly as thorough as an appraisal, which "can take several months."

But the fact that CBRE has been examining city properties for years gives him greater comfort the broker opinion has merit.

"You can't totally hang your hat on it," he said, "but it's probably going to be in the ballpark."

Also at the heart of the subsidy debate is a disagreement over how much economic development an arena actually would spur downtown.

City officials say the arena term sheet includes an agreement to work with arena developers to build an additional 1.5 million square feet of office space, retail, housing and a hotel around the arena. They point to the L.A. Live area surrounding the Staples Center, where the Lakers and Clippers play, as an example of what they hope to achieve on a smaller scale.

Critics point to economic studies that say cities typically oversell the economic benefits of arenas. They point to other cities where development didn't produce expected revenue.

Land appraiser Jarrette said there's little question that some downtown land parcels will rise in value if the arena gets built at Downtown Plaza.

"They're going to create value because the arena is going to kick-start it," Jarrette said. "That's going to be a huge ripple effect."

Michael Ault, executive director of the Downtown Sacramento Partnership, said his organization has seen "a big increase" in recent days in inquiries from brokers and representatives of retailers and restaurants asking about available property near the arena site.

Those parties have also asked about hotel room inventory, foot traffic in the Central City and the site's proximity to Old Sacramento, Ault said.

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


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