Revised arena deal provides more certainty for city of Sacramento, leaders say

04/21/2014 3:43 PM

10/01/2014 1:18 PM

The price tag for the new Sacramento Kings arena just went up, and the team’s development deal with the city has undergone significant changes.

Yet an updated deal released by the city Monday shows its planned contribution to the project has actually been reduced slightly, to $255 million, and the Kings’ owners will pay for the additional $30 million or so needed to build the team’s new home at Downtown Plaza.

The higher price tag, bringing the project to a total cost of $477 million, is among a host of changes outlined in the 26-page update. City officials said the revised agreement gives them a larger and more reliable share of the revenue generated by the arena. That will make it easier for the city to borrow against its parking garages, the mechanism being used to finance the bulk of the city’s share.

“We’ll get a better credit rating, lower risk,” said City Treasurer Russ Fehr. “It saves us money.”

Kings President Chris Granger agreed the new deal gives the city more financial “certainty” and added: “We’ve both gone into this with everyone’s best interest in mind.”

City staff members will provide the City Council with a briefing on the update Tuesday night, three weeks before council members are scheduled to take a definitive vote on the arena project. If all goes according to plan, Granger said, the Kings could start demolishing Downtown Plaza on May 14, the day after the council vote.

Financing won’t be in place for several months, and city officials said they will present the council with proposals for interim financing. Granger said the Kings’ owners, who have already spent $36 million buying the mall, would put up the cash for the early months of construction to keep the arena on track. The building is supposed to open in 2016.

The revised deal reflects months of negotiations and comes more than a year after the City Council approved a nonbinding term sheet with the investors who eventually bought the Kings and prevented their planned relocation to Seattle. The city’s contribution to the project was pegged at a maximum of $258 million, and the Kings would be on the hook for additional costs.

Despite the changes, “we have broadly remained consistent with the term sheet,” said Assistant City Manager John Dangberg.

The revisions follow intense criticism by some taxpayer groups that the city was being too generous with the Kings ownership group, led by Silicon Valley tech magnate Vivek Ranadive, and was putting the general fund at risk. City officials defended the original deal. They said the financial risk was minimal and the economic development benefit would be enormous.

With the revisions, city officials said a good deal got better. Among other changes, the Kings have now committed to making lease payments of at least $6.5 million a year, with the amount expected to grow. The team previously had estimated it would pay $4.7 million annually, depending on the arena’s profitability.

“It was a significant enhancement to our financing package,” Dangberg said of the new lease amount.

Under the revised agreement, the city’s share of the arena cost drops by $3 million, to $255 million, including cash and the contribution of some real estate. The Kings’ share jumps to around $222 million.

The higher costs reflect the Kings’ decision to move their practice facility out of the arena itself and into an adjoining administrative office building at the east end of the mall. The move will enable the team to build “a true state-of-the-art practice facility that will help us recruit the best players to Sacramento,” Granger said. The building will have two full-length basketball courts, viewable from the main concourse of the arena.

In addition, Granger said, the Kings are spending the extra dollars on improvements around the arena’s exterior, including public art, landscaping and retail space along L Street.

The redeveloped space will amount to a “grand public plaza,” Dangberg said, “a gift to the citizens of Sacramento from the Kings.”

The public space is separate from the team’s plan to build 1.5 million square feet of retail, office, residential and hotel space on a portion of Downtown Plaza immediately north of the arena.

City officials and the Kings expect to release the final development deal and other documents on May 1. Dangberg said the deal is largely complete but “there are minor and a few more substantive issues that are still under discussion.”

Perhaps the biggest change is the financial terms between the city and the Kings. That will affect the city’s plan to borrow $212.5 million against parking garage revenue.

The earlier plan left a $9 million a year hole in the city’s general fund, reflecting parking profits that would now be paid to bondholders. The city cobbled together a complicated “backfill” plan to replace that $9 million. The team had agreed to contribute at least $1 million in profits and an estimated $3.7 million in revenue from ticket surcharges, for a total of $4.7 million a year. The rest of the backfill was coming from other sources.

The revised plan is a simpler model. The Kings’ contribution has grown and become more ironclad. Instead of $4.7 million, much of which depended on ticket sales, the Kings have now committed to a minimum of $6.5 million in annual lease payments. The payment will jump to $7.5 million in 2021 and will grow by at least 3 percent a year after that, depending on inflation. City officials said the team’s payments could grow to $18 million or more eventually.

Dangberg and Fehr said the new arrangement will make the debt financing simpler and less expensive for the city.

Instead of creating a nonprofit entity to borrow the money, the city will issue the bonds directly. Still, Fehr said the guaranteed revenue stream from the Kings will provide “better protection for the general fund” than the earlier model. It will also make the bonds more marketable because of the plan’s comparative simplicity: “It’s more vanilla,” he said.

The city’s borrowing cost, estimated at around 6.7 percent, is about 1 percentage point higher than what the city estimated last fall. That’s due in part to rising interest rates in general, and the fact that the additional cash from the Kings means the city won’t be able to use tax-exempt borrowing. Fehr said the extra cash from the team more than offsets the higher interest costs.

The earlier plan, giving the city a percentage of arena profits, provided less certainty that the payments would materialize. It also meant the public would be able to determine just how profitable the arena was. “The Kings didn’t want that,” Dangberg said.

In total, the city plans to contribute $223.1 million in cash and $32 million worth of real estate and “air rights” over one piece of property. Compared with the earlier version of the package from a year ago, the city is putting in slightly more cash and slightly less real estate, in part because real estate appraisals came in lower than expected.

About $5 million in cash is coming from profits left from the sale of the Sheraton Grand Hotel, which the city developed. Under the terms of that sale, the $5 million was supposed to be earmarked for projects being developed by prominent developer David Taylor and Los Angeles’ CIM Group. But Taylor and CIM agreed to contribute the $5 million, in part because they own several land parcels near the arena, Dangberg said.

“They see the (arena) project as a catalyst for economic development,” Dangberg said. “They saw that they could contribute and help make that happen.”

To view the city staff report, visit www.cityofsacramento.org.

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