Arena deal completed, heads to City Council for historic vote

05/09/2014 7:30 PM

10/08/2014 11:55 AM

After years of frustration and false starts, Sacramento city officials completed a definitive agreement Friday evening to replace aging Sleep Train Arena with a new sports and entertainment palace for the Kings.

City officials released more than 2,600 pages of documents spelling out 35-year lease terms with the Kings, financing of the project, environmental reviews and a host of other details on the $477 million project at Downtown Plaza. The deal now goes to the City Council for a May 20 vote.

More than a year ago, with Mayor Kevin Johnson leading the cheers, the council voted 7-2 in favor of a nonbinding “term sheet” that was essentially the same deal that was finalized Friday. But the upcoming vote could still be contentious, as taxpayer groups have been opposed to the city’s proposed subsidy for well over a year.

Assuming the council gives the green light to the definitive agreement, Kings President Chris Granger said preliminary demolition work, such as “making sure the electricity is turned off,” could begin the next day at the Downtown Plaza site.

“It’s a win obviously for the Kings,” Granger said. “It think it’s great for the city. It’s thrilling.”

One year after nearly losing the Kings to Seattle, the city is on the brink of “the biggest economic development project we’ve had in recent memory,” said Assistant City Manager John Dangberg in an interview with The Sacramento Bee. “I’m feeling very good about what has been accomplished in the last 12 months. I couldn’t be happier with where we are right now.”

The broad outlines of the deal were unveiled three weeks ago by city officials. The hundreds of pages of documents released Friday include fresh details on how the city expects to finance its $255 million share, most of which is based on mortgaging its parking operations. The Kings will contribute $222 million toward the project, in addition to the $36 million they’ve spent buying crumbling Downtown Plaza.

The documents were originally supposed to be released a week ago, but finalizing the agreement took longer than expected. Dangberg said the delay was caused by last-minute negotiations over contingency plans in case something goes awry. “You have to start asking questions about all the what-if scenarios,” he said.

One new wrinkle that’s emerged in recent weeks: The city will loan the Kings around $12 million from its risk management fund to cover permits and fees that the team has to pay before construction begins. The Kings will repay the loan this fall, Dangberg said.

With the release of these documents, Sacramento is the closest it’s ever been to having an arena deal in place after nearly two decades of fruitless negotiations that almost cost the city its only major league sports franchise. The Kings’ former owners, the Maloofs, abandoned at least two tentative arena agreements with the city and tried to move the team out of town – to Anaheim in 2011 and Seattle in 2013 – in part because of Sleep Train’s shortcomings. After the NBA blocked the Maloofs’ proposed deal to sell the team to investors from Seattle last May, they sold the team to a group led by software tycoon Vivek Ranadive.

Even with Ranadive’s commitment to Sacramento, the NBA told the city it must open the new downtown arena by 2017 or risk having the Kings yanked away. Ranadive’s group has spent the past few months hammering out a deal with the city, using the year-old “term sheet” as a template, and the current timetable calls for the building to open in 2016, a year before the NBA’s deadline.

The NBA is demanding a new arena because Sleep Train, built in 1988, is considered ancient by league standards. Although the new arena will have only about 130 more seats than Sleep Train, the league’s smallest arena, the downtown facility will be designed with “club seats” and other money-making amenities that are common to modern facilities.

According to Dangberg, the Kings will put up the cash for the project during the early months of construction. The city will have an interim financing package in place, through a private-placement bond arranged by investment banker Goldman Sachs, in October or November. Dangberg said the city could issue its permanent bonds sometime next spring, or wait even longer, depending on the interest rate environment.

Ultimately, the city plans to donate $223.1 million in cash and $32 million worth of city-owned real estate, including the land adjacent to the current arena at Natomas. The city is also giving the Kings the right to build six digital billboards on city property and city parking garages at Downtown Plaza.

All but around $10 million of the city’s cash would come from a public bond offering, in which the city plans to borrow against future parking garage revenue. The city expects to pay around 6.7 percent interest. The interim financing with Goldman Sachs will cost about 3 percent, Dangberg said.

Currently, the city’s parking operations generate about $9 million a year in profit for the general fund. To make up for that, the Kings will pay the city at least $6.5 million a year in lease payments. The annual fee will grow to as much as $18 million eventually. Also, the city expects to collect up to $2.9 million a year in additional revenue from the arena, including taxes and event parking.

The financing plan puts the city’s general fund on the hook if those arena revenue sources aren’t sufficient to cover the estimated $21.9 million in annual debt payments. But city Treasurer Russ Fehr has said the risk is minimal. As a cushion, the city is creating a “liquidity reserve fund” seeded by hotel-tax revenue, which would be tapped if necessary before the general fund is harmed.

Despite those projections, opponents have said the arena subsidy is far too generous and the plan is too risky financially. Two taxpayer groups tried but failed to have the subsidy issue placed before the voters on the June 3 ballot.

The council will vote on the lease terms, the city’s financing plan and the environmental impact report – more than a dozen documents in all. The council is also expected to vote on entitlements for 1.5 million square feet of retail, office, residential and hotel space on the north side of Downtown Plaza immediately adjacent to the arena.

At least 10 arena plans have been proposed since 1996, when former Kings owner Jim Thomas proposed a downtown sports complex that would have included a baseball stadium. Thomas’ idea quickly fizzled, and he sold the team to the Maloofs a few years later. But the quest for a new arena was just getting started.

In 2006, the Maloofs agreed to a deal at the downtown railyard, to be financed with higher sales taxes, but the Kings owners then scuttled the arrangement, and voters killed the proposed tax hike. In 2012, in a deal brokered by former NBA Commissioner David Stern, the Maloofs agreed again to build an arena at the railyard. But they abandoned that plan a few weeks later.

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