Sacramento’s arena deal would make Kings one of downtown’s largest property owners

The city of Sacramento’s agreement to invest millions of dollars in a downtown arena isn’t just about a basketball team or a new building. It also would be one of the largest land deals in downtown history.

Plans call for the city to turn over a dozen-plus parcels to the Kings’ ownership group, which would emerge as one of the largest property owners in the central city, in control of more than seven square blocks. These are not trophy high-rises, however. The city’s motley portfolio of excess buildings and land includes such gems as a 25,000-square-foot hole in the ground at the heart of K Street and a historic apartment complex that has become a haven for squatters and vandals.

The deal has stirred big hopes – and major questions – about the future of downtown. How interested would the team’s ownership group – led by tech mogul Vivek Ranadive – be in building anything in Sacramento, other than an arena, anytime soon? Would a group made up mostly of high-tech entrepreneurs – with only one Sacramento developer, Mark Friedman, in its leadership ranks – succeed in building on properties that for years have confounded efforts by the city and top local developers?

Then there is the question that arena subsidy opponents ask: Why is the city giving the Kings’ wealthy owners millions of dollars worth of land that isn’t even at the arena site? Altogether, the city is investing $258 million in the arena project, including a roster of properties, most of them downtown, appraised at $38 million. The Kings owners, in turn, have agreed to spend $189 million on an arena, and they’ve filed plans to redevelop the rest of Downtown Plaza with a 250-room hotel, housing and offices.

Arena boosters, downtown interest groups and city officials say they’re optimistic the new owners will finally steer some of the central city’s most troublesome properties toward brighter futures. But they acknowledge that the impact might not be felt immediately as the city and team focus on building a $448 million arena at Downtown Plaza.

Many of the sites scheduled to be transferred to the Kings have stood empty behind chain link fences and padlocked doors for years. A vacant office building overlooking Cesar Chavez Plaza, a block from City Hall, has been ravaged by vandals and copper wire thieves. A prime piece of real estate, known as Lot X, sits undeveloped on Capitol Mall near the Tower Bridge. Plans for an arts rehearsal space on another empty lot fell through.

Councilman Steve Hansen, who represents the central city, said he wants to discuss with team owners an informal outline for their development plans. He said he wants to use that “as a guidepost” to set an agenda for the development, seeking to avoid more years of idleness.

Hansen’s request could be more than a gentle nudge: Unlike stadium financing plans in some other cities where professional sports teams received public subsidies, an arena financing term sheet tentatively approved by the Sacramento City Council last year does not include deadlines for the Kings to develop any of the land the team is receiving. Nor does it contain a timetable for the planned redo of the rest of Downtown Plaza.

“I would like to see what the team thinks are reasonable timelines for these developments,” Hansen said. “If the market (to build) is not there right away, the market is not there. But I want to make sure they’re on point of delivering the benefits (to downtown) beyond the arena.”

Kings officials said they are focused on the arena project and the broader plans for the Downtown Plaza site. Once that work moves forward, they will turn their attention to the other properties included in the deal.

“We are laser-focused right now to deliver a world-class (arena), and then plan on taking that same focus to develop the Downtown Plaza mall and other ancillary properties,” Kings President Chris Granger said in an emailed statement Friday. “The development of all of these properties is critical to our vision for the arena, downtown and the region.”

Assistant City Manager John Dangberg said he believes the Kings’ owners will have a strong incentive to develop their new land portfolio, including a major parcel outside of downtown: 100 acres of empty land in Natomas adjacent to Sleep Train Arena. Turning the empty lots and dilapidated buildings into modern housing complexes and office space would help the team’s owners earn a financial return on the roughly $500 million they spent buying the Kings and are contributing to the new arena, he said.

“We have these properties that are close to the arena in the hands of a development group that is incentivized to develop the properties,” Dangberg said. “It’s exactly what we’ve been looking for for a long time: having interests that are motivated economically, that are motivated from an urban design perspective to do something really grand and that have the financial capacity (to follow through).”

Value in dispute

Critics assert that the city has undervalued the properties. The city’s $38 million estimated value is based on a broker’s assessment, or “opinion of value,” conducted by CBRE commercial brokerage last year, just before the city signed a tentative “term sheet” with the Kings. The Eye on Sacramento watchdog group argues the city should have done a more thorough “certified appraisal.”

Councilman Kevin McCarty, who opposes the arena deal, said he thinks the city is putting in too much. He recently told The Bee he wants a public contribution to the arena that could be measured as “commensurate with the potential return on investment.”

But one developer who knows the downtown real estate market well said the city actually may be overestimating how much some of the properties are worth.

David Taylor, who at one point contemplated investing in the team but didn’t, is one of downtown Sacramento’s most prolific developers. He said tough challenges facing the real estate and development market in Sacramento could mean that some of the properties are worth far less than the city’s appraisals. Taylor attempted to make a residential development project pencil out on a key downtown block at K, L, and Eighth streets, which is now slated for transfer to the Kings. He said he stopped a year and a half ago because the numbers didn’t add up.

“I don’t believe the balance between residential rental rates and the cost of construction justifies paying much if anything for that land for that use,” he said. “From that angle, the city is making as good a deal as they can make, and perhaps making a better deal than the team is.”

An office development might be easier to build at that site, he said, but it may be another five years before the downtown office market heats up enough to make that investment worthwhile.

Taylor said Lot X, a prime parcel at the entrance to the city on Capitol Mall, may also be a risky bet for the Kings. The city’s broker put that site’s value at $10 million, but Taylor said he would not pay that much right now, given that there are two competing sites on Capitol Mall closer to the arena – CalPERS’ 301 Capitol Mall and Taylor’s 601 Capitol Mall – that are approved for building and ready to go when the market is ready.

“The Lot X and Natomas site valuations put more risk on the team than they do on the city,” Taylor said.

Still, Taylor said a finished arena might boost the property’s value in the future. “If the arena’s up and it is truly generating the kind of excitement and multiple uses, and private tenants want to come downtown because of it, then yes, an office developer might pay $10 million for it,” he said.

Disused ‘classics’

While none of the properties in play has formal development plans on file with the city and each would require an environmental review, the parcels are all zoned what is called C-3 Special Planning District, meaning everything from offices to restaurants to hotels and apartments could be built on them.

Many of the properties on the list have presented conundrums to city officials for years.

Lot X, an empty lot of grass and pavement, is one of the first sights to greet drivers as they enter downtown from the Tower Bridge. Defunct plans for the parcel over the years have included a nine-story hotel and an aquarium.

At 14th and H streets, a vacant lot behind the Wells Fargo Pavilion had been the preferred location for a planned $25 million rehearsal facility for the Sacramento Ballet, Opera, Philharmonic Orchestra and California Musical Theatre. But the funding never materialized. The facility is being built elsewhere, and the lot remains empty.

One of the few buildings included in the deal is the abandoned Bel-Vue apartments near the corner of Eighth and L streets. It was built in 1910 and was once a thriving housing complex for an eclectic mix of residents, including state workers, seamstresses and bartenders, said local historian William Burg.

Today, its hallways emit an overwhelming stench of mold and human waste. Empty apartments are filled with discarded magazines and stained clothing. Police have arrested multiple squatters living in its dusty rooms over the years.

Around the corner, a building at 815 L St. is also in the mix. It most recently housed a nightclub named “815 L,” and previously was the longtime home of Sam’s Downtown Hof Brau. A 45-foot long mahogany bar still stands – covered in dust – on the main floor.

Another empty building in the deal is a seven-story office tower at 921 10th St., across from Cesar Chavez Plaza. It was most recently a city office until it was abandoned a few years ago. In recent months, vandals burrowed through a brick wall in the basement from a neighboring building and broke into the office tower. City officials said the thieves took off with copper wire, electrical panels and water pipes.

Burg, like others, wants to see more housing built downtown. And he sees the buildings being transferred to the Kings as prime real estate for developers wanting to rehab historic structures into housing, much like efforts along the R Street corridor and at the Maydestone Building across from Memorial Auditorium.

“The success stories we’re seeing are places where we’re making use of the urban fabric,” Burg said. “There is value in those buildings. They’re classics. They remind us of who we are.”

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