Sacramento seeking to file eminent domain suit for arena property

After negotiations over the property stalled without a deal, the city of Sacramento is preparing to push ahead with an eminent domain lawsuit to seize control of the former Macy’s men’s clothing and furniture store at Downtown Plaza, a vital parcel in the plan for a new sports arena.

Top city officials will ask the City Council on Tuesday for authority to file an eminent domain lawsuit as early as next week. The city has been trying for months to buy the vacant site from its owners, but has been unable to secure agreement on a sales price.

The former Macy’s sits at 600 K St. and has been empty since last summer, when the department store chain consolidated its downtown operations into its store on the western end of Downtown Plaza. The site contains more than half the land needed for the planned $448 million arena.

The parcel is owned by CalPERS, the state’s public employee pension fund, and U.S. Bank holds a ground lease on the property, according to a city staff report. C-III, a Texas-based asset management firm, is negotiating on behalf of U.S. Bank, city officials said.

Representatives for C-III could not be reached for comment Thursday. CalPERS issued a written statement saying that the giant pension fund “recognizes the significance of the city’s downtown redevelopment efforts and we are confident that we will reach a solution that is in the best interests of everyone involved – our members, the tenant and the City of Sacramento.”

Sacramento Basketball Holdings, which owns the Sacramento Kings, reached a tentative deal with the building’s owners to buy the property last spring, said Assistant City Manager John Dangberg. That deal fell apart following the NBA’s decision in May to deny the Kings’ relocation to Seattle.

If the council approves the eminent domain strategy, the city will place a check for $4.35 million into escrow that would be used to acquire the property. That amount is based on a third-party appraisal of the property, Dangberg said.

The Kings on Thursday wired the money to the city to cover that deposit. That reimbursement was necessary under an agreement that requires the Kings to cover all arena pre-development costs.

Kings President Chris Granger said in an emailed statement that the team supports the city’s eminent domain suit and is “fully committed to our partnership in every facet.”

Dangberg said the city’s planned contribution to the arena will not increase as a result of the eminent domain suit. The city has capped its contribution at $258 million. Critics contend that the city is putting more into the deal.

In order to seize the former Macy’s, the city must first convince a judge that it needs the land to serve a public good. A judge will not rule on the city’s lawsuit until 60 days after the motion is filed. If a judge rules in the city’s favor, the city could take control of the property 30 days later – even before a final sales price is determined.

A jury would then determine a fair price.

The city has rarely used eminent domain to seize control of properties. The most prominent case in recent memory occurred in 2008, when the city filed an eminent domain lawsuit to wrestle control of several K Street properties away from landowner Moe Mohanna. That suit was settled before it went to trial, which could also happen in this case. Dangberg said the two sides will continue negotiating as the lawsuit proceeds.

Sacramento officials and eminent domain attorneys said the city has a strong case that eminent domain is justified.

Dangberg said the arena and adjacent plaza will be a city-owned amenity used for high school graduations, concerts and sporting events. Under a term sheet approved by the City Council last year, the city could host up to nine events at the arena each year without paying rent and the Sacramento Convention and Visitors Bureau would have the ability to conduct events at the facility as well.

“Regions of this size need to have places for concerts and entertainment and major events,” Dangberg said.

The city is taking a well-traveled path. Local governments in California have used eminent domain to obtain land for other sports facilities, including the Staples Center arena and Dodger Stadium in Los Angeles.

“Courts have found that (a sports stadium) is a public use,” said Brent Hawkins, a partner at the Best Best & Krieger law firm in Sacramento. “It is certainly not new.”

Hawkins said the court is unlikely to get into the question of whether the city should be involved in a sports arena business deal in the first place. It will limit itself to the question of whether an arena and surrounding project is a “public use.”

“I think (the city) can show there are spinoff development activities, jobs, sales and property taxes, bringing more people into downtown,” he said.

Gary Livaich, an attorney with Desmond, Nolan, Livaich & Cunningham in Sacramento, said the courts tend to defer to local governments on eminent domain issues.

“Fighting (the right to take the property) can be successful, but in limited situations,” he said. “The $64,000 question is whether there is a public purpose or not.”

Local redevelopment agencies historically used the eminent domain procedure frequently, persuading courts that new projects would clear up blight or reduce socio-economic disparities. The state recently ended redevelopment, however, likely reducing or eliminating the ability to use blight reduction as a legal justification for forcing land sales.

The city has the backing of the state Legislature in this case, through a state bill crafted last year by Senate President Pro Tem Darrell Steinberg, D-Sacramento. That bill allows the city to move forward with eminent domain before an environmental impact report on the arena is certified.

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