Sacramento closes deal for Kings arena financing

Finally and officially, the city of Sacramento has become a partner in the construction of the new Kings arena, enabling the half-finished project to avoid a possible cash shortage and loan default.

City officials announced Thursday they’ve wrapped up the first phase of their arena financing by closing on a short-term $300 million bond sale, 15 months after the City Council approved the deal with the Kings. The city expects to re-issue the bonds sometime next month, effectively converting the short-term loan into a 35-year borrowing.

Using proceeds from the short-term bond sale, the city will make its first contribution to the project shortly after Aug. 21, when the next round of bills is submitted, and will continue in monthly installments until Golden 1 Center opens in October 2016.

“The next payments to contractors and vendors will be made with city funds,” said City Treasurer Russ Fehr. Eventually, the city will contribute a total of $255 million.

Officials rushed to get the financing done by Sept. 1. If they’d missed that deadline, the Kings could have been declared in technical default on their loan.

While default probably wouldn’t have derailed arena construction, Fehr and other city officials said they were concerned about a looming cash squeeze facing the project. The Kings had borrowed $265 million, or roughly half the amount needed to build an arena whose price tag has risen to $507 million, and likely would have had to scramble to raise additional financing if the city hadn’t come through with its cash quickly.

Completing the financing deal caps a long and fairly tortured road for the city, which had expected to have the money in hand months ago. Instead, the financing has been delayed by a series of lawsuits, the most recent of which was resolved barely a week ago.

“I thought we’d have plenty of time before this funding crunch and this technical default issue came up,” Fehr said.

Mayor Kevin Johnson called the financing “a profound milestone” in the long quest to build the Kings a new arena. “It’s a proud moment among many, many more to come,” he said in a prepared statement. The arena is set to open in October 2016.

Kings President Chris Granger added: “We congratulate our partners at the city for achieving the next milestone in our journey to deliver a world-class sports and entertainment venue.” The Kings, who broke ground on the downtown arena last October, have declined to comment on the potential default or cash shortage.

The delay in getting the financing done has had other consequences. The city expects to spend up to $18.5 million a year repaying the long-term bonds. That will be about $1 million a year more than if the city had been able to sell the bonds earlier this year, when it originally expected, Fehr said. Interest rates have risen in recent months.

The Kings, who will lease the arena from the city, will contribute about 70 percent of the debt-service payments through rental payments and increased property taxes at Downtown Plaza.

The rest will come from expected increases in city parking revenue. Not only do city officials expect revenue to increase as downtown traffic perks up, they’re also planning rate increases and to extend the hours during which motorists will have to pay to park.

Parking officials plan to ask the City Council in the next 30 to 60 days for permission to raise meter rates by 50 cents an hour, to $1.75. At some point, they also plan to implement “dynamic” pricing models that will charge more for those who park near the arena during Kings games and other events.

The use of parking meter revenue has been unsuccessfully challenged in court. Three Sacramentans fighting the city’s arena subsidy charged that using meter revenue to repay the bond debt would violate city and state law because those dollars can only be used for traffic management purposes. City officials countered in court that they are not directly using meter money to pay arena debt.

Parking meter revenue is not adequate to pay all city traffic management costs, they said, so other general fund revenue is being used as a supplement. By increasing meter revenue to shoulder more of the traffic-management cost burden, city officials argued, it frees up general fund revenue for other uses, including the arena debt payments.

Superior Court Judge Timothy Frawley sided with the city, saying the plaintiffs’ argument had “no merit.”

Frawley rejected the plaintiffs’ entire lawsuit as well, saying the city’s subsidy is perfectly legal. He also told the plaintiffs to reimburse the city for its court costs. The plaintiffs agreed not to appeal the ruling when the city decided to forgo the court costs.

That settlement enabled the city to move quickly on the short-term financing and beat the Sept. 1 deadline.

On Thursday, the city sold just under $300 million in short-term bonds to investment bank Goldman Sachs & Co. The bonds carry a 2.47 percent annualized interest rate.

City officials said earlier they would borrow $282 million; Fehr said the extra $17 million is to create an additional cushion in case interest rates spike before the city can issue its long-term bonds in September. The city can’t borrow any more money in September than it borrowed Thursday.

With the Federal Reserve widely expected to hike interest rates next month, Fehr said he’s pushing to get the long-term bonds sold quickly. “I just want to get to market as soon as we can,” he said.

The bonds are likely to carry a 5.5 percent to 5.75 percent interest rate, he said.

Fehr, reiterating the pledge made by city officials, said the financing won’t put the city’s general fund at risk. Of the bond proceeds, $212 million will be plowed into actual construction, with the remaining $87 million going into debt reserves and bond-issue costs. The rest of the city’s $255 million arena subsidy will come in the form of land parcels and other resources.

The original plan called for the city and the Kings to share the project’s costs in roughly equal proportions. But because of the delays on the city’s end of things, the Kings have been putting all the money in – around $237 million as of July 1, according to a city document. As a result, the city will be putting up all of the costs “until we’re square with the Kings,” Fehr said.

Time lapse of Downtown Plaza demolition – July through October 2014 – in preparation for the new Sacramento Kings Arena, which is scheduled to be completed on Oct. 2016.

Dale Kasler: 916-321-1066, @dakasler

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