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March 01, 2012

Sacramento to pay more in Kings deal, but get arena profit-sharing

The Sacramento Kings arena term sheet is set to be released today, a whole five days before the Sacramento city council will have to vote on it — though what voting on it will mean remains a bit murky, given that the term sheet is more a framework for a plan than an actual t's-crossed-and-i's-dotted document. And unlike the Minnesota Vikings stadium proposal, here a few more advance details have emerged:

  • The arena will now cost $391 million, up very slightly from previous projections of $387 million.
  • The city will be putting in $255 million, up from Monday's "$200 million to $250 million" report. If money from the leasing of future city parking revenues (or bonds sold against those revenues) isn't enough to fill that bill, as seems like, then proceeds from the sale of city-owned land will provide the difference.
  • The arena ticket surcharge will be 5% on all events, Kings games or otherwise. The Kings owners the Maloof brothers say they'll be supplying the city with $70 million over a 30-year period, but some of that will include taxes, which they'd have to pay anyway.
  • The Kings will get to refinance their existing $67 million loan from the city, likely over a new 30-year term.
  • The city will share some of arena operator AEG's net profits: 15% on the first $10 million, 30% of the next $5 million, and 50% above that.

All told, the new revelations are a mixed bag: Getting a cut of arena profits is undeniably a very good thing, though from the looks of things the proceeds are unlikely to exceed a couple of million dollars a year, and given that AEG is both an arena operator and a concert promoter, the city will need to guard against the company charging itself artificially low fees to hide profits from its public partner. On the downside, meanwhile, that $255 million nut means the city really needs to be bringing in at least $15 million a year to make the deal come close to paying for itself, something that doesn't seem likely even from combining a ticket fee and shared arena profits.

Meanwhile, we still have no idea what the future parking revenues are worth — soliciting and vetting solid bids is expected to take several months — which is no doubt why Mayor Kevin Johnson included the possibility of selling bonds based on future revenues as a fallback option. (Though how much in bonds can be financed on the backs of parking money is a huge open question as well.)

The one piece of the puzzle that's in place: Sacramento County voted Tuesday to provide $3 million a year in revenue from its own parking lots toward the city's arena costs. Only $12 million or so to go!


I don't think there's even a slight doubt that this plan passes next Tuesday. Nothing can stop it.

In your analysis, though, you forgot the refinance of the current debt. The plan is to sell bonds equal to that of the outstanding debt (about $67M), which is secured by future lease payments from PBP.

My question is, What is the proposed security for those new bonds? They'll have to be secured by something. I don't think the Maloofs' boyish good-looks will cover it.

No, the new debt will be secured by the new arena. And I don't know how you do that, since there is no new arena yet. If the new bonds are secured by the new arena, then the City's involvement is way more than $255M.

And, like you, I'm skeptical that the City will simply be able to produce $255M, even after raising money from its parking (by selling bonds or entering a concession agreement) and selling surplus property. I think that plan will come way short of raising $255M.

Oh, and they haven't designed the new building yet. They need to start that within 4-5 weeks to ensure a 2015 opening.

The EIR is due in Sept 2012. You need to see that area to appreciate this. I do not believe the existing freeway onramps will be up to handling that much traffic. Once in a while, sure. 225 times, most of which would be between 5:30 and 7:00, no way. There will be more costs. $391M will not cover this.

Posted by MikeM on March 1, 2012 10:38 AM

The business model of pro sports just doesn't work.

Has anyone bothered to ask Wilf or the Maloofs how they would have to run their teams if they didn't have public taxpayer money? I bet they would be a lot more frugal.

What fans also need to realize is that these scammers often stop maintaining and upgrading their arenas so that the fans will notice how dilapidated it is and think a new arena is needed. I remember hearing not long ago that everyone thought Arco was one of he best arenas in the NBA. Now, every Sacramento fan hates it? I think a lot of fans have been brainwashed by ESPN and their local sports media or the arena wasn't maintained deliberately so the fans would support building a new arena.

The thing was built in 1988. What could possibly be wrong with it that a few renovations wouldn't fix? If you ask me, they will try and pull this stunt again in 20 years.

Posted by Roger C. on March 1, 2012 05:26 PM

The reality of the matter is municipalities such as Sacramento and Minnesota are desperate to keep their teams (And of course, the construction jobs and tax revenue involved). They also know that the days of being able to finance construction of sports (And other) facilities on the cheap is coming to an end. This will occur when interest rates finally rise in 2014. this is a prime reason why the 49ers want to get into Santa Clara earlier than expected. So for those reasons, both buildings will likely be built.

Posted by David Brown on March 1, 2012 06:14 PM

I understand that "refinancing" of Maloof's debt means the City will refinance it's muni bonds sold for old Arco arena and let Maloof's use the money the city borrowed to pay the Maloof share of the new arena coast. Is this accurate?

Posted by Jennifer Soloway on March 1, 2012 07:07 PM

@ Roger C -

You've obviously been taking good notes - you are bang on. At the very least the arena will be out of date in 15 and needing some money to get it up to the "World Class Facility" that put Sacramento on the map.

What doesn't get mentioned enough but should is that in the not too distant future, if not already, Madison Square Garden will be the oldest arena in North America. Yet when it grew outdated they did this crazy thing called a r-e-m-o-d-e-l and they found the money to do this out of something called "profits."

It's a funny way to do business.

Posted by Andrew T on March 1, 2012 08:20 PM

Here are the term sheets for those interested.

(Mostly for Neil, because I know he'll be up at 3 a.m. California time...)

Posted by MikeM on March 1, 2012 11:40 PM


If you have time, can you explain why the bond issue will cause the city to be on the hook for more than $255M? I'm missing a step somewhere.

Posted by Jeff on March 2, 2012 12:27 AM

Jeff, it's $256M, and there's a current loan that the Maloofs are on the hook for. That loan is secured by lease payments to the City, which the City sold bonds for. Once the existing arena is sold, the bonds must be repaid.

As a part of this deal, the City is refinancing this. This refi will be funded by another bond sale. The money raised there will pay off the old bonds.

The agreement says that the Maloofs must provide the security for the bonds, and it will be interesting to see how that works.

I don't know how others view this, but whenever a municipal government sells bonds "on behalf of" a private entity, I always view the municipal government as being ultimately responsible for those bonds.

In this case, though, I view this security as being a little hard. The Maloofs are pretty strapped financially; what do they have to offer that can be viewed as collateral for $67M in bonds?

(Rather than pasting the text from the document, just look on page 26 for what is probably a better description than the one I just gave you.)

It's not really spelled out anywhere, but in actuality, the money involved here should also include the existing loan. Thus, we have $391M + $67M (the loan) and $25M (the new parking lot). In practice, we're over $500M now.

Posted by MikeM on March 2, 2012 01:00 AM

Neil, is it typical in a document as complex (in some ways) and vague (in others) that the public and the governing board usually only gets 5 days to review it?

I won't change my mind on this: I think this passes 6-3, and then the plan unravels over the next 3-5 months. The biggest problem: The City won't be able to raise $256M.

Posted by MikeM on March 2, 2012 01:05 AM

Thank you. That helped a lot.

Posted by Jeff on March 2, 2012 01:36 AM

"I don't know how others view this, but whenever a municipal government sells bonds 'on behalf of' a private entity, I always view the municipal government as being ultimately responsible for those bonds."

No, most people (including myself) don't view it that way. If the city is offering the Maloofs a discounted rate on the loan, that's a subsidy, obviously. But lending someone money isn't the same as giving it to them.

As for the five-day lead time for the vote, I wouldn't say it's typical, but it's not all that unusual, either. As I've noted here several times recently, the New York state legislature was asked to approve the sale of public parkland for the Yankees' stadium only eight days after the deal was announced, and they didn't get the actual bill until an hour before they had to vote on it.

Posted by Neil deMause on March 2, 2012 07:00 AM

Also, MikeM's link for the term sheets isn't working for me. Anyone else have better luck?

Posted by Neil deMause on March 2, 2012 09:22 AM

I live in Sacramento, and I listened to local Sports Talk Radio last night. The hosts and the callers talked about the deal as "a miracle" and "an ending that only happens in a Hollywood movie."

Even though the average citizen probably isn't as rabidly elated as sports fans, if, as Mike predicts, the plan unravels because of finance issues that should have already been worked out, consternation will be extreme.

Call me naive, but I have a hard time accepting that Mayor Johnson would raise everybody's hopes in an election year, then allow them to be dashed before Novemember. I wouldn't mind if this happened, but it's hard for me to fathom.

Posted by Jeff on March 2, 2012 10:24 AM

The link didn't work?

Well, let me try again...

(Goes off to check...)

Yeah, they moved it overnight. Sorry.

Posted by MikeM on March 2, 2012 12:04 PM

There are some pretty huge hurdles left to go here, because the City's funding source for $256M is highly theoretical, and also the profit thresholds look unattainable to me (They need to get WAY more conservative on their revenue estimates).

Having said that, the new parking option they're considering is what I've been talking about for weeks now. Instead of entering into a concession agreement, keep the parking and borrow against future revenues. This deal is about 3 times better for the City financially. Thirty year bonds will inherently be better than a 50 year concession agreement.

With a parking concession, this entire deal was horrible. With a parking authority, it doesn't taste quite as cruddy.

They laid the table for that themselves, though, with the agreement with the county for the 1,500 spots and the new 1,000 premium garage. These two items make a parking concession agreement virtually worthless.

They're also proving my point on the loan refi. This project is really $391M for the arena, plus $67M on the existing loan, plus $25M for the premium garage. It does all add up. And I have no idea what the Maloofs will offer as security for the redone loan.

Posted by MikeM on March 2, 2012 12:18 PM

"This deal is about 3 times better for the City financially. Thirty year bonds will inherently be better than a 50 year concession agreement."

Why do you assume that, Mike? Obviously, none of know what the offers will be, but isn't it safe to assume that a bank and a private parking operator would monetize future parking revenues pretty similarly? It seems like the main difference is that by keeping the revenues and bonding on them, the city gets the upside if parking revenues go way up; but it also gets the downside if they tank.

Posted by Neil deMause on March 2, 2012 12:56 PM

If pigs could fly! Greece is the word.

Posted by William on March 3, 2012 01:25 PM

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