There is a term sheet. So there is that. Now it's onto the bid, which, if you believe David Stern and I do not, Stern said he expected the variances in bid (i.e. more money from the Sac bid) to be eliminated. In otherwords: We're not making the Maloofs take less money for what they sold the team for.
Are the Sacramento Kings worth 525 million in Sacramento? Probably not, but there is more than one way to skin a cat and the city almost certainly proved that today with the term sheet they released just a few hours ago.
Kevin Johnson kicked off the festitivites with a series of tweet I will embed so you won't have a problem seeing them. After the jump I'll discuss the term sheet.
I’m pleased to announce an agreement w/ Burkle-Mastrov-Ranadive group on a public-private partnership to build a new ESC at DT Plaza Mall...— Kevin Johnson (@KJ_MayorJohnson) March 23, 2013
Consistent w/our core tenets, the deal avoids new taxes, protects the City on the Kings loan, and ensures no net impact to the general fund…— Kevin Johnson (@KJ_MayorJohnson) March 23, 2013
For a comparable investment to the 2012 deal, we've secured more private investment & greater econ development potential at the new site…— Kevin Johnson (@KJ_MayorJohnson) March 23, 2013
The new ownership, historic in its reflection of our city's diversity, will invest up to $1B in Sac - a strong sign of confidence in our mkt— Kevin Johnson (@KJ_MayorJohnson) March 23, 2013
They will also make a 35-year commitment to keep the Sacramento Kings right here where they belong!....— Kevin Johnson (@KJ_MayorJohnson) March 23, 2013
Once again, we're proving the strength of our market – both as host to an NBA team, but as an emerging region with global potential…— Kevin Johnson (@KJ_MayorJohnson) March 23, 2013
I'm excited to talk further about the deal with my Council colleagues and the public...— Kevin Johnson (@KJ_MayorJohnson) March 23, 2013
With all that said...I'm pumped!!Ron B & I officially closed the deal a few mins ago - maybe this pic says it best! twitter.com/KJ_MayorJohnso…— Kevin Johnson (@KJ_MayorJohnson) March 23, 2013
True team effort! Props to City Mgr John Shirey + team, esp Dan Barrett & John Dangberg. All fought hard for City taxpayers & core tenets.— Kevin Johnson (@KJ_MayorJohnson) March 24, 2013
I apologize for all that, but didn't want any of it to get lost in the shuffle as some of these things are wont to do. Okay discussion of the term sheet after the jump.
First the term sheet itself.
On February 26, 2013, the City Council authorized the City Manager to pursuenegotiations with credible prospective buyer(s) of the Kings and to return to the CityCouncil prior to the NBA’s April meetings. The City Council adopted the followingprinciples to guide the negotiations: Protect the taxpayer Retire the existing city loan to the Kings New entertainment and sports center must be located downtown Long-term commitment to keep the Kings in Sacramento City will consider investing net value of its parking, land, and other assets Develop a public-private partnership Prepare for the economic reuse of the Natomas arena siteOn March 1, 2013, an investor group headed by Ron Burkle of The Yucaipa Companiesand Mark Mastrov of Fitness Holdings Worldwide, Inc. submitted a proposal to the NBA toa) acquire the Sacramento Kings, b) build a new Entertainment and Sports Center inpartnership with the City, and c) keep the Kings in Sacramento on a long-term basis. Dueto the longstanding need to replace the existing Natomas arena, the Mastrov-Burkleproposal included a commitment to develop a plan to finance and develop a newEntertainment and Sports Center (ESC) to serve as a premier regional entertainment andsports venue. The Mastrov-Burkle partnership now includes Vivek Ranadivé, founder andCEO of TIBCO, to form the current group (Investor Group) working with the City on theESC proposal.Prior to the NBA meetings in April, the Investor Group must come up with a viable financeand development plan for the Sacramento ESC. Due primarily to the limited size of theSacramento regional media market and corporate base, the financing and development ofa new arena will require a public-private partnership. Although several teams in largemarkets have privately financed multi-purpose facilities, a privately financed facility inSacramento would not be economically viable given the limitations of the Sacramentomarket.
Environmental Considerations: The actions in this report are exempt from the CaliforniaEnvironmental Quality Act (CEQA) under CEQA Guidelines (14 Cal. Code Reg. Section15000 et seq.) as they concern proposed business terms for future agreements. If theCouncil approves the term sheet for the ESC, the project itself will be subject to CEQAanalysis.
Development Revenue Sources
|City contribution||$258 million|
|Investor Group/Sacramento Kings||$189 million|
|Development Revenue Sources||Amount|
|City Contribution||$212.5 million|
|Public Parking Finance Model||212.5 million|
|Parking Infrastructure Fund||1.5 million|
|Sales Tax Construction Rebate||1 million|
|Sheraton MOPA Funds||5 million|
|Land Sales||38 million|
|Investor Group/Sacramento Kings||$189 million|
This is what the investors are giving up in this deal:
Investor Group’s Contribution: $189.7 million for ESC construction 5% ticket surcharge on all ESC events (remitted to the City) Capital Repair Fee of $1 per ticket on all events to the Capital Repairs Reserve Fund6 Responsible for all predevelopment expenses Responsible for arranging or providing a project completion guarantee Responsible for all ESC project cost overruns Responsible for all ESC operating expenses and routine maintenance and repairs Responsible for all ESC capital repairs, replacement, and improvements Responsible for all operating risk Reimbursement to City for all customary police, traffic control, and other municipalservices on event nights ESC profit-sharing with City:o 15% of first $10 milliono 30% of next $5 milliono 50% of anything over $15 milliono Guaranteed annual payment of no less than $1 million
City Contribution: $258 million for ESC construction Sources:o $212.5 million from public parking self-financing, parking infrastructure fund, andconstruction sales tax rebateo $1.5 million from the City parking infrastructure fundo $1.0 million from construction sales taxes generated from the ESC projecto $5 million from the Sheraton Master Owner Participation Agreement (MOPA)proceedso $38 million from land transfers to In1997 City Lease-Revenue Bonds (Loan):
1997 City Lease-Revenue Bonds (Loan):Existing bonds will be retired. City will issue new 30-year bonds to retire existing bonds uponthe Investor Group providing satisfactory security and collateral for the loan which may includean ESC lockbox on revenues among other items to be determined. The Investor Group wouldhave the right to utilize proceeds of the sale of the 85 acres of land at the site in North Natomasas well as other sources to pay down the current balance of the 1997 bonds and reduce theprincipal amount of new bonds to be issued. Furthermore, a 5% ticket surcharge will apply to allevents held at Sleep Train Arena and the revenue from that will be used to retire the 1997bonds.
Event Parking Revenues in City Garages (excluding Downtown Plaza Garages):All parking revenues at non-Downtown Plaza City garages during ESC events will be retained bythe City.Downtown Plaza Parking Garage:The City will transfer operational control of the remaining spaces in the Downtown Plaza parkinggarages (estimated at approximately 2,700 spaces after demolition of spaces for ESCconstruction) to the Investor Group through a long-term (i.e., 35-year agreement plus two 5-yearextensions) parking management agreement. At least 1,000 spaces shall be reserved forpremium parking for ESC events. (The City is not required to build any additional parkingstructures for the ESC.)Downtown Plaza Develop
No more going DT, driving into the Plaza and watching a movie while getting your ticket validated. (See what they did to you, Mom? They're practically encouraging you to take Light Rail more often!)
Downtown Plaza Development:The City commits to work with the Investor Group to secure the necessary entitlements to allowfor the potential development of up to 1,500,000 square feet of office, retail, housing, and hoteluses around the ESC on the Downtown Plaza site. The proposed development would includeapproximately 475,000 square feet of office, 300,000 square feet of retail, 250 hotel rooms, and600 units of multi-family housing development. The preliminary costs estimates provided by theInvestor Group are just over $500 million.
Section 2: City Sources of ESC Capital FundingPublic Parking Financing ModelWorking with the City’s team of investment bankers, the City has developed a public parking financingmodel using the parking, Transient Occupancy Tax (TOT), and other revenue streams. The structureof this public sector model would involve establishing a non-profit corporation under Section 115 ofthe Internal Revenue Code (IRC). The non-profit corporation would be separate from the City andhave a board of directors appointed by the City Council.In this model, the City would transfer its off-street parking assets and/or operations (i.e., City-ownedparking garages and lots) to this new corporation and appropriate on an annual basis revenues equalto net on-street and enforcement revenues. This structure would enable the corporation to issue acombination of tax-exempt and taxable revenue bonds that would generate proceeds to fund a majorportion of the Entertainment and Sports Center (ESC) project. The revenue bonds would not be adebt obligation of the City. Other revenue streams, such as TOT, would provide debt coverage andenhance the ratings of the bonds resulting in lower interest rates. The financing structure wouldgenerate surplus net revenues from the corporation that would be used to backfill the General Fund.In this model, the new corporation would be responsible for off-street parking operations. ExistingCity parking staff, a private operator, or a combination of the two would operate the garages. Withrespect to the control of rates, the City Council could identify parameters for future rate increases;however, the corporation’s Council-appointed governing board would be ultimately responsible forsetting rates for off-street parking garages. In the City’s financial analysis of this model, only thoselimited increases for off- and on-street parking identified in the original Walker Parking Consultantsreport were included in the public sector model (refer to the study prepared on November 23, 2011 byWalker entitled “City of Sacramento: Market, Financial and Condition Assessment of Parking Assets”from the December 13, 2011 Council meeting). The corporation’s ability to make significant rateadjustments is limited by its relatively low market share of downtown off-street parking. On-street rateincreases will likely be driven by off-street parking rates.As with any financing, there are potential risks to the City associated with this approach. To minimizerisks, staff used conservative (Walker) parking revenue growth projections for the term of theagreement with the corporation. In a scenario where parking revenues are not sufficient to make thedebt payments of the corporation, the City’s TOT would be used to make those payments. That riskwould be mitigated by using conservative assumptions and establishing various debt and ratestabilization reserves as a part of the financial transaction. Furthermore, the model provides upfrontcapital for investments in technology and operational efficiencies to enhance the net parking revenueavailable for debt service payments.The upside potential is equally important to recognize. As the city grows, parking demand increasesresulting in increased parking revenues that would accrue to the City General Fund.
Now, here is the various parcels of land the city is using:
City-owned Land TransfersThe City owns several properties that could generate revenue for the ESC. Under the proposedTerm Sheet, these properties would be transferred to the Investor Group and it would be responsiblefor providing the cash equivalent land value toward the development of the ESC. CBRE was retainedby the City to determine the value of City-owned land assets. Based on their recent update datedFebruary 26, 2013, the value of the land assets listed below is estimated at $37.98 million. The valueof the Natomas property is based on the assumption that the current development moratorium islifted.One-Time Revenues Value EstimateNatomas – City Parcel (100 acres) $19,990,0003rd Street and Capitol Mall (Lot X) 9,970,0002nd Street and O Street (Lot Y) 470,000Haggin Oaks at Business 80 (approx. 60 acres) 3,920,000800 K Street (includes multiple parcels) 1,600,0004th and J Street 2,030,000TOTAL $37,980,000
So essentially that's the cost to the city. Oh damn. (You can read that as: The city wasn't able to do anything with it, and this is a heck of a lot better than taking a vote to the citizens increasing taxes to pay for an arena.)The sources of City funds include Master Owner Participation Agreement (MOPA) funds. The MOPAfunds were set aside for Downtown development projects from proceeds after the sale of theSheraton Grand hotel. The MOPA funds are intended to facilitate planning and implementation ofprojects in downtown Sacramento and the ESC project is an eligible use of those funds. Use of theMOPA funds requires approval from both the City of Sacramento and CIM and David S. TaylorInterests per the terms of the agreement. The City has received that approval.
County Possessory Interest TaxOn February 28, 2012, the Sacramento County Board of Supervisors approved a resolutionsupporting a financial contribution from the County for the ESC. The Board agreed to contribute newpossessory interest tax (PIT) revenue generated by the ESC. The County has agreed to contribute 10the same source of revenue for this project. The PIT revenue from the ESC is approximately$600,000 per year. The funds will be included in the financial structure in order to increase borrowingcapacity for the development of the ESC.
If you're looking at 35 years for 600K per year, that's 21 million coming from the county on this project. That's not insignificant, but when you consider that the county isn't getting use from those lots anyway at nighttime, it's probably not nearly as terrible a deal for them when you get right down to it. And it's not like 21 million was necessarily going to come from those lots if they do not build an arena.
Annual Backfill Revenue Sources Post-ESCCompletionCity Parking Revenues $3,000,000Ticket Surcharge on ESC Events (5% surcharge) 3,700,000City Parking Revenues from ESC Events 625,000ESC Generated Possessory Interest Tax – City 898,000ESC Taxes (Sales/Utility User) – City 300,000City Profit from ESC Operations 1,000,000Downtown Plaza Garage Possessory Interest Tax 39,000Investor Group Land Acquisition Property Tax 98,000TOTAL $9,660,000
Prior to the start of construction of the ESC, the City expects to receive a lump sum payment from the proceeds of the Public Parking Finance Model that will backfill the loss of annual parking revenues to the General Fund during construction.
The proposed ESC will be owned by the City and leased to the private Investor Group. The value of the private operator’s right to possess the property (the leasehold interest) is subject to payment of the possessory interest tax. Valuing possessory interests for property tax purposes is a complex process and subject to a number of variables including the lease and any sublease structure, term of the lease, rights conferred on the lessee, market value of those rights, and a number of other factors. Ultimately, the Sacramento County Assessor’s Office will determine the possessory interest tax amount through their valuation process. Only the City portion of the possessory interest tax would be used for backfill the General Fund.
The proposed ESC will be owned by the City and leased to the private Investor Group. The value of the private operator’s right to possess the property (the leasehold interest) is subject to payment of the possessory interest tax. Valuing possessory interests for property tax purposes is a complex process and subject to a number of variables including the lease and any sublease structure, term of the lease, rights conferred on the lessee, market value of those rights, and a number of other factors.Ultimately, the Sacramento County Assessor’s Office will determine the possessory interest taxamount through their valuation process. Only the City portion of the possessory interest tax would be used for backfill the General Fund.
City Profit from ESC OperationsUnder the proposed term sheet, the Investor Group has agreed to profit-sharing with the City. Under the terms of the profit-sharing agreement, a minimum $1 million would be paid annually into the City’s General Fund.
So the city is supposed to get a minimum of a million dollars guaranteed. So that's it not looking for profits from the ESC (it wants that certainly) to backfill the general fund certainly. I'm not a lawyer but a lot of that could have to do with trying to avoid lawsuits by knowingly funding an arena with the general fund as a backstop.
Downtown Plaza Garage Possessory Interest TaxUnder the proposed term sheet, the Investor Group would have operational control of the remaining 2,700 parking spaces in the City-owned garages under Downtown Plaza. Given that the Investor Group would have operational control of this City asset for the term of the agreement, they would be required to pay Possessory Interest Tax. Only the City portion of the possessory interest tax would be used for backfill of the General Fund.
Investor Group Land Acquisition Property TaxThe City would transfer the City-owned properties to the Investor Group that are currently valued at approximately $38 million. Once controlled by the private Investor Group, it would be required to pay property tax. Only the City portion of the property tax would be used for backfill of the General Fund.
Some of the advantages of the proposed ESC development at Downtown Plaza include: Preserves Key Benefits of 2012 Railyards Dealo Strengthens City efforts to save Kings, a major employer with 800+ local jobso Expands the City’s civic attractions through a new ESCo Project would create between 2,300 and 6,500 new jobs and result in anywhere from$380 to $847 million in income and revenues1o Preserves the City’s Intermodal property in the Railyards for transportation uses andpreserves the area for future transit-oriented developmento Protects Natomas from risk of blight from team leaving immediately.o Honors City’s core tenets of protecting the taxpayer, protecting the City General Fund,and keeping the Kings in Sacramento The 2013 ESC proposal provides new economic benefits to Cityo Closer proximity to City economic development priorities of K Street, Old Sacramento,and Capitol Mallo Utilizes revenue streams that benefit City and developer (e.g., using City land fordevelopment, etc.)o Simultaneously resolves arena and Downtown Plaza revitalization issueso Benefits previous City investments in K Street (Convention Center, 700 K, etc.)o Provides higher level of private investment ($189 million) compared to prior proposal inRailyards ($132 million)o Generates potentially larger stream of tax revenue for City services as a result of ESCand additional private development by Investor Group including: Property taxes1Note: Based on estimates from both the CRA Redevelopment Construction Jobs Calculator model and the City of SacramentoConstruction Project Economic Impact Calculation Tool, which was developed by Center for Strategic Economic Research (CSER), andutilizes the IMPLAN input-output model. The CRA model looks at overall economic impact in the region and beyond while the Citymodel just looks at local impact within the City.
The parties shall work cooperatively and make commercially reasonable effortsto open the ESC by September 2016 and shall promptly after the date hereofagree upon a schedule of milestones regarding CEQA, permits and otherimportant events such as to meet such timetable.The City agrees to assign the appropriate planning, engineering, building, safetyand other staff to enable the parties to achieve such timeline.
The Investor Group shall be responsible for project pre-development expenses;provided, that, for the avoidance of doubt, the Investor Group shall have noobligation to reimburse the City for any pre-development expenses incurred bythe City prior to the date hereof.
As required by law, the City retains the sole and independent discretion as thelead agency to, among other things, balance the benefits of the ESC projectagainst any significant environmental impacts prior to taking final action if suchsignificant impacts cannot otherwise be avoided, and determine not to proceedwith the ESC project. No legal obligations to approve the project, the permits forthe project, or the transaction will exist unless and until the parties havenegotiated, executed, and delivered definitive agreements based uponinformation produced during the CEQA environmental review process and onother public review and hearing processes, subject to all applicable governmentalapprovals.The City shall assist the Investor Group during the CEQA process, includingworking with the State of California (State) to qualify the project under AB900;however, the City shall not be required to incur costs in doing so.
One thing that will certainly interest KingThere shall be no restriction on the ability of the Kings at any time to use the practice and training facility built into the ESC. s fans:
Kings TeamCo, Kings ESCCo, and the City shall enter into a lease agreement forthe ESC, containing the following principal terms and other terms to benegotiated:1. Kings TeamCo shall enter into a 35-year non-relocation agreement, asdescribed above.2. The lease shall be for a term of 35 years and provide Kings TeamCo with twofive-year options exercisable by Kings TeamCo to extend the term.3. Except as otherwise provided herein, Kings TeamCo shall control and retainall revenues relating to Kings Events and the Team’s operations, includingrevenues from the sale of tickets, broadcast and other media rights, Team gameday inventory, such as rotating and other customary temporary signage(including a reasonable allocation of LED signage to be agreed upon), on-courtpromotions, seat backs, pole pads etc., and other revenues typically retained100% by an NBA team.4. With respect to sales of suites and other premium seating, Kings TeamCo shallreceive the value of tickets (to be agreed upon) to Kings Events; additionalrevenues from such sales, net of expenses (to be agreed upon), shall be divided50% to Kings TeamCo and 50% to Kings ESCCo.5. Kings ESCCo shall have the exclusive rights to sell arena signage and namingrights. The parties shall agree on the number of exclusive categories. The Teamshall contribute an agreed upon level of game day team inventory to such salesand the revenues from such sales, net of direct expenses, shall be divided 50% toKings TeamCo and 50% to Kings ESCCo.6. Kings TeamCo shall retain 100% of net food, beverage, and merchandiserevenues generated by Kings Events.7. Kings TeamCo shall be responsible for game-day operating expenses forKings Events.8. Kings ESCCo shall be responsible for Annual Operating Expenses of the ESC,as described below.9. Kings ESCCo shall retain all fees related to the distribution of tickets in theprimary market (i.e., any Ticketmaster convenience fees/rebates).
Except for City Events and Kings Events, Kings ESCCo shall receive allrevenues from all other events.
Ron Burkle is an invester. He doesn't kick in money unless he thinks he's getting something back. Remember what I wrote a year ago? Yeah, still applies. That's what this guy does. He buys low (and that's possibly what he's doing among other things), builds up the property and then blows out the berg with a ton of money. Can't say you weren't warned.
The Kings shall include “Sacramento” as the first part of the Team’s name. Forexample, the Team must be named the “Sacramento _____.” The Kings may notinclude any other geographic, city, county, or state reference in the Team name.The Kings shall reasonably reference Sacramento in public statements (whethermarketing, advertising, or otherwise).
The Kings shall request that the NBA host the NBA All-Star Game at the ESCwithin three years after opening. The roles and responsibilities of the City andInvestor Group shall be determined in the definitive legal documents.
Operating Profit shall be the difference between: (a) all revenues retained byKings ESCCo relating to the operation of the ESC (as described above),including but not limited to: rent, concessions revenue, merchandise revenue,premium seating revenue, naming rights revenue, sponsorship revenue,Downtown Plaza ESC event parking revenue, ticketing handling fees and rebates,facility fees (except those earmarked for Capital Repairs Reserve Fund), interestincome, handling fees, etc.; and: (b) all unreimbursed event expenses and AnnualOperating Expenses paid by Kings ESCCo relating to the operation of the ESC(as described above)
Operating Profits shall be allocated by the Kings ESCCo on an annual basis asfollows: First $10,000,000 (escalated annually by CPI) to be allocated 85% to KingsESCCo and 15% to City. Next $5,000,000 (escalated annually by CPI) to be allocated 70% to KingsESCCo and 30% to City. Remainder to be allocated 50% to Kings ESCCo and 50% to the City.The minimum annual payment to the City shall be no less than $1,000,000(escalated annually by CPI)
EXHIBIT 2PRELIMINARY PROGRAM DESCRIPTIONBasketball Capacity (Minimum) 18,500Suites (Standard/Super/Mini/Other) 50 to 70Party Suites 4Loge Seats 192Ledge Seats 80Club Seats 1,430Courtside Club Seats 330Space Type Gross Square FeetClassification 1: Spectator & Arena Bowl Facilities 145,916Classification 2: Premium Facilities 58,110Classification 3: Circulation 188,322Classification 4: Food, Retail, & Spectator Facilities 104,250Classification 5: Team Facilities & Practice Facility 49,879Classification 6: Administration 25,463Classification 7: Media Facilities 13,977Classification 8: Event Facilitates & Operations Support 88,083Classification 9: Parking TBDEstimate of Gross Building Square Footage (G.S.F.) 674,000
Remember what I said about the mall going vertical on the West End? Well, think about the current size of the mall, and then look at the square footages the agreement has in building office space, living spaces and retail on the West End. (Well, I'm assuming it's on the West End.)
But, Sacramento can't benefit from a new ESC right?
My general opinion of the term sheet, upon first blush, is that the risk to the general fund exists, but is not nearly as cavernous as it might be in other circumstances elsewhere. That's important to the council who wouldn't vote for it otherwise.
The city and the investors have a chance to make money. When you invest something, you want a return, right? That's called money. Or resources, but usually money works. Money = power = world domination.
It's amazing what happens when adults sit down at the table, take advantage of the issue at hand, and move on from there. That's what happened here even if it's not shaped in that way for the public narrative.
The game isn't over kiddies, and don't begin to think that the game is over until the NBA officially announces anything. Because it's never over until the final buzzer is definitely sounded with all plays no longer being capable of counting. There has to be no shot at the buzzer after it sounds that could go in. In order for Sacramento to even have a strong enough chance to be realistically considered, a term sheet had to be there. David Stern's presser several weeks ago in Oakland suggested that he felt the variance in the bid from the investors that was submitted on March 1st would be there by April 3rd when the NBA meets again to start figuring out where they really stand on the issue. (Or, informing everyone on the BOG how they think the vote should go.)
We're most of the way there. The question is where the BOG stands. I've said ti before: What's in Sacramento's favor will always be there throughout this process. That hasn't changed. If the owners are there, they are there. That's what Sacramento can control. I'm confident that Sacramento can win this particular fight and get on with the next phase of our lives. Because, after all, isn't living well what this is all about?
I was going to do a profile, but I won't bother now. I think it's a mere formality and is almost certainly going to pass at least 6-3 if not 7-2 or possibly 9-0. As such, there's no reason to break it down if it's so likely to pass as many believe.
So, have a good weekend, eh?