The Maloof family owned the Sacramento Kings (“Kings”) from 1998 to 2013. Continuance of ownership and the Moolofs’ relationship with the City of Sacramento have been on a rocket course. In January, 2013, the Maloof’s agreed to sell their 65% interest in the Kings to a group led by Chris Hanson and Steve Ballmer who promised to relocate the Kings to Seattle and name the team the Seattle Supersonics. On May 15, 2013, the NBA Board of Governors denied the relocation request, effectively nullifying the sale to the proposed Seattle ownership group. The following day the Maloofs agreed to sell their 65% interest in the team to a Sacramento group led by Vivek Ranadive for $347 million. Ranadive will be the first majority NBA owner of Indian decent. The ownership group also includes the Jacobs family which runs the communications giant Qualcomm, swimwear magnate Raj Bhathal, 24-Hour Fitness Founder Mark Mastrov, and former Facebook executive Chris Kelly, who represent a cross-section of California investors who came together to save the team. The sale equates to a team valuation of $535 million.
The Maloofs had been most unhappy with the venue in which the Kings played. The ARCO Arena was opened in November of 1988 and retained its name until 2011. The arena was subsequently named Power Balance Pavilion and then changed in 2013 to Sleep Train Arena. Sleep Train is a chain of mattress and bed retailers based in Rocklin, California. The arena is one of the older arenas in the NBA and probably not economically competitive in an NBA revenue chase. The Sleep Train Arena is located in an isolated area on the expanding northern outskirts of the City of Sacramento and was originally constructed at a cost of $40 million.
In 2006 the Maloofs proposed a quarter cent sales tax increase over fifteen years on the fall election ballot to help fund a new downtown arena, which was overwhelming defeated by Sacramento voters. A plan was proposed to build a new arena at Cal-Expo, the state fair grounds, but fell apart in February of 2009. The Kings then proposed a move to Anaheim, California.
In order to prevent relocation, Mayor Kevin Johnson, a former NBA All-Star, has been principally responsible for not only keeping the Kings at home, but for promoting the plan for the new “Entertainment and Sports Complex” (ESC) to be built on the former rail yard site in downtown Sacramento.
In March of 2013, the Sacramento City Council approved a non-binding preliminary term sheet for a public-private partnership between the City of Sacramento and the Kings’ new ownership group for the potential location, financing, ownership, design, development, construction, operation, use, and occupancy of a new first class, state-of-the-art, multipurpose ESC that will serve as the home of the Kings.
The original non-binding term sheet was amended in April of 2014 and on May 20, 2014 the City of Sacramento Common Council by a seven-two vote approved the revised term sheet by and between the City of Sacramento and Sacramento Basketball Holdings, LLC (SBH). The financial structure of the new ESC pursuant to the term sheet as approved are as follows:
- Cash Sources for Development: The sources for cash contributions to the development, design and construction of the ESC are identified in the table that follows. The table reflects the sources of cash that will be contributed to the development of the $477 million ESC.
|Capital Sources for Development|
|City Cash Contribution (47%)|
|Parking Infrastructure Fund||5,630,100|
|SBH Cash Contribution (53%)|
|Debt and Equity||253,869,900|
- City Contribution Overview:
- Cash contribution totaling $223,130,100. Capital contributions include $212,500,000 through the sale of taxable lease-revenue bonds; $5,630,100 from the Parking Infrastructure Fund; and $5,000,000 from downtown economic development MOPA funds derived from the City’s sale of the Sheraton Grand Hotel.
- Transfer of land to SBH in exchange for a cash contribution to the ESC by SBH equal to the appraised value of the land as shown below:
|Natomas Arena – City Parcel||14,815,000|
|3rd Street and Capitol Mall||13,400,000|
|2nd Street and O Street||370,000|
|4th and J Street||1,640,000|
|312-314 K Street||830,000|
|1401 H Street||700,000|
|5th and K Street Air Rights2||293,480|
|J Street Remnant Parcel3||1,000|
|TOTAL VALUE||$ 32,049,480|
- Ground leases, at no cost, for foundation pads and any necessary easements on up to six City-owned sites for the duration of the ESC lease. SBH will have the right to design, finance, construct, operate, and maintain digital billboards on these sites.
- SBH will assume the management and operations of the Downtown Plaza parking under an Arena Parking Management Agreement for the term of the ESC lease. SBH will assume all management and operational costs and retain parking revenues, except for City events.
- Approximately 1,000-1,200 City-owned parking spaces under and adjacent to the footprint of the arena will be demolished. Additional spaces may become inaccessible during construction of the ESC and ancillary development.
- While not part of the City cash contribution, the following confer benefits to SBH:
- Planning entitlements for up to 1.5 million square feet of ancillary development surrounding the ESC.
- Establishment of a sign district surrounding the ESC. This sign district will allow for enhanced signage rights consistent with an entertainment district.
- Rezoning, planning entitlements, and an ordinance amendment that would allow for up to six digital billboards in total.
- Naming rights for the ESC.
- SBH Contribution Overview:
- Capital or cash contribution of $253,869,900 through debt and equity for ESC development, design, and construction.
- Annual lease fee payments to the City that range from a minimum of $6.5 million in year one to a minimum of approximately $18 million in year 35 with a cumulative nominal value of $390,994,149 and a present value of $157,555,183
- Design and construction of a state-of-the-art, LEED Gold, national trend-setting, multipurpose entertainment facility to serve the City and region.
- Design and construction of a grand public plaza adjacent to the ESC.
- Contribution of the land required for the ESC, practice facility, and team offices at no additional cost to the City.
- Payment of ESC project cost overruns.
- Payment of any public plaza cost overruns.
- Payment of all predevelopment expenses including City expenses as agreed.
- Provision of a project completion guarantee.
- Responsibility for all ESC operating risks, expenses, and routine maintenance and repairs.
- Responsibility for all ESC capital repairs, replacement, and improvements and the establishment of a capital repair fund.
- Responsibility for all public plaza operating risks, expenses routine maintenance, and capital repairs.
- Responsibility for all Downtown Plaza parking facilities maintenance, operations, and capital repairs.
- Reimbursement of the City’s incremental police, traffic control, and other municipal services on event days.
- Payment of possessory interest taxes and utility taxes to the City on the ESC and property taxes on transferred parcels (not currently on the tax roll).
- Provision of a public sector suite and public sector tickets.
- City use of the ESC for 9 major events and 24 minor events each year at no cost to the City except for actual service costs of SBH.
- A 35-year Kings Non-Relocation agreement.
- Reuse of the Natomas arena site including demolition and remediation costs associated with the baseball park foundation and arena.
- ESC Ownership: The ESC and the land it is situated on will be owned by the City of Sacramento. SBH is responsible for all ESC land costs. SBH will have an option at the end of the lease to acquire the land and ESC.
- ESC Lease Term and Fee: SBH will enter into a lease agreement with the City for a term of 35 years plus two 5-year extension options. The minimum annual lease fee is $6.5 million. The fee will increase annually by the greater of (a) 3 percent or (b) the annual CPI Index. The annual lease fee will remain flat for the first five years. A compounded catchup adjustment will be effective in year six. The resulting minimum payment of $7.53 million in the sixth year will escalate each year thereafter. The fixed lease fee replaced two variable revenue sources including the ticket surcharge and the Operating Profit Allocation which were eliminated. The surcharge was estimated to generate approximately $3.7 million per year but was subject to market risks. The Operating Profit Allocation had a minimum payment of $1 million per year and limited potential for profit sharing. It also carried market risk. The new fixed lease payment of $6.5 million with inflation adjustments replaces the estimated $4.7 million in potential revenue from the surcharge and operating profit allocation (OPR). The total minimum lease fee payments over the term of the lease are approximately $390 million.
|Sample Annual Fee Based on the Minimum 3% Adjustment|
- 1997 City Lease-Revenue Bonds (Loan): The 1997 City Lease-Revenue Bonds must be paid off when the new ESC opens. The City and SBH will negotiate to implement a plan by which the City will issue replacement bonds to pay off the existing bonds contingent upon SBH providing satisfactory security and collateral for the loan. SBH is required to use the existing 5% Sleep Train Arena event fee, to pay down the current balance of the 1997 bonds to help reduce the principal amount of new bonds to be issued.In response to the City Council’s approval, Mayor Johnson said, “Tonight’s vote is a historic moment for Sacramento and the culmination of years of hard work from so many in our city and our region. Sacramento has had a vision for its future and I am so proud of our community for their fight and resolve to ensure that vision became a reality. I can’t wait till groundbreaking in the fall.”
“We want to thank Mayor Johnson and the Sacramento City Council for their leadership,” said Kings’ owner Vivek Ranadivé. “We are humbled by tonight’s historic vote and the opportunity to truly transform this great city. Most importantly, I want to thank Kings fans and the amazing people of the entire region for their passion and support. As I’ve always said, the Sacramento Kings belong to you.”
Construction of the new crown shape facility officially broke ground in October of 2014 and is expected to be completed in time for the 2016/2017 season.
Since 2010 the public-private partnership contribution percentages for NBA arenas have been all over the board. For example – approximately 87.5% of the Orlando Magic funding for the Amway Center was publicly financed in 2010. The Sacramento deal for the new Entertainment and Sports Center requires a 47% public contribution. The owners of the San Francisco Warriors have announced a return to San Francisco with a 100% privately financed arena. And finally, it appears that the Milwaukee Bucks already have at least 50% of the new arena privately funded up front, with the remainder coming from public sources to be determined.