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A Downtown Arena for Sacramento: A Dubious Project for Tough Times

By Jock O'Connell

This article appeared in the Sunday Forum section of the Sacramento Bee on Sunday, March 14, 2010 under the title "Reality Check for Arena Project: Tough questions must be asked in tight economy"

Ever since Gregg Lukenbill snuck into Kansas City one night about 25 years ago and made off with that town's NBA franchise, finding a home for the Sacramento Kings has been pre-eminently about real estate development, secondarily about franchise profitability and only incidentally about the interests of the team's fans.

Back then, Lukenbill and his partners deftly used the palpably urgent need to build a suitable home court for the team on available land in Natomas as political leverage in obtaining official acquiescence to develop large tracts of housing in a floodplain defended by some of the most fragile levees this side of New Orleans.

Recently, an even more audacious development plan has been proposed that would not only entail the construction of a sports arena and entertainment facility in downtown Sacramento but a land swap that would send the state fairgrounds to the Arco Arena site in return for 350 acres at Cal Expo for real estate development.

That plan, proposed by developer Gerry Kamilos, has gained the support of the NBA and the team's owners, even though it rivals a Rube Goldberg contraption in complexity and the number of moving parts.

On Thursday, Mayor Kevin Johnson's Sacramento First task force, charged with evaluating seven different arena proposals, shortened the list to three but signaled its support for the Kamilos plan -- as long as the arena is integrated with a transportation hub, which was proposed in the plan from Thomas Enterprises, the company handling the vast railyard development project. Under the plan, the arena would be built in conjunction with the intermodal transportation depot adjacent to Sacramento's train station.

When they convene on Tuesday to evaluate the various proposals still on the table, City Council members should ask what any household would prudently ask when facing a major purchase or investment: Can we afford it?

The answer may not be the one we want or expect to hear.

The checkbook argument

Even if construction of a new arena is entirely financed by private investment (which is unlikely to be the case), the task of repaying lenders and bondholders -- not to mention generating the revenue to cover the arena's maintenance and operations costs -- will fall largely on individual ticket-buyers and those local businesses still able to lease luxury boxes.

It should come as no news to elected officials struggling to balance budgets that the Sacramento region is a much less affluent place than it was just three or four years ago. And no amount of civic cheerleading -- or exceedingly optimistic economic impact studies -- can obscure the fact that we are staring at several years of sluggish, if not jagged, economic growth in this region.

Janet Yellen, the president of the Federal Reserve Bank of San Francisco, delivered a decidedly downbeat assessment of California's economic prospects in a speech last month. According to her analysis, the state's real estate market remains in flux and sustained economic growth is not likely to kick in before 2013. Recovery may be even more delayed in the Sacramento region, where government employment has long played an outsized role.

In all likelihood, it will be years before Sacramento households have as much discretionary income as before housing prices collapsed, credit disappeared and unemployment soared. All those fashionistas who have become frugalistas know this instinctively. So should public officials.

But this would not be the first time that a sober economic analysis would be trumped by the emotional lure of professional sports. So even if city and county leaders decree that we can afford a new arena, there is still the question of whether downtown Sacramento is the best location for it.

If the interests of the team's fans were given top priority in choosing a site for a new home for the Kings, a decision would have already been taken to build right next to the team's existing facilities in Natomas. Arco Arena may be in sad shape, but area fans know how to get there and know there will be ample parking then they arrive.

Of course, fans don't come first. Property developers, team owners and a determination to revitalize downtown Sacramento take precedence. So that's why consideration of a new arena is limited to a downtown location.

Which brings us back to the proposal that the task force endorsed Thursday -- the Kamilos land swap plan.

A complicated puzzle

The deal requires the state of California to sell the 350 acres on which Cal Expo sits to Kamilos and his development group at today's market value. In exchange, the state would receive title to the 185-acre parcel at Arco Arena where the state would build a new fairgrounds. In addition, the developer is offering the state 25 percent of future net profits when his development team eventually sells parcels at the Cal Expo site.

Before that happens, though, the Kamilos group would build a new sports and entertainment complex in downtown Sacramento. Only after the new arena opens and the Kings move in would Cal Expo be able vacate its current site. And only then would the Kamilos group be able to transform the Cal Expo site into a mixed-use community. And getting to that stage is crucial since profits from development of the Cal Expo property are what float the entire deal.

At first glance, the Kamilos proposal appears to serve several beneficial goals. It promises to reinvigorate Cal Expo by compelling that organization to reinvent itself at a different location, presumably with new buildings better suited to current needs. The plan would also provide housing and offices as well as a host of amenities for thousands of Sacramento residents in a manner consistent with the smart-growth policies being promoted by the Sacramento Area Council of Governments. Not least, it would provide Sacramento with a modern arena for professional sports and other events. And integrating it with a regional transportation center would enable fans to use light-rail and Regional Transit buses to travel to and from events at the arena.

So what's not to like about the plan?

By itself, the Kamilos proposal leaves a lot of questions unanswered, not only about its financial and political feasibility but also about whether a new arena is really in this region's best interests at this time.

A plan this complicated offers multiple chances for things to go awry, with a high potential for things to come unglued only after huge sums of money have been invested and public policy agendas have been reordered.

Hitching the Kamilos proposal to the transportation hub Thomas Enterprises has been trying to build, as the First Sacramento task force has recommended, would effectively handicap what is already a long shot. Thomas Enterprises, whose notion of a public-private partnership evidently is that it will provide the circus if taxpayers provide the bread, has been unable to turn a single shovel of dirt on the depot project for years, unless first handed a check drawn on a federal stimulus funds or state transportation bonds.

Perhaps the most immediate concern about the Kamilos plan's viability is its need for the Legislature to authorize sale of the Cal Expo site before land values in the area begin rising. To make the plan work, the developers must be able to buy the land while the local real estate market remains depressed and to sell the land at much higher prices in the future.

If the sale does take place while real estate values are still low, how much potential profit would a revenue-starved state government forego in order to let this deal proceed? Wouldn't a quick sale be interpreted by some as a direct subsidy to wealthy private investors?

Then there are issues surrounding the move of Cal Expo to Natomas. How much will it actually cost to build the new fairgrounds? How certain are state officials that the Kamilos group would be able to follow through on its financial commitments to Cal Expo when the time for the move to Natomas comes? After all, the downtown arena would be getting first dibs on whatever financing the Kamilos group is able to secure.

In the likely event that the project experiences more than the usual delays and cost overruns, who is to say that enough money would be left to get Cal Expo off the site whose subsequent redevelopment helps finance the deal?

Pulling off this swap requires an enormous amount of financing. Buying the Cal Expo site, building the downtown arena, moving Cal Expo to Natomas will require a huge financial commitment that will eventually have to be paid off with interest. Generating the funds to repay those obligations will depend fundamentally on an appreciable increase in the value of the Cal Expo site. That, in turn, will hinge on how fast the regional economy -- and especially its real estate market -- recovers from the recession.

Dots remain unconnected

On the downtown front, would it really jump-start development in the old Southern Pacific railyard? So far those dots have not been convincingly connected.

Would an arena in the railyard be profitable? As Stockton residents have come to understand, a spiffy new sports and entertainment center can turn into a white elephant if economic circumstances are less than ideal.

Although sports and entertainment complexes do attract some visitors from outside the area, the vast majority of ticket-buyers are local residents opting to spend some of their limited disposable income to attend a Kings game or a rock concert at an arena rather than on a dinner or movie closer to home in Roseville or Elk Grove. So instead of appreciably raising the level of entertainment spending in the region, an arena largely just redistributes it from one jurisdiction to another.

That part of it is a zero-sum game. With a downtown arena, downtown gains, while Folsom and other communities lose.

But what is almost never mentioned in the typically upbeat economic impact studies commissioned by arena proponents is the leakage factor. Does anyone really think that all or even most of the nearly $70 million in salaries paid to Kings players this year will stay in Sacramento? Add to this the huge fees earned by all those rock stars, figure skaters and other entertainers who regularly breeze through town. Then tally up the portion of ticket receipts and luxury box rents that are earmarked for repaying the various bondholders and investors who helped finance the arena's construction.

So, far from being the unalloyed engine of local economic growth its proponents vigorously claim, a sports and entertainment center can be an even more efficient engine for draining vast sums of money out of the area's economy.

At a time when public officials should be preoccupied with finding ways of bringing new wealth to town, it's regrettable that so much of our public agenda in Sacramento is being misshapen by bold visions grounded in economic illusions.