Keep your eye on the ball

First rule is, don’t call it a basketball arena. Early on in one of many discussions between SN&R and developer Gerry Kamilos, he corrected the reporter, saying, “It’s called the sports and entertainment complex.” Better yet, Kamilos said his Convergence development proposal will yield, among many other goodies, a “state of the art, acoustically superior facility,” that will not only host the Kings games, but national caliber music acts and other big events that the Sacramento region is missing out on now. And it will be good for the neighborhood to boot.

“The city gets a new sports and entertainment venue that will help bolster the next round of economic growth downtown,” he said.

For the last decade, various players have kicked around the idea of downtown basketball arena—sorry—sports and entertainment complex. The idea is to create a big regional draw to downtown Sacramento, to jump-start the long-awaited construction of a whole new urban district on the old toxic rail yards between the existing grid and the American River.

And anyone who’s followed that saga knows that every couple years a new proposal for building a downtown arena comes along and fails—mainly because they rely too much on public money or because they’re too complicated to work.

In 2006, measures Q and R, which would have raised sales taxes to build a new arena, were beaten at the polls by 60 points. In 2005, it was a plan to open up 10,000 acres of farmland and wildlife habitat north of North Natomas to development and use part of the profits to build a downtown facility. Backers pulled the plug on that one before it even reached the ballot, deciding it was too risky. And that was before the real-estate market collapsed. In 2004, it was a plan to stick an arena in the Downtown Plaza at Seventh and K Streets. And before that, Mayor Heather Fargo’s early proposal for a Kings arena in the rail yards, built with a special tax on area businesses, puttered along for a few years but never caught on.

For all of those 10 years, fans and politicians alike have fretted. The Sacramento Kings North Natomas home, Arco Arena, was built cheaply, is outdated and doesn’t have the amenities a modern sports franchise depends on to make its nut. The Kings might leave unless Sacramento provides them with a new venue.

The Kings are clearly important to Sacramento. Most studies show that sports teams and new stadiums don’t really boost the economy. But the “psychological return” that a major-league sports team brings is worth something.

But then and now, backers and critics of all these arena plans agree: It’s really not about basketball. It’s about real estate and money.

In that, the Convergence plan has that much in common with the approaches that went before—but with more moving parts.

Convergence came to life after it was chosen last spring by Mayor Kevin Johnson’s Sacramento First task force as the most viable of several competing arena plans.

Developer Kamilos and his partner David Taylor want to shuffle the California State Fair off of its prime Cal Expo real estate, building up that land as a new residential neighborhood (the area is called Point West) and using the profits to build a new Kings arena downtown and a new state fair in North Natomas, on the site of the aging Arco Arena. The city would own the new sports and entertainment complex. The Kings would operate it, pay rent for the next 30 years and keep all of the money made within its walls.

When you get down to the mechanics of the complicated land swap and its tricky financing, Convergence is a bit like a game. In fact, it’s been compared to three-card monte. But will Sacramento be delighted by the neat trick, or be left feeling frustrated and ripped off?

Everything in the Convergence plan begins and ends with Cal Expo.

Altogether, the plan involves about 600 acres of land and a cost of more than half a billion dollars. The arena will cost about $400 million to build. The new state fair, about $250 million, by the Convergence team’s estimates.

The arena and new state fair and other supporting developments would all get built with hundreds of millions in loans from the lenders—big-name financiers Macquarie and Pacific Coast Capital Partners—that have been brought in by Kamilos. If all goes well, construction of the downtown arena would begin in 2012. That same year, construction of the new state fair on the land next to Arco Arena could begin—with Arco being leveled in 2014, after the downtown arena is completed.

Only after the state fair is completed in North Natomas (in 2015 or 2016) would the redevelopment of Point West begin. It’s the profits and taxes generated by Point West that are supposed to pay off Macquarie and PCCP, with interest, over the next 30 years. (Somewhere along the line, the deal is supposed to provide a little something for Kamilos and Taylor, too, in the form of “management fees.” But that hasn’t been negotiated yet.)

It will take months of review and public input for the Convergence to move forward. Cal Expo officials, Sacramento city officials and the state Legislature all have to sign off. “This is not like building a shopping center,” Kamilos explained. “It’s not a project that can be handled in a few public hearings. It’s really more of a process than it is a project.”

But all eyes right now are on the Cal Expo board—a group dominated by real-estate agents and farmers, mostly from the agricultural counties of California’s Central Valley. Some are from Sacramento, but most aren’t. And their priority isn’t necessarily the revitalization of downtown.

The last time the Cal Expo board had dealings with the NBA, things didn’t go so well. A proposal to build a new arena at Cal Expo fizzled earlier this year, with each side reportedly accusing the other of not acting in good faith.

The Cal Expo board has been a bit wary of this plan, too. Early on, it was apparent that the 180-acre Arco site might just be too small for the state fair, which now enjoys 350 acres at the Cal Expo property. The board has already said that no deal could go forward unless it includes a separate site to hold horse races—or find some way to reimburse Cal Expo for the $2 million in revenue that racing brings in every year.

But the board seems to feel some urgency to make a move. Attendance has slipped over the years, and Cal Expo’s assistant general manager, Brian May, told SN&R that Cal Expo’s deferred maintenance is about $45 million right now.

“The infrastructure is failing. The electrical system is failing. The water system is failing,” said May.

The board, Kamilos, the city and all the other players are anxiously awaiting a report to the board from consultant A. Plescia & Co. that should indicate whether the Convergence plan is a good idea for Cal Expo, or whether it makes more sense for the state fair to sell off part of its land for development and use the proceeds to make improvements.

If the board does decide to move the fair, special state legislation will be needed to move the fair and to sell any Cal Expo land. The developers also want the state Legislature to create a new law setting up a special “tax increment” district that would allow the state’s share of future sales taxes generated by all this new development to be plowed back into the construction of a new state fair.

Kamilos hoped by this time to have some broad agreements in place. But in mid-August, Darrell Steinberg (state Senate President Pro Tem and the state Senator from Sacramento) wrote a letter to the Cal Expo board and to Mayor Johnson, saying he couldn’t sponsor new legislation until a long list of questions were answered—beginning with whether or not the Cal Expo board even thinks it would be in the state fair’s interest to move.

(Before his election to the state Senate, Steinberg worked as a consultant for the Kings owners, the Maloof family, during the measures Q and R campaign.)

And while the consultant’s report was due out in late August, Kamilos asked Plescia for a little more time. He wanted the consultant to include some additional information from another player in the Convergence plan called VisionMaker Worldwide, a theme-park developer run by former Disney and Universal executives.

“Certainly our team is convinced that there are no other options that will deliver a new state fair as quickly as our plan,” Kamilos explained.

But there’s a good chance that the Plescia report—now due no later than September 14—says it makes more sense for the state fair to go it alone. If that’s the case, it could be the end of Convergence, though Kamilos says it’s not do or die.

“I have no idea what happens to the Cal Expo portion at that point,” Kamilos said. “We would have to retool the model.”

If the state fair is wary of moving to North Natomas, then North Natomas is just as dubious about hosting the state fair.

“Arco Arena was the first thing here,” noted Angelique Ashby, who in June was elected to the city council seat that includes Natomas and downtown, including the rail yards. She will take over the seat in November. “Where the restaurants and hotels went in, where the roads and infrastructure went, it had everything to do with Arco Arena.”

In all, the city would be donating about 115 acres of land to the deal. City officials wouldn’t offer any estimates for the value of the public land proposed to be donated to the deal. But earlier this year, an arbitrator valued the city’s rail-yard property—purchased from developer Thomas Enterprises—at $1.6 million an acre. Convergence would include 100 acres the city owns next to Arco Arena, and 10 to 15 acres in the downtown rail yards.

Ashby and many Natomas residents and business owners are concerned that Cal Expo will be mismatched with Arco’s footprint, or that it will be an inferior replacement for Arco’s economic engine.

“The state fair, as it exists now, is not a good fit for North Natomas,” said Ashby. For example, a water park would be a “great component” in the neighborhood. But a racetrack, not so much.

Kamilos originally proposed that a second floor be added to Arco Arena, suggesting the stadium could be repurposed as an exhibit hall, including animal exhibits. But the Cal Expo board said earlier this year they weren’t interested in a hand-me-down arena, and that Arco would have to be leveled.

The other thing that Natomans didn’t want was Cal Expo’s homeless shelter. “We don’t even have public transportation to the site. There are no services, no food closet, no Loaves & Fishes,” said Ashby.

A project this big and complicated is always a target for lawsuits. And Natomas seems like particularly dangerous territory, especially if the Natomans feel left out. “A lot of time and money has been spent creating a vision for the downtown location,” Ashby noted. “But we’re still trying to figure out what the Natomas site would look like.”

“When I first saw drawings, I thought, there’s no way this will work,” said Kay Knepprath, a historic preservation advocate, community activist and sometime developer. For years, Knepprath and her fellow citizens have dogged the city about protecting the historic train depot in the rail yards and tried to help shape the vision for Sacramento’s future “intermodal transit facility,” a 21st-century transit village, including a light-rail station, bus terminals, Amtrak, Greyhound station and, perhaps one day, a high-speed rail station.

The facility is supposed to be built on the same land the city would donate for the arena. In fact, the Convergence plan would plop a 16,000-seat facility right between the historic rail depot and the future alignment of the Amtrak train tracks.

And one of the main features of the entertainment complex is a parking structure of several thousand parking spaces. Without a lot of parking, one of the major revenue sources for financing the arena goes away. Does so much parking really fit into the intermodal concept? Since the basketball arena and parking facilities would be built first, would high-speed rail or other components of the intermodal facility wind up being lost in the shuffle?

After spending some time looking at the plan, Knepprath said she’s come around a bit. “I think it can work.”

“But first we need to find out if that arena even fits in there. The engineers need to look at it.”

Betty Masuoka, the city’s project manager on the Convergence proposal, said the city has made its requirements for the intermodal facility clear to the Kamilos team.

“Right now, we’re looking for a base level of comfort that everything fits,” said Masuoka. “But we’re not at a design level yet.”

It’s also not clear how the financial troubles of Thomas Enterprises, the developer that owns most of the rail yards around the city’s land, will affect the Convergence proposal.

Right now, the developer faces the strong possibility of losing its rail-yard property to its lender, Inland American Real Estate Trust.

City officials say they feel comfortable that new owners would play ball with the arena plan, if it came to that. However, the uncertainty has led the state Department of Housing and Community Development to suspend, at least temporarily, millions of dollars in state infrastructure grants from the rail-yards project. “All these intertwined funding sources are really about opening up the rail yards, not about the arena,” said Sacramento Assistant City Manager John Dangberg. But you can’t build an arena without roads, and the Thomas troubles just add more uncertainty.

Still with us? Good, because this is where things get tricky.

Backers have said that taxpayers won’t be on the hook for a new arena. “We know the state and city general fund can’t be put at risk,” Kamilos explained.

But it’s pretty clear that the Convergence plan will require a significant public investment.

“To say there’s no public money would not be accurate,” said Sacramento City Councilman Steve Cohn. “At a minimum, there’s the public land that would be involved.” And there’s a lot more than that.

The Cal Expo land would be sold to a “special purpose entity”—basically a partnership of public agencies and private developers—which would get the land zoned and then sell chunks of it off for construction by other companies.

“But this is a very down real-estate market,” noted Bob Blymyer, with the Sacramento County Taxpayers League. It’s not clear that the development of Point West could generate enough “extra money” to build a new state-of-the-art basketball arena and a new state-of-the-art state fair.

One of Blymyer’s concerns: Would the Cal Expo land be sold to developers for less than it’s really worth, in order to make the development pencil out?

“We don’t yet know what the real value of the Cal Expo property is. It’s an interesting idea, but there are a whole lot of unanswered questions.”

SN&R asked Cal Expo’s Brian May for a rough estimate of the value of the current state fair land, but he said there was none available. “First, Cal Expo hasn’t agreed to sell the property,” he explained, adding that the value would be determined by the particular development. “The land would be valued differently if office buildings dominated the site vs. single family homes,” May said.

Even if the Cal Expo board decides to move forward with Convergence, it will be months before the specific financing mechanisms are defined.

According to Kamilos, the three big revenue sources are going to come from parking, a special tax on new development and something called a “tax increment district.”

Much of the parking revenue would come from the new parking structure that would be built to accommodate the new sports and entertainment complex. Half of that money would go to the Maloofs. Half would be plowed back into paying off the loans for building the arena. But the city would use part of the money generated by city-owned parking structures near the new arena to help pay for the construction costs as well.

The other possible financing tools are a bit more complicated. As the city’s Betty Masuoka said “there’s still a lot of noodling going on with what the financing structure would be.”

The negotiation documents between the city and the development team make reference to this noodling, explaining that “legislation may be needed to allow for establishment of one or more tax increment financing districts or other financing mechanisms to allow [the city] to assist in funding a portion of the costs of the additional public facilities and infrastructure which may be required for implementation of the Convergence Project.”

Tax-increment financing a common tool for redevelopment. Imagine a blighted area, like the rail yards, with very little economic activity going on for several years. There’s very little sales tax or property tax flowing in that area. Now imagine that same area built into a brand-new neighborhood, with lofts and shopping and hotels, you name it. The difference between the taxes gathered in that place and the old blighted place is called the tax “increment.”

Normally, these taxes are divided up between state and local governments to provide services, schools, cops and parks for everybody.

Under the Convergence plan, “What would normally go to the state would go to build the state fair. And what would normally go to the city would go to build the sports and entertainment facility,” Kamilos explained.

State redevelopment law allows a local government to plow the tax-increment portion back into an officially designated redevelopment area. More importantly, it allows local governments to sell bonds against that tax increment. The bonds pay for the new development. And the tax revenue, when it starts flowing, pays for the bonds.

The rail yards are already part of the city’s downtown redevelopment area. The city could declare Cal Expo and Arco as redevelopment areas, too. But that would require both areas be found to be “blighted.” That would be a tough sell in this case, and could open the city up to lawsuits for abusing redevelopment law.

Kamilos said tax-increment money is a critical piece of the financing plan. But it’s not entirely clear what kind of tax-increment district he has in mind, or what the legislation to create such a district would look like. That will come later, Kamilos said.

But it is clear that tax-increment money is public money. It’s a lot of public money.

“They are essentially city resources,” said City Councilman Kevin McCarty, who cautions that careful analysis will be needed to make sure that any new financing districts are being used properly. “These things shouldn’t be done lightly. You need a top-notch fiscal analysis to make sure this rare tool is being used in the public interest,” McCarty added.

But Kamilos said that those new taxes wouldn’t exist without the Convergence project. “The only reasons those additional revenues are available is because of the private investment that was made,” he explained. “And remember, we’re only talking about the next 30 years.”

Year one or year 30, it will take much more detailed analysis to decide if the city, or Natomas, or state taxpayers are net winners or net losers in the Convergence game. Or if the game is even worth playing.

Some, like Red Slider, who has been a vocal opponent of selling off Cal Expo for private development, say we better call if off now. Slider is the founder of a small citizens group called Cal Expo—an Alternate Vision, which is pushing to keep the Cal Expo land in public hands, because it is “the last big piece of urban commons in the state.” CEAV suggests building a publicly owned, one-of-a kind, environmental science and technology center—something similar to the California Academy of Sciences in San Francisco, but with more of a green-technology theme.

Slider also publishes a blog at http://stopcalexpo.wordpress.com. And even if CEAV doesn’t catch on, he wants people to be skeptical of plans he believes put the real-estate deal ahead of the public interest.

“To me, this looks like it’s all about turning this public land over to private developers without making it look like a gift,” Slider said.

But there’s little other organized opposition to the Convergence plan so far. Even the skeptics say there’s just not enough information available yet.

Sacramentans seem to be in general agreement that having the Kings in town is a good thing, and that a downtown arena would probably help revitalize the rail yards. But the spectacular failure of measures Q and R show that voters won’t tolerate anything that looks like a big subsidy for a sports team, beloved though it may be.

And though this plan requires no public vote, the plan won’t be helped if the public suspects backers are playing Hide the Subsidy.

Kamilos says that won’t happen. “It’s an incredibly transparent process,” he said.

Just keep your eye on the ball.