Sacramento arena lawsuit unearths new emails, documents that suggest illegal collusion and gifts to the Kings

Mayor Kevin Johnson and friends traveled to the Tribeca Film Festival last month for the premiere of the ESPN-produced documentary Down in the Valley, which recounts Team K.J.’s triumphant campaign to keep the Kings in Sacramento. For many, that is the only version of the Kings arena story that needs telling.

But a different story is spooling out in Sacramento Superior Court right now. Three Sacramento residents and their lawyers are suing the city, claiming Sacramento officials committed fraud by giving Kings investors as much as $100 million worth of “sweeteners,” including the rights to build digital billboards, and the city-owned parking garage beneath Downtown Plaza. The city gave these assets to ensure the team’s profitability, while never disclosing the real costs to the public.

In this version of the story, the mayor, the city and the Kings colluded to shift millions of dollars in costs away from NBA owners and onto taxpayers, without the public catching on.

The city of Sacramento’s attorneys call this story “salacious,” “slanderous” and a “work of fiction.” But emails and other documents submitted to the court show the Kings’ majority owner, Vivek Ranadive, did ask the city for millions in additional revenue, above and beyond the city’s contribution to the arena, because he felt he overpaid for the team.

And while city officials told the public that assets like the billboards and underground parking garage had no monetary value, court documents show these assets were worth tens of millions to Kings investors. Those court documents also suggest the mayor and other city officials believed the assets were worth considerably more than the public was told.

Judge Timothy Frawley has agreed to hear the plaintiffs out in a trial starting on June 22. Ironically, if the city loses the lawsuit, it could come out ahead: If Frawley agrees there was fraud, plaintiffs say the Kings may be forced to return millions of dollars to city coffers.

Ranadive became the majority owner of the Kings two years ago, in a deal which valued the team at $534 million. The price set an NBA record at the time. But the city of Sacramento insisted it could contribute no more than $258 million to a new arena—the same amount offered to the Kings’ previous owners, the financially struggling Maloof family.

When the arena deal was finalized in May 2014, the city’s contribution included $223 million in cash—from bonds the city would pay back by diverting revenue from parking garages, meters and tickets—and $32 million worth of land in Natomas and downtown. Officially, the city’s entire contribution to the arena deal is $255 million.

But the city also agreed to give the Kings its parking garage under Downtown Plaza. And the city agreed to lease six city-owned parcels of land to the Kings, along with the rights to build jumbo-sized digital billboards on each site. (The Kings would pay nothing for these leases for 35 years.)

The city acknowledged giving these assets, but at the time claimed they had no monetary value. According to the plaintiffs, the assets amount to a hidden subsidy for the Kings.

Why did the city give these assets to the Kings? Ranadive may have summarized it best, in an email to other potential investors Mark Mastrov and Ron Burkle, in February 2013:

“The problem is that while 525m may be a justifiable price for the Seattle market it is not for Sac … Leaving aside our ask on the arena we have to make the Kings price tag more in the 325m to 350m range. So we need almost 200m in value separate from the arena.”

An internal city memo explains: “Investor group wants $258 million plus additional City assets (land, entitlements, etc.) to offset the difference in the purchase price of the Kings vs. their perceived value of the Kings.” The memo goes on to say that the investors “may want the 3,700 parking spaces at the Downtown Plaza.” But this request was never disclosed to the public.

Patrick Soluri and Jeff Anderson, attorneys for the plaintiffs, say the city fulfilled the request, thereby making an illegal “gift of public funds.” It’s one thing for the city to contribute money to a project like an arena, with a public benefit, says Soluri. But government may not give money or property to an individual or business to help make a profit. “I can’t just ask the city for money so that I can buy a McDonald’s franchise,” Soluri said.

Assistant City Attorney Matt Ruyak told SN&R earlier this year that the city’s financial help “had nothing to do with the purchase of the team.” (Calls and emails to the city attorney for this story went unreturned.)

Still, the Kings’ request, and the reason for it, was known around City Hall—though never disclosed to the public.

Assistant City Manager John Dangberg testified that the Kings owners explicitly asked for more than the $258 million for the arena, because Ranadive and company, “felt that the overpayment for the team might require the city to play a larger role,” Dangberg explained. “We said, ’That isn’t going to happen,’” he added.

But plaintiffs say it did happen, because those revenue-producing assets were in fact given to the Kings, on top of the city’s contribution needed to build the arena.

The city claims its contribution to the arena deal was only $255 million, because the additional assets offered by the city had no value.

According to the city, the Downtown Plaza parking had no value because the garage needed to be refurbished. Likewise, city officials claimed that the digital-billboard rights had no value because the land isn’t making money for the city now, and the billboards might not ever be built.

But Soluri and Anderson point out Johnson’s handwriting on an internal memo, noting the underground parking spaces are worth $30 million to $40 million. The handwriting also says, “Can’t put in writing. Politically tough.”

In an April 2013 email to Ranadive, Kings arena developer Mark Friedman says the value of city’s assets given to the investment group were, “worth well in excess of $100 million.”

In the email, Friedman writes that the city’s land in Natomas was likely worth $40 million, much more than the $19 million value disclosed to the public. Friedman goes on to say the revenue from the gifted parking garage could be worth $60 million or more. He said the billboards had a potential value of $18 million to $24 million.

Friedman declined to answer SN&R questions about his estimates, saying, “Unfortunately, I cannot discuss pending litigation.”

Another email prepared by an employee at Burkle’s Yucaipa Co., sent to Burkle, Ranadive and Mastrov, says revenue from the city’s additional assets could help ensure a return on their investment for the team. Soluri and Anderson say this shows the direct relationship between the city’s sweeteners and the profitability of the team.

The mayor drew a similar connection when he went to plead Sacramento’s case before the NBA board of governors in May 2013. Johnson’s notes for that presentation state that the Kings would “not be a significant revenue sharing recipient,” in part because the billboards, land and parking spaces provided by the city would “preserve long-term economic viability” of the team.

If the Kings agreed not to take advantage of revenue-sharing, that would boost the bottom line for other team owners. And that helped convince the NBA to block the planned sale of the team to Chris Hansen in Seattle, and to hand the team to Ranadive.

The city also agreed to give the arena-naming rights to the Kings, even though the city technically owns the arena. Arena-naming rights may be worth as much as $120 million.

Naming rights present something of a chicken-and-egg problem. There would be no naming rights if there was no arena. Still, the naming rights belong to the public, because the arena does. “To me, the naming rights are just another case of there being no real attempt to fight for the city,” says Anderson.

Anderson and Soluri have hired an economist who puts the value of the billboards at $10 million to $18 million. The Downtown Plaza parking lot, he says, is worth $46 million to $59 million. These numbers are close to, or a bit lower, than Friedman’s estimates mentioned above.

Emails obtained by SN&R show a close working relationship between the mayor, his staff and attorney Jeffrey Dorso, who served as a go-between between the city and the Kings. Immediately after the deal was struck between the city and Kings, Dorso went to work representing the Kings on several arena matters. This tight-knit group also included Kunal Merchant, who headed the mayor’s nonprofit organization Think Big, which was funded in part by the Kings. Merchant later parlayed his role in the arena deal into a job with the Kings.

Dorso and Merchant helped city staff craft talking points and brainstormed with them about how to outmaneuver opponents. For example, the group joked about how arena critic Councilman Kevin McCarty should be made to “feel the Eye of Sauron.”

According to testimony from Councilman Jay Schenirer, Dorso attended “ad hoc” meetings with city council members to discuss the arena—meetings which were closed to the public. Dorso also wrote language that later appeared in city staff reports on the arena deal.

(The city council has been criticized for its extensive use of ad hoc committees to do city business. The Sacramento Bee editorial board recently called the committees an “affront to open government.”)

Soluri says the evidence shows that the city wasn’t negotiating with the Kings, so much as colluding. “This collusion between the city and Kings meant it was almost impossible to negotiate a fair deal.”

City officials have warned that the lawsuit could cost the city millions because it will delay issuing bonds and cause the city to miss out on low interest rates. There is also the threat that if the arena isn’t built by 2017, the NBA could yank the Kings away from Sacramento.

Anderson says that’s not realistic. “Sacramento is not going to be left with a hole in the ground. This is a simple accounting problem.”

The attorneys say the Kings should return the sweeteners, or compensate the city for their value, and the arena project can still go forward. Then the value of the additional assets can be used by the city for other projects or programs. “There are a lot of ways this can be solved to the benefit of the city,” said Soluri.