City frets over Arco loan
Refinancing $70 million due on the aging facility is complicated by the push for a new arena.
By Terri Hardy - Bee Staff Writer
Published 12:00 am PST Friday, November 17, 2006
Story appeared in METRO section, Page B1
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A $70 million time bomb has been quietly but persistently ticking beneath the white noise generated by the high-volume, high-profile negotiations and failed campaign for a new downtown arena for the Sacramento Kings.
Now the ticking is getting louder -- much louder.
Terms of a $70 million loan approved in 1997 call for the city to find a new financing plan for the entire amount by April. The city guaranteed the loan in an attempt to keep the Kings in town, and it falls to the city to refinance the deal.
The refinancing has been complicated by the push for a new arena, City Treasurer Tom Friery said.
Lenders and investors are going to have questions about refinancing the loan because Arco Arena would be part of the collateral, Friery said. Analyses by a downtown group and the NBA have both concluded the building is nearing the end of its useful life, and recently, high-ranking NBA lawyer Harvey Benjamin told The Bee that the arena's stands are aging and in the long term will be dangerous.
If no new facility is built for the Kings, many believe the team will leave the city, a belief likely to worry potential lenders. If a new arena is constructed, the team would move into the new building and Arco would be demolished -- making it difficult to still use the building as collateral, Friery said.
"How do we structure new financing when they could leave or we don't have the facility anymore?" Friery said. "What am I going to use as collateral -- a city asset?"
John Thomas, president of Maloof Sports and Entertainment, said his organization has brought in its own financial experts to examine this issue and said they are also working closely with Friery.
"The city is technically responsible for remarketing the bonds, but we pay 100 percent of the costs," Thomas said. "Our interests on this are completely aligned."
The city in 1997 acted as a "white knight" for the Kings organization when then-owner Jim Thomas came to the council and asked for financial help so the team could stay in Sacramento, Friery said. The team was losing money and a private loan the owner had taken out for Arco Arena required almost all profits to be used to pay down the balance, leaving little to be reinvested in the team.
Two loans were approved: One for $70 million to allow Thomas to pay off his debt and a second for $8.5 million to be used to help the team make the first loan payments for seven years.
The city agreed to go to a bank, borrow the cash and float 30-year bonds. The Kings would own the arena and make payments on the loan each year.
Because the team's cash flow was so tight, Jim Thomas worried that if interest rates rose too high, he would not be able to make payments. So for an additional cost, the loan was guaranteed to remain at 6.8 percent.
That guarantee, however, lasted only 10 years. After 10 years, the loan would have to be paid off and restructured -- the situation now facing the city.
After 10 years, the Kings can leave the city for any reason but must pay off the loan balance, according to the contract.
City Councilman Steve Cohn, who was on the council at the time the loan was granted, voted against giving Thomas the money because he believed it posed too much risk to the city's general fund.
He thinks this latest loan wrinkle could allow the Kings to use the same pressure tactics used in 1997.
"What if they say they won't work with us on this, what if they say they'll default unless we come up with a new arena?" Cohn said.
When the 1997 loan was crafted, several provisions were included to secure the loan.
The city now holds a $25 million interest in the Kings franchise as collateral. And, if the Kings were to default, the city would take possession of Arco as well as the entire 85 acres owned by the Maloofs in North Natomas. However, Friery said that process could be time-consuming and possibly require legal action.
Arco in 1997 was seen as the major source of collateral, but its value has diminished, and would plunge further without the Kings playing there, Friery said.
More value is now in the land. Assistant City Manager John Dangberg said when property prices were at their highest last year, the parcel was valued at $450,000 per acre or about $38 million. Since then, land prices have softened. The city, as part of the loan restructuring, will examine the total value of all its collateral, Dangberg said.
John Thomas has repeatedly said the Kings will pay off the loan, and the team has faithfully made it payments, Friery said.
In April 2005, the Kings surprised Friery with a $12 million check to pay off the $8.5 million secondary loan and the interest accrued. The Kings now owe almost $71 million on their loan, but another payment is scheduled by next July, bringing the total to slightly more than $70 million, Friery said.
In April, Friery must inform investors how the loan will be restructured, and the deal must be completed in July. Briefings to the City Council will take place over the next two months.
The treasurer hopes to find a short-term loan with payments amortized over 20 years. However, that will likely mean higher fees or prepayment penalties, and it's unclear if the Maloofs, the owners of the Kings, will be willing to take on any added expenses, he said.
"I'm encouraging (the Kings organization) to help find a solution, but it's the city that has to pay the bondholders off -- not the Maloofs," Friery said. "We're going to need real money come July."
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Refinancing $70 million due on the aging facility is complicated by the push for a new arena.
By Terri Hardy - Bee Staff Writer
Published 12:00 am PST Friday, November 17, 2006
Story appeared in METRO section, Page B1
[FONT=arial,helvetica,sans-serif]
A $70 million time bomb has been quietly but persistently ticking beneath the white noise generated by the high-volume, high-profile negotiations and failed campaign for a new downtown arena for the Sacramento Kings.
Now the ticking is getting louder -- much louder.
Terms of a $70 million loan approved in 1997 call for the city to find a new financing plan for the entire amount by April. The city guaranteed the loan in an attempt to keep the Kings in town, and it falls to the city to refinance the deal.
The refinancing has been complicated by the push for a new arena, City Treasurer Tom Friery said.
Lenders and investors are going to have questions about refinancing the loan because Arco Arena would be part of the collateral, Friery said. Analyses by a downtown group and the NBA have both concluded the building is nearing the end of its useful life, and recently, high-ranking NBA lawyer Harvey Benjamin told The Bee that the arena's stands are aging and in the long term will be dangerous.
If no new facility is built for the Kings, many believe the team will leave the city, a belief likely to worry potential lenders. If a new arena is constructed, the team would move into the new building and Arco would be demolished -- making it difficult to still use the building as collateral, Friery said.
"How do we structure new financing when they could leave or we don't have the facility anymore?" Friery said. "What am I going to use as collateral -- a city asset?"
John Thomas, president of Maloof Sports and Entertainment, said his organization has brought in its own financial experts to examine this issue and said they are also working closely with Friery.
"The city is technically responsible for remarketing the bonds, but we pay 100 percent of the costs," Thomas said. "Our interests on this are completely aligned."
The city in 1997 acted as a "white knight" for the Kings organization when then-owner Jim Thomas came to the council and asked for financial help so the team could stay in Sacramento, Friery said. The team was losing money and a private loan the owner had taken out for Arco Arena required almost all profits to be used to pay down the balance, leaving little to be reinvested in the team.
Two loans were approved: One for $70 million to allow Thomas to pay off his debt and a second for $8.5 million to be used to help the team make the first loan payments for seven years.
The city agreed to go to a bank, borrow the cash and float 30-year bonds. The Kings would own the arena and make payments on the loan each year.
Because the team's cash flow was so tight, Jim Thomas worried that if interest rates rose too high, he would not be able to make payments. So for an additional cost, the loan was guaranteed to remain at 6.8 percent.
That guarantee, however, lasted only 10 years. After 10 years, the loan would have to be paid off and restructured -- the situation now facing the city.
After 10 years, the Kings can leave the city for any reason but must pay off the loan balance, according to the contract.
City Councilman Steve Cohn, who was on the council at the time the loan was granted, voted against giving Thomas the money because he believed it posed too much risk to the city's general fund.
He thinks this latest loan wrinkle could allow the Kings to use the same pressure tactics used in 1997.
"What if they say they won't work with us on this, what if they say they'll default unless we come up with a new arena?" Cohn said.
When the 1997 loan was crafted, several provisions were included to secure the loan.
The city now holds a $25 million interest in the Kings franchise as collateral. And, if the Kings were to default, the city would take possession of Arco as well as the entire 85 acres owned by the Maloofs in North Natomas. However, Friery said that process could be time-consuming and possibly require legal action.
Arco in 1997 was seen as the major source of collateral, but its value has diminished, and would plunge further without the Kings playing there, Friery said.
More value is now in the land. Assistant City Manager John Dangberg said when property prices were at their highest last year, the parcel was valued at $450,000 per acre or about $38 million. Since then, land prices have softened. The city, as part of the loan restructuring, will examine the total value of all its collateral, Dangberg said.
John Thomas has repeatedly said the Kings will pay off the loan, and the team has faithfully made it payments, Friery said.
In April 2005, the Kings surprised Friery with a $12 million check to pay off the $8.5 million secondary loan and the interest accrued. The Kings now owe almost $71 million on their loan, but another payment is scheduled by next July, bringing the total to slightly more than $70 million, Friery said.
In April, Friery must inform investors how the loan will be restructured, and the deal must be completed in July. Briefings to the City Council will take place over the next two months.
The treasurer hopes to find a short-term loan with payments amortized over 20 years. However, that will likely mean higher fees or prepayment penalties, and it's unclear if the Maloofs, the owners of the Kings, will be willing to take on any added expenses, he said.
"I'm encouraging (the Kings organization) to help find a solution, but it's the city that has to pay the bondholders off -- not the Maloofs," Friery said. "We're going to need real money come July."
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