Convergence Plan vs. Original Cal Expo question

[Trueblood]

The answer is probably easy to answer but I admit to being ignorant about these private funding deals so I need some help here from Kennadog, Arena Skeptic, Larry David or anyone else who understands these things.

One thing people tend to forget about on this board is the original Cal Expo plan that the league put together. I see posters talk about how the league came up with the convergence plan but they actually just backed that plan as opposed to put it together from day 1.

The original Cal Expo plan would've had an arena at the Expo site as opposed to the railyards but the site around the arena would've been built up so much to the point that the Cal Expo board was all for it. Unfortunately, no developer came to the forefront so we went to the convergence plan but the Cal Expo people weren't willing to play along.

My question is what was so much worse about the original Cal Expo plan that a developer didn't want to touch it with a 10 foot pole whereas Kamilos was licking his chops at the convergence idea instead?

 

[Sketcher]

Cal Expo Plans

As some of you may know I've been promoting an arena at Cal Expo for 3 years and can give you some history. When the NBA entered the picture back in October 2007 they hired John Moag to be the front man. He's the lawyer from Baltimore who's claim to fame was moving the Cleveland Browns. He got it in his head that we needed to extract the land value from development of the Cal Expo property to pay for the arena. After months of waiting and a claim that they spent millions of dollars formulating the plan, a peer review consultant gave an analysis that the assumptions and projections used were wildly optimistic and not attainable. Based upon this finding it was decided not to do an RFP and solicit developer interest. However, apparently at the same time Gerry Kamilos thought what was needed was more acreage to extract more land value and came up with the Convergence Plan. Andy Plescia was engaged by the Cal Expo Board to do a three pronged analysis of the development of Cal Expo, the feasibility of a fair grounds at Natomas and what could Cal Expo do to develop the property alone to pay for their $40M in deferred maintenance. His analysis was almost a duplicate of the original report that said the assumptions and projections contained within the Convergence Plan were not realistic or attainable and that's why the Board voted 7-2 to reject the plan.

 

[Larry David]

The original Cal Expo plan: (1) took Cal Expo’s large and underutilized property, which is owned by the state: (2) and put them together with a private developer with a plan crafted by the NBA, where it seems like at least 1/3 of the land would be redeveloped, and the profits would be used to construct an arena; and (3) the big upside was – Cal Expo kept/improved most of the original fairgrounds (mostly parking and racetrack that went away) and they added an world class arena and the Kings got new digs. As they say, win win. But the problem was finding a developer that wanted to take all the risk of fronting the arena construction while banking on the Arden area to return downtown real estate prices. Thus, it stalled out / never had a chance because the proposal was overly rosy on the estimate depending upon your take.

To put it simply, Cal Expo II / the Convergence was different because: (1) all of Cal Expo would have sold, the fairground would have been downsized even further, and moved to Natomas, where they would have only PBP and a few other buildings, and the “new fairgrounds” would eventually be finished/constructed over time – after profits started coming in; and (2) Kamilos was going to use the difference in value between the State’s land at Expo and the Natomas land to fund the arena in the rail yards.

To answer your question, Kamilos was probably willing to take on Cal Expo II, but not Cal Expo I because more of Cal Expo was being sold … a lot more quickly … thus, meaning more money would be available to him faster … thus, less risk for a developer.

Also, looking at this in hindsight, it’s not shocking that Cal Expo said not to the Convergence after being sold on Cal Expo I. Cal Expo I was basically like saying, your crappy back yard is huge. If you let us take 1/3 of it, you get to keep the house and we’ll make the rest of the backyard really nice and put a new pool in. When the Kings aren’t using it, you can swim in the pool too. Sweet! A year later, we were talking about instead moving them out to a smaller house, in crappy neighborhood, with an old cracked pool. No thanks, I’ll see if another developer wants to remodel my house.

 

[hrdboild]

The original Cal Expo plan: (1) took Cal Expo’s large and underutilized property, which is owned by the state: (2) and put them together with a private developer with a plan crafted by the NBA, where it seems like at least 1/3 of the land would be redeveloped, and the profits would be used to construct an arena; and (3) the big upside was – Cal Expo kept/improved most of the original fairgrounds (mostly parking and racetrack that went away) and they added an world class arena and the Kings got new digs. As they say, win win. But the problem was finding a developer that wanted to take all the risk of fronting the arena construction while banking on the Arden area to return downtown real estate prices. Thus, it stalled out / never had a chance because the proposal was overly rosy on the estimate depending upon your take.

To put it simply, Cal Expo II / the Convergence was different because: (1) all of Cal Expo would have sold, the fairground would have been downsized even further, and moved to Natomas, where they would have only PBP and a few other buildings, and the “new fairgrounds” would eventually be finished/constructed over time – after profits started coming in; and (2) Kamilos was going to use the difference in value between the State’s land at Expo and the Natomas land to fund the arena in the rail yards.

To answer your question, Kamilos was probably willing to take on Cal Expo II, but not Cal Expo I because more of Cal Expo was being sold … a lot more quickly … thus, meaning more money would be available to him faster … thus, less risk for a developer.

Also, looking at this in hindsight, it’s not shocking that Cal Expo said not to the Convergence after being sold on Cal Expo I. Cal Expo I was basically like saying, your crappy back yard is huge. If you let us take 1/3 of it, you get to keep the house and we’ll make the rest of the backyard really nice and put a new pool in. When the Kings aren’t using it, you can swim in the pool too. Sweet! A year later, we were talking about instead moving them out to a smaller house, in crappy neighborhood, with an old cracked pool. No thanks, I’ll see if another developer wants to remodel my house.

Correct me if I'm wrong here, but as I recall the original Cal Expo plan pre-dated the economic collapse and corresponding collapse in real estate prices. I think estimates for the cost of a new arena at that time were in the $500 million range. If that plan were resurrected it would probably be considerably less expensive now. On the other hand, the revenue that could be raised selling off land for development is considerably smaller as well.

The biggest obstacle though has always been getting everyone on the same page. Every proposed plan so far has had it's opponents for various reasons. Natomas doesn't want to lose the Kings, the city of Sacramento wants the arena downtown at the railyards, Cal Expo wants to become relevant again. If all these different parties could get on board with one plan there'd be a much greater chance of something getting done. Maybe there's a greater sense of urgency now but it doesn't matter if the Maloofs are determined to leave regardless.

Also, there's a number of old arena related articles posted in one place here. The 2005 one in particular is interesting as a time-capsule.

 

[Trueblood]

Thanks to Sketcher, hrdboild and Larry David. To sum up all 3 of you, it all comes down to Cal Expo I as being bad for a developer and good for Cal Expo while II was the reverse in that it was good for the developer but bad for Cal Expo.

To touch on what hrdboild was saying at the end, there has to be a compromise in there somewhere. Maybe grease the Cal Expo board by offering no show jobs with the Kings that would pay them what they make now? Seriously, why do these old geezers take that job so seriously? The fair takes place for 2 weeks out of the year. What the heck do they do the rest of the time? I think some of these guys just want an income and I think that some sort of payoff/pension could be worked out.

 

[CPR]

Correct me if I'm wrong here, but as I recall the original Cal Expo plan pre-dated the economic collapse and corresponding collapse in real estate prices. I think estimates for the cost of a new arena at that time were in the $500 million range. If that plan were resurrected it would probably be considerably less expensive now. On the other hand, the revenue that could be raised selling off land for development is considerably smaller as well.

This is a great point.

One thing to add though is that land values have dropped significantly more than construction costs have. That $500M figure for a new arena probably hasn't come down much, if at all. Steel, lumber, concrete, etc. all still cost what they cost. With the high price of oil that's also an inflationary influence on construction costs.

The drastic, steep decline in land values from where they were in 2006/07 is what dooms all of these plans for failure that featured land swaps or sales as the primary funding mechanism for constructing a new arena.

 

[Larry David]

They rolled out Expo 1 in January 2009. Prices and values had dropped a lot, but that is ongoing.

 

[kennadog]

This is a great point.

One thing to add though is that land values have dropped significantly more than construction costs have. That $500M figure for a new arena probably hasn't come down much, if at all. Steel, lumber, concrete, etc. all still cost what they cost. With the high price of oil that's also an inflationary influence on construction costs.

The drastic, steep decline in land values from where they were in 2006/07 is what dooms all of these plans for failure that featured land swaps or sales as the primary funding mechanism for constructing a new arena.

Actually in my projects, construction costs have gone down quite a bit. We've been surprised by how low some bids have come in.

BTW, ICON has said $500 million is really inflated. They think $350-400 million, max. Looking at the costs of some other arenas, complete more recently, $500 million does look like too much.

 

[JB_kings]

Actually in my projects, construction costs have gone down quite a bit. We've been surprised by how low some bids have come in.

BTW, ICON has said $500 million is really inflated. They think $350-400 million, max. Looking at the costs of some other arenas, complete more recently, $500 million does look like too much.

And some of those $400 million arenas built were started when the economy was more robust. Comparable downtown sites like Pittsburgh and Orlando are pretty close. And you figure the city already owns the land around the train station. Lots of the infrastructure costs should already be figured into the overall Railyards development anyway. In other words that load should be shared by all development down there and not just the arena project. Part of the problem with Q & R is that it appeared to be an open checkbook for all development of the railyard using the arena as the driving factor. It's nice for developers to cut costs and get to breaking ground faster, but not really the norm. The goal should be to fund the arena and let all the other projects pay their own way.