To compare the condo deal with the arena deal is really comparing projects that can't be compared. John Saca only has to convince private lenders that he has a realistic development budget, timeline and prices that will work on the Sacramento market inorder to finance the deal. He only has to ask the city to approve the project design and location. The city isn't going to give him one dime.
Big developers spend a LOT of money on all the predevelopment work, including the architectural design (and architects are expensive). However, if it doesn't sell, because they miscalcuted the market or planned poorly, it is Saca and any investors who lose their money or at least any profit if they have to reduce sales prices. Development is a high risk business, but brings big profit, if it works. Not only that, Saca isn't building condos to run a business. He builds them, he'll sell them and then he's on to something else.
On the other hand, perhaps a better comparison would be the high quality hotels that the city wanted. The city spent millions building the community center and convention center (and millions more to rehab it recently). Problem? It was not paying for itself, it was not attracting conventions as they'd hoped. (They built it and they didn't come.) One of the main reasons being lack of quality hotel rooms nearby. None of the big hoteliers wanted to build here. Why? All their marketing studies indicated the market here would not allow them to make a profit.
Enter the Hyatt Regency. The City had to offer them a huge financial incentive to even build here and then had to gurantee they would profit. How, by spending millions more to make up the operational shortfalls the hotel suffered for many years. In other words, the hoteliers were right. They couldn't make enough money here to operate a quality hotel at a profit. Not for a long time. Both the Sheraton and Embassy Suites were enticed here by City financial incentives/contributions.
Cities all over this country spend a lot of public money to bring businesses to their communites and to keep them in their communities. Hyatt, Sheraton and Embassy Suites all have "rich owners." They could finance their own hotels. Building isn't the problem, keeping a business profitable after you build is the problem. Its really simple. You can't pay cash for a house, so you borrow. But it won't do you any good if you can't make enough money to pay the mortgage. The Maloofs money is invested in their many businesses. Not likely they have wads of cash sitting around to invest in an arena. Like any business person, they borrow from banks and then have to pay back the debt by being profitable.
Therein lies the problem. If they built an arena with a cash "downpayment" and borrowed the rest at commerical interest rates, its unlikely they would be able to pay the debt. The Kings, Monarchs and other arena events, don't produce enough revenue stream to pay a huge debt. Or you'd have to raise ticket prices so high, you'd definitely lose customers and still go bankrupt. Remember, until the Kings made the post-season, the Kings ran in the red. The Sacramento Bee, checked out the books twice over several years. The original Kings ownership had to sell, because they were going bankrupt. And the City loans to the franchise were to keep the franchise from going under financially (Cheap tickets to events at Arco were not cutting it, no matter how much we liked it.)
Pro sports owners are not generally getting wealthy operating a sports team. Where they ultimately get the profit is from the increasing value of the franchise over the years, which they don't realize until they sell. (Same as a homeowner. I'm house rich in California, but I can't spend it unless I sell or use it to get a loan.) Of course, for the Maloofs owning the Kings is a pleasure (non-monetary benefit) and good advertising for them (that has financial value). Those two things also have a value to the City.
Bottom line, the Maloofs need some public help with the financing of an arena. And if I were them, I'd see no reason to spend a lot on architectural designs, until I know if its a realistic possibility the darn thing will get built. (Because designs are usually site specific, for many reasons. Why waste money?)
Sorry this is long...I get all worked up over this issue.
EDIT: This is really weird. I quoted from the other arena thread which is where I thought I was responding and it ended up in this thread.
Big developers spend a LOT of money on all the predevelopment work, including the architectural design (and architects are expensive). However, if it doesn't sell, because they miscalcuted the market or planned poorly, it is Saca and any investors who lose their money or at least any profit if they have to reduce sales prices. Development is a high risk business, but brings big profit, if it works. Not only that, Saca isn't building condos to run a business. He builds them, he'll sell them and then he's on to something else.
On the other hand, perhaps a better comparison would be the high quality hotels that the city wanted. The city spent millions building the community center and convention center (and millions more to rehab it recently). Problem? It was not paying for itself, it was not attracting conventions as they'd hoped. (They built it and they didn't come.) One of the main reasons being lack of quality hotel rooms nearby. None of the big hoteliers wanted to build here. Why? All their marketing studies indicated the market here would not allow them to make a profit.
Enter the Hyatt Regency. The City had to offer them a huge financial incentive to even build here and then had to gurantee they would profit. How, by spending millions more to make up the operational shortfalls the hotel suffered for many years. In other words, the hoteliers were right. They couldn't make enough money here to operate a quality hotel at a profit. Not for a long time. Both the Sheraton and Embassy Suites were enticed here by City financial incentives/contributions.
Cities all over this country spend a lot of public money to bring businesses to their communites and to keep them in their communities. Hyatt, Sheraton and Embassy Suites all have "rich owners." They could finance their own hotels. Building isn't the problem, keeping a business profitable after you build is the problem. Its really simple. You can't pay cash for a house, so you borrow. But it won't do you any good if you can't make enough money to pay the mortgage. The Maloofs money is invested in their many businesses. Not likely they have wads of cash sitting around to invest in an arena. Like any business person, they borrow from banks and then have to pay back the debt by being profitable.
Therein lies the problem. If they built an arena with a cash "downpayment" and borrowed the rest at commerical interest rates, its unlikely they would be able to pay the debt. The Kings, Monarchs and other arena events, don't produce enough revenue stream to pay a huge debt. Or you'd have to raise ticket prices so high, you'd definitely lose customers and still go bankrupt. Remember, until the Kings made the post-season, the Kings ran in the red. The Sacramento Bee, checked out the books twice over several years. The original Kings ownership had to sell, because they were going bankrupt. And the City loans to the franchise were to keep the franchise from going under financially (Cheap tickets to events at Arco were not cutting it, no matter how much we liked it.)
Pro sports owners are not generally getting wealthy operating a sports team. Where they ultimately get the profit is from the increasing value of the franchise over the years, which they don't realize until they sell. (Same as a homeowner. I'm house rich in California, but I can't spend it unless I sell or use it to get a loan.) Of course, for the Maloofs owning the Kings is a pleasure (non-monetary benefit) and good advertising for them (that has financial value). Those two things also have a value to the City.
Bottom line, the Maloofs need some public help with the financing of an arena. And if I were them, I'd see no reason to spend a lot on architectural designs, until I know if its a realistic possibility the darn thing will get built. (Because designs are usually site specific, for many reasons. Why waste money?)
Sorry this is long...I get all worked up over this issue.
EDIT: This is really weird. I quoted from the other arena thread which is where I thought I was responding and it ended up in this thread.
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