The big news yesterday was the latest snag in the arena deal, which came when the Maloofs suddenly read the non-binding term sheet we all had already stopped talking about weeks ago, and realized they were on the hook for some development funds. Today Tony Bizjak and Dale Kasler report that David Stern is planning to pick up part of the tab to make sure initial work can get done.
A pessimistic person would say that this is just the first line in the sand drawn by the Maloofs, and that if they resolve this issue it’ll just be something else down the road. I am trying not to be that guy. For instance, who says that one of the tenants of a building that will be owned by someone else should have to pay for infrastructure? Maybe there is a better deal that takes away some of those costs and puts a corresponding amount in profits back into the city’s bank account.
Unless I’m mistaken, the Kings are to be thought of as a “tenant” of the arena, but their financial contributions either come up front or from fans (as ticket surcharges–I don’t think this red flag has really been discussed much). They don’t actually pay any rent. Couldn’t they just put up a smaller down payment and then pay a monthly fee or let the city take their rent out of their profits? I still don’t know why a different deal that includes bond sales but much more profit to the city isn’t a better way to go. Something like:
Up front costs
City: 51% ($196m) – more realistic
Bond sales: 39% ($152)
Kings: 10% ($39m)
AEG: 10% ($39m)
Profit share:
City: 51%
Kings: 24.5%
AEG: 24.5%
As far as I understand it, the cost to the City for $152m in bonds at 2% is about $8.1m per year. Shouldn’t half of the profits from use of the facility worth that much? If there are 150 events the profit would have to be about $108k per event which seems quite reasonable at $6 per seat (18000 seats).
Of course, I’m doing back of the envelope, uneducated math problems that might only be appreciated by Cosmo Garvin. I’m leaving out the fact that the city would actually have to profit double that as they’d still have to pay back the general fund for loss of parking revenue.
On the flip side, the answer to my question “who says that one of the tenants of a building that will be owned by someone else should have to pay for infrastructure”? is that by demanding a new building (long story short), the Maloofs are kinda sorta saying that. They can’t demand it without paying anything to build it. But we are being told that this is not about the Kings, that an arena is about becoming a “world class city” so why are we asking the tenants to pay to construct it and then also giving them most of the profits?
But I like simple and it seems like if the city owns the building, the city should get most of the profit and share it with the people who operate it and draw the customers. I know this is a pipe dream as it’s not how these things work, but who says how these things work is right?
Anyway I’m rambling and I’m pretty sure I dropped some zeroes somewhere. Can somebody more familiar with these things chime in perhaps?
The Sac Rag 
The Maloofs raised the latest objection to buy a few more days until the Mega Lotto drawing.
Lottery tickets are the only chance for the Maloof’s to chip in anything more expensive than a Denny’s Grand Slam.
LikeLike
Despite my normal pouncing on your back-of-the-envelope musings, CoolDMZ, I think you’re on the right track here. The city is putting in two-thirds of the money, and, rightfully, should get two-thirds of the profit–but if two-thirds of the profit, not from a best-case scenario but from a kind of “middle of the road, most likely to happen” scenario isn’t enough to actually pay the expenses, then it’s still a bad deal.
As to whether or not the Maloofs should pay pre-development expenses, these are not infrastructure costs–the cost of nearby infrastructure isn’t even included in the $400 million price of the arena–but the cost of designing the arena in the first place. It’s pretty standard for a commercial tenant to pay for improvements inside the building, as they are done to the tenant’s specifications, not that of the building owner.
And keep in mind that the Maloofs aren’t just tenants here–their part of the deal includes parking revenue from game nights, and 50% of the money from naming rights (which AEG will be negotiating, hopefully preventing another sale of naming rights to companies that sell magic rubber bands.) If you rent an apartment, normally you don’t have the right to charge people to use the apartment parking lot when you have parties, or to make money off advertising on the side of your building.
It sounds like the Maloofs have other concerns about the arena project–here’s an 11-page document outlining some of the other problems they have with the deal:
LikeLike
Thanks, it’s good to have you on one’s side.
That Maloof letter outlines all the concerns that most folks who are skeptical of this plan have brought up and then some. It would be easier to take if the Maloofs seemed to be planning to stay here to see the right plan come to fruition, but it seems disingenuous to demand a plan to build an arena soon (long story short) and then complain when the resulting plan calls for a new arena to be delivered *too* soon. If they weren’t on record as having asked for relocation a year ago it would be easier to take.
LikeLike