Wednesday, April 6, 2011

Sacramento Bee: Sacramento Positions to Protect Kings Loan Repayment

Sacramento jockeys for leverage to ensure Kings repay loan

Published: Wednesday, Apr. 6, 2011 - 12:00 am | Page 1B
 
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Fourteen years ago, Sacramento famously lent the Kings $70 million to stop the team from bolting town.
Could that loan now become a dark cloud over the city's financial future?

The basketball team again has a foot out the door. Team officials are negotiating a move to Anaheim. But the loan balance remains a hefty $67 million. Concerned city officials have hired attorneys and sent letters to the Kings, the NBA and Anaheim, demanding loan repayment before the team moves.

Officials say loan agreements obligate the Kings to pay in full if the team leaves.

"It is not panic, not a last-minute 'Oh my gosh,' " city Treasurer Russ Fehr said. "We are just trying to enforce a legally binding agreement."

The Maloofs, who own the Kings, have said they intend to pay their debt and are insulted that the city would suggest otherwise, but they have declined to say exactly how or when they would pay, or to put it in writing.
State Senate President Pro Tem Darrell Steinberg of Sacramento – who voted for the loan as a city councilman in 1997 – stepped into the breach Tuesday, saying he'll author a bill banning any city from signing a lease with a professional sports team unless the team has paid its debts to another city.

As Steinberg made his announcement, the City Council held a closed-door meeting to discuss potential litigation.

The city and Kings could well find themselves in court, said Thomas Joo, who teaches contract law at the University of California, Davis, law school.

Joo, who reviewed the loan documents Tuesday, said it appears the city can require the Kings to make good immediately. That payment may involve collateral, cash or a combination.

The situation has caused consternation among residents and elicited one reverberating question: How and why did the city get into this position?

The loan dates to 1997 and involves a central fact often misunderstood in subsequent debates: the $70 million given to the Kings was not the city's money.

"We've always called it a loan, but the city never put up money," said former city Treasurer Tom Friery, a key player in 1997.

The city instead sold bonds to private investors – said to be mutual funds, insurance companies, banks, and some individuals – and forwarded the money to the team.

It was a deal made under duress. Then team owner Jim Thomas, a Los Angeles developer, told city officials he was losing money and wanted city help restructuring his debt.

Thomas said he had received a lucrative offer from another city and was within days of saying yes if Sacramento didn't step in financially. The other city was rumored to be Nashville.

City officials rejected Thomas' initial request that Sacramento kick in $145 million and partner with him in refinancing the team and building a sports and entertainment center around the Natomas arena.

After weeks of negotiations, the city agreed to sell bonds for Thomas at municipal interest rates. The city also offered a shorter-term $8 million loan. In exchange, Thomas agreed to keep the team in town at least 10 years.

The council OK'd the deal, but not before a last-minute change that could prove beneficial to the city in the coming months.

Thomas had offered Arco Arena, now Power Balance Pavilion, as collateral. The city would take ownership of the arena until the Kings pay off the debt. Officials estimated the facility was worth about $50 million at the time.

But a skeptical then-city councilman Jimmie Yee and some city staffers said that wasn't enough. At the last minute, Thomas added $20 million worth of his team as collateral. (That stake later increased to $25 million).
The night of the vote, all eyes were on Yee, the swing vote. Yee, whose own family was divided on the wisdom of the loan, flipped up a sign saying "Go Kings!" and shoved a fist into the air.

He said later: "With the kind of (collateral) provided, it gives the city a prudent risk. And that's all I'm asking."
In retrospect, Yee says he wished he had asked Thomas to put up personal property to back the loan. He doesn't regret the loan, and expects it to be paid.

"I think it is a moral obligation by the Kings," Yee said.

Even at the time, team owner Thomas and others warned that the loan was no more than a Band-Aid. The team needed a new arena, and the NBA needed to fix its business arrangement for small-market teams like Sacramento to survive in the long term. Neither of those things has happened.

Thomas later sold to the Maloof family. The Maloofs repaid the city's $8 million loan, and have made all payments on the $70 million bonds. Early payments were partial interest only, ballooning the debt to more than $80 million at one point.

The outstanding amount will be $65 million this summer, when the NBA is expected to decide if the Kings can leave Sacramento, city officials said.

If the Kings pay the loan in full, they must kick in an estimated $10 million prepayment fee to bond holders, making the total payout cost $75 million.

The matter would then be closed.

But it's possible the Kings could try to just hand over the collateral – an arena that the county assessor says is worth around $35 million, a parking lot worth $6 million, plus the $25 million stake in the team.

That could leave the city with assets well short of the $75 million owed to bond holders if the prepayment fee is included.

The Kings' agreement with the city suggests that the team should be required to make up the difference, Davis professor Joo said. But if it doesn't, city officials say they don't have funds to do it.

City Treasurer Fehr said the city has another possibility to ponder. The loan was written to protect the city's general fund. If the Kings default and the city chooses not to pay off the bond investors, investors do not have legal recourse against the city, Fehr said.

A city default, however, could be catastrophic long term, Fehr and municipal finance experts said. Tom Dresslar of the state treasurer's office called it a "scarlet letter." Lenders would refuse to do business with Sacramento or would charge the city high interest rates.

"That means taxpayers take it in the shorts," Dresslar said.

City officials declined to say this week what they would do if faced with those scenarios.

Joo pointed out that the contract could be renegotiated. Bondholders might not want to be paid back all at once, and the city and Kings might agree that the team could pay them back over time.

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