SAN FRANCISCO — The California cities of Sacramento and Anaheim are in a tug-of-war over the fate of a National Basketball Association franchise, with bonds tied to each end.
Lured by a better arena, favorable demographics and a big loan, the struggling Sacramento Kings appear likely to move to Anaheim in Orange County by next season.
The Anaheim City Council Wednesday unanimously approved $75 million of taxable lease revenue bonds to pay for improvements to its Honda Center arena and to help fund the Kings’ move.
But hanging over the deal is $77 million of debt the team owes Sacramento in the form of $67 million of lease revenue bonds issued in 1997 and refunded in 2007. There is also an interest rate swap with by Goldman Sachs.
The Power Balance Pavilion and its 180-acre site were sold to Sacramento as part of the original bond deal, and leased back to the city for the price of the debt service. The city also got security in the form of the option to take a $25 million interest in the franchise in the event of a contractual problem.
Now there could be a problem. Sacramento’s City Council voted Wednesday to hire lawyers to make sure the city gets paid.
“The bankers, investors and rating agencies share the city’s understanding,” Sacramento Treasurer Russell Fehr said. “If the team no longer plays here, they have to pay us off.”
Fehr said the bondholders of the debt are fragmented and it would be difficult, if not impossible, to coordinate a deal with them.
The Kings owners, the Maloof family, have publicly stated they will honor the debt if they move.
Fehr said the city needs something “more definitive” than a public statement.
“Quite frankly, this is a non-issue,” Joe Maloof said in an e-mailed statement. “The city of Sacramento will be paid in full.”
In a letter Tuesday, Sacramento assistant city manager John Dangberg warned Anaheim city manager Thomas Wood that the Southern California’s city actions may cause “irreparable harm” to the state capital.
He asked Anaheim to cease negotiating with the Kings, and if not, to contractually guarantee repayment of the debt owed to Sacramento.
The possible relocation of the Kings would keep with the league’s long history of letting teams pack up and move to a better arena and economy.
Anaheim would be the sixth city to host the Kings franchise after Sacramento, Kansas City, Omaha, Cincinnati, and Rochester, N.Y., dating back to the 1920s, when they were called the Royals.
In 2008, the NBA let the 40-year-old Seattle Sonics franchise move to Oklahoma City.
The Kings have until April 18 to file a formal relocation request with the league. The NBA would then form a committee to review the application and after that all owners would vote on the move.
Anaheim has given the team 180 days to relocate, which is just before the start of next season.
Fehr said one of the reasons the team and the NBA gave for the possible move is Sacramento’s inability to replace the 17,000-seat arena, which was built in the late 1980s. A replacement for the no-frills facility could cost between $300 million and $500 million.
The Kings would like more luxury boxes. But even now, Fehr said, the team struggles to sell its existing boxes at a premium price. He said most of the seats are sold to individuals and informal partnerships, rather than corporations as in larger markets.
The team’s biggest revenue sources are ticket sales, including suites and boxes, parking revenue, naming rights to the facility, and radio and TV contracts.
The team, which has the lowest player payroll in the league at around $45 million, has borrowed about $100 million from an NBA credit facility to make up for losses over the years, according to Fehr.
The Maloofs’ Las Vegas casino has struggled, and the family recently sold its New Mexico beer and alcohol distributorship, according to media reports.
“The real issue here — and it might be true in other markets — is that most NBA teams are losing money,” Fehr said. “There is a disconnect between the Sacramento regional economy, not just the city, and the economics of the NBA.”
With a population of around two million, the capital region’s two largest employers are the state and the county governments.
In fiscal 2010, Sacramento city property-tax receipts declined by nearly 7% while sales tax revenue fell 22% and hotel tax receipts dropped 20%, according to a report by Moody’s Investors Service. Sacramento’s unemployment rate is about 12.6%, slightly above the state average.
“The economic forecast and other information suggests that the recovery in Sacramento will lag behind that of the state as a whole and the nation,” Fehr said.
If the Kings do pay off the Sacramento bonds, they would gain ownership of the arena’s adjacent land, leaving the facility’s future up in the air.
The lure of a larger market may be drawing the team south. Orange County has twice the population of Sacramento County, and it’s wealthier..
Orange County’s unemployment rate hit 8.9% in February, well below the state’s 12.3% average.
“This is a going to be a great economic engine for all of us,” Anaheim City Council member Harry Sidhu said during Wednesday’s meeting. “A lot of jobs will be created.”
To help lure the franchise, the council agreed to issue the $75 million in Anaheim Public Financing Authority paper as a conduit for a private placement to three companies owned by billionaire Henry Samueli, who owns the Honda Center’s current primary tenant, the National Hockey League’s Ducks franchise, and also manages the arena.
Samueli made much of his fortune as co-founder of chipmaker Broadcom Corp.
The loan would finance $25 million to spruce up the arena, and $50 million for working capital to use in relocating an NBA team.
The bonds will have a maximum term of 10 years and the funds to make the principal and interest payments will come from the center’s revenue.
The bonds’ interest rate will be market rate, according to city officials. The city has no obligation to pay the bond debt, beyond revenue from the operations of the Honda Center.
Anaheim has selected Orrick, Herrington & Sutcliffe LLP as bond counsel and Public Financial Management Inc. as adviser.
The arena, built in 1993, has $36 million of lease revenue bonds outstanding as of the end of fiscal 2010. Anaheim has more than $1.9 billion of outstanding long-term debt, according to its fiscal 2010 certified annual financial report.
In an ironic note, Anaheim has more than $12 million of outstanding debt that is still being paid off by the National Football League’s St. Louis Rams, who moved from Anaheim in 1995.