The Maloof's Financial Problems

As widely reported the Maloof’s have balked at paying 3.25 million dollars towards arena pre-development costs, an amount they had previously  agreed to pay.  The Maloof’s are claiming the agreement to pay pre-development costs was non-binding, which may be true, but this was obviously a term they were aware of since they agreed to include it in the language of the term sheet negotiated in Florida, a term sheet that also allows them to fund their portion of the arena by borrowing huge amounts of money with the only collateral being future arena profits.

With this move it has become abundantly clear the Maloofs have serious financial problems.  Given the self-avowed wealth of the Maloofs, the 3.25 million dollar payment should not be an issue considering the amount of money they stand to make off the arena.  But now the Maloof’s are telling Fox 40’s Jim Crandell, one of the loudest arena supporters, that, “’[n]obody can afford [the arena] in its present form’” and when “[a]sked about the family finances in general, [George] Maloof politely answered, "’Those questions are unfair.’"

I’m not sure what makes George Maloof believe those questions are unfair when the city and AEG are agreeing to build them a brand new arena for their team to play in.  I think the family finances are of utmost importance and with this move it is now clear the Maloofs have serious financial problems that need to be thoroughly examined before the City Council agrees to spend any more money on the Arena.

[Update]

The latest news is that the NBA has agreed to pay $200,000 in pre-development costs on behalf of the Kings.  As I previously posted the NBA needs to make sure this deal happens so that it can continue to keep Anaheim in play in future arena negotiations with other cities.  This is purely a business move on the part of the NBA and shows that they are concerned about the Maloof’s finances as well.

AB 900: Jobs and Economic Improvement through Environmental Leadership Act of 2011

Assembly Bill 900 has come up numerous times during the arena discussions. I thought I would provide you with a short summary so you know what all the hubbub is about.  

Assembly Bill 900  is entitled the “Jobs and Economic Improvement through Environmental Leadership Act of 2011.” AB 900 streamlines CEQA’s administrative and judicial review procedures for development projects that qualify as "environmental leadership development projects (leadership projects).” The point of the bill is this - projects that create high quality jobs and spur business will be fast tracked through the California Environmental Quality Act (CEQA), which is California’s main environmental statute.

HOW DOES A PROJECT QUALIFY?

In order for the project to qualify as a leadership project, the following criteria must be met:

1) The project must be either a development project on an infill site that is certified as LEED silver or better and achieves a 10% greater standard for transportation efficiency; an exclusively wind or solar energy project; or a manufacturing project that manufactures parts for renewable energy generation, energy efficiency, or the production of clean alternative fuel vehicles.

2) The project must results in a minimum investment of $100 million.

3) The project must create high-wage, highly skilled jobs that pay prevailing and living wages, and provide construction jobs and permanent jobs for Californians. The bill does not provide guidance on how to determine what is considered a “high-wage, highly skilled, permanent job.”

4) The project must not result in any net additional emissions of green house gas (GHG) including employee transportation.

WHAT BENEFITS DOES A LEADERSHIP PROJECT RECIEVE?

If the project meets the above criteria then it will receive a streamlined CEQA administrative and judicial process. Basically the project will move through the court process faster and the delay to implementation, i.e. construction, of the project will be minimized.   

Provisions that streamline the administrative process include the following:

-          The lead agency must prepare the administrative record concurrently with the administrative process and certify the final administrative record within five days of approving the project. Preparation of the administrative record is always a time consuming process in CEQA litigation. All written material relied on or relevant to the development of the project must be gathered. This includes but is not limited to documents, reports, studies notices, comments, and correspondence. Typically the public agency has 60 days after a suit is filed to prepare the administrative record and extensions are liberally granted (PRC 21167.6).  It is not uncommon for the preparation to take months. Requiring the project proponent to prepare the administrative record concurrently with the administrative process and certify the administrative record within 5 days of project approval substantially cuts down on the time between filing a suit and actually beginning trial.  Essentially the litigants will get into court to argue their case faster and the project will be subject to a shorter delay.  

-          The lead agency must place documents (administrative record, Draft and Final EIR etc) and public comments on the internet on specific dates so that the public can access the information more easily. Although CEQA encourages the use of the internet, it does not make the posting of such information on the internet mandatory and does not provide specific time requirements. Hey CEQA, welcome to the 21^st Century! I believe this will improve public participation, public disclosure and transparency. This is the type of amendment that should apply to all CEQA projects.   

Provisions that streamline the judicial process include:

-          All CEQA challenges will bypass the trial court and be filed directly with the applicable Court of Appeal. Typically CEQA litigation begins in the trial court and makes its way to the appellate court, this could take years. So skipping trial court and going straight to Appellate Court is a big deal. Further, it is highly unlikely that the California Supreme Court would ever exercise its discretion to listen to an appeal of the case. So it basically guarantees that you only have to go through one round of litigation in one court– the appellate court. But skipping the trial court could create other problems. For instance, the appellate court case will now take longer to litigate. Typically by the time the appellate court sees a case, all arguments on the administrative record have been decided by the trial court. Since the trial court has been bypassed, the appellate court now has to decide these questions. Depending on the number of leadership projects, the appellate court could be overrun with CEQA litigation, which would lead to delays undermining the fast track purpose of the bill. It is unclear whether there will be a flurry of leadership projects seeking streamlined review. Project proponents may be anxious to fast-track their projects thru the court. On the other hand, project proponents may be hesitant to use their project to test whether AB 900 achieved its streamlining goals or just creates new and different problems in the appellate court. 

-          The Court of Appeal must issue its decision within 175 days of the filing of the petition and the court may grant extensions of time only for good cause and in the interests of justice.  Normally there are no deadlines for the court to issue a decision.  Developers claim that investors are generally reluctant to sink money into a project that will be tied up in protracted litigation so shortening the litigation time will encourage investment and stimulate the economy.  Environmental groups claim that the 175 day time limit places incredible stress on community based groups and low income groups that often have smaller staffs and need a longer turn around period to review legal matters and file briefs. Again if the appellate courts are bombarded with litigation then the 175 day deadline will have to be extended, which again would undermine the basic streamlining intent of the statute.   

-          The Court may appoint a special master to assist it in managing and processing the case. All land use challenges must be filed concurrently with the CEQA challenge. Again both of these provisions will make litigation go faster.

HOW DOES THE PROCESS WORK EXACTLY?  THE NITTY GRITTY

Prior to the release of the Draft Environmental Impact Report (DEIR), the project proponent can petition the governor to have the project certified as a leadership project and receive streamlining benefits. The proponent must submit evidence to the Governor that the project qualifies as a leadership project. The information provided to the Governor is subject to a 15 day public review period. The Governor will make a determination as to whether the leadership project criteria have been met. This determination is not subject to judicial review. The Governor will submit the determination, and any supporting information, to the Joint Legislative Budget Committee (JLBC) for review and concurrence or nonconcurrence. If the JLBC fails to make a determination within 30 days the project is deemed certified. The bill is silent as to what occurs if the JLBC issues a nonconcurrence.

In order for a project to receive the streamlining benefits, the proponent must agree that all mitigation and monitoring obligations will be met. Further, the proponent must agree to pay the cost of the appeal, the special master, and for the preparation of the administrative record. Normally in CEQA litigation the costs are split between the parties. But under AB 900, if you have deep pockets, and these big developers do, then you can pay to cover these costs and have your case heard before other cases. Many have commented that this violates the main tenet of our justice system, that everyone should be treated equally in the court system, regardless of financial stature.

How all of this will play out in regards to the arena remains to be seen.  However, it does seem certain that the arena project will move more quickly through the environmental review process and because of that the public will have to act more quickly in objecting to the environmental review.

Reality Check: General Fund Backfill Sources

The table above is from page 21 of the Term Sheet.  It shows the source of backfill for the loss to the general fund that will occur as a result of the sale of the city’s parking assets.  It contains no explanation for how the figures were reached.  Thus, my goal here is to try and determine how realistic these figures are.

City Parking Revenues from Non-King’s Events ($965,000): It is unclear where this figure is derived from, we do not know how many non-King’s events will occur each year, how much parking will cost and how many parking spaces are in play.  It is clear is that this amount is dependent upon non-King’s events being well attended, thus this number could fluctuate greatly from year-to-year.

Ticket Surcharges on King’s Events ($2,640,000): This is where it gets interesting.  Michael Shaw from the Sacramento Business Journal did the math (in reverse) to determine how many people the city assume will attend an average King’s game and how much they will pay for their ticket.  The “the average paid attendance estimate is 16,268 fans or 87.9 percent of the 18,500-seat venue” and the average ticket price is $77.96.

The Kings averaged 15,117 fans in attendance for each season between 2004/2005 and 2010/2011.  This is 1,150 less fans than the cities estimate and includes the 2004/05, 2005/06 and 2006/07 season which were all sold out because the Kings were a competitive team.  For the past four seasons, as the Kings have become a non-competitive team, attendance has dropped dramatically to an average attendance of only 13,466, or 2,802 less than the cities estimate.

Currently an average ticket for an NBA game sells for $48.48 that is $29.48 or 38% less than the city believes the Kings will be able to charge for an average ticket at the new arena.

To say that the cities attendance and ticket assumptions are optimistic is an understatement.  It is unlikely the Kings, in their current state of perpetual mediocrity, will be able to draw 16,268 fans a game or charge an average of $77.96 for that ticket.  Chicago, Boston and Miami all extremely popular teams in large markets do not even command that type of ticket price.

Let’s plug some more realistic numbers into the equation to determine how much general fund backfill can actually be expected from the ticket surcharge on King’s events.

Average attendance of 16,117 (I added on a thousand fans because the new arena may boost attendance, at least for the first season) and an average ticket price of $60 (again I added on a bit of a premium for the newness of the arena).

16,117 * ($60 * 5%) = $48,351 in revenue per game.

$48,351 per game *41 games/season = $1,982,391.

$1,982,391 is $657,609 less than what the city is predicting, a significant difference, and that is with the caveat of using optimistic figures.  If we use average figures the situation becomes even worse, with the surcharge only generating $1,502,387.93 or $1,137,612.07 less than the city is predicting.

The arena Term Sheet claims that generating $2,640,000 reflects the “most likely scenario,” based on my calculations above that scenario is at best unlikely, and at worst a complete work of fiction.

Ticket Surcharges on Non-King’s Events ($1,100,000): Like the parking revenue from non-King’s events it is unclear where this figure is derived from because we do not know how many non-King’s events will occur each year and how much the average ticket price is.  It is probably safe to assume the figure is too high because the figure for revenue generated from the ticket surcharge on King’s events is far too high.  It is certainly clear is that this amount is dependent upon non-King events being well attended and the number could fluctuate greatly from year-to-year.

The ESC Generated Possessory Interest Tax – City ($850,000):  The agreement states “[o]nly the city portion of the possessor interest tax would be used for backfill of the General Fund.”  I am not sure exactly how to read this but it appears to me the city is paying tax to itself, I’m not really sure how this would be considered a new source of revenue to backfill the general fund.

Property Taxes Paid by the New Premium Parking Facility – City ($50,000):  Devin Lavelle points out that while this is a new source of revenue, the amount of property tax would likely be more if the land was used for another kind of development because  “[a] parking lot has a lower property value than retail or housing that would otherwise be there.”

ESC Taxes (Sales/Utility User) – City ($300,000):  As with the possessory interest tax it appears that at least a portion of the new Utility User tax is the city is paying tax to itself. 

The sales tax generated is not a new source of revenue because it is just replacing the sales tax currently being collected at Arco Arena.

City Profit from ESC Operations ($1,000,000): This appears to be a legitimate source of new revenue.  Although I do not know if the city currently makes any money from Arco Arena, if they do then this revenue would just replace revenue that is lost when Arco Arena is closed.

Digital Signage ($200,000): This is a legitimate new source of revenue.

Parking System ($1,895,000): I am not really sure what this amount is, since the assumption is that, the city will be selling its parking assets.  My best guess is that this is money left over after the parking has been sold and the arena has been built.  I have serious doubts that any money would actually be left over.

Based on the above analysis the amount of general fund backfill listed in the Term Sheet is entirely too high.  A number closer to $6.5 million seems much more realistic and that is with giving the benefit of the doubt to the City on a lot of the numbers presented.  The City Council and Taxpayers need raise some serious questions about the figures presented in the Term Sheet and how realistic they are.

Just to be clear, I am not a financial analyst by trade, just a concerned citizen attempting to make sense out of the sparse and confusing information being by presented by the City.