Why arena deal makes sense

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As Sacramento moves forward with a downtown redevelopment project centered on an entertainment and sports center, it’s important to tune out the ideology both for and against the project. Our actions should be based on a clear-eyed account that weighs the potential benefits and costs for the city.

Arena construction projects generally make economic sense for cities when they do three things: catalyze additional investment that would not have happened otherwise, minimize the downside risk, and preserve other elements of the civic infrastructure.

Anyone who has been to the K Street Mall west of 10th Street knows that it is an area that is long-struggling. TheDowntown Plaza mall was recently sold for a 10th of what it used to be worth. Nearby, the railyard project is finally, slowly, moving forward, but this and other downtown projects have struggled to attract private capital because lenders are doubtful of Sacramento’s future. The cost of inaction at the loss — not just of the Kings, but also the Natomas arena’s economic impact that supports 800 jobs and numerous restaurants — is reason enough to justify a gut check on how far we are willing to fall as a city before trying something new.

One way of evaluating these deals is to assess their multiplier effect — the extent to which money spent on a project will ripple through the economy, increasing overall economic activity. The arena development project includes 475,000 square feet in office space, 300,000 in retail space, 250 hotel rooms and 600 housing units, as well as the development of blighted adjacent properties. So on its own it includes substantial development beyond just an arena.

And since it is occurring in an area where prime development land stands barren, there are pragmatic as well as economic reasons to believe that this deal will have a significant effect in catalyzing additional development.

The deal also reduces some of the downside risk to the city. In many cases these deals are financed through tax-increment financing or a similar tool, in which the city is banking on major economic growth that may never materialize. Many communities have found themselves in a tough spot when they use expected growth to pay for a redevelopment project, and then discover that the project is not as transformative as they had expected.

In this deal, the investor group is taking on much of the financial and operating risk by taking on the cost overruns, operating risk and committing to an annual $1 million lease payment, as well as the risk inherent in their capital investment. There is some risk to the city, of course, if the parking revenue or ticket sales that drive the deal fail to meet expectations. The skeptics of this project are absolutely right that it is critical to continue to vet these projections as well as the basic financing mechanisms, and there will be additional opportunities to do so.

It is also vital that arena deals not compromise other elements of the civic infrastructure such as public services and the arts. Sacramento has a long-standing commitment to the Crocker Art Museum, the Community Center Theatre, and other similar projects. These aren’t just feel-good organizations. According to a recent report, in 2012 they brought 750,000 people into the center city for events and generated over $112 million in revenue.

The Council took great effort in its vote to protect these institutions from the ancillary impacts of the deal, but the Council received testimony that this new facility could be the rising tide to lift their boats too

We have to keep a very close eye on this process as it moves forward to ensure that this is and remains a good deal for the city. In this case, there is reason to believe that the arena project will catalyze the revitalization of the central city and leverage additional investments and revenues that can support all of Sacramento.

Evaluating the deal based on what we know today provides more than enough reason to move forward. While this has been on a tight timeline, we should not let an imperfect process be the enemy of a good deal.

Micah Weinberg, CEO Healthy Systems Project with Steve Hansen for Sacramento Business Journal