Warriors and Seaside Company only winners in Arena deal

Photo: Gary Patton

NOTE TO READER: Below is a letter from former County Supervisor, Gary Patton and current City of Santa Cruz resident. Patton calls the plan "a high risk venture" and is opposed to the City of Santa Cruz investment of 2/3 of our reserves in a for-profit professional basketball league as currently proposed. He has concluded that the deal will make money for the Seaside Company but not the City.  Here is his letter in its entirety delivered and ignored by the Santa Cruz City Council with a 6-0 vote on Wednesday, September 12th.  ---- Becky Johnson, Ed.


Gary Patton's letter can be found online here.

Gary A. Patton

Law Offices – 147 South River Street #221, Santa Cruz, CA 95060

Telephone: 831-429-4055 / Email: gapatton@wittwerparkin.com

September 10, 2012

Santa Cruz City Council

Santa Cruz City Hall

809 Center Street

Santa Cruz, CA 95060

RE: Meeting of September 11, 2012 – 7:00 p.m. Evening Session

Agenda Items #1 and #2 (Basketball Arena)

Dear Mayor Lane and Council Members:

This letter is to express my personal views. I am a resident of the City of Santa Cruz, and I have an individual and personal interest in the City’s proper compliance with local zoning and other laws, and with the state’s environmental laws. I am also concerned, as a city taxpayer, that the Council not place the financial assets of the city at risk.

I understand that at its September 11, 2012 meeting the Council will consider two different agenda items related to a proposal to build a basketball arena on land owned by the Santa Cruz Seaside Company, located at the intersection of Front Street and Spruce Street, on the fringes of the commercial areas of downtown Santa Cruz. I have reviewed the agenda items made available on the City’s website (which do not include the actual legal and financial agreements that the Council is being asked to approve). I have also read with attention the news articles in the Santa Cruz Sentinel that have commented on the proposal. I was particularly struck by the following statement made by the City Manager (presuming that he was quoted correctly) in the September 8, 2012 edition of the Sentinel:

“This isn’t a money-making scheme for the city.”

I hope that Council Members will pay attention to the implications of this statement by the City Manager. I think it is absolutely clear from the materials that I have been able to review that the City Manager is correct about this proposed project. Supposedly, this is an “economic development” project, but it is a project that the City Manager believes (I think correctly) will not make money for the city. The project will presumably make money for the Warriors. It is likely to make money for the Seaside Company. But it won’t make any money for the City of Santa Cruz.

If that is true (and I think the City Manager is right) why fund this effort?

Financial Concerns

Here are some of my specific concerns about the financial and business aspects of this proposed project, as the project is presented in Agenda Item #1. Again, neither I nor any other member of the public has had the benefit of reviewing the actual financial agreements that the Council would be endorsing, if the Council approves the recommendations before it. Perhaps my concerns would disappear if I were able to review the actual legal documents. More likely, my concerns would be even more focused and specific than the concerns I am presenting in the following list:

1. The City would be investing more than $4.1 million dollars in the arena project (various staff and other costs have not been included in the $4.1 million dollar figure, which is thus a “low” figure with respect to actual city costs). The specific $4.1 million dollar investment has been characterized as a “loan” in various public statements made by City Council members, the City Manager, and others. In fact, the transaction is not really a “loan.” That can be seen most clearly from the fact that the so-called “loan” has a 15‑year amortization period, and yet the facility that the “loan” is helping to construct is temporary, and is slated to be removed after seven years. If there is a remaining outstanding balance after seven years (which there is almost certain to be, since the payments are intended to pay off the “loan” in fifteen years, not seven years), then the City and the Warriors will “split” the outstanding balance due. This transaction results in a “contribution” to the Warriors, not a “loan” to the Warriors. Moreover, the Warriors in a certain sense have an inducement to maximize the amount owing at the end of the seven year period, since the bigger that number, the more the city’s payment will be, and the less the Warriors will have had to pay.

2. Not having seen the actual documents, it’s hard to tell for sure, but it appears that the City does not even get an enforceable commitment by the Warriors to play their next seven seasons in Santa Cruz. If attendance isn’t what the Warriors had hoped (or maybe if some other city gives them another good deal), it appears that the Warriors will be able to walk away. There will be some security, but it’s not 100% security. Again, a genuine “loan” of the city’s financial reserves should only be made if there is true security that is intended to guarantee the return of the loaned amount.

3. Since the city’s contribution is not a “loan,” what is it? In fact, it appears that the city’s investment is a contribution to a kind of joint venture with the Warriors (and not the “real” Warriors, either, but a “shell corporation” using that name, which has no assets of its own). To be clear about it, the recommendation before the Council is that the City of Santa Cruz should go into the basketball and arena business.

4. Let’s examine the “basketball business” first. It appears that the city, not the Warriors, is taking the big risk in that business, as this deal is structured. If the Santa Cruz Warriors don’t make money in Santa Cruz (i.e., if basketball in Santa Cruz isn’t the great draw that people hope it might be), the Warriors can move on. But the City of Santa Cruz is left holding the bag for the facility, since the city is the owner, and the value of that asset will be much diminished without a team. In addition, of course, the city will also have a so-called “loan” that will never be repaid in full.

5. Assuming that things go well with the basketball business, what does that mean? Has the city reviewed any survey of D-League basketball team attendance/revenue, so that the city can gauge what sort of revenue and attendance might be generated at the proposed facility? It’s not mentioned in the materials available to the public on this agenda. There ought to be such a survey, before the city makes a commitment.

6. The proposed location of the arena doesn’t lead me to believe that this is going to be a natural “winner” as a place for a successful arena business. Building a 2,800-seat arena on the fringes of the downtown commercial area, with no adjacent parking, is quite problematic. Those who want to come to the game will first have to locate the facility, and then will have to scout all over downtown for a parking space, and then will have to walk to the arena. This isn’t an automatic game plan for a booming attendance. It could be raining. It could be dark and cold. The Front Street/Spruce Street area in which the arena is proposed is not a great area in which to be walking around during the evening, or at night, and especially not when it’s cold and dark. When there is no parking provided, it makes it really hard to think that this is going to be a great success. Oh, and don’t forget the parking tickets that at least some fans will inevitably get if they do find parking at downtown meters. That’s revenue for the city, of course, but when a fan gets a parking ticket after having had a hard time finding a spot in the first place, that may be the last time that that particular fan ever drives to Santa Cruz for a Warriors game.

7. Has there been a survey to see whether there is any D-League basketball team that has ever had success with a 2,800-seat basketball arena when there is no adjacent parking? There ought to be such a survey before the city makes a commitment.

8. Now let’s look at the “arena” business. It seems clear that if the city is ever going to break even on this proposed deal (much less make money), the city is going to have to rent out the arena facility when the Warriors aren’t using it. The Warriors are only going to be using the arena from November to April, so during the spring and summer, the city is going to have to find alternative users. If the city isn’t successful in finding other users, it’s pretty clear that the city won’t get its so‑called “loan” back.

9. The Council should take a long pause before it puts the city in the position of running an “arena business.” Here are some things to think about:

· The city is already running an “arena” business (the Civic Auditorium). This new arena on Front and Spruce will compete against the city’s own Civic Auditorium facility. That is problematic, in and of itself. In addition, the city has not made money on the Civic. If the city can’t make money on its existing arena business, why does anyone think that it can run two arenas successfully?

· Running the “arena business” will cost money. There are new costs for city staffing that don’t seem to be factored in.

· The current plan assumes that there will be parking available in the greater downtown area during the late fall and winter, when the Warriors will be using the Front/Spruce arena. However, there will be less parking available in the greater downtown area during the spring and summer months, when the general tourist trade ramps up. This means that there is not going to be much chance to attract lots of users during the “on” season of the year. Materials in the agenda packet indicate that UCSC might be interested, but I don’t believe that the campus fields sports teams during the summer. Has there been a formal revenue study, so that the Council can see likely revenues from the city’s operation of the arena during the Warriors’ off-season, and match those likely revenues against actual costs? There ought to be, before the city makes a commitment.

· If the city is actually going to go into the basketball/arena business, there should be a business plan in place before the Council commits two-thirds of the city’s financial reserves to what amounts to a high‑risk venture.

10. Here a few other concerns about the financial and business aspects of the proposal, to the extent that a member of the public can understand that proposal without having access to the actual legal agreements which the Council will apparently be approving:

· How much will it cost to deconstruct and remove the arena facility at the end of the seven years? Who is going to pay for this? I presume that the city will pay for removal, since the city is going to be the “owner” of the facility. I bet the removal costs could be $500,000 or more. Has any study or analysis been done? The Council should have a good estimate of those costs, before it makes a commitment, since deconstruction and removal costs are a cost that will presumably be paid for by the city, and this is another cost that may well not be offset by the revenues that the business is going to generate.

· Has anyone noticed that the Seaside Company owns the land? At the end of seven years, faced with what could be very significant removal costs, the city may want to retain the arena on the Front/Spruce street property. But that property is not owned by the city. Unless the city has an option to lease or purchase the property, set now, the city will be at the mercy of the Seaside Company in seven years, since the city will have to pay whatever the Seaside Company demands, or vacate the property, and incur removal costs that the city may find are truly horrendous. Again, the Council should insure that this issue is fully dealt with in the documents, and that the city’s interests are protected, before it makes a commitment.

· As our community faces a genuine water crisis, I think it is unconscionable that the Council should be asked to excuse the Warriors from paying sewer and water fees. They will be using the water for their business. They should pay for it just like everyone else. Incidentally, the staff report says that these fees, owed by the Warriors, will be “deferred,” giving the impression that the Warriors will pay these costs, but at a later time. In fact, the staff materials also reveal that the city is planning to impose a $1.00 surcharge on each ticket sold, and to use this money to repay itself for the so-called “deferred” fees. In other words, the fans, not the Warriors, will be paying this bill. The fees that the Warriors should normally pay aren’t really “deferred,” at all; they are just going to be paid by someone else – those who attend the Warriors’ games).

· The plan to move 225 cars from the Seaside Company’s private parking lot at Front and Spruce Streets, and to give those cars free parking at the city’s downtown parking garage at Front and River should raise lots of concerns. The Front/River garage is in the heart of the downtown commercial district, and giving away parking places there could have really adverse impacts on the employees of downtown businesses, and on downtown business customers. In other words, if cars of workers who are working at the beach are allowed to take up 225 parking spaces in what amounts to the City’s prime downtown parking structure, the impact of this on downtown businesses may be quite negative. Has there been a study of the possible impacts of giving away these 225 parking spaces, looking forward over the next seven years? Until the Council really understands this potential impact, the Council should not make a commitment to the current proposal.

· Item #11 on the September 11, 2012 Consent Agenda indicates that the Front/River parking garage has 463 spaces. By giving the Seaside Company 225 spaces free, the city would thus be committing 49% of the spaces in that garage to free parking for the Seaside Company, as an in-kind payment for the use of the Seaside Company property on Front/Spruce. Again according to Consent Agenda Item #11, the city is planning to charge everyone else $31 per month for a parking permit in the Front/River garage. That means that the value to the Seaside Company, for 225 spaces, is $6,975 per month; $83,700 per year; and $585,900 over the seven year period contemplated. This payment, going to the Seaside Company, is not discussed in the analysis presented to the Council.

· Finally, it is being proposed that the Council “delegate” to the City Manager (with approval of the City Attorney) the details of the various lease and other agreements that will define this deal in legal terms. The Council should require that the actual agreements come before it, so the Council can assume full responsibility for its actions – and so members of the public can have a chance to see the details of the proposal, before it is approved.

Environmental Concerns

In addition to great concerns about the financial and business aspects of the proposal before the Council, I am quite distressed by what I think is the noncompliance of the city with the requirements of the California Environmental Quality Act (CEQA). I also think that the city is, in effect, avoiding the provisions of its own zoning laws, since the proposed facility is not really appropriate for the RH zone district.

Specifically, with respect to CEQA, I do not believe that the proposed facility qualifies for a categorical exemption, as the Council has been advised. CEQA requires that an EIR be prepared whenever a proposed project “might” have a significant adverse impact on the environment. The parking analysis seems to be based on a 2,800-seat facility, but the facility will be able to seat 4,000 persons for non-Warriors events. This impact has apparently not been analyzed. This is not the kind of “infill” project that qualifies for an exemption. Predictable traffic and parking impacts translate into direct physical changes in the environment that are likely to be significantly adverse. The Council should not make a commitment to this project unless and until it undertakes a proper review of the environmental impacts of the project under CEQA.

Conclusion

I urge the Council not to proceed with the project as proposed. While I think that there are legal deficiencies, my appeal to the Council is mostly based on the lack of a business plan that shows that this investment of about two-thirds of the city’s financial reserve funds is going to have a demonstrably positive impact for the city.

Maybe this proposed project will have positive economic impacts; maybe it will “pay off,” and will represent a good investment of the city’s reserve funds. However, Council Members should pay attention to the remarks of the City Manager:

“This isn’t a money-making scheme for the city.”

When I look at the future, with respect to local government finances, I don’t see a rosy picture. Please don’t put two‑thirds of the city’s financial reserves at risk, on what amounts to a very speculative business venture.

If this is a good business investment, then the business people who own the Warriors should be willing to make the investment. If they ask for city help, by way of investment, then they should sign agreements that will insure that the city’s funds are protected, and that the amount that the city makes available is returned, in full, at the end of the investment period.

That isn’t the deal that is before you on September 11^th.

The Warriors have not asked the city for an “investment” or a “loan.” They have essentially asked that the City of Santa Cruz join them in the basketball/arena business, with the city bearing most of the risk.

Yours truly,

Gary A. Patton

Gary A. Patton

cc: City Manager

City Attorney

City Council Candidates

Santa Cruz County Board of Supervisors

Fred Keeley, Gary Reece, Larry Pearson

Beach Hill Neighborhood Association

Santa Cruzans For Responsible Planning

Santa Cruz Neighbors