A lawsuit claims the city hid the full value of its subsidy to the Sacramento Kings to build a new downtown arena. The arena is now under construction, and will be called Golden 1 Center. Sacramento Kings
A lawsuit claims the city hid the full value of its subsidy to the Sacramento Kings to build a new downtown arena. The arena is now under construction, and will be called Golden 1 Center. Sacramento Kings

Arena

Lawsuit alleges cover-up in Sacramento arena deal

By Tony Bizjak and Dale Kasler

tbizjak@sacbee.com

June 20, 2015 11:00 AM

On a drizzly Friday in February 2013, Sacramento Mayor Kevin Johnson huddled with a group of wealthy California businessmen who were trying to buy the Kings and prevent their planned relocation to Seattle. The topic: Figure out how much each side would contribute to the construction of a new downtown arena that was critical to Sacramento’s chances of keeping the team.

The meeting wasn’t an easy one. The businessmen, including Vivek Ranadive and Mark Mastrov, pressed the mayor for additional dollars. To match the purchase offer from Seattle hedge fund manager Chris Hansen, the Californians said they would have to pay well above market value for the Kings, maybe $175 million more. Could the city put in more money?

“Not going to happen,” Johnson told them, according to testimony provided by Assistant City Manager John Dangberg. The city’s contribution to the arena would be capped at $258 million, he recalled the mayor saying.

Almost 21/2 years later, construction of the $477 million arena is underway at Downtown Plaza, en route to an October 2016 opening. The city is poised to hand over a subsidy now officially pegged at $255 million.

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Yet as the Kings’ new home rises from the ground, a trio of citizens opposed to the project is raising questions about how much the city is donating and whether the mayor found a way to meet the investors’ demands for more money. Starting Monday, these three Sacramentans will put the city’s arena deal with the Kings’ owners on trial.

Downtown residents Jim Cathcart and Julian Camacho and Tahoe Park community activist Isaac Gonzalez say the deal is a fraud, and they’re asking for a court order invalidating the subsidy. For the next two weeks in Sacramento Superior Court, they will press their claim that the mayor and people around him lied to the public about the true value of the arena subsidy.

Instead of holding the line during negotiations, they contend that city officials covertly agreed to the investors’ demands, larding up the deal with as much as $200 million worth of undisclosed “sweeteners,” such as the parking garage beneath Downtown Plaza.

“They gave stuff to the Kings, and they did it without full public disclosure,” Cathcart said. “It’s wrong, and it’s got to be exposed.”

City officials say those claims are entirely false. While it’s true the city gave the Kings’ new owners additional assets, they say those assets and every other element of the deal were disclosed in public documents and at City Council meetings. “The city fully engaged (in) that process and publicly debated that process,” said Assistant City Attorney Matthew Ruyak.

The Kings declined comment last week. They previously have labeled the lawsuit “frivolous” and said they expect Judge Timothy Frawley, who will decide the case without a jury, to let the city deliver on its end of the deal.

City officials and the Kings are anxious to have the case resolved. To finance the bulk of its contribution to the project, the city plans to borrow against future parking revenue. With the lawsuit pending, the city can’t sell the bonds.

An outside legal expert who has been following the proceedings said it will be tough for Cathcart and his allies to win. While it’s true the city provided additional benefits to the Kings, the public disclosure of those assets weakens the plaintiffs’ claims of fraud, said J. Clark Kelso, a professor at the University of the Pacific’s McGeorge School of Law.

Even if those assets prove valuable, a judge is unlikely to overturn the City Council’s decision if there’s no clear showing of fraudulent behavior, Kelso said. “Courts are going to be, in general, pretty deferential to the decisions taken by elected officials,” he said.

For Cathcart and other arena foes, the trial represents the latest and possibly last stand in a war they’ve waged unsuccessfully for more than two years. Their push for a public vote on the subsidy failed after their ballot petitions were disallowed by Frawley because of flaws in how the petitions were worded. Frawley also dismissed a lawsuit filed under the state’s environmental laws, arguing that the arena would create traffic jams, pollute the air and lead to postgame riots.

The trial on the subsidy remains a final legal hurdle for the city to complete the deal. It’s expected to be contentious. The plaintiffs’ lawyers, Patrick Soluri and Jeffrey Anderson, said they plan to put Johnson, Ranadive and other key players, including City Council members, on the stand. One of their main witnesses will be former City Councilman Kevin McCarty, who opposed the arena subsidy and is now a state assemblyman.

A hefty purchase price

As part of the pretrial discovery process, Soluri and Anderson amassed scores of internal city documents and deposed the mayor, Ranadive and others during hours of closed-door testimony. The case documents includes Dangberg’s stated recollections of the mayor’s comments at that Feb. 8, 2013, meeting and multiple emails showing the Kings’ investors musing on the potential value of the additional assets the city was willing to surrender. The lawyers provided copies of many of the documents and deposition transcripts to The Sacramento Bee. The Bee also obtained internal documents from the city attorney’s office through a Public Records Act request.

Taken together, Soluri and Anderson say the documents provide compelling evidence of an illegal scheme. They contend the mayor and others purposely kept the public in the dark about the dollar value of two key assets the city gave the Kings’ owners: 3,700 city-owned parking spots beneath Downtown Plaza; and the rights to build six digital billboards around the city.

They also say it was improper for the city, which will own the arena, to allow the Kings to retain all revenue from the sale of the building’s naming rights, although experts say such arrangements are typical. The Kings announced last week that they sold those rights to The Golden 1 Credit Union in a deal worth a reported $120 million over 20 years.

Soluri and Anderson argue that the city didn’t just lie about the size of the subsidy. It also lied about what the subsidy was intended for. They say the extra dollars weren’t really part of the arena subsidy, but were designed to help the new Kings’ owners pay for the team itself. That kind of financial aid isn’t allowed, making the subsidy “an illegal expenditure of public funds,” the lawsuit says.

“The purpose and intent of these assets was not to subsidize the construction of the arena, but to ensure the purchase and ongoing profitability of the franchise,” said Soluri, a Curtis Park activist who has tussled with the city in the past on downtown development issues.

Kelso said Soluri will have a tough time selling that argument to the judge. The new arena and the purchase of the team “are inextricably intertwined,” the law professor said. “The whole transaction was for both the Kings and the arena, and that was clear to everyone.”

The trial will lay out a play-by-play replay of nearly 18 months of negotiations, starting with Johnson and his advisers coming to grips with the purchase offer from Seattle and culminating with the City Council’s historic May 2014 vote on a definitive development agreement.

As Soluri and Anderson see it, many of the pivotal moments occurred early on, when Ranadive and his partners complained that matching the $525 million offer from Seattle would be difficult to justify financially in a market like Sacramento, where corporate sponsorships are scarcer and TV revenue is lower.

“The problem is that while 525m might be a justifiable price for the Seattle market it is not for Sac ... so leaving aside our ask on the arena we have to find ways to make the Kings price tag more in the 325m to 350m range,” Ranadive wrote in an email to his partners. “So we need almost 200m in value separate from the arena.”

The investor group was correct in predicting it would have to pay a hefty price for the team. After the NBA vetoed the Seattle move, Ranadive, Mastrov and their partners bought control of the Kings in spring 2013 in a deal that valued the franchise at $534 million, the most ever paid for an NBA franchise. The record since has been eclipsed.

By the time Ranadive completed the deal to buy the Kings, litigation already was percolating. Cathcart and his allies had filed their lawsuit two weeks earlier, alleging that the nonbinding “term sheet” spelling out the basics of the city’s proposed $258 million arena contribution contained a “secret subsidy” to provide additional benefit to the investors. After the City Council approved the definitive development agreement a year later, detailing a $255 million subsidy, the Cathcart group amended its lawsuit but raised the same basic allegation that the public was being defrauded.

The documents unearthed by Cathcart’s lawyers suggest the huge sum the investors were paying for the Kings figured into the negotiations. The mayor insisted that he told Ranadive and his partners the price for buying the team was their problem.

“That was their pill to swallow, and that was their bullet,” Johnson testified during an April deposition. “And there was no way the city was going to subsidize that in any shape or form.”

‘What I can + can’t’

Nonetheless, the Ranadive group continued to push for more value in the arena deal.

In one email to his partners, Ranadive said the digital signboard rights “could be fairly valuable” and added that the investors might try to get out from under an existing $70 million loan the city made to the Kings years earlier. In a follow-up note, he suggested asking the city for free hangar parking for team jets. “This might be small but why not! Also we are coming there to save the team for the city so they should make it as painless as possible.”

Discussions of loan forgiveness and hangar parking apparently went nowhere. Those two items weren’t incorporated into the deal.

But documents suggest that the city’s negotiators, a group that included Dangberg and Kunal Merchant, who was leader of Johnson’s Think Big arena task force, were keen on keeping the investors onboard. They were especially worried about losing Ron Burkle, a Southern California grocery magnate who was the lead investor for a time.

“Burkle has kicked the tires on lots of deals and walked away if not happy,” Merchant said in a January 2013 email to Johnson and Jeff Dorso, a Sacramento lawyer assisting the mayor. Burkle eventually left the investor group, with city officials saying he had a conflict of interest with another business he owns.

Under pressure from the NBA, with a deal already pending in Seattle, city officials pushed to get a tentative deal done by the end of March 2013. In a March 22 email to Burkle, Johnson urged the investor group to come to an agreement that day so details of the deal could be taken to the City Council the next week. He reiterated the city’s commitment to a $258 million subsidy, but added: “above and beyond, we’re offering significant value in the form of parking, signage and entitlements.”

How much value? This goes to the heart of Soluri and Anderson’s case. The lawyers argue that internal documents show city officials knew they were handing over significant assets that greatly enhanced the official subsidy.

One document from early 2013, labeled “talking points” for the mayor, said Ranadive had estimated the digital billboards alone could be worth as much as $160 million. In an April email to Ranadive and others, Kings investor Mark Friedman, a Sacramento developer, valued the billboards at $24 million to $36 million, less $6 million in construction costs.

A city document from late February, titled “Conceptual Approach/Options,” said the city would put $300 million into the project. The document contained handwritten notes on potential values for parking spaces and the billboards, and included the notations, “can’t put in writing,” “politically tough,” and “politically, what I can + can’t.”

At a pretrial deposition, the mayor acknowledged the handwriting was his. But Johnson testified he couldn’t recall what he meant by the written comments.

In any event, city officials say those emails and talking points aren’t relevant.

“Those are just speculative values,” said Ruyak, the assistant city attorney. “Vivek’s speculation ... has nothing to do with what (the assets) are actually worth to the city.”

City negotiators wrapped up their deal with the Kings in May 2014, a year after the team changed hands. The subsidy was listed at $255 million.

In the run-up to the City Council vote, city staff released hundreds of pages of details. They included several paragraphs about the parking spaces and billboard rights, which were being handed to the Kings at no charge.

Why were they free? The staff report said the parking spaces – lodged beneath a dying shopping mall, generating little revenue and facing expensive capital repairs – actually had a negative value of $167,000 to the city.

As for the digital billboards, the staff report said the rights had value but it was “difficult to come up with an exact estimate.” The report added that “there is currently little value and no cost to the city other an opportunity cost in providing these sites.”

Kelso, the McGeorge professor, said the disclosures to the City Council likely will help the city defend itself in court. Even if the parking spaces and billboards wind up bringing considerable profit to the Kings, that doesn’t mean the city committed fraud, he said. What matters, he said, is that before they voted, council members were given “a plausible analysis” by staff officials about why those assets were being handed over for free.

The staff report was posted on the city’s website for public viewing prior to the council vote.

“The City Council looked at the benefits of this project openly and publicly,” Ruyak said. “And the City Council – exercising its legislation discretion – decided that supporting this downtown project was important for the city and the revitalization of downtown.”