Friday, March 20, 2009

"Hooverville" meets 21st century sports economics in Sacramento

Evan WeinerBusiness of Sports Examiner
"Hooverville" meets 21st century sports economics in Sacramento

March 20, 11:18 AM ·

There is probably nobody who is connected to the National Basketball Association that has a harder job that John Moag. For lack of a better description, Moag is the NBA’s point guard in the league’s attempt to get public dollars from Sacramento elected officials to help build a new area for the owners of the local NBA franchise, the Maloof brothers.

It is in Sacramento that 2009 economic reality is intersecting with the needs of a major league sports business. A “Hooverville” tent city housing the homeless has sprung up not far from the Cal Expo grounds, the place where the NBA and Sacramento officials want to build a new arena to house the Sacramento Kings.

"Hooverville” was the given to shantytowns built by the homeless on open spaces during the Depression. It was named after President Herbert Hoover who led the nation during between 1929 and 1933. Nobody has recorded any songs like “Brother Can You Spare a Dime?’ as the jobless rate hasn’t reached 25 percent but clearly wealth has been lost in the economic downturn.

Both the residents of the Sacramento “Hooverville” and the Maloof brothers’ basketball team have one thing in common, financial problems. A little background is needed to fully explain the connection between the 300 or so residents who are living near the American River and the Maloofs’ basketball team. Both need public handouts to survive. The economy is taking a toll on people who have lost jobs and have had their homes foreclosed and some of those people have ended up in tent towns.

The Maloofs are not hurting for money, their portfolios could be down because of being shareholders in the Wells Fargo bank, but they still have the Palms hotel and casino in Las Vegas along with a beer distributorship. But their basketball team suffers in comparison to other NBA franchises because the team plays in an outdated arena that lacks the big revenue producing luxury boxes and club seats that are so important to team owners. The franchise needs more money to run as a viable business.

Sacramento is small market and a government town that lacks both a rich, local cable TV contract and a multitude of big money, big spending businesses that buy the luxury boxes, the club seats and advertising inside the arena but small markets can survive in new arena with all the money making gadgets. But there is just enough money to support one big time pro sports team and in this case, it is an NBA team. Sacramento is also important because it is the capital of the country’s biggest state, California, and the NBA does a lot of business in California with two franchises in Los Angeles and one in Oakland. It always helps to have a team in the state capital for lobbying purposes in the event the NBA needs government help to solve a problem that could crop up.

Sacramento has been a problem franchise for the NBA for years. The "Hooverville" tent city has been a Sacramento problem since the economic downturn. Both are related.

Sacramento Mayor and former NBA player Kevin Johnson wants to see a new arena built and there are plans to construct an arena as the centerpiece of an arena-village at the Cal Expo although no one is sure how it would be funded. Johnson governs an area that has been hard hit by the recession hurt by job losses and home foreclosures. It is those people who have lost their jobs and homes who could be Kings ticket buyers.

Mayor Johnson wants to close the Sacramento “Hooverille” as quickly as possible and move the residents to homeless shelters and other more secure shelters including some places at Cal Expo.

That is why John Moag’s job has become even more difficult than it was after NBA Commissioner David Stern appointed him to help get the new Sacramento arena built following two crushing referendum defeats in November 2006. How do you get public money to build an arena for expensive entertainment in an area that clearly has many other public needs? An NBA team is not a quality of life issue. “Hooverville” clearly is a quality of life issue.

The question is pretty simple. How do you justify building an arena with some public funding when Sacramento’s jobless rate is more than 10 percent? One answer is that building an arena will create construction jobs. But those construction jobs will not materialize for another two years or so because no developer has stepped forward to help pay off some of the costs of building an arena and surrounding village. The money is not available for the project at the moment. Credit markets remain frozen.

The Kings franchise was born in Rochester, New York in 1945 as the Royals and played in the National Basketball League. The franchise moved to the Basketball Association of America in 1948. The BAA became the National Basketball Association in 1949. Rochester had become too a small and financially challenged NBA city in the 1950s and the franchise moved to Cincinnati in 1957. Cincinnati could not financially support an NBA team either and the franchise shifted to Kansas City where it was renamed the Kings in 1972. Kansas City was also a money loser.

The Kings franchise ended up in Sacramento in 1985 not long after the owners of the Kansas City Kings threw in the town and sold the franchise to a Sacramento group who wanted a team in California’s capital. In 1996, the Kings owner at the time, Jim Thomas, proposed building both a Major League Baseball stadium and an NBA arena in the city, but by January 1997, the idea fell apart and Thomas began threatening to sell the team because the franchise was losing money. Sacramento city leaders, fearing that Thomas might move the team to Anaheim or some other city, loaned him $82 million to help ease his financial burden. Thomas then sold the franchise to the Maloof brothers in 1998.
In 2001, Sacramento's mayor, Heather Fargo, put together a task force to study whether Sacramento should green light an arena and entertainment center in the city's downtown area and, by November 2002, there was some sort of commitment to the plan. But the Maloof brothers pulled out of the proposed venture within a year, partly because they didn't want to get stuck with a debt service bill. When the issue was revisited in 2004, the Maloofs were unhappy that a city councilman offered a resolution that would cap spending at $175 million for the city and $175 million for the Maloofs.

Apparently a salary cap on NBA players' payroll was fine for the brothers, but a municipal spending cap for an arena was unacceptable.

In 2006, the Maloofs and the city seemed to have struck a deal for a new arena that would have secured the franchise for decades if voters said yes in a November 2006 referendum The city, through the general tax, would have put up at least $470 million for the arena and parking. The city would own the building, but all of the revenue generated for all events held inside the building would go to the Maloof brothers. Not only that: The siblings would keep all the money earned from selling the naming rights to the city owned arena.
The Maloofs would pay off Thomas' old loan, which they inherited after they purchased the team. Additionally, they would pay $4 million in annual rent, an amount that could easily come from naming rights. They will also have to kick in $20 million for arena repairs. The Maloofs walked away from the deal however.

The Maloofs and the city fought over development surrounding the arena, the city wanted commercial and residential building to ring the new facility to spur downtown development but the Maloofs, who would get just about every nickel of revenue inside the building, wanted the land for an 8,000 space parking lot. The Maloofs wanted the big parking lot because they would keep all of the money generated from the lot. The Maloofs wanted the same parking deal they had and still have at the old arena.
That might not seem like a deal breaker until you do the math. Assuming the Maloofs fill the lot and charge $10 a car, that would mean $80,000 a night multiplied by 41 and you get more than $3 million annually from parking alone just from Kings events. The Maloofs would also get parking money from non-Kings events at the building, so the parking lot issue was a deal breaker.

“Hooverville” has met the Maloofs in Sacramento. The 1930s and 21st century sports business reality will meet at the Cal Expo when some “Hooverville” residents are placed in shelters on the Cal Expo grounds, land that someday might house the Maloof brothers’ Sacramento Kings.

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