Anaheim, Santa Ana Play Risky Game Over Arenas

Orange County’s two biggest cities, engaged in a battle of municipal egos in a race to build indoor sports arenas, are taking significant risks by proceeding without commitments from pro sports teams, observers say.

And although both cities are pledging to protect taxpayers from major costs, critics say a “frenzy” among cities to get pro franchises can undermine their bargaining power when dealing with team owners who can pit one arena offer against another.

The way Los Angeles Raiders’ owner Al Davis manipulated four cities until he received a $660-million deal from Oakland illustrates the pitfalls. One victim was Irwindale, which gave Davis a non-refundable $10 million as an incentive to move and ended up with nothing.

The Raiders need a football stadium. But the competition for basketball and hockey teams to play in multipurpose indoor arenas is no less intense. At the moment, for instance, seven California cities are hoping to lure--or hang onto--a pro basketball or hockey team.

Anaheim and Santa Ana--despite differences in their financing schemes, timetables and plans for arena ownership--face the same perils, according to people who have studied the public financing of sports facilities.

“Any municipal government is far better off negotiating with potential tenants before they build (a sports facility) than building the thing and then hoping they get a tenant,” said economist Stephen J.K. Walters of Loyola College, Baltimore.

“Look at the stadium as a hostage,” said Walters, author of a paper on the Raiders’ move to Los Angeles. “Once you’ve created this big asset that sits there and has no other alternative uses, you become specialized to a particular use or user. You will be . . . victimized.”

With each new arena, the chances of attracting one of the finite number of professional teams diminishes, said Robert Baade, a Lake College (Ill.) professor and author of studies on public financing of sports facilities for the Heartland Institute, a Chicago think tank.

“One of the real frightening things in all of this is that cities are rushing willy-nilly into things,” Baade said.

Anaheim and Santa Ana announced last year that private firms would finance indoor sports arenas and lure National Basketball Assn. or National Hockey League franchises. Proponents conceded that only one such arena could operate successfully.

Santa Ana city officials are considering up to $10 million in public subsidies for their arena. Anaheim already has spent $18 million, raised a local tax and is considering an operating subsidy for its arena.

League officials say it would be virtually impossible to get basketball and hockey franchises for each facility.

Anaheim, with an arena now estimated to cost $94 million, took an early lead. But in January a lawsuit by disgruntled neighbors over the arena’s environmental report temporarily halted the project.

Santa Ana, proceeding more conservatively, pulled even in the race with a $75-million arena proposal. Its environmental report won city approval last month.

Along the way there have been some doubters.

“We’re giving and not getting; the people of Anaheim are just losing their butts on this . . . $17 million for land . . . a $15-million obligation for 10 years,” said Anaheim City Councilman Irv Pickler, a former advocate who cast the only dissenting arena vote. “It’s way out of line.

“We’re taking all the risks, and I think the (developers) are just sitting back and seeing what they can get. The citizens are going to eat it all.”

A Times Poll in February found that 57% of Orange County residents do not believe that a sports arena is needed. Only 12% unequivocally favored spending public funds on such a facility.

“There’s this frenzy among the cities to get these franchises, even when most taxpayers in the city are against it,” said Thomas W. Hazlett, professor of economics and public policy at UC Davis. “There still is a tremendous minority constituency of maniacal . . . fans that will support the politicians. . . . They get to give away the free tickets, and their big supporters will sit in the boxes with them.”

However, some parties do make money in the process:

In Anaheim, six property owners have or soon will sell the city land for its arena. Their price: $20 million.

The arenas have provided paydays for environmental consultants in Anaheim and Santa Ana, and a host of attorneys are being paid to haggle in and out of court over Anaheim’s arena.

Private investors who don’t have to know Anaheim from Zanzibar will be paid $1.76 million a year--a 9.1% return on their investment, exempt from state taxes--for buying $18.7 million in bonds sold for Anaheim arena land purchases.

Ogden Corp. of New York proposes building and operating Anaheim’s arena with entertainment bookings handled by the Nederlander Group.

In Santa Ana, Spectacor Management Group would operate the arena with bookings handled by MCA Entertainment Inc.

King-Guanci Development Co. is in partnership with Spectacor and MCA Entertainment in the development.

But Anaheim, which would own its arena, and Santa Ana, which would not, are not alone in the race to build arenas. Five other California cities--San Francisco, San Jose, Oakland, Los Angeles and San Diego--also plan arenas.

There are a couple of hitches: Supply and demand.

“If you are a franchise owner, there are many more cities that want you than there are franchises available,” Walters said.

Or in the words of Alfred Gobar, a Brea consultant who has worked on 25 arena and stadium proposals: “There is usually one more arena than there are ballclubs.”

This glut of demand, Walters said, creates a sellers’ market--and another hitch.

The prevailing thinking is that a city must already have an arena to get a franchise. As reasonable as this may sound, some say it can be dangerous.

“You are caught in a classic Catch-22,” Santa Ana Mayor Daniel H. Young said. “The NBA makes it real clear that they want the arena before they begin to talk about . . . a team coming.”

Ultimately, the best offer will win the arena race. However, the best offer for a franchise may be wasteful from a taxpayers’ point of view.

Despite occasional assurances otherwise, taxpayers would be financial partners in the seven California arenas.

The risks can be high. Already millions in public funds have been spent and millions more almost certainly will be--much of it before anyone knows whether his city will have an arena or a team.

“A franchise would be foolish to commit to an arena before it is open,” said Marie Monet, president of Ogden Financial Services of New York, an Ogden Corp. subsidiary. “We would build that (Anaheim) arena with no commitments in place from a team.”

Of course, Ogden won’t build an arena until the city buys the land and agrees to other financial considerations still being negotiated.

If after an arena is built it does not have a paying tenant, bills still must be paid for construction, for land and for overhead.

Football and baseball stadiums are more vulnerable to this kind of exploitation, said Walters, because indoor arenas offer more alternative uses, including trade shows and entertainment.

But most observers concede that a sports team is needed to make an arena profitable.

“We don’t think it flies without a franchise,” Anaheim Assistant City Manager James Ruth said.

The sentiment is similar in Santa Ana.

“If arenas were inherently profitable without a sports franchise, we would be building them all across the country on a speculative basis--we’re obviously not,” said Don Webb, vice president of Spectacor Management Group, the world’s largest operator of indoor arenas.

Although Santa Ana and Anaheim city officials initially touted the private nature of their arenas, each city’s financial involvement has grown.

In Santa Ana, the plan now is to limit public financing to an operating subsidy. In Anaheim, the city has spent money on land and intends to subsidize operating costs if necessary.

“The city of Anaheim is the owner ultimately (of its arena), as opposed to Santa Ana, where it will be privately constructed and owned by the developer and his partners,” Young said. “We have not spent a dime of public money.

“This project has to pencil as a private venture--that’s our requirement--(it must be) financially a success and privately owned.”

Nevertheless, Santa Ana officials revealed in October that a $5-million subsidy in operating costs would be provided for their $75-million arena.

“We were surprised when (the city) offered us that,” said Tony Guanci, of King-Guanci Development Inc. “I believe they raised the ante a little bit because of what is going on in Anaheim.”

A little-noticed economic analysis prepared for Santa Ana in January indicates that the city is considering a larger subsidy.

“The deal with the developer says that the city will assist the project by providing an annual subsidy of $1 million per year for the first 10 years,” according to the analysis by Economics Research Associates of Los Angeles. “Thereafter, the city will participate in the profits of the project to recapture the subsidy.”

Closed-door negotiations in Santa Ana continue.

Guanci said that his partners do not intend to finance construction of the Santa Ana arena. Investors, perhaps from Taiwan or Japan, will be sought for the construction money, he said.

“If the costs are controlled properly and it’s designed properly and some of our plans for city participation and sales levels are attained, we don’t believe any of our partners will be financially responsible for anything,” Guanci said.

Unlike in Santa Ana, the plan in Anaheim is for the developer to deed the building to the city and in return be awarded a 30-year lease to operate the arena.

But ownership has its price. On Nov. 30, 1989, the Anaheim City Council issued $18.7 million in bonds to buy arena land and land for those displaced by the project.

To pay off the bonds, the City Council increased a tax on the city’s hotels and motels, which can be expected to pass it on to customers.

About 20 of Anaheim’s largest hoteliers were briefed on the bed-tax increase and apparently had no protest because the land also can be used for truck marshaling for trade shows at the Convention Center, said Bill Snyder of the Anaheim Convention Bureau.

The increase will bring Anaheim’s bed tax to 11%, compared to 7% in Las Vegas and 13.25% in New York City.

“It’s an easy tax to put on because you are not taxing the local constituency,” said Richard J. Newman, president of the International Assn. of Convention and Visitor Bureaus, based in Champaign, Ill., and representing 360 visitor and convention bureaus. “The people from out of town don’t have any say about how they are being taxed.”

Anaheim officials say the bed-tax increase more than covers the bond debt. If for some reason it does not, the bond’s fine print requires the city to make payments “from any source of legally available funds.”

Officials pledge that property taxes wouldn’t be used to pay the debt.

Anaheim’s arena deal has yet to be approved by the City Council, and for the most part its terms remain secret.

However, tentative agreements signed July 12, 1989, between Ogden and the city would have Anaheim provide an arena subsidy of up to $1.5 million a year for 10 years, if the facility operates in the red. The city would be repaid with interest from the next year’s arena revenue, if there is revenue.

Anaheim Finance Director George Ferrone said the city could recoup its investment by selling the property. “Whether we build an (arena) or don’t . . . this is land in one of the hottest building areas in the United States.”

However, Anaheim Councilman Pickler disclosed in January that the city paid $3.2 million for one parcel appraised at less than half that price. (City Atty. Jack L. White said subsequent appraisal of furniture, fixtures and “good will” raised the value to $3 million.)

“I don’t think we should be in the real estate business,” Pickler said.

Although Anaheim and Santa Ana both emphasize that local taxpayers won’t be stuck with the arena bill, the source of Anaheim’s operating subsidy has not been publicly identified. Santa Ana’s subsidy is expected to come from increased property taxes generated by the arena--not the city’s general fund.

“Politically it’s important to make that distinction,” said one Santa Ana council member who asked not to be identified. “If you build the arena, you qualify for taxes that you are creating.”

However, if a different development were built at the same location, the city would receive the increase in property taxes and would not have to pay a dime of it to the developer in subsidy, city planner Jeff Rice said.

Arena proponents stress that their proposals are more than dollars and cents.

Santa Ana’s arena will create “positive regional and national exposure,” and “enhance community and civic pride,” boosters say.

Likewise, Anaheim’s arena will enhance “the entertainment capital of Southern California,” as the city fathers like to call it.

“I would argue that those arguments of civic image are important, but it’s kind of a red herring,” Walters said.

“The (economic) downside is it could cost the city,” said Anaheim Planning Commissioner Lewis Herbst, who voted against the arena’s environmental report.

“Why do we want to spend 85 million bucks until we find out for sure,” Herbst asked when that was the estimated cost of the arena.

A TALE OF SEVEN CITIES

California cities are planning luxurious indoor sports arenas to attract or hang on to professional sports franchises. OAKLAND Estimated cost: Unknown. Seating: 20,000 seats with 120 luxury suites. Pro team: The NHL’s Minneapolis North Stars have talked with Oakland officials about moving, and an NHL expansion team is also a possibility. The NBA’s Golden State Warriors already play in the existing Oakland Arena. Background: The Oakland Coliseum Arena Commission is considering tearing down its 14,000-seat arena and building a new facility complete with luxury boxes. The expense of demolishing the existing indoor arena, building a new one, revamping the Coliseum to regain the Raiders and possibly paying a franchise fee to the Raiders’ Al Davis may be more than the community can afford. SAN JOSE Estimated cost: $100 million. Seating: Up to 19,000, 22 luxury boxes with option to add 100 more. Pro team: Howard Baldwin, former owner of the NHL Hartford Whalers and Morris Belsberg, owner of Budget Rent-a-Car, are negotiating for the city to get an NHL expansion team. They are not seeking an NBA team, said Dean Munro, who spearheads the city’s arena-franchise effort. Ground-breaking is expected in June or July. Construction should take 24 months. Background: In June 1988 voters approved a $100 million arena bond issue for the city’s redevelopment agency. The debt is to be paid from property taxes on the improvements. San Jose, the third largest city on West Coast, has 2.5 million people within 30 miles. “We’ve got the population base to support professional sports,” Munro said. ‘We show the facility in the third or fourth year of operation making money, even without a professional team.”

SAN FRANCISCO Estimated cost: $80 million. Seating: 20,000 seats, unknown number of luxury suites. Pro team: Possibly a NHL expansion team. Would be arena operator Spectacor Management Group, the same firm proposing new arenas in Santa Ana and Los Angeles “owns the Philadelphia Flyers,” said Ed McGovern, assistant to the mayor. “Obviously they’ve got some . . . clout with the NHL on where an expansion franchise is going to be located.” Spectacor Executive Vice President Don Webb said the San Francisco Arena is “a little further along...than Santa Ana.” Background: The arena would be built on 12 acres in the city’s Mission Bay 200-acre redevelopment area owned by Santa Fe Pacific Realty, the same company that owns the arena land in Santa Ana. said voters will be asked to approve the entire Mission Bay project, but a separate agreement may be negotiated just for the arena if the ballot measure fails.

LOS ANGELES Estimated cost: $100 million to be financed by Spectacor Management Group. Seating: 20,000 seats with 200 luxury boxes. Pro team: NBA’s Los Angeles Clippers Background: The Clippers, now playing in the Los Angeles Sports Arena, want a new facility with revenue from luxury suites. Clipper owner Donald Sterling says “We must have a new state-of-the-art facility to play in. That’s absolutely mandatory.”

ANAHEIM Estimated cost: $94 million, financing to be arranged by Ogden Corporation. Seating: 20,000, including 80 luxury boxes. Pro team: An NHL or NBA franchise. The Major Indoor Soccer League has indicated it may grant an expansion franchise. Background: A previous attempt to build an indoor arena and obtain an NBA expansion franchise failed in the mid-1980s. This time the city is opening its purse strings for land acquisition and even subsidize its operation, if necessary. A court challenge of the city’s environmental study will delay ground-breaking at least to the next court hearing in May.

SANTA ANA Estimated cost: $75 million. Seating: 20,000, including 120 luxury suites. Pro team: An NHL or NBA franchise. Background: As in Anaheim, a prior attempt to build an arena in the mid-1980s failed, even though a $37 million bond issue was tentatively approved. A politically acceptable location for the arena could not be found because homeowners protested they did not want it in their back yards. This time the land is in place and there are only scattered complaints from the arena’s neighbors in the mostly industrial and commercial neighborhood.Spectacor Management Group is expected to sign a development agreement this month.

SAN DIEGO Estimated cost: $120 million. Seating: 22,900 seats, 180 luxury suites. Pro team: NBA or expansion NHL team. Background: The NBA Clippers deserted San Diego in 1984 and three minor league hockey teams failed between 1966 and 1979. But millionaire Harry Cooper, who holds a 27-year lease to operate the city’s existing 14,500-seat sports arena, says TV revenue has since changed the economics of hockey and basketball dramatically. “We’re offering free rent for 40 years. We’re letting all the (franchise) owners know that...there’s (an arena) here they can start playing in immediately and a state-of-the-art one” proposed. Ground-breaking is targeted for March, 1992, and the grand opening for August, 1994.

WHAT PEOPLE SAY ABOUT THE ARENAS

Irv Pickler, Anaheim Councilman--”I think they (the NBA and NHL) are going to look at other areas where there are fewer teams.” Dan Young, Santa Ana Mayor--”Do we expect to have an NBA team? Yeah. Do we know when that is? We really don’t have a clue.” Marie Monet, President of Ogden Financial Services--”The real risk of there not being a team would be Ogden’s risk, not the community’s.” Miguel A. Pulido, Santa Ana City Councilman--”The Angels and the Rams have proven there’s an independent market in Orange County outside of Los Angeles.” Harry Cooper, Plans his own arena in San Diego--”The only way they (Orange County cities) are going to get a team is if the Lakers go there or the Clippers go there...” Douglas G. Logan, Vice president of Ogden Corp.--”With the way television is fragmented, there is plenty of room in a market of that size.” STADIUM DEALS--Proposed arena operator may face a contractual conflict. C1

RISING PRICE--Potential cost overrun seen in Anaheim’s stadium project. A20