City Scours Arena Deal in Search of Extra Costs

For city taxpayers, the cost of bringing the Lakers and Kings to downtown Los Angeles appears fairly simple and straightforward: up to $70.5 million--or roughly half of what the Lakers will pay their new star attraction, Shaquille O’Neal, for the next seven years.

Yet as the City Council prepares to begin formally deliberating this week whether to consider providing the land for a $200-million sports arena, officials still must determine how the city would pay its share and whether taxpayers could face additional, unanticipated costs.

At this point, there appear to be few clear-cut risks to city taxpayers--beyond financing land costs for the 20,000-seat, privately owned sports mecca next to the Los Angeles Convention Center.

Under the nonbinding proposal presented to the city last month by Kings co-owner Edward P. Roski Jr., taxpayers would be required to provide $60.5 million from bonds to buy and clear land for the complex. If the pre-construction costs turn out to be higher, the city could be on the hook for up to another $10 million.

The plan, a product of 19 drafts and a year of behind-the-scenes negotiations between the Kings and Mayor Richard Riordan’s office, calls for the arena developers to pay for building the facility.

“We give them the land and they do everything else,” said Riordan confidant Steven L. Soboroff, the city’s chief negotiator in bringing the deal to the table.

At this point, the city is looking to place most of the burden of paying off the bonds on out-of-town visitors by increasing the city’s hotel room tax rate by 1%. Failing that, the city would probably be forced to dip into money that otherwise goes to police, fire and other municipal services, to cover part of the estimated $7-million-a-year cost of the deal.

Within the next two weeks, the council must decide whether to approve the proposal in concept. If the answer is yes, the city and the L.A. Arena Co., made up of the Kings owners, would seek to negotiate a binding pact by mid-October.

For Los Angeles, the out-of-pocket costs are less than many other cities have paid to lure pro sports teams.

Inglewood, hoping to keep the Lakers and Kings from leaving for Los Angeles, is offering not only land but up to $30 million in cash. The Kings say they will study Inglewood’s offer and send their own proposal to the current home of the sports teams within the next two weeks.

Under the proposal submitted to Los Angeles by land developer Roski and his Kings co-owner, Philip Anschutz, the pair would build, own and operate the sports and entertainment complex, paying $1 a year to lease the land--including part of the publicly owned Convention Center--for 55 years. Through an agreement worked out with the Lakers, the developers promise to have both teams stay for at least 25 years--the length of time it would take for the city to pay off its bonds. The developers also would plan to build shops, restaurants and a hotel.

The owners would keep all profits from the arena, including parking revenues. They would also be given the option to purchase all but the Convention Center parcel--which now holds the aging North Hall--for $1. The city would retain ownership of the Convention Center land on which the arena would sit.

City officials and team owner representatives maintain that the proposal insulates the city from such big-ticket risks as freeway improvements, if needed. At the same time, the developers have not ruled out the possibility that they may seek public funds elsewhere--from the state or federal government--for unanticipated costs.

With lower risks and outlays than many cities building arenas, Los Angeles’ potential dividends would also be less direct than for some municipalities. The payoff, city officials say, would consist of arena-spurred opportunities to improve the city’s tax base, revitalize dormant downtown neighborhoods and help wean the underbooked Convention Center from taxpayer subsidies.

Even before the city’s top bureaucrats have finished crunching the numbers and sifting through the fine print, civic leaders have lined up enthusiastically behind the proposal, displaying rare unity in a city known for its fractious politics.

For the most part, experts in municipally aided sports complex projects agree that the L.A. proposal compares favorably to many deals cut around the country in an era of fierce competition to lure and keep pro sports franchises.

“I wouldn’t go so far to say that it’s a great deal, but it’s certainly reasonable,” said Marc S. Ganis, president of Chicago-based Sportscorp. Ltd., who worked on the Rams’ move to St. Louis and the Raiders’ return to Oakland.

Ganis said Los Angeles has to put up enough money to attract the teams’ owners to the central city. “This is a way for the city to simply even the playing field between an urban location and a suburban location. . . . This is what the city has to do--effectively what all cities have to do--when they’re competing for businesses.”

City officials are facing tight deadlines--the developers say they must break ground by September 1997--as well as an at-times nasty battle with Inglewood for the teams.

Before tentatively committing to a deal, Los Angeles officials still must determine how to cover the debt that would be incurred in issuing the bonds.

Los Angeles officials expect the arena complex to generate $1.5 million in additional city taxes yearly.

To cover the about $5.5 million remaining in annual debt, officials are considering a 1% hike in the citywide hotel room tax rate--now at 14%.

Officials like the idea that visitors, not residents, would be footing the bill, but most at City Hall would think twice before forcing a tax increase on an industry that only recently began rebounding from a nationwide slump.

George Kirkland, president of the Los Angeles Convention & Visitors Bureau, said arena project proponents asked his organization to “shop the idea” of the hotel tax increase. Most of the hoteliers he has spoken to “certainly are supportive” of the project and “understand the [regionwide] value of having this arena complex downtown,” Kirkland said.

But, he added, industry leaders are concerned that raising the tax to 15%--on a par with its top tourism competitors--could leave the city without means to pay for more Convention Center improvements down the road and thereby hurt its future competitiveness.

A public vote would probably be required on a hotel bed tax increase if a November statewide anti-tax measure passes, but arena backers don’t see that as a problem. “I can’t imagine walking into a booth and saying I’m going to either tax myself or tax somebody else [out-of-towners], and pushing the button that says ‘tax myself,’ ” Soboroff said.

Adding slightly to the city’s tab for the arena is the lost value of a narrow band of parcels already owned by the city along 11th Street that the developers can purchase for $1. City officials have not yet calculated the value of this land, mostly remnants left from street widening projects.

The city could also encounter costs in freeing up the North Hall site. The remaining Convention Center property must be sufficient in value to be security for the outstanding bonds, a city spokesman said. Otherwise, the city might have to swap other city land for security on the existing bonds.

In addition, the city could lose revenues it now gets from current North Hall exhibitions, which net $300,000 to $600,000 a year.

Taxpayers beyond the city’s boundaries could also face costs.

For any unanticipated public improvements costing more than $5 million, the city would agree to help the developers seek funds elsewhere, according to the proposal.

With some major entertainment developments, such as the proposed Disneyland expansion in Anaheim, the state and federal governments have offered to put up tens of millions of dollars for traffic improvements. Any decisions on whether such spending would be needed for the arena project would await completion of an environmental impact report. The developers say they do not believe major roadwork would be necessary.

No matter how limited the cost or risk, the project is likely to encounter opposition from those who dislike the notion of any taxpayer money going to big-money sports enterprises when there is no money to operate a new county jail, rescue an overburdened county health system or hire all the police the city wants.

Councilman Joel Wachs, for one, said he would draw the line at dipping into the general fund to cover the bond debt.

“I’d love to see this project happen, but I want to be sure it can pay for itself,” said Wachs. “We should help, but we should get full reimbursement. . . . [city funds] should go for making sure the kid in Little League has a ball diamond to play on” and not to “help a profit-making business that can pay Shaquille O’Neal $20 million a year.”

“Why are we subsidizing these things?” asked Jeffrey Finkle, executive director of the National Council for Urban Economic Development in Washington. “If you look at who the major team owners are, they are the wealthiest of the wealthy of this country. And this supports athletes who are making gazillions while we are pricing out the middle-class and low-class from walking into these facilities anymore.”

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Indeed, the cheapest seat at the Forum for Lakers games this season will be $21.

Arena proponents counter that the project represents more than simply building a House of Shaq.

“This transaction isn’t about sports,” said Soboroff, who called the deal “a very frugal investment on the part of the city with huge, huge returns” in revitalizing downtown.

County Supervisor Zev Yaroslavsky, a former city councilman, agrees that the arena should be viewed in broader terms than how much money it would pour directly into city coffers.

“Is it worth $6 million or $7 million a year for 20 years to turn downtown around?” he asked. “Yeah, I think it is. Has the city spent more money than that on flakier ideas? Darn right, it has.”

Attorney George Mihlsten, lead negotiator for the developers, said they made it clear from the beginning that they were not interested in sharing the profits. “The city is delivering a site to us; we are taking all the risks--and they are risks over the long term--in building and operating [the complex],” Mihlsten said.

City Administrative Officer Keith Comrie agreed, noting that the cities or counties that have been left holding the bag are those that insisted on owning the stadium or getting a piece of the business action. If teams eventually move or their attendance drops, taxpayers are stuck with a money-losing proposition.

“This way,” Comrie said of the proposal now on the table, “the city takes no business risk. None.”

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Downtown Arena at a Glance

THE SITE

* 11th and Figueroa streets, above, where the north hall of the Los Angles Convention Center now stands.

COSTS TO CITY

* $60.5 million in bond proceeds to buy and clear land.

* Up to $10 million for possible pre-construction cost overruns.

* Granting developers the option of buying city-owned land adjacent to the arena for $1.

DEVELOPER COSTS

* $200 million-plus to construct the proposed 20,000-seat arena.

* Construction costs for possible hotel, restaurants and shops.

* Possible pre-construction and construction cost overruns.