How the Game Was Played

It looks grand, loaded with extras, big and expensive, and comes complete with this stop-you-in-your-steps welcome mat: The most complicated sports arena deal in the country.

Most any way you pour it, this is a strange brew.

Start with elaborate maneuvers by the two businessmen intent on building a new arena. They buy the Los Angeles Kings hockey club and announce that they’ll no longer play in the Great Western Forum. The gambit gives them the leverage to convince the owner of the Forum--who also is majority owner of the Lakers--that the Forum has no future. They not only persuade him to move to the arena they plan to build, but also extract a price of admission: a chance to buy one-quarter of the Lakers, which happens to be L.A.’s most successful sports franchise.

Next this twosome shops for a place to put the arena. After a messy public dispute with Los Angeles officials, they finally settle on a site downtown, even though the city is comparatively stingy in providing public money for the venture. They then sell off a share of the arena to Fox Group to ensure a strong media presence and begin trying to balance the egos, interests and schedules of what will be the busiest arena in the United States--the only one that’s home to three major professional franchises.

Complicated enough? Add this: The arena comes freighted with the hopes of civic leaders that it will revive downtown Los Angeles, which has been on life support for decades. And it exposes the owners to more economic risk than owners of most arenas elsewhere.

“There’s no question the developers have borne the brunt of the economic load to put this thing together, but it’s one of the most extraordinary sports developments in the country, if not the world,” says Dean Bonham, president of the Bonham Group, a Denver-based sports and entertainment marketing consulting company. “I think you are looking at the ownership model of the next millennium.” Philip Anschutz, principal owner of the Staples Center, is trying to “put together a synergistic package that includes a TV component, facility, development and team components,” Bonham says. “We’re looking at something in sports that’s no longer an ego play, but an economic play . . . . I don’t think there’s any doubt it’s going to be successful, but given the complexities of this deal, not without some operational headaches.”

All that, and you thought it was just a big building requiring a second mortgage to buy a ticket. And it will--with the arena’s 160 luxury suites going for as much as $307,500 a year. Three hundred and seven thousand and five hundred dollars--a year. It’s a number worth lingering over, for it is one of three lucrative reasons the owners of the Staples Center and its resident teams--the Lakers, Kings and Clippers--would endure the arabesque jockeying needed to build it. Combined with the whopping $116 million that Staples paid for the rights to post its name on the arena and the potential to build an entertainment district nearby, the payoff could be enormous.

Seen from another perspective, of course, sports fans now have an arena that, more so than any other in America, celebrates the difference between the haves and the have-nots. The former can afford the expensive premium seats or suites; the latter will have to scrape to get in the door for the oxygen tank seating--all in the name of one of the most highly centralized businesses on the planet. Most of the earnings go to a handful of wealthy players and owners.

What’s in it for Los Angeles, besides a palace for sports and entertainment? “This building is the beacon for many of the hopes and aspirations of the city as to the economic rejuvenation of our downtown area,” says Tim Leiweke, president of the Staples Center. “So we are out there taking the leadership position on things like the Democratic convention--you don’t always see that out of other arenas. Combine that with the land we own around the building and the master plan for that land, and we believe we must be a leader in this city and utilize this asset as a major piece of the economic engine for L.A.”

Looking at it all now, this has been a massive undertaking, one that will require a corporate scorecard to better understand how this mishmash of talent will work. But first, some history on how this mega-deal fell into place, and why this month’s grand opening is happening in downtown Los Angeles rather than the little burg of Inglewood.

Planting the Seed

It began more than six years ago. Industrial real estate developer Ed Roski Jr. had an idea to build a sports arena on 47 acres of railroad land owned by Anschutz below Dodger Stadium just beyond Chinatown, an area known to most developers as the Cornfield. He studied sites in Inglewood, the San Fernando Valley, one near LAX, a couple in West Los Angeles and a different one downtown. He pitched the idea for a new arena to the Clippers, Kings and then the Lakers. They all listened, seemed interested, but made no move to do a deal with Roski.

While this was happening, troubled Kings owner Bruce McNall sold 72% of his team to new owners, who were also having financial difficulties. Roski had a new idea. He had dealt with Anschutz for years and arranged for the two of them to acquire the hockey team. As part of that transaction, a bankruptcy court negated the Kings’ lease at the Forum.

Now the Kings had leverage. Roski and Anschutz never had the intention of buying the team without working a deal to build a new arena, but they also knew that a new facility would work best if it included the Lakers. They went back to Jerry Buss, owner of the Forum and the Lakers, who knew that without the Kings, the Fabulous Forum was going to lose its luster. Their talks led to Buss selling 25% of the Lakers to Roski and Anschutz in exchange for the opportunity to become a tenant in a new sports arena.

Why? Buss knew that a new arena would put some of the Hollywood back into “Showtime,” while dramatically increasing the value of his franchise overnight. It would also make him significantly richer in another way, increasing the Lakers’ revenues through the sale of those high-priced luxury suites. As a result, Buss had the kind of money--$6 million a year--to hire the immensely successful Phil Jackson as head coach.

Watching It Grow

Name the sport, here’s the way the arena game is played these days: Franchise owners increase their revenue at new stadiums because they can charge higher ticket prices and sell luxury suites and premium seats. Stadium and arena naming rights have also become a boon, with Staples paying $116 million for the next 20 years of exposure. Ten corporations, including the Los Angeles Times, are “founding partners,” each paying $2 million to $3 million a year to advertise inside and around the building.

As part of the game, local governments generally contribute to build a new arena, with the implied threat that anything less will result in the departure of the team. The Raleigh, N.C., Entertainment and Sports Arena, for instance, is being built with a contribution of $92 million in public money; in Indianapolis, $79 million of public funds is going to the new Conseco Fieldhouse; in Miami, public contributions to the American Airlines Arena total $39.1 million.

Roski and Anschutz were expecting the same kind of assistance in Southern California as they began shopping their plans for a new arena. Inglewood, which had promised almost $50 million in public funds for a football stadium that never materialized, made its interests known.

At the same time, Steve Soboroff, friend and advisor to Mayor Richard Riordan, suggested a site beside the Convention Center in downtown L.A. Roski was quickly hooked on the idea, and he became a strong advocate. From the beginning, Anschutz had taken his lead from Roski--a man who the Denver billionaire says earned his admiration earlier by taking the Kings out of bankruptcy. In Leiweke’s view, if Roski “hadn’t been as bullheaded and stubborn as he can be, then we wouldn’t be sitting here. Give Ed Roski credit for being persistent.”

Excited by the downtown site, Roski and Anschutz tried to persuade L.A. city officials to provide more public money to the project, suggesting that Inglewood might be the better financial choice otherwise. Eventually, the parties to the Los Angeles site reached an agreement, only to see it undone in disputes between lawyers trying to work out the details.

Suddenly Inglewood resurfaced as an alternative--some would say ploy--to force L.A. officials to soften their position. “We had walked away from negotiations in Los Angeles and we were trying to do the deal in Inglewood,” says John Semcken, chief negotiator on behalf of Roski. “It was so close.” Roski’s heart was still with the downtown site, but he reluctantly agreed with Anschutz to proceed with a deal in Inglewood, and for a few opportunistic days late in 1996, an agreement was there to be made.

If successful in Inglewood, the developers would have probably built a scaled-down version of the Staples Center. “I’m telling you, what people don’t realize is it came so close to being built in Inglewood,” Semcken says. It probably would not have been called the Staples Center, certainly not drawing $116 million in naming rights for that location. The arena also might not have been grand enough to attract the Clippers, or the major concerts now being planned.

“Los Angeles had blown it and Ed Roski was prepared to walk away from the downtown deal,” says someone familiar with the negotiations, and here’s where it gets a little nasty. “It was Inglewood’s deal to lose and Inglewood blew it.” No one wants to attach his name to such a stinging indictment in these happy times downtown, but as Leiweke says now, “We were prepared to go there, but thank God it didn’t work out that way.”

In hindsight, Inglewood was ready to do a deal at Hollywood Park, the horse racetrack immediately south of the Forum. But the developers said that R.D. Hubbard, former CEO of Hollywood Park, was asking too much for his land, confident that the developers would never be able to consummate a deal in Los Angeles. “Hubbard overplayed his hand,” says an insider. “Both Hubbard and Buss overvalued their assets. Buss would probably have come around, but Hubbard thought we would never get a deal done in L.A. and figured he could play hardball. It all came down to one day. Hubbard and Buss weren’t ready to do the deal, and L.A. called willing to talk again.”

Hubbard scoffs at such a suggestion. “This is the first I ever heard of that. My opinion is we really never had a chance.” Although Hubbard believes Anschutz seriously considered the Inglewood site, “realistically, Roski and Semcken never even intended to do the deal at Hollywood Park.”

Leiweke, while declining to be more specific, says, “I know this, you have to hang in there with Phil Anschutz. Phil’s a businessman, and if you try to out-negotiate him, it’s probably not a good idea.”

A Budding Deal

It has long been the opinion of outsiders that it’s next to impossible to do a deal requiring approval of the Los Angeles City Council, given the range of interests and viewpoints it reflects. Three years ago, Roski and Anschutz could have ratified that view. Their frustration had sent them charging toward Inglewood, but they were brought back to the bargaining table by John Ferraro, president of the City Council. “John Ferraro is the unsung hero in this thing,” says George Mihlsten, an attorney working on behalf of Roski and Anschutz. “He made the deal happen in L.A.”

Ferraro wrote a series of memos nudging the process forward. He called the parties together and assembled a team of administrators from various city agencies to help with the nuts and bolts of the deal. “It was all slipping away from Los Angeles,” Leiweke says, “and John Ferraro stepped in. If not, who knows. We could be standing in Inglewood today celebrating the opening of a new sports arena.”

But just as Ferraro’s diplomacy succeeded in turning Roski and Anschutz back toward L.A., Councilman Joel Wachs began pushing for better terms for the city. Wachs threatened to give voters the last say on whether public money would be spent for a sports palace. The Clippers had a better chance of winning the NBA championship than the voters agreeing to use public money for a new arena.

Roski’s counter-threat was to scrap plans for an arena if it went to a ballot. But Wachs held firm to demands for more protection for taxpayers and more concessions from the developers. Among other things, Anschutz had hoped to repay the bonds with city taxes generated from the arena, but the city demanded that the money be kept as a profit.

The dispute moved to negotiations behind closed doors and ended with an agreement weeks later. Although both sides won concessions, the truth is, Anschutz surrendered. They offered an “ironclad” guarantee that they would repay $58 million in municipal bonds used for the project. They agreed to pay $3.2 million for a 55-year lease on the arena land, which in earlier negotiations the city had offered to give them for $1 a year. They also paid $1.6 million for two acres of land that the city had previously agreed to give them.

In return, the city’s Community Redevelopment Agency gave $12 million to the project without requiring that it be repaid. With a few exceptions, notably Boston and Denver, that is far less public money than most cities have offered to arena and stadium developers in the 1990s.

On Oct. 21, 1997, the City Council approved financial and environmental agreements for the arena, leaving Wachs to proclaim that he had saved the city $126 million by standing tough. Anschutz, while in no mood to revisit the issue, estimates a much lower number, although admitting that the city and its taxpayers contributed much less than called for in earlier financial models. “Look, these are very responsible people, very successful people, out to get every buck they can,” Wachs says of the developers. “That’s the nature of it.”

Two years later, the deal still has people buzzing. “Worst arena deal in the country” for the developers, says Pat Lynch, general manager of the Los Angeles Memorial Coliseum and Sports Arena. “Great for L.A., but not so good for the developers, who are paying for virtually everything.”

National Basketball Assn. Commissioner David Stern “looks at this deal and compares it to Cleveland and says you guys are idiots,” Leiweke says. “It’s not that we are idiots; we are just business people who are used to taking risks because we have faith at the end of that day that our vision, our ability to sell and our ability to operate give us a strategic advantage to be ultimately successful.”

“It probably looks like the worst deal a developer has ever done,” says Greg Nelson, chief deputy to Wachs. “But what you’re not looking at is the value of all that land they’re getting in the middle of downtown.”

By most accounts, Anschutz, one of the wealthiest men in the world, knows what he is doing. Experts say Anschutz will not only turn a profit from the arena, but will also strike it rich on 30 acres of land acquired nearby to develop an entertainment district with a hotel, restaurants and shopping. It’s all about vision: Where others might see the Lakers, Clippers and Kings, Anschutz is looking at “critical mass.” That’s business talk for “bring on the paying public” after placing a moneymaking draw close to other attractions. The “worst arena deal” in the country might one day become the most profitable arena deal in the country.

Those crucial 30 acres near the arena cost $88 million. The developers put up $18 million in cash, and the municipal bonds and redevelopment money account for the rest. Notably, that land is also hard by the Convention Center, an immense island with little on surrounding streets to lure conventioneers. “You’re gonna have a billion dollars of investment in that area around entertainment and a hotel,” says Soboroff, who is also a successful commercial real estate developer. “If they don’t do those things, they lose money.”

Given all the factors, just how big is the risk? Not very, says Dennis Howard, professor of marketing at the Warsaw Sports Marketing Center at the University of Oregon, especially given that the owners expect to book the Staples Center for at least 200 events the first year alone. In addition to the three major professional teams, the center will be home to an arena football team and possibly the Los Angeles Sparks, the Women’s National Basketball Assn. team, and is expected to be popular for concerts. “There just aren’t that many places in the country that have that kind of critical mass,” Howard says. “Typically you have to have 125 events in a major arena to hit the break-even point. Anything over that means you’re operating at a profitable level. For the Staples Center to have 200 nights guaranteed out of the box--that’s just awesome.

“This thing is going to make enough surplus revenue to bring a very nice return on their investment. If they get four or five conventions through the hotel each year, that’s a windfall.” Other investors are also bullish. A number of them, including several insurance companies, recently bought $315 million in asset-backed bonds that essentially reimburse Anschutz, who had personally guaranteed the construction financing. These new investors expect to not only recoup their money, but also draw a 7.65% annual return on arena revenues for the next 27 years.

What those investors know about the arena is this: In Leiweke’s words, the Staples Center “had three anchor tenants in the Lakers, Kings and Clippers . . . . Add to that an Arena Football League team and the possibility of the WNBA, and automatically you have about 150 days booked. Any concert of any magnitude is going to want to play in this building; this is the new Madison Square Garden of the 21st century, so that will give us 30 major concerts a year. Add family shows with the circus and ice shows and that’s another 50 dates.”

The Staples Center has secured the 2000 Grammy Awards and, with the assistance of the Los Angeles Sports and Entertainment Commission, has bids in for the 2002 NHL All-Star Game and the 2003 NBA All-Star Game. “We have a vision and we are about halfway through it,” Leiweke says. “As much as the Staples Center opening is huge, it’s less than half what is going to happen here. We have a master plan of where we want to be five years down the road.”

There is a footnote to the gyrations involved in the deal, one with $2.1 million attached. It is the Pico-Union neighborhood, a dense community less than a square mile in size just west of the arena. The area is made up primarily of first-generation immigrant families, just the sort of small and poor place that developers usually trample. But in this tale, Pico-Union confronted Goliath. Residents filed a lawsuit two years ago claiming the arena would bring more traffic, noise and crime to their streets. The developers have since settled out of court, providing money to replace a child-care center that was razed to make room for arena parking lots, establish a foundation for community programs, preserve historic homes, conduct a landscaping study and plan and finance an independent traffic study.

As for the city of Los Angeles, it is now rooting hard for the arena to succeed. Insiders estimate the city will collect more than $70 million in property, parking, sales and utility taxes over the next 27 years. City officials are also eagerly hoping the center and surrounding development will provide a catalyst to revive downtown.

In Full Blossom

Believe it or not, ownership of the arena and its tenants has grown even more complicated over time. Here’s how the ownership breaks down:

Fox now has 40% of the Staples Center, in return for the exposure and programming that brings and the potential to play a significant role in the retail plans outside the arena.

Anschutz maintains controlling ownership in the Los Angeles Arena Co., with a little more than 50%. Fox’s 40% was purchased from Roski under a prior agreement with Anschutz. “I thought from the beginning that we had to have an entertainment company involved in the arena, and our agreement was I would sell my share of the arena,” says Roski, who retains a little less than 10%. “I talked to Sony, Warner Bros., Universal, Disney, Fox . . . . It was just critical to the deal.”

Two of the teams involved, the Lakers and Kings, have also undergone further ownership shuffling.

Buss still owns 70% of the Lakers. Anschutz and Roski still have 25%, but have given Fox an option to buy 10% of the team from their share. In another indication of Anschutz’s intentions in L.A., he has an option on the 5% share held by TV executive Bill Daniels, and right of first negotiation on any deal to buy out Buss. “We have spent more than $375 million to build the greatest arena ever, and the day the Lakers walk in their value goes through the roof,” says Leiweke, highlighting once again the benefits of a new playpen for L.A.’s indoor teams.

As for the Kings: the organization will say only that Anschutz owns more than half, Roski less than half, and Fox has an option to buy 40%. If Fox exercises that option, the team says, Roski’s share will be less than 10%.

The Clippers remain wholly owned by Donald Sterling, who is now officially an anachronism in this city where the mom-and-pop days of family ownership had mostly evaporated with the departure last year of former Dodger owner Peter O’Malley. “It’s obvious Fox and Phil are the big fish in this pond,” Leiweke says. Maybe it’s not long before it will take a corporate appointment with the vice president to the vice president of something to register a complaint or suggestion with teams residing in L.A.

Anschutz has purchased the Forum to use as a backup venue to the Staples Center. He is considering buying the Sparks, the women’s professional basketball franchise.

Bonham, the Denver consultant, says Anschutz may well be the model owner of the future. For example, he says, New Yorkers “will probably see [cable company owner] Charles Dolan trying to emulate what Anschutz is doing with a new Madison Square Garden. And while I predict there will be more public money in Madison Square Garden, I look for him to bring teams together like Anschutz, even building an NFL stadium for the Jets in Manhattan, near the Garden.”

As for the Staples Center, Leiweke says the owners are fully aware that it represents more to L.A., especially downtown, than just a new playground. “This project is critical for L.A. We must succeed, must live up to our potential and must have the impact everyone expects out of us. The revitalization of an entire urban area is pinned toward this project.” The new Roman Catholic cathedral and Walt Disney Concert Hall, now under construction, will help toward that end by bringing even more people downtown. “But you’re talking about 3 to 3 1/2 million people a year just for the arena, and that doesn’t include the draw from the entertainment zone planned outside the building.”

“I can tell you this building works,” Leiweke says. “It’s not the best investment we will ever make. It’s not the worst. But this arena will do fine. This is not a charity case, not a tax shelter . . . . We’re never going to get rich off of it, but it will work because of the relationships we have established, and because of our vision.

“We know what we want to accomplish.”

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The Cash Register

Having poured nearly $400 million into the arena, Staples Center executives are coy about how much of that money they hope to earn back the first year. “Are we going to get rich off the building? No,” president Tim Leiweke says. “But are we going to go broke on it? No. We can make this work financially.” Sources close to the project offer a glimpse at projected revenues:

Suites

160 suites from $197,500 to $307,500 per season

Total: $35 million

*

Premier seats

2,476 seats from $12,800 to $14,800 per season

Total: $33 million

*

Concessions

2 million fans at an average of $6 each

Total: $12 million

*

Parking

$12 average for each of 4,000 spaces at 200 events

Total: $9.6 million

*

Sponsorship Naming rights

$116 million for 20 years from Staples

Total: $5.8 million

*

Founding partners

10 corporations at $2 million to $3 million each.

Total: $25 million

Concerts, other events

Total: undetermined * The arena pays slightly more than 50% of its suite and Premier seat revenue to the Lakers and Kings. Some concession revenue goes to the Lakers, Kings and Clippers and the companies that operate a private club, two restaurants and 23 snack bars in the arena. A portion of the parking revenue goes to a private parking company and to pay for leases for lots. Promoters share revenue from rentals.