Bloomberg News

Santa Clara Borrows Against Odds of Gain With 49ers

April 19, 2012

The proposed new stadium for the San Francisco 49ers, is seen in this artist's rendering. Source: San Francisco 49ers via Bloomberg

The proposed new stadium for the San Francisco 49ers, is seen in this artist's rendering. Source: San Francisco 49ers via Bloomberg

Michele Ryan says Santa Clara, a Silicon Valley city of 116,500, overreached by betting it can build a $1.18 billion stadium for the National Football League’s San Francisco 49ers without dunning taxpayers.

Elected officials, in borrowing $950 million for the project from firms led by Goldman Sachs Group Inc. (GS:US), went beyond the $114 million investment approved by voters, says Ryan, who teaches high school mathematics. Groundbreaking for the field is today, with the team planning to move in for the 2014 season.

“What happens if this doesn’t work?” Ryan, chairwoman of the anti-stadium group Santa Clara Plays Fair, said by telephone. “They don’t want to ask those questions.”

Santa Clara is wagering on the nation’s most-popular sports league, joining U.S. cities that owe at least $10 billion combined for professional sports venues, according to data compiled by Bloomberg. Atlanta, Minneapolis and San Diego are in talks to borrow hundreds of millions of dollars more, while a study by Harvard University’s Judith Grant Long suggests that such investments generate little economic benefit and typically cost taxpayers about 40 percent more than forecast.

Santa Clara, home to chipmakers Intel Corp. (INTC:US) and Nvidia Corp. (NVDA:US), avoided using its general fund or tax increases to pay for its plan. By relying instead on projected stadium revenue, including the sale of naming rights and personal-seat licenses, along with $200 million from the NFL, the city is taking what may be the largest per-capita risk for any municipal sports facility. Its general-fund spending reached $138.3 million in fiscal 2011.

Revenue Variables

The size of the potential unfunded liability hinges on how much a sponsor would pay to put its name on the venue and the amount fans agree to hand over to guarantee a seat, as well as the economy and the team’s business management, said Roger Noll, a professor emeritus of economics at nearby Stanford University.

“The thing that makes this such a dog is that Santa Clara first of all is a small town,” Noll said by telephone. “There’s some amount of financial hit the city could probably pay, but the probability that it’s going to exceed that is certainly not zero.”

Santa Clara is about 45 miles (72 kilometers) south of San Francisco, where the 49ers missed a chance to go to the Super Bowl when they lost their conference championship playoff to the New York Giants in January. The team hasn’t played for the NFL title since 1995 and made the postseason last year for the first time in a decade. In December, two power outages at the 69,900- seat Candlestick Park held up a nationally televised game.

Heading South

After a year of study, the 49ers said in 2006 that the team would move to Santa Clara, the site of its headquarters and a training center, and leave 52-year-old Candlestick Park.

Unanswered questions remain about what happens when the loan from Goldman Sachs and 15 other firms matures in 2015 and has to be refinanced, said Jamie McLeod, a City Council member who opposed municipal financing. The cost of subsidies has risen for facilities including the Louisiana Superdome in New Orleans, Lucas Oil Stadium in Indianapolis and in Ohio, where Cincinnati is selling a hospital to cover debt for venues used by Major League Baseball’s Reds and the NFL’s Bengals.

“We’ve seen a lot of cases where teams want to limit their liability and have to be bailed out by the public,” McLeod said. “The bottom-line concern I have is how water-tight are the legal documents” that are supposed to shield the city.

City Shield

The protections include placing ownership of the 68,500- seat facility with the Santa Clara Stadium Authority, a city affiliate set up to arrange the loan and finance the work. Gregory Carey, who heads the Goldman Sachs infrastructure group in New York, told the council in March that the loans were oversubscribed and that the team’s Forty Niners SC Stadium Co. would cover cost overruns.

Bob Lange, a team spokesman, didn’t respond to a telephone call and an e-mail seeking comment on the plan.

The floating-rate debt will be less than $600 million when it’s refinanced, which may be as soon as 2013, Carey said.

“We’re probably going to be coming back with somewhere around a $575 million loan that is a combination of the authority and StadCo,” Carey said. “But we feel things have gone exactly as expected, which is very unusual in markets, and we feel very, very good about the position we’re in.”

Cost of Loan

The loan will cost about $78 million, including fees and interest during construction, and must be refinanced by September 2015, either with new lending or with long-term debt. Goldman Sachs won the business “because it had the most favorable terms,” said Alan Kurotori, the assistant city manager who handled the deal.

Interest will be set based on the 90-day London interbank offered rate, or Libor, which averaged 1.02 percent last week, plus 3.25 percentage points, Kurotori said. Libor is a daily benchmark that reflects the rate at which banks in London are willing to lend to each other for a specified time period.

The football team that has played in San Francisco since 1946 has agreed to stay in the Silicon Valley city for at least 40 years, with the possibility of extensions, Kurotori said. The 49ers, whose name won’t change, must pay to demolish the Santa Clara stadium once it becomes obsolete.

The agreement makes fans shoulder the loans instead of Santa Clara taxpayers, Carey said at a March council meeting. The facility’s financial and maintenance obligations belong to the team’s corporation and not the stadium authority, he said.

Buffered Risk

“There are many layers of protection,” said Kurotori. “If they wanted to leave, they would have to pay off the loans and demolish the stadium.”

City taxpayers shouldn’t need to cover any of the costs, because the loan was made to the stadium authority, which was created last year to handle the project. Revenue derived from the facility, such as rent and other payments from the team, is to be used to cover debt service.

“What happens a few years after the stadium is built and they refuse to pay remains to be seen,” councilwoman McLeod said, referring to the team. “We’re told that they protected the city, but there are still questions in my mind about the risk the city is taking.”

Although the city’s general fund is supposed to be spared, the “obvious problem for the taxpayers of Santa Clara becomes inadequate debt coverage,” said John Vrooman, sports economist at Vanderbilt University in Nashville, Tennessee.

Team Commitment

Ultimately, the funding will come from the team, and the 49ers’ commitment to cover the debt “is less than an ironclad guarantee,” said Stanford’s Noll. If the team reneges on the deal, the city’s only alternative is “to let it go bankrupt.”

“The creditors will own the stadium unless the city kicks in millions of dollars of financial support,” said Noll. “The guarantee from the 49ers only works if it works.”

Stadiums are “the worst thing you could possibly build” from a city’s economic perspective, Noll said. Public subsidies for sports venues cost taxpayers an average of 40 percent more than planned for 99 facilities built through 2001, according to research by Long, who teaches urban planning at Harvard in Cambridge, Massachusetts.

The deal is different than a ballot measure authorizing the project that passed in 2010, McLeod said. Although cost wasn’t mentioned, she said a term sheet showed that the city would commit to investing $114 million in the stadium and borrowing $330 million through the authority. The public didn’t learn the amount of the loan until more than a year later, McLeod said.

Unsuccessful Battle

Santa Clara Plays Fair fought the plan as the borrowing level rose, collecting signatures on a petition demanding a new referendum, said Ryan, the group’s chairwoman. A judge rejected the bid this month, clearing the way for today’s groundbreaking.

“We’ve done everything we can to protect the taxpayers and the general fund from risk,” said Kurotori, the assistant city manager.

Taxpayer costs haven’t been detailed beyond $75 million from municipal agencies and special districts, plus a “half- hearted promise prohibiting the use of Santa Clara city funds for funding or operating the 49ers stadium,” Vrooman said.

“The wording of the deal has been vague and confused from the beginning,” Vrooman said. “If a private professional sports club takes public money, then the public should be privy to quasi-public details.”

Following are descriptions of coming sales:

ILLINOIS, Moody’s Investors Service’s lowest-rated U.S. state, plans to sell $1.8 billion in general-obligation refunding debt as soon as April 30, according to the ratings company. The sale may save more than $100 million in interest costs on a net present value basis, said a statement from the company. Moody’s rates the securities A2, sixth-highest. (Added April 18)

NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY plans to offer about $413 million of tax-exempt bonds and $22 million in taxable debt by competitive sale as soon as next week, according to an offering document. The proceeds will be used to fund or refinance the cost of school facilities projects. S&P rates the bonds A+, fifth-highest. (Added April 18)

To contact the reporters on this story: Darrell Preston in Dallas at dpreston@bloomberg.net; Aaron Kuriloff in New York at akuriloff@bloomberg.net.

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net; Michael Sillup at msillup@bloomberg.net


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