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Santa Clara Observer: March 23, 2016

Santa Clara Observer

Playing Political Football with Levi’s Stadium Rent Reset, Despite Stellar Financial Results

Levi’s Stadium has been a financial success for the City of Santa Clara. But you’d never guess it from the argument over the contractual one-time stadium rent reset; which begins to look like political calculus for the future elections.

In fiscal year 2014 Santa Clara’s general fund realized $2.9 million in net revenue from performance rent, ground rent and ticket fees. In FY 2015 (which ends on March 31), the forecast net revenue is $3.4 million. Over the 40-year term of the lease, Santa Clara’s estimated general fund is expected to realize $220 million from these revenues alone.

Yesterday’s special City Council meeting was the latest in a series of meetings on the rent reset. City staff and the 49ers have been working on the rent reset – as required by the contract – since last fall when the actual stadium construction costs were finalized and audited by KMPG, as the agenda report explains.

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The rent reset is part of the Levi’s Stadium lease contract – not an arbitrary demand to lower the rent, as stadium critics insist. Further, the 49ers are not asking for a retroactive reset – which they would be entitled to do – and instead will pay $24.5 million in facility rent for the second year of the stadium operations.

Rent Reset Overdue – Not the Rent

The recent assertion that stadium facility rent is being withheld is false. There is no set due date in the lease, as the 2012 Stadium Lease Agreement explains:

The timing of Tenant’s [49ers] payment of Facility Rent for each Lease Year shall be reasonably determined by Landlord and Tenant based on the projected revenue requirements for the operation of the Stadium as set forth in the Annual Stadium Authority Budget. The present discussion is that process of determination.

The facility rent number is designed to fund Santa Clara Stadium Authority expenses over the 30-year term of the lease.

The Facility Rent Schedule shall be determined such that the Facility Rent payable over the Initial Term, together with other amounts payable by Tenant under this Lease and other reasonably estimated revenues of the Stadium Authority will provide the Stadium Authority with funds required to pay the Ground Lease, the Stadium Authority’s reasonably estimated operating and maintenance expenses of the Stadium, the Annual Capital Reserve Amount and scheduled debt service.

The amount of the facility rent, the way it was to be calculated, and when it was to be calculated was established in the June 19, 2013 Amended and Restated Stadium Lease Agreement. The initial amount, $24.5 million, was set for the first year only of stadium operation.

After a full year of operations, if debt, interest or operating expenses change the facility rent was to be adjusted based on those changes. Further, that difference was to be applied retroactively to the previous lease year. The original 2012 lease agreement noted, Facility Rent is projected to be reduced over time.

If, as of April 1, 2015 (or within thirty days after the final Stadium Authority Development Costs is determined) the debt service on the Project Debt or the then estimated operating expenses of the Stadium are either more or less than the estimated amounts then a one-time adjustment to the Facility Rent Schedule (including, if necessary, a retroactive adjustment) shall be made to take account of such increase or decrease.

Stadium Rent Reset: Financial Math

Here’s the facility rent calculation. The model increases annual expense and utility costs 3 percent and 5 percent respectively. There’s been no significant change in seat license prices at resale, and the rates of resale and default have not changed from the expected rate of 2 percent.

Here’s what’s changed. Final stadium construction cost was $136 million less than originally estimated. Seat license revenues are $140 million over expectations. Construction debt is $138 million less than forecast and the corresponding annual interest payments are $8.3 million lower. Because of the lower debt and interest, the Stadium Authority’s cumulative reserves will grow as a slightly faster rate than initially predicted.

One important cost reduction is that $100 million in variable rate bank debt will be paid off at the end of March. In 2014, this was expected to take 10 years to pay off, with refinancing in the fifth year.

The bottom line is simple: First year facility rent, minus reduced interest cost, plus forecast expense increases, equals the new facility rent: $24.5 million – $8.3 million = $16.2 million + $4.0 million = $20.2 million.

Stadium Rent Rest: Political Math

What happens if the City and the 49ers can’t come to an agreement about the facility rent? That’s where the political calculus comes into play.

The dispute then goes to arbitration. Any Dispute or Controversy which is not resolved may be submitted to binding arbitration hereunder and if submitted shall be resolved exclusively and finally through such binding arbitration. (Stadium Lease, Alternative Dispute Resolution Procedures).

If the rent reset is done by an arbitrator, candidates for re-election can distance themselves from it, and avoid being attacked as 49ers allies – despite former advocacy for stadium construction and highly visible presence at celebratory events like the stadium groundbreaking and opening gala.

Irvine’s Mission Town Center – R.I.P.

Last week the Irvine Company withdrew its proposal to build the mixed use Mission Town development. In a letter to the City Council, Irvine said the Council-imposed reduction in the number of units and increase in low income units made the project economically unworkable at the lease negotiated with the property owner, James Viso. Irvine redesigned the project twice at the Council’s behest.

Irvine attempted to renegotiate a lower land lease, but Viso refused to consider a lower offer. Last Friday morning, city officials had a meeting with Viso’s representatives to see if the deal could be saved, but the effort was unsuccessful, according to City Manager Julio Fuentes.

The Mayor and I were very excited with the unanimous agreement on this project, says Council Member Dominic Caserta. Irvine was willing to compromise. If the project does come to fruition, it will be a legacy for Old Quad owners and the Viso family.

It’s been speculated by the Business Journal and other local news outlets that Irvine is working on a deal to buy the Great America land for redevelopment. The GA land, along with other Northside city properties, must be sold and the proceeds distributed to county taxing entities as a result of the 2011 state shutdown of redevelopment agencies.

Mission Town Center is just the latest in a series of development projects to come to nothing since 1958, when Santa Clara City Manager Lloyd Brady and City Planner William Loretta applied for government funds to rehabilitate a section of the blighted area and reverse its ‘creeping’ effect from spreading to other areas, according to a contemporary news story.

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