The plan to redevelop the Pechanga Arena area with a new state-of-the-art venue, thousands of homes, hundreds of millions of dollars in infrastructure and park improvements on city-owned land will go before a City Council committee Friday.
Negotiators with the city and Midway Rising — a development team led by billionaire megadeveloper Stan Kroenke — arranged a deal based on one fundamental trade-off: rather than seeking immediate revenue to aid a cash-strapped city, they embraced massive up-front investments by the developer for priorities like housing, infrastructure and a new arena.
The up-front investments by the developer include a $526.4 million, 16,000-seat arena, and $460.3 million in infrastructure in and surrounding the project, including 14.5 acres of park space.
If completed as drafted, Kroenke’s development team will also build 4,254 housing units — 2,000 of which are reserved for low-income residents — with 130,000 square feet of retail. The project is expected to take 20 years to build.
The city will eventually collect up to $68 million of revenue in two major forms: An arena ticket fee and a share of rent from the market-rate housing and retail development. But that won’t come immediately.
Kroenke, the nation’s largest landholder and owner of the Los Angeles Rams, Los Angeles Angels, Colorado Avalanche, Denver Nuggets and English soccer club Arsenal F.C., will finance the $4.2 billion project.
Today, the city collects about $2 million in revenue from the entire property, a relatively small amount compared to the city’s $2.6 billion annual budget. That $2 million in annual revenue will disappear for the city once the development team finishes building the new arena. Only after the Midway Rising team recoups its investment on the arena does the ticket revenue again become a factor.
By that time, the city also begins to collect revenue from the market-rate housing units, which changes over time as different phases of the project are finished.
On Friday, San Diego’s Land Use and Housing Committee will take the first step toward final approval of the massive overhaul of San Diego’s Sports Arena property.
In an Oct. 12 report, San Diego’s Independent Budget Analyst called the proposal “a fair and reasonable transaction for the City.”
The first phase
The deal between the city and Midway Rising includes a $548 million initial investment for 2,000 affordable housing units, which would be set aside for residents earning on average 60% of the median income, $520 million to build the new arena and $400 million for streets, parks, and pedestrian improvements.
Kroenke’s Midway Rising team will begin with a first phase that includes the new arena, located on the eastern side of the 48.5-acre lot, along with surrounding mixed-use buildings and a public outdoor space. The existing sports arena will remain in operation.
After the new arena is built, which is estimated to take approximately five years, Midway Rising will shift to the new rental structure in the deal.
For the first 15-year period, the city will receive $100,000 a year in rent.
In addition, after the first ten years, the city will collect $1.50 per ticket from the arena, with a 3% annual increase.
Eventually, the city will collect the entire ticket fee amount. In an interview, IBA analyst Noah Fleishman said the office estimates that could amount to a $2.1 million payment to the city in 2053.
Rent payments from the market-rate housing and retail development are also highly variable and likely to change based on when each phase is completed, but Fleishman said the IBA’s model estimates that if all five phases are done in 2052, it could mean another $815,000 in payments to the city.
Brad Termini, CEO of Zephyr, the leader of the local development team, said instead of seeking immediate revenue, the city will get major infrastructure improvements, thousands of affordable units and a complete transformation of the Midway District.
“It will turn San Diego into the event destination that it should have always been while addressing the need for new housing,” Termini said during an Oct. 9 interview.
Termini said the team will implement an expedited building plan, with construction to begin as soon as next year, taking approximately 10 to 12 years for full buildout. The IBA estimated 20 years for full buildout.
The IBA’s office also estimates the city will collect between $38.1 and $68.5 million in combined arena and development revenue over the life of the 105-year deal, adjusting those payments for the current value of the dollar. Without accounting for inflation, the expected revenue is around $1 billion.
The city-owned land, according to a valuation report paid for by the city, is currently worth $75.6 million, further illustrating that the city is focusing less on revenue than it is on the introduction of thousands of housing units, infrastructure and a new arena.
But by prioritizing infrastructure improvements — which will be built by the developer’s own crews, not city workers — the city will get to enjoy reconfigured streets in and around the project, a pedestrian-friendly route between the project and the Old Town Trolley Station, park space, parking garages and more.
To help fund the $460.3 million in infrastructure improvements, the Midway Rising team is asking the city and county to form an Enhanced Infrastructure Financing District.
That district will determine the current property tax level within the project area. When property tax revenues increase, the new money above the starting point will pay back the developer’s infrastructure investments, rather than going into the city and county budgets.
The IBA estimates that the developer will be reimbursed for up to $378 million of the $460 million in infrastructure spending. But because those payments will come many years in the future, Midway Rising’s team expects that they’ll cover about 25% of their expense, once accounting for inflation. Once the repayment is complete in about 50 years, the financing district will disappear and the increased property tax values will go back to the city and county.
The deal “represents a fair and reasonable transaction for the City and an important opportunity to achieve the long-sought redevelopment of the Sports Arena property,” barring any major changes over the course of the 10-15 year buildout, the IBA concluded.
Examples of some potential changes include problems with financing, soaring construction costs and underperforming real estate markets.
“These uncertainties underscore the importance of continued City oversight and periodic review as the project progresses,” reads the office’s Oct. 12 report.
And as the Midway Rising Team says all elements are in place, there has been some internal movement.
According to filings with the California Secretary of State, four of the business entities they created are now run by someone outside of Termini’s Zephyr organization, transferred to Midway Rising’s arena specialist, Legends Hospitality, the Jerry Jones-owned group that specializes in managing arenas and stadiums.
The managers of Midway Rising General Partners, Midway Rising LLC, Midway Rising Group, and Midway Rising Venue Management shifted from Zephyr’s control to Legends’ Senior Vice President Tim Lamoriello in June of this year.
Midway Rising’s team said that despite the changes to the LLCs, the organization’s structure remains the same.
“There has been no change in ownership structure or management of the Midway Rising team,” said Jeff Meyer, a spokesperson for Midway Rising in response to Times of San Diego’s questions. “Zephyr, The Kroenke Group, Legends Global, and Chelsea Investment Corporation will work together to deliver all project components outlined in the Development Disposition Agreement.”
