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13% interest owed to Warriors for Piers 30-32 is nuts

The Fiscal Feasibility report has one important number that all San Franciscans, both supporters and doubters of an arena on Piers 30-32, should be concerned about in my opinion. That number is the 13% interest that will be paid to the Golden State Warriors organization on principal of $120 million that will be spent by the Warriors first thing when construction is assumed to start in 2014 to fix up Piers 30-32 (which remain in the hands of The Port of San Francisco).

Unfortunately, the fourth estate – the media in San Francisco – are out of their comfort zone when it comes to finance and calculations. They just accept what they’re told without question.

Go look at the discussion on Socketsite.com where folks are comfortable with finance and you’ll see 13% is unacceptable in today’s unprecedented low interest rate environment.

11/13/2012 UPDATE: I’d like to point out that Piers 30-32 are today and will likely always be 100% publicly owned property, with or without an arena or a putt putt course sitting on top of them.  The City, in general, bids out for the lowest costs the repair of 100% owned public property when those costs exceed $10,000.  Until the arena idea was introduced, the numbers from the past studies of these piers have hovered around $80 million to fix the piers. With a 17,500 seat public assembly space, the piers need additional reinforcement to be seismically safe and hold up such a heavy structure. Why would the City have to pay on the additional $40 million that is due to the type of use being proposed?  Finally, the City should never be taking on any perceived financial risks to the benefit and profit of a private business to the tune of 13%. It is especially outrageous that a City with our creditworthiness would even consider handing over a credit card with a $120 million limit that we promise to pay the USER of the credit an interest rate of 13% to use.  THis 100% publicly owned asset needs to be fixed, but let’s bid it out to make sure we’re not getting fleeced on the financial terms – and let’s not pay extra for the additional seismic retrofits and reinforcement needed due to the large public assembly space proposed.

If $120 million is borrowed for 30 years at 13%, it will cost $16 million per year. Add to that the additional MUNI costs of $8 million per year that comes with directing traffic necessitated by an arena along with extra transit service, plus DPW, SFPD, and other city services impacted by an arena …. I’m sorry, how does the City come out net positive if we’re starting off with this 13% interest rate on $120 million if I see (-$5) million out of the gate?!? By the way, 30 years at 13% adds up to $358 million just in total interest costs … above the $120 million principal.

Who says the Warriors have to come up with the $120 million? How can the public trust that we’re not being fleeced if there is no open bid on this $120 million loan? Why not be creative and take advantage of the unprecedented low interest rates out there and get a loan from some other private entity (a pension fund or insurance company looking for 8% perhaps) just to fix up the Piers? While there is an exclusive negotiation agreement for building an arena, I wouldn’t think there’s an exclusive to the Warriors to make the loan of $120 million to the City at whatever interest rate they feel like naming because that would be incredibly dumb.

It is very important to keep in mind that this $120 million to fix Piers 30-32 could be considered a 100% Port of San Francisco public asset improvement project in that the Port will still own the piers, even with a 17,500 seat arena and so on sitting on top of them. Why should the City be locked into a loan from the Warriors and not go out to bid to get the best interest rate to do this capital improvement project? For capital improvements, the City sold $42.8 million of Certificate of Participation bonds at yields no higher than 4% just last spring.

While today’s Chronicle article about the Fiscal Feasibility Report quotes a project representative indicating that anyone who dares to question a 13% interest rate on this deal doesn’t know what he/she is talking about, I personally beg to differ. While I look forward to seeing an arena that works well with the neighborhood, I am absolutely against signing up for a financing plan at a gratuitous interest rate owed by us taxpayers to this private business to fix up the 100% public asset of Piers 30-32 without some competitive bidding on that interest rate for $120 million. To not bid out this loan is a disservice to the residents of San Francisco in my personal opinion.

When most pension funds and insurance companies would kill for a return of around 7.5% on $120 million these days when a 30-year Treasury Bond pays less than 3% risk-free, why not explore other potential suitors to make sure we’re getting the best deal the financial market has to offer? Private lenders are out there and awash in cash, and fixing the piers which remain the property of The Port doesn’t necessarily need to be done by the Warriors organization, right? Why not bid this out instead of locking in what appears to be a predatory interest rate given today’s low interest environment? How do we know we’re not getting taken to the cleaners on this 13% – and why is it that the City is taking on all of the costs of risks when these piers have studied 3 times over and folks know the costs – granted, the costs are probably even higher when you want to build a 17,500 seat arena on top of the piers, but again, why does the City have to take on such speculative interest risk and guarantee the investment return to the Warriors? This stinks and it stinks bad.

There is an argument that the $120 million principal will be decreased so that the 13% interest is only applicable to $30 million. That’s just a hope and a dream with no basis in reality until it happens, right? When did the City and County of San Francisco start taking out 13% loans on $120 million and speculating they can pay it down in the future if the sun, moon, and stars align just right? It’s ridiculous to even think fiduciary responsible officials would talk such talk with the public’s money.

Let me toss some doubt on those assumptions:

  • $60 million of IFD (Infrastructure Financing District) Bonds will be issued, but where’s the market for IFD bonds and what interest rate would be paid on those? There is no market for IFD Bonds because none have been sold in the State of California. According to Tom Lockard at Municipal Finance firm Stone and Youngberg at a Federal Reserve Bank of San Francisco symposium in September, the only way IFD bonds are getting sold is through a private placement because there is not enough diversification of risk… which brings us back to the question of why don’t we bid out the full $120 million? If the arena’s unsecured possessory interest property tax only provides $5 million or so per year, the amount of principal on the $120 million that can be reduced is dependent on the interest rate sought by the lender for the IFD bonds … and that may be 8% or so on its own, meaning the $5 million or so in tax increment may only cover $45 million, not $60 million – assuming the Golden State Warriors don’t appeal the assessed value down to $400 million from their assumed $800 million taxable value which would make it even worse (listen to Tom Lockard for yourself on IFDs, fast forward to 5:55 in the video below).
  • Watch live streaming video from frbsf at livestream.com
  • An IFD with a single property is very risky because that property could appeal the assessed value of $800 million through the County Assessment Appeals Board just like any other taxable property owner and request a lower taxable value of say $400 million … suddenly reducing how much tax increment the City receives by half. That happens every year with commercial properties in San Francisco – commercial property owners annually appeal the assessed values, and often get reductions in recent times because they have the lawyers and incentive to appeal when they pay millions of dollars in property taxes. Regardless of how much tax increment is collected on the arena and associated SWL 330 development, the 13% on $120 million (or whatever the loan amount is) won’t reduce – instead, the City will have to cut services as it reaches into the general fund to pay the bonds. I don’t seem to see that risk mentioned anywhere in the official documents…
  • Another $30 million is predicted to pay down principal from the sale of Seawall Lot 330 to the Warriors, but there’s no guarantee the State Lands Commission will approve that sale. What if the State Lands Commission insists that the City can only lease SWL 330 and not sell it outright? No $30 million to pay down the $120 million principal.

Other Cities Getting Much More Favorable Interest Rates on Arena Project Loans than 13%

Please go ahead and start Google-ing or search the Municipal Security Rulemaking Board’s EMMA database for Port Authority or Arena related loans and bonds issued in the last couple of years. Email what you find to me at RinconHill@gmail.com before Tuesday, 11/13/2012. It is not hard to find that the interest of 13% is ridiculously high. If 13% is common for the Port of San Francisco, perhaps we need to investigate who is negotiating for The Port because the current interest rate environment makes rates above 8% seem completely nuts to me … we aren’t talking about a City in the same shape as Greece or Spain for loans, are we?!?

Example 1 – Allentown, PA Arena Bonds – $224.4 million in bonds with a 30 year term at an average interest rate of 4.78% in October 2012

  • “The Allentown Neighborhood Improvement Zone Development Authority (ANIZDA) successfully closed its $224,380,000 bond issue this morning, providing the necessary funding to construct the arena complex.”
  • “The bonds were sold at an overall average interest rate of 4.7786% and were issued in very favorable market conditions, with both tax-exempt and taxable yield curves near all-time lows. “
  • Allentown will pay about $10.7 in interest on their $224.4 million loan while San Francisco would pay $15.6 million in interest on our $120 million loan each year for the first few years. In what bizarro universe does it make sense that a financially strong City and County like San Francisco pays way more than a non-tourist mecca, lower discretionary income per capita town like Allentown?
  • Total interest paid by Allentown will be about $198 million on that $224 million loan at 4.78% … City and County of San Francisco would pay $358 million in total interest on $120 million at 13%. The 13% is a juiced up interest rate – we should demand the City bid out for a private placement loan on the $120 million to verify 13% is the best we can do and that we’re not getting fleeced by this deal.

Example 2 – New York, NY’s Barclays Center Bonds – $511 million in bonds with up to 38 years term with an average interest rate of 6.48%

  • Read the Official Statement and see the interest rates for yourself … in general, everything is under 7% except the capital appreciation bond portion which means no interest nor principal were paid for years, making them stupid expensive.

With this process so rushed, is it any surprise that we may get ripped off because we’re skipping any bidding out for this $120 million loan to make sure we’re getting the best interest rate the market will offer?

2 Responses to 13% interest owed to Warriors for Piers 30-32 is nuts

  1. If the Warrior Arena is built on Pier 30 you guys south of the bridge are absolutely screwed. When the Giants are also playing you will not be able to access your homes. The Red Bull event was held this afternoon and you could not move south of Market. Mind you this was just one event.