Monday, September 24, 2012
SEATTLE — Seattle City Council members this summer said they wouldn’t approve a $490 million basketball and hockey arena without knowing more about Chris Hansen’s business plan, his investors and how he would minimize the risk to taxpayers for up to $200 million in public bonds.
Monday, the council is expected to approve an agreement with Hansen, though many of their questions remain unanswered.
But city leaders say it’s enough for now that a reworked deal requires a financial audit of Hansen, as well as more detail about how much equity his partners have in the investment group.
They say they won’t finalize the deal until they’re satisfied with the financial projections for the arena operations and with Hansen’s personal wealth.
“We won’t enter into final transaction documents until we’re satisfied that he has a viable business plan for the arena and team,” said Councilmember Tim Burgess, who with colleagues Sally Clark and Mike O’Brien led negotiations for the reworked deal.
Hansen, 44, a San Francisco hedge-fund manager and Seattle native, has pledged $290 million of private money to build the arena. He has promised to secure a new NBA team and plans to attract an NHL team.
He introduced Microsoft CEO Steve Ballmer and Nordstrom executives Peter and Eric Nordstrom as partners in the deal.
But a majority of council members remained skeptical of the original agreement. O’Brien paraphrased their thinking as, “Ballmer is a great name. Nordstrom is a great name, but frankly, Chris, we don’t know your name at all.”
Under the revised deal, Hansen has agreed to an independent, third-party review of the ownership group’s finances, principal investors and business plan. The accountant’s report will be made available to city officials and the public, but not the underlying financial documents, Burgess said.
Still, city leaders say the complex agreement builds in numerous taxpayer protections and the financial review should tell whether Hansen has the wealth and business savvy to back up his promises.
A peek at the hedge fund
Thanks to new federal rules, some basic facts about Hansen’s hedge fund, Valiant Capital Management, are now available:
• The San Francisco-based firm had nearly $3.3 billion in net assets under management at the end of 2011. Valiant has grown rapidly since its founding in March 2008, but is still fairly small by hedge-fund standards.
• Valiant’s assets are split between two funds — one in the United States, with close to two-thirds of total assets, and one in the Cayman Islands.
• The firm’s clients must invest a minimum of $10 million.
Like other hedge funds, Valiant employs a variety of sophisticated investment strategies in pursuit of above-market returns.
Valiant says it invests mostly in stocks — U.S. and foreign companies, public and private companies — as well as preferred and convertible shares, options, swaps and even more arcane securities. It also invests in bonds, currencies and commodities, and employs such high-risk/high-return strategies as short selling and margin trading. It does all this with just 27 employees.
Valiant also must report quarterly on what publicly traded stocks it holds, though given the rapid shifts in trading strategy at many hedge funds, those reports are best seen as snapshots of a moment in time. As of June 30 the firm’s biggest holdings included Apple ($124.8 million), VeriSign ($71.5 million) and Google ($71.1 million).
Not disclosed: what Hansen gets paid, or how it’s determined. However, hedge-fund managers typically receive management fees calculated as a percentage of assets, plus a hefty share of whatever trading profits the firm makes. A common setup is the managers receive 2 percent of assets under management and 20 percent of investment gains.
Council members’ confidence also can be buoyed by the fact that, over the past 10 months, Hansen and investors have bought most of the land he needs for the arena, paying four different owners a total of about $37 million for 4.37 acres.
The remainder of the arena site is owned by an affiliate of American Life, Sodo’s largest property owner, or is a city right of way that would be vacated if the deal goes forward. Hansen said this spring that all the required property was under contract or otherwise under his control.
He also has spent $13.7 million for three properties totaling 1.14 acres on the block just to the north, where he has said he is considering related uses that would enhance the fan experience.
In addition to the initial financial review, Hansen has agreed to open his books annually and to personally guarantee the public loan before any construction bonds are issued. He’s promised to maintain his personal wealth at $300 million.
Hansen also has agreed to double the security reserve, from $15 million to $30 million, in case the arena’s finances underperform. He must keep cash on hand equivalent to three months of operating expenses.
The revised deal also requires the arena to be built within five years of the city and county issuing the first installment of bonds, and it can require Hansen to buy the arena from the city and county at the end of 30 years for at least $200 million.
“We wanted the potential, in dire circumstances, to immediately tap into cash reserves. We got that,” said Burgess.
The revised agreement also directs $40 million of tax revenue from arena operations into a transportation fund to improve freight mobility in the Sodo neighborhood where Hansen plans to build the new sports-and-entertainment venue.
“We think we might be setting a new standard for a public/private partnership,” said O’Brien, who helped negotiate changes to a proposal announced in February by Mayor Mike McGinn, King County Executive Dow Constantine and Hansen.
Can Hansen succeed?
The deal features so many guarantees and so much private investment compared with agreements around the country that critics of public subsidies for sports facilities are now wondering if Hansen can really pull it off.
“Hansen is going to have to make a lot of money off this. He’s going to have to book a ton of concerts. He’s going to have to buy a team that doesn’t bankrupt him,” said Neil deMause, who writes the blog “Field of Schemes” and is co-author of a book by the same name.
“Hansen is clearly putting up the bulk of the money, and that almost never happens. If all that works, that’s fantastic. But I don’t know anyone other than Chris Hansen who thinks the math works out,” deMause said.
A City Council committee voted 7-0 to approve the deal this month, and the outcome of Monday’s vote isn’t in doubt. The County Council, which approved the original deal, will vote on the revised proposal in early October.
But maritime businesses and industries continue to oppose the Sodo location because of the potential threat to Port of Seattle operations.
Opposition also has emerged from advocates of KeyArena, which could become obsolete with construction of a new, state-of-the-art entertainment center across town. The revised deal creates a $7 million fund to study the future of the arena and Seattle Center, but $5 million of the fund is earmarked for the Seattle Storm if the women’s professional basketball team relocates to the new arena.
The revised agreement also calls for an environmental review, which must examine alternate sites, including Seattle Center, before the city finalizes the agreement with Hansen.
After city and county approval, Hansen can file for a building permit and begin the environmental review process, which is expected to take up to a year. But he might wait until he secures a basketball team. The city won’t issue construction bonds until Hansen has a team.
Hansen said he wouldn’t comment until after the City Council vote Monday.
Seattle Metropolitan Chamber of Commerce President Maud Daudon, who served on an advisory panel reviewing Hansen’s original proposal, said the deal before the council Monday accomplishes two important goals.
“It gets the city in the position of any other private lender with respect to the investor finances. And the lead investor has personally guaranteed the deal. Those significantly improve the transaction,” she said.
In anticipation of the City Council giving the green light to Hansen’s new arena, O’Brien said, “We’re in a partnership now. We both want to succeed.”