This letter was almost not written. After all, what good will it do? The city of Santa Clarita has already closed escrow on the Ice Station Valencia after agreeing to pay $14.2 million for the land and buildings, borrowing $15 million with tax-exempt bonds, and expecting repayment of the bonds to exceed $21 million.
The financial drain upon the city for future years is bound to be substantial. There are no ice skating rinks that are owned by public agencies that are profitable in the United States. In fact, the ownership of an ice skating facility is associated with financial loss and operating subsidies. The facility owned by Pasadena is unlikely to reopen with a skate rink.
Here is the story of how the city of Santa Clarita purchased a failing ice hockey facility, and paid a premium price based upon it being a warehouse facility.
In effect, the city purchased a 20-year-old used car needing a new engine and tires by pretending it was a brand new SUV using taxpayer money.
Shortly after the Wuhan China virus began to spread around the world and the state and federal governments announced a lockdown, the manager of the Ice Station Valencia operations announced that it was closing for business.
It is fairly safe to assume that no private company would have purchased the property as a hockey rink. There are reports that the L.A. Kings had passed on making a deal for the facility.
Families associated with local hockey began a very public campaign to save the rink, with pressure placed upon the City Council. This included a change.org poll that showed substantial “support” for the purchase. (Signal Editor Tim Whyte) indicated enthusiastic support with a Sunday commentary.
On Aug. 25, the City Council approved the purchase for $14.2 million with a plan to finance the entire deal with tax-free municipal bonds ($15 million) to help pay for closing costs, substantial repairs and professional fees.
I was interested in how that price was approved for a failing facility, with deferred maintenance and upgrades required, during a pandemic, the end of which is still undetermined. To do this I placed a California Public Records Act request to review the documents relied upon to approve the purchase.
To my great surprise, I found out that two appraisals had been ordered through the same company, DMD Appraisals of San Fernando, with substantially different values.
The first appraisal, conducted on June 14, utilized the cost approach, resulting in an appraised value of $8.9 million. In the narrative the appraiser justified this approach because there are no hockey facilities being sold in the area or across the United States.
The appraiser noted that he was not able to access the interior of the building. In addition, he noted that he was “making the extraordinary assumption that the subject property is in good condition with no deferred maintenance issues.” This is quite strange in that it was widely known that the property needed substantial investment to facilities to continue operating, due to years of deferred maintenance.
A pro forma income expense statement presented to the appraiser, lacking any meaningful detail, disclosed three consecutive years of operating losses. In the words of the appraiser, “The net operating income has been negative and shows a substantial loss.”
Let’s skip forward to July 24, when the same appraisal firm, using the same appraiser, used the sales and income approach and issued a new appraisal in the amount of $14.5. To get to this value the appraiser made the assumption that the property was a new warehouse using comparable sales and lease information from local brokers.
There is no explanation in the second appraisal that the same appraiser issued a recent appraisal using a different approach, estimating a substantially lower value. The second appraisal allowed the city to pay a much higher amount for the property even though its value as a hockey rink is objectively much less.
I attempted to speak with the appraiser, Dale Donnerkiel, about his work and he declined to speak without the express consent of the city, which is his client.
Ice Station Valencia was designed and built as a special use facility by Newhall Land in 2000 and sold to an LLC controlled by an extremely wealthy hedge fund manager based on the East Coast. There are issues of functional and economic obsolescence with the facility. Warehouses typically do not have mezzanine levels and include loading docks. The configuration of the building on the lot may not even allow for loading docks in the back of the building.
Neither of the appraisals addressed the issue of the cost to repurpose the Valencia Ice Station as a warehouse.
The city wanted to purchase the property at any price without concern to its present market value given the intended usage. Santa Clarita agreed to pay a warehouse price for a dilapidated and run-down hockey facility that will incur years of operating losses subsidized by the general fund.
As an open government advocate, it is concerning to me that the city staff and the City Council were not transparent with important information of interest to the public. The appraisals were not in the agenda packet for the Aug. 25 meeting. By the time I had the appraisals in hand (Sept. 28), after making a Public Records Act request, the deal had long been approved with unanimous consent of the council and without a single word about the financial impact.
There is no financial forecast for the facility as to income and expenses, which leaves the city no accountability for future losses. The debt service is expected to be $730,000 annually for 30 years. The city plans to hire a management company to run the facility.
I spoke with a member of the Parks and Recreation Commission about the purchase, which they never considered, but the individual fully endorsed. This person had no idea about the two appraisals and seemed unconcerned about ongoing operating losses that the city will likely incur.
I asked this person about the opportunity cost associated with investing such a large amount into such a large project that serves a very small, special niche population. It the city went to the Parks Commission with a proposal to invest $15 million in park facilities, would they be inclined to spend it all on a hockey rink? They took a moment to reflect and acknowledged, probably not.
The period of lockdown has been used by public agencies to make many decisions that grow the government at the expense of the private sector.
I am disappointed, but not surprised that the transaction for the Ice Station Valencia was not closely scrutinized by city staff and council, and local media. The city withheld important information from the public that would have allowed them to meaningfully participate in the decision-making process leading up to the purchase approval.
It remains to be seen how high a price will be paid by future generations for the haste in making the decision to purchase the Ice Station Valencia.