The Morning Report
San Diego news and info
you need to take on the day.
The city of San Diego finds itself in the middle of what’s becoming a bitter fight between the company that runs Pechanga Arena and the venue’s most high-profile tenant.
But the central contention of that dispute should be moot by July, when the two sides are scheduled to hash it out in court.
Last month, San Diego officials started accepting bids to run Pechanga Arena – the Midway district venue long known as the Sports Arena – where the current operator, AEG, pays roughly $800,000 a year in rent. AEG, in return, books events at the arena and gets to collect the revenue those events bring in.
The bidding process kicked off a public records fight between AEG and the group that owns the San Diego Gulls, which is also bidding to operate the arena.
AEG is required to provide the city with its audited financial statements each year as part of its lease. The Gulls ownership submitted a public records request to the city for those statements to assist in its bid preparation.
The city attorney’s office determined that those financial statements are indeed public records, and was ready to turn them over before AEG intervened in court to prevent them from doing so. They contend the documents contain trade secrets.
For both parties, the records fight is central to the bidding process to run the arena. AEG thinks having the records would give H&S Ventures, the Gulls ownership group, an unfair advantage; H&S says that by that same logic, AEG retains an unfair advantage if it is the only group that knows how much it currently costs to run the arena and how much it’s bringing in.
“It appears there is now a coordinated effort by AEG’s competitors to gain access to AEG’s confidential and proprietary information, in order to gain an unfair advantage over AEG in when responding to the announced (request for proposals) for the Arena Lease,” the company’s lawyers wrote in a complaint against the city.
The bidding period, though, ended on Thursday. That means the AEG lawsuit, which prevented the release of the records until at least a July court date, has already thwarted the ability of any rival bidder to get a look at them within the city’s deadline.
“We wanted it to be a public document available to all bidders,” said Craig Benedetto, a veteran City Hall lobbyist retained by H&S. “If they’re claiming having them would give a rival bidder an advantage, then by keeping it for themselves they’re retaining an advantage.”
This is all playing out at the same time that the city is attempting to plot a better long-term future for Pechanga Arena, and the area surrounding it.
The city last year adopted new development regulations for the community, making way for potentially far more homes and businesses to be built in the area. And the Gulls, as well as the San Diego Seals, a lacrosse team that also plays there, haven’t been shy about their desire to see a new and improved facility replace the 1966-built arena, a goal for which H&S has also enlisted Benedetto’s help.
Benedetto said the documents would help the Gulls substantiate basic claims made about the events that take place in the arena, and how much they bring in, to help inform their bid. He said the city cites the arena as hosting 150 events per year, for instance, but no one from the city has been able to substantiate that figure. In its complaint, AEG says it hosts 125 events a year.
Nonetheless, Benedetto said the Gulls still intend to make “a strong bid,” and he expects multiple other bids to come in as well.
If nothing else, that could mean AEG ends up paying more to lease the property than it does today, even if it retains its right to operate the facility.
Earlier this year, the Gulls and Seals ownership groups independently asked Mayor Kevin Faulconer to open the arena to a public bidding process. In March, AEG asked the city to instead begin exclusive lease extension discussions. But Faulconer decided to see what else was out there, and last month launched a 30-day window to submit bids, with a plan to choose a winner within 10 days.
Ernie Hahn, the general manager of Pechanga Arena, declined to comment beyond a statement saying AEG was eager to participate in the city’s selection process and expects to win.
“We see a very bright and successful future for the arena and are looking forward to our continued role for years to come,” wrote Hahn.
Craig Gustafson, a mayoral spokesman, said in a statement that the bidding process was moving forward despite the dispute.
“Qualified bidders will undoubtedly have extensive understanding of managing and operating a major entertainment facility and will rely on that expertise to formulate their bids,” he wrote.
The battle over the AEG’s audited financial statements heated up last month when a deputy city attorney alerted the company that the city was set to release the documents.
AEG’s lawyers submitted a letter arguing that the documents include trade secrets that they would “under no circumstances make available to the public.”
The company filed a reverse-California Public Records Act action, in which a party can seek to prevent documents from being made public. AEG says the financial statements contain information far exceeding what it considers “city business.”
For instance, the city’s lease requires that AEG always have at least $50,000 in cash available, and long-term debt that can’t exceed $500,000.
“Even information such as AEG’s cash on hand is not relevant to the requirements of the lease or the city’s business,” the lawsuit reads. “How well capitalized AEG is certainly would be of interest to AEG’s competitors, but as long as AEG has at least $50,000 cash on hand and is not in breach of the lease, it should not matter to the city if AEG has cash on hand of $100,000 or $10,000,000.”
Likewise, AEG says the documents include how much revenue it has received from each source, how much it has spent on every expense and its overall income. None of that is city business, the company argues, as long as it makes its lease payments on time.
“Simply put, the city has never expressed any interest in whether AEG is managed internally in a way that maximizes income and minimizes its expenses,” the lawsuit reads.
In emails with the city attorney’s office, AEG’s lawyers noted the documents include details like the company’s contract agreements with vendors in the arena, money owed to the company, revenue-sharing agreements it has inked and all the sources of revenue it relies on, plus insights into its overall money-making strategy.
It’s not hard to see why those things would be of interest to the Gulls, or anyone else who would like to compete with AEG to run the arena.
And Benedetto doesn’t disagree.
“They’re saying a look at their financials would give us an advantage, but then theoretically so would keeping them private give them an advantage,” he said.
It’s also an argument that Mark Mazzarella, an attorney retained by AEG, explicitly made in a letter to the city attorney’s office attempting to persuade her not to release the records.
“The following are some, but not all, examples of information contained within the documents that AEG actively protects from disclosure because the information provides AEG with an economic advantage over its competitors,” he wrote.
In the subsequent lawsuit, he wrote that releasing the information before the bidding period closed would be “especially harmful,” because it would give “insight into the operation of both the Arena and AEG as the Arena’s operator.”
But Melissa Ables, the deputy city attorney, was not persuaded.
“After reviewing the information provided, the city is not convinced that the records as a whole are exempt under any of the cited provisions,” she wrote.
She told AEG the office would release the records in 10 days, unless there was a legal intervention. AEG intervened four days later.
Hilary Nemchik, a spokeswoman for the city attorney’s office, reiterated that the city determined there were no exemptions that would keep it from releasing the documents, and said it is now waiting on the court to make a determination on the merits of the case at a July 19 hearing. She declined to comment further because of the pending litigation.