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GAME ON! The China connection finds private funds for arena proposal in Virginia Beach

Updated: March 31, 2014 - 7:46 pm

Posted: March 28, 2014

By Jared Council
jared.council@insidebiz.com

Many competitions take place in an arena. This one's taking place over an arena, and officials at The ESG Cos. like their odds in the battle over rights to build what would be Virginia's largest indoor entertainment venue.

This Virginia Beach developer and its partners face a group led by Newport News construction giant W.M. Jordan Co. Inc., a matchup that features internationally renowned companies on both teams. Each group is looking to build a roughly $200 million, 18,000-seat arena near the Virginia Beach Oceanfront, but ESG believes its plan has a key advantage: It does not ask for one cent of taxpayer financing.

It's a point ESG officials have repeatedly emphasized, from a Feb. 17 press conference announcing their plans to a March 24 public forum. It's an attribute that has generated positive feedback from some cost-conscious city council members. Overall, it's a component that would not have been possible without ESG's relationship with Chinese companies, which will result in a $160 million Chinese bank loan should the city choose ESG's plan.

"It was pretty apparent that for special-use projects like this," ESG Chief Financial Officer Andrea Kilmer said, "U.S. lenders with the regulatory environment here would not be able to lend with the parameters of a loan that we could get through this international relationship."

Across the country, the norm is for municipalities to assume some risk in developing arenas. Kansas City, Mo., for instance, covered more than 75 percent of the costs to develop the $276 million Sprint Center in 2007. For the $291 million CenturyLink Center in Omaha, Neb., which opened in 2006, private contributions covered roughly $75 million and taxpayers picked up the rest, mostly through bonds. Several U.S. cities own arenas outright.

ESG hopes to buck the trend. Their private-financing approach wasn't intended to be a selling point for a city with various large-scale funding obligations and interests on its plate. For ESG, it's an ideology.

"In the 30-plus years that I've been here and even prior to that," Kilmer said, "it's just not our modus operandi to enter the public-private partnership arena."

ESG's Chinese ties began in 2012. It was around that time that an official from former Gov. Bob McDonnell's office contacted Kilmer, who was on the state's Economic Development and Jobs Creation Commission, and asked her to assist visitors from Asian companies.

"If they're going to get involved in a business transaction, we want to make sure it's profitable, that it meets their goals," Kilmer said summarizing the sentiment from the governor's office. "We don't want to lead them astray because we're hoping they do more business in Virginia."

Up to that point, McDonnell's administration and the state-created Virginia Economic Development Partnership had been aggressively marketing Virginia to other countries, especially China. Among other things, McDonnell and cabinet members went on at least two notable Asia trips during his tenure, and VEDP opened an office in Shanghai in May 2011. The efforts were meant to strengthen ties with foreign companies already in Virginia and to promote the state's amenities to prospective corporate investors and importers.

Kilmer said at the time she was only interested in giving advice to the foreign visitors, not partnering with any firm. She and other ESG officials reviewed project ideas she declined to disclose, saying only that they sought to utilize the U.S.'s EB-5 visa program for immigrant investors. Kilmer ultimately opined the plans weren't economically viable.

The visitors heeded her advice, she said, and she thought that was the end of it. But one of the companies represented by the delegation, China Machinery Engineering Corp., continued talks with the state. CMEC is a Beijing-based, state-sponsored engineering firm traded on the Hong Kong Stock Exchange.

About a year later, in April 2013, McDonnell went on a trade mission to Asia with various state and local officials, including Mark Wawner of the Virginia Beach Economic Development Department. Wawner said the Virginia delegation met with several companies, one of the larger ones being CMEC.

Shortly after that encounter, CMEC officials visited Virginia Beach, and Economic Development Director Warren Harris visited CMEC in May, he said. Harris said all the conversations involved his office proposing large-scale opportunities to the firm.

"We told them about major projects that required major investments: light rail, a headquarters hotel, the Dome site, Rudee Loop, the arena," he said. "All those were thrown out there."

After Harris' trip, CMEC leaders returned to Virginia Beach twice in a matter of weeks starting that June, according to several people involved. On their first visit, Del. Ron Villanueva, R-Virginia Beach, Kilmer, Harris and others attended a Saturday dinner with CMEC officials at the Cavalier Hotel, sources said. Kilmer said she was invited because CMEC remembered her from 2012.

"From what I was told, they knew that we had evaluated these projects before and were very candid with them," Kilmer said, "so they asked to meet with us again."

That was one of the first signs of a budding relationship. On CMEC's subsequent visit, which involved its former chairman, Yang Wansheng, Kilmer joined them on a light-rail ride and other activities. It was between those visits, Kilmer said, that ESG's approach evolved and its executives began seriously considering business opportunities.

"They're very relationship-oriented," she said about CMEC. "So the more time I spent with them and the more we saw potential opportunities, that's when it converted into the business potential between the parties."

Villanueva was among elected officials heavily involved in state-level foreign business talks, he said, steering interest to Hampton Roads.

In addition to going on the trade missions last year, Villanueva helped host business officials visiting the area from Korea, Nigeria, the Philippines, Australia and China. Those visits included tours and discussions about potential projects, exports and imports, he said.

CMEC was interested in various projects, especially light rail, Villanueva said, and the firm brought high-level managers, engineers and others to Virginia Beach several times.

"They had been here a half-dozen times," Villanueva said. "So that leads you to believe they were pretty serious."

Villanueva, a longtime Kilmer family friend and one of her opponents in her unsuccessful 2002 bid for a Beach city council at-large seat, said he's abstained from voting on recent legislation related to arena development.

By late July, ESG officials still hadn't decided exactly what they wanted to partner with CMEC on, Kilmer said, but they wanted to show the firm that they were sincere. So Kilmer and ESG Executive Project Manager Joe Gelardi booked a trip to Beijing.

The Aug. 15-21 trip had its share of business meetings, but the two also got to explore China. They saw the Great Wall and Tiananmen Square, Kilmer said, and visited hyper-local restaurants and had a variety of cultural experiences.

"They had a lot of fresh fruit," Kilmer said about one restaurant. "I mean, their watermelon is so much sweeter than the watermelons you get here in the United States."

But the two weren't there as tourists; they were there to nail down a plan worth everyone's while. Because of CMEC's interest in Virginia Beach light rail, Gelardi said, talks progressed rapidly to possibly meet a city-set mid-October deadline for submitting light-rail proposals. Gelardi and Kilmer even met with China Railway Corp., but eventually the appetite faded.

"We were trying to develop a private-enterprise approach to light rail," Gelardi said. "And the more we looked into that, it just didn't seem like a private enterprise approach was going to be economically viable."

The groups discussed other project ideas, Kilmer said, but everything was outshined by the benefits of pursuing an arena. Among other things, a variety of market studies had been done on an arena, and city and state officials expressed interest in one less than a year ago.

"There was already a lot of momentum," Gelardi said. "And they saw we could capitalize on that and move forward quickly."

At the beginning of 2013, an arena plan put forth by Philadelphia-based Comcast-Spectacor involving the Sacramento Kings fell through. The plan called for a $346 million arena and $80 million for moving the Kings to be paid for with $241 million from the city, $150 million from the state and $35 million in private funds.

The plan prompted various economic viability studies, and several elected officials supported the idea, if not the costs. The Kings ultimately stayed put.

Kilmer and Gelardi went to China with several project ideas, came back with one project goal and immediately got to work. Over the next few months they assembled a team and secured a financing strategy. They had never been involved in anything like this, but it wasn't their first time embarking on something they had never been involved in.

ESG describes itself as a diversified operation that began as an electrical contracting business founded by Eddie S. Garcia in 1950. Garcia, who spends most of his time in Florida, remains president and CEO.

In 1962 the company participated in the construction of the Princess Anne Shopping Plaza, one of the region's main shopping centers before malls popped up and before the current Virginia Beach was even a city. ESG now owns the 29-acre site.

The company is not flashy, not attention-hungry and prefers to let its work speak for itself, officials said. Its headquarters is in the only remaining 1960s-era segment of the Princess Anne Shopping Plaza, and it still houses propeller-base office chairs from the 1980s. Sea-green-colored carpet lines the floors, and gold-framed impressionist art pieces hang from the walls.

"This is not the most desirable space for us to lease, obviously," Kilmer said. "It doesn't have a big entryway. We're not all about pizzazz."

Over the decades, the company has dabbled in military construction, residential development, commercial leasing, car dealerships and more. In some cases, it acquired struggling businesses, brought them to profitability and sold them. It recently closed on a $140 million, 15,000-acre ranch site in Florida now named Garcia Farms.

"We don't profess that we know everything about everything," said Mike Gelardi, ESG vice president and Joe Gelardi's father. "But if we get involved in something, we go out and bring the people in who have that expertise."

The arena team ESG assembled ultimately included some of the most renowned companies in their respective industries. Facility-operator SMG services more than 230 facilities around the globe, including the Verizon Center in Washington, D.C. Mortenson Construction has built more than 100 sports and entertainment venues across the country. Architecture and design firm AECOM has designed 95 stadiums and arenas nationwide, including the Barclays Center in Brooklyn, N.Y.

Two local companies - S.B. Ballard Construction and architecture and design firm Clark Nexsen - round out the group and provide in-depth knowledge of the region.

"It's a pretty incredible team, if you look at it," Villanueva said. "On paper it reads like a good fantasy draft team." He also said W.M. Jordan has a quality team.

Components of the group had previously worked together, Kilmer said, which helped things flow smoother. Also, ESG officials proposed an arena without the need for a professional sports team, a condition that many saw as burdening the 2012 arena proposal.

The linchpin of it all was the financing, which is to come from a bank that CMEC introduced ESG to. Kilmer declined to name the bank, saying only it was "not unlike a Bank of America or Wells Fargo here in the U.S."

The parties ultimately agreed on borrowing $160 million; the other $40 million was to be covered by equity from ESG and its partners. The chances of ESG arranging a similar loan for an arena with a U.S. lender were slim, sources said. Still, American banks are involved in the deal.

"Even though the Chinese bank would be the source of the money," she said, "a major U.S. lender would be the servicer and would stand behind that Chinese bank. That was important for us."

Shaomin Li, a management professor at Old Dominion University, said the Chinese government used to be restrictive with respect to its firms investing abroad, but that's no longer the case. In general, he said, investment return and risk is higher in China than in the U.S., "thus many Chinese investors investing in the U.S. are not looking for high returns, but for safety."

He said the relationship with ESG and the lender could be a win-win.

"The U.S. company gets the much needed capital," he said, "and the Chinese lender gets its foot in the U.S. market and hopefully will earn a profit."

Even with the Chinese funds, the financing plans hinge upon state and local provisions. In Virginia Beach ESG is seeking 1 percent of the local hotel tax. At the state level it's looking to capture a portion of sales tax generated at the arena. The state provisions aren't yet law but are included in legislative amendments on the way to Gov. Terry McAuliffe's office that could take effect July 1.

Kilmer said soon after the Beijing trip, ESG lobbied for those amendments, which were sponsored by Del. Barry Knight, R-Virginia Beach, and Sen. Frank Wagner, R-Virginia Beach. The original law passed last year and allowed only the city to divert sales tax to cover bond payments, so the revisions expand that to private developers.

The ESG team, officially named United States Management, was about 90 percent finished with its plan in mid-October 2013 when Kilmer heard another proposal was forthcoming. USM planned to submit its plan that December.

Kilmer said when she heard about the other plan she wasn't surprised. If ESG and its partners could consider building an arena without an anchor sports team, surely another group could. The W.M. Jordan team submitted its plan, a public-private partnership, on Nov. 8, and elected officials set a Feb. 17 deadline to allow for competing proposals.

When the news broke about W.M. Jordan's proposal, it didn't drastically impact ESG's plans, but it did prompt a shift in strategy, Kilmer said. For one, ESG had to adapt its plan to a public-private-partnership format, even though it isn't asking for taxpayer financing. Second, ESG decided to wait until the February deadline to submit its plan.

"We made a business decision that we did not want to submit our proposal early," Kilmer said, adding she didn't want to get into a bidding war or have other groups try to "up the ante" after seeing USM's plan.

While ESG isn't seeking financing, it is asking for the city to fund various infrastructure improvements related to the arena, the cost of which are still being finalized.

No matter which proposal is selected, it will surpass the capacity of Virginia's largest arena, the $131 million, 14,600-seat John Paul Jones Arena in Charlottesville. It is also expected to spur a nearby headquarters hotel and other growth.

It's been a while since ESG has been involved in a headline-grabbing local development, but Kilmer said the firm doesn't seek the limelight. The company has also been heavily involved in philanthropy, she said. Despite W.M. Jordan's list of current high-profile projects, including the $250 million Newport News Tech Center, ESG believes it can contend with them on the arena.

"Our all-star team has been drafted," Kilmer said at the March 24 forum. "We're on the sidelines ready to play."

Kilmer has been the point person, along with Joe and Mike Gelardi. Garcia, who was at last week's forum, has not been as involved. But Kilmer said he's aware of everything and has had input in the arena plans.

"We don't say think outside the box because his creativity helped us realize there isn't a box," Kilmer said.

For ESG, no box means assembling a team of national and international partners, borrowing from a Chinese lender and excluding public financing from a project that typically requires it.

Villanueva said the traditional mind-set for such projects is to go to the state and city and ask for funding.

"Folks kept saying for years that the private sector could do it," he said. "Well, this is a perfect example of that."

To read about the other arena proposal go here:

http://insidebiz.com/news/optimists-land-lost-opportunity-how-john-lawso...

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