Kroenke Becomes Majority Investor in San Diego Arena Redo

The odds that San Diego’s Midway Rising project, a 48-acre, mixed-use redevelopment on city-owned land, will get built just increased exponentially: billionaire sports and real estate mogul Stan Kroenke has inked a letter of agreement with the city to take a 90% stake in the project.

Kroenke brings more than financial firepower to the plans to redevelop the Midway District, which includes the Midway sports arena, and replace the aging sports venue with 4,250 residential units, a new 16K-seat arena, a 200-room hotel and 20 acres of plaza and park space.

His position as the top stakeholder also makes it much more likely that the new arena will be able to attract a successful professional sports franchise.

Kroenke’s Denver Nuggets basketball team just won the NBA championship, a year after Kroenke’s Los Angeles Rams hoisted the Vince Lombardi trophy at Super Bowl LVI. Super Bowl LVI was held at Kroenke’s $5.5B SoFi Stadium, home to the Rams, who moved to L.A. from St. Louis, and the Chargers—who moved up I-5 from San Diego.

Last year, San Diego’s City Council selected a partnership between market-rate housing developer Zephyr, sports-and-entertainment venue operator Legends—who partnered with Kroenke on the 300-acre development that includes SoFi Stadium—and affordable housing builder Chelsea Investment to redevelop the city-owned tract on Sports Arena Boulevard.

After a negotiation that took three months, ESK Midway Rising Investor, LLC, a special purpose entity owned by The Kroenke Group, now has a 90% ownership interest in the Midway Rising project, according to a report in the San Diego Union-Tribune.

The Kroenke Group will be responsible for an equivalent percentage of equity capital contributions prior to construction. The stake and financial commitment increase to 95% once construction starts, the newspaper reported.

Zephyr and Legends remain as general partners, each with a 5% stake; both will be managing day-to-day operations. The general partners’ ownership interest and financial obligations will be halved when construction starts, the report said.

Chelsea is still partnered on the project as the affordable housing builder; the firm does not have an ownership stake and won’t collect in returns. According to the terms of the agreement, the limited partner and general partners will share 75% of proceeds proportionally based on ownership interest after capital investments are recouped.

Zephyr and Legends will split the remaining 25% of project proceeds as an incentive payment.

Key to the project is compliance with California’s Surplus Land Act, which the state has been invoking to promote the development of affordable housing. The Act, on the books since 1968, mandates the prioritization of affordable housing development whenever local government land is designated as “no longer necessary for public use.”

The Midway Rising project will include 2,000 residential units that are deed restricted for low-income families, a requirement that has been included in the exclusive negotiation agreement, or ENA, between the city and the development team.

The city made the affordable housing piece a non-negotiable requirement of Midway Rising in order to avoid any state action to mandate a portion of the 48-acre site be set aside.

In February, California invoked the Surplus Land Act and ordered the San Diego suburb of Chula Vista to put up for sale to affordable housing developers 300 acres the city had set aside for a university campus and innovation district, GlobeSt. reported.

In 2019, the state legislature expanded the scope of the Act, widening the definition of what constitutes surplus land to include former redevelopment properties, and to apply it to economic development agencies.

The 2019 law also narrowed the definition of surplus land that was exempt from the Act; it required local public agencies to make public the availability of surplus land in a listings inventory maintained by the Department of Housing and Community Development (HCD), California’s state housing agency.