Sponsors of Initiative 91 warned Seattle City Council members Thursday to expect a lawsuit if they approve the current proposal to build a new sports arena in Sodo.

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Sponsors of Initiative 91 warned Seattle City Council members Thursday to expect a lawsuit if they approve the current proposal to build a new sports arena in Sodo.

Mark Baerwaldt and Chris Van Dyk said the proposal does not meet the initiative’s requirement to return a fair value on the city’s proposed investment. They said the city would have to net 2.7 percent a year, or about $3.25 million annually, to satisfy the initiative, which was approved with 74 percent of the vote in 2006.

Baerwaldt said he “and many others” would challenge the arena deal — which aims to bring the NBA and NHL to Seattle — in court if the city approves it.

“These guys figured out a sophisticated way to duck around” the initiative, Van Dyk said Thursday outside a council meeting reviewing the proposal.

Council members also heard city staff’s analysis that the proposal — billed by supporters as self-funding — would fall up to $4 million a year short of that goal, a difference that would have to be paid by private investors.

City analysts and Chris Hansen, the lead private investor in the proposal to build a $490 million arena with up to $200 million in public investment, disagreed with I-91’s sponsors.

Hansen said the city’s return would be at least 7.4 percent a year, and likely more. He said Baerwaldt and Van Dyk are not counting the value of the arena property, which the city would own after the 30-year deal is complete, nor are they counting increased tax receipts that would be generated by hotel stays and other spending related to an arena.

“You can put a low number on them if you want, but if you’re going to be intellectually honest you have to acknowledge these two things exist. If you do a scientific analysis you have to include them,” Hansen said.

Hansen said just the raw value of the arena land in Sodo is about $50 million today and that value would increase by about 5 percent a year over the life of the proposed 30-year deal.

Representatives of Mayor Mike McGinn said the proposal exceeds I-91’s requirement that the city’s return must be no less than the rate of return on a U.S. Treasury bond, which is currently about 2.7 percent.

Deputy Budget Director Hall Walker reasoned that because the city would get back what it borrows, including interest, the return would be about 5 percent.

City Council analysts had a different view of Hansen’s proposal and I-91. They said the city could argue I-91 does not apply to this deal because it calls for the city to get a fair-value return for its investment. And fair value, according to I-91, should be computed as the city’s “net cash on cash return.”

Because the city isn’t investing cash — but rather borrowing money for the project that will be paid back — there is no cash investment on which to base return rates.

Van Dyk strongly disagreed with city staff analysis. “Give me a break. That’s like saying you didn’t buy a car or house because you borrowed money from a bank,” he said.

Ben Noble, director of the council’s research staff, said the city is “left in a bit of a quandary” because I-91 does not explicitly define what it means by “net cash on cash return.”

One solution, Noble suggested, would be for the council to find that “fair value” is still required and not be concerned with the “cash on cash” language.

That may appeal to some council members. “I-91 clearly requires a fair return. It’s not clear this deal does that,” said Councilmember Tim Burgess.

As for Hansen’s arguments about the value of the land and increased tax receipts for hotel stays, Burgess said it’s risky to assume the increase in taxes, and questions remain about the land value 30 years from now.

Burgess also was concerned about council analysis that base rent and taxes collected at the arena would not be sufficient to pay the city’s annual arena debt. Council analysts projected that private investors would have to pay about $120 million over 30 years in additional rent, if both an NBA and NHL team play at the arena.

Walker noted that the council analysis is based on budget-office projections, which are conservative. Using different projections, Hansen says additional rent payments may not be needed.

Walker also said that the mayor’s office has done a background check on Hansen and some of his partners and concluded that they can handle paying additional rent.

Does the added rent and threat of an I-91 lawsuit amount to a deal killer?

“I wouldn’t say that,” said Burgess. “But it shows we have a lot of work to do.”

Hansen said he isn’t about to walk away, either.

“I knew it would be difficult at times,” said the hedge-fund manager. “Having some frustration is par for the course when negotiating something like this. I would just ask people who are opposed to support their case with facts and not unsubstantiated analysis.”

Bob Young: 206-464-2174 or byoung@seattletimes.com