The Wichita city council will consider expanding an existing TIF, or tax increment financing district.
Tomorrow the Wichita City Council will consider expanding the boundaries of an existing tax increment financing district in downtown Wichita. 1
According to city documents for this agenda item,
Expanding the District would allow the Developer to capture the additional increment generated by the increased value of the Ice House building for pay-as-you-go reimbursement of eligible TIF expenses within the TIF district. The Developer would also be reimbursed for the TIF eligible costs related to redevelopment of the Ice House building.
Further:
The project includes up to $317,170 in infrastructure improvements that would be TIF eligible. The Developer proposes that tax increment financing be used to pay for eligible redevelopment project costs on a “pay-as-you-go” basis, for site preparation and infrastructure improvements.
This may be confusing, so here it is in a nutshell: The city will be diverting up to $317,170 in future property tax paid by the developer. Instead of these taxes going to pay for operations of the city, county, and school district, these taxes will be given back to the developer.
Usually, economic development incentives such as tax increment financing, or TIF, are justified because they create jobs. For this building, according to Wichita Eagle reporting from August, the two tenants that will occupy most of the space are existing companies that are moving from other parts of Wichita.
In addition, Gary Oborney, Manager of Union Station, LLC and Ice House, LLC, the company that is receiving the benefit of tax increment financing, has made these recent campaign contributions, according to campaign finance reports filed in July:
Of note, all three are seeking reelection this year.
There is nothing illegal regarding these campaign contributions based on Wichita and Kansas law. Some jurisdictions, however, have laws known as pay-to-play. These laws may prohibit political campaign contributions by those who seek government contracts, prohibit officeholders from voting on laws that will benefit their campaign donors, or the laws may impose special disclosure requirements.
In general, these laws prohibit government officials from enriching their campaign contributors. That seems like a simple concept that makes sense.
While there is no such law in Wichita, wouldn’t citizens appreciate officials acknowledging the campaign support they have received from people with business before the council?
City of Wichita City Council Agenda for October 8, 2019. Agenda Item No. V-1, Public Hearings Considering an Expansion of the Union Station Tax Increment Financing District and Considering a Development Agreement for the Union Station Project Area 3 Plan (District I) ↩
The amending of a retail lease tells us a lot about the economics of downtown Wichita.
This week the Wichita City Council amended a lease for some retail space at 360 East William in downtown Wichita. This is the retail space on the ground floor of the Block 1 parking garage at the northwest corner of Topeka and William.
Block One retail space sits half empty. Click for larger.
The first lease, passed by the council in 2011, refers to “ground level of the Parking Structure retail space containing approximately 8,400 square feet of surface floor area.” 1 The lease was between the city and a master tenant, which was Douglas Place, LLC. The master tenant, it was thought, would find retail tenants and earn profits based on the difference between the rent it collects from them and the rent it pays to the city.
Earning profits seemed virtually guaranteed for the master tenant, because the rent it paid to the city for the entire 8,400 square feet was to be according to this schedule (along with my computations of rent per square foot, the common way commercial rents are quoted):
First five years: $1 per year
Years 6 through 15: $21,000 per year, or $2.44 per square foot
Years 16 through 20: $63,000 per year, or $7.33 per square foot
So for the first five years of the lease, the master tenant faced virtually no cost in obtaining and controlling rentable space. Other commercial landlords must pay to build structures in order to collect rent, but not this master tenant.
The deal was even better than that for the master tenant, as the city would pay for tenant build-out. This is the cost of making space ready for tenants by building things like walls, floors, ceilings, restrooms, heating, air conditioning, etc.
According to the lease, at the end of 20 years, the master tenant could either continue to manage the property for the city for a fee, or purchase the property for $1,120,000, or do nothing.
The amended lease the council passed this week holds these terms for rent: 2
First four years: $1 per year
2024 through 2035: $10,000 per year, or $1.16 per square foot
2036 through 2043: $20,000 per year, or $2.33 per square foot
At the end of this term, the tenant has the option to purchase the property for $400,000. That’s a reduction of $720,000, or 64 percent, from the option price in the 2011 lease. As part of the amended lease, the city will not pay for tenant build-in.
City documents now state the amount of retail space as 8,600 square feet, up from 8,400 in 2011.
City real estate administrator John Philbrick told the council that half of the space was built out. (Video is at the end of this article.) Real estate experts told me that build-out costs for space like this could be around $50 per square foot, although there is a wide variation. With 4,300 square feet remaining, this amounts to something like $215,000 in savings for the city.
In summary, with the amended lease the period of nearly free rent ($1 per year for the entire space) starts again, this time for four years. The step-ups in rent to the city have been discounted. Instead of some years when the city would collect $2.44 per square foot, it now stands to collect $1.16. For the next step-up, the city will collect $2.33 per square foot instead of $7.33. The step-up schedule in the amended lease doesn’t precisely align with the original lease, but the step-up rates are much lower.
Besides these aspects, there is a political angle to this matter. See here.
Block One, the origin point for future growth
Click for larger.
Block One, or Block 1, is the downtown Wichita block bounded by Douglas on the north, William on the south, Broadway on the west, and Topeka on the east. The downtown Wichita development agency (formerly the Wichita Downtown Development Corporation, now called simply Downtown Wichita) once billed this block as “the first complete city block of development along the core of Douglas Avenue.”
In promotional material, the agency promoted the area’s bright future: “Block One is the origin point for future growth.”
Block One ribbon cutting, March 2013.
That was in 2013, six years ago. There has been progress. The Ambassador Hotel and its restaurant are still open. The Kansas Leadership Center is complete. But the former Henry’s building languished until this year. Plans call for it to become a culinary school instead of the retail, restaurant, and office center that was originally promoted.
But the retail space on William Street has not been successful. In this week’s city council meeting administrator Philbrick told the council that about half of the space was leased, with the two existing leases at the rates of $4 and $6 per square foot.
Block One promotional material. Click for larger.
How do these rates compare with other downtown retail space? In the Weigand Commercial Retail Forecast for 2012, for total retail space in the central business district, the quoted rent was $9.84 per square foot. For 2015 it was $10.54, with class A space at $14.00. (No quote for class A was given for 2012.) For 2019 it was $10.65, with no quote for class A space, $11.59 for class B, and $5.35 for class C.
For the entire city, the Weigand forecast reports that class A retail space rents for $19.81.
Why has this retail space been difficult to lease? Philbrick told the council, “[The] market at the time was not strong and it continued to weaken.”
With the city proposing to rent the space for $1 per year for four years, then increasing according to the schedule shown above, Council Member Jeff Blubaugh (district 4, south and southwest Wichita) asked Philbrick if this is a market rent, saying if the value of the building is $400,000, the monthly rent should be about one percent of that.
Blubaugh’s valuation of $400,000 may be reasonable. (Or maybe not, as it is the option price to purchase the property after the lease expires in 2043. Currently, Sedgwick County appraises the property at $620,600.) If it is, a landlord should be able to collect $4,000 rent per month, or $48,000 per year. With 8,600 square feet of available space, that implies rent of $5.58 per square foot.
Philbrick replied: “The two current leases are at very low rates. I mean, the two current leases are at, I think, four dollars per square foot triple net and six dollars per square foot.”
Blubaugh followed up: “So there’s just not … it’s just not competitive down there, then?”
Philbrick: “There’s very, very little demand.”
That is the most sobering realization, that after years of subsidy, investment, and promotion, downtown Wichita is not doing well. That’s about the only conclusion we can make when we see the city renting nice retail space for nearly zero rent, and doing this not just once, but twice.
Other indicators
For downtown population, Wichita economic development officials use a convoluted method of estimating the population of downtown Wichita, producing a number much higher than Census Bureau estimates. See Downtown Wichita population.
The assessed value of property in downtown is not growing very rapidly. According to data compiled by Downtown Wichita, assessed value hit a recent low of $78,573,959 in 2012 – 2013. 3 For 2018 – 2019 the value is reported as $85,766,869, an increase of 9.15 percent in six years, barely more than one percent per year. Assessed value is the property tax base, the building of which officials tell us is an important goal. It’s how the city pays for services, they say.
But assessed value has barely grown in downtown Wichita despite hundreds of millions in investment, both public and private. And some of the assessed value is captured by tax increment financing districts and diverted away from paying for the cost of government services.
View video of the council meeting with added commentary below, or click here to view at YouTube.
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Notes
Wichita City Council Agenda Packet for September 13, 2011. Exhibit 1, Parking Structure Retail Lease, page 205. ↩
Wichita City Council Agenda Packet for October 1, 2019. Agenda Item No. V-4, Assignment and Amendment of Lease of Retail Space at Block 1 Garage, 360 East William (District I). ↩
A lawsuit claims that when the City of Wichita refinanced its special assessment bonds, it should have passed on the savings to the affected taxpayers, and it did not do that.
A lawsuit filed in Sedgwick County District Court charges that the City of Wichita improperly handled the savings realized when it refinanced special assessment bonds at a lower interest rate. The case is 2018-CV-001567-CF, filed on July 13, 2018, and available here.
The suit names David L. Snodgrass and Leslie J. Snodgrass as plaintiffs, and a long list of defendants, namely:
The City of Wichita, Kansas
Wichita City Manager Robert Layton
Wichita Finance Director Shawn Henning and Former Wichita Finance Director Kelly Carpenter
Wichita City Clerk Karen Sublett
Wichita Mayor Jeff Longwell and former Wichita Mayor Carl Brewer
Current Wichita City Councilmembers Brandon Johnson, Pete Meitzner, James Clendenin, Jeff Blubaugh, Bryan Frye, and Cindy Claycomb
Former Wichita City Councilmembers Lavonta Williams, Janet Miller, Sue Schlapp, Paul Gray, Jeff Longwell, Jim Skelton, and Michael O’Donnell
Springsted Incorporated
Gilmore And Bell, A Professional Corporation
Kutak Rock, LLP
Sedgwick County Treasurer Linda Kizzire
The suit asks for a class to be created consisting of “all other affected land owners paying excess special assessments,” which would, undoubtedly, be many thousands of land owners. No specific amount of relief is requested.
The suit’s basis
The city borrows money by issuing bonds to fund improvements to (generally) new neighborhoods. These bonds pay for things like residential streets, water pipes, and sewer lines. The debt service for these bonds, that is, the money needed to make the bond payments, is charged to benefitting property owners in the form of special assessment taxes, often called “specials.” These specials are separate from the general property taxes that are charged to all property.
General property taxes are based on a property’s assessed value multiplied by a mill levy rate. Specials, however, are based on the cost of the infrastructure and the payments needed to retire the debt. This amount is determined at the time bonds are sold and the repayment schedule is established. (Bond payments depend on the amount borrowed, the length of the repayment period, and the interest rate. All this is known at the time the bonds are issued.)
These specials usually last 15 years, and after paid, no longer appear on a property’s tax bill. Sometimes special assessments are prepaid.
What the city did, and didn’t do, according to plaintiffs
During the last decade, interest rates on long-term bonds generally fell. In response, the city issued refunding bonds. These bonds took advantage of low interest rates by paying off old bonds that had higher interest rates, replacing them with bonds with lower interest rates. The lawsuit alleges that since 2009, the city has issued $216 million in refunding bonds saving $60.2 million, according to city documents cited in the lawsuit. The suit does not specify how much of this savings is attributed to special assessment bonds.
So the city refinanced special assessment debt at a lower rate, reducing the cost of the debt. That’s good. Homeowners often do this when mortgage rates are low, and it’s good that the city does this too.
The problem, according to the lawsuit, is that some of the refinanced debt was special assessment debt. The lawsuit contends that, based on Kansas law, the city should have passed on the savings to the property owners that were paying off this special assessment debt. Instead, says the suit, “the City of Wichita transferred the excess special assessment money paid by affected Wichita taxpayers to support its general fund and/or other municipal funds.” In other words, the city spent the savings on other things, when it should have directed the savings to land owners who were paying the special taxes.
Plaintiffs allege that the conduct of the city and its advisors constitutes fraud against those paying special assessment taxes:
The fraudulent actions of Defendant City of Wichita, along with the other Wichita Defendants, and Defendants Springsted, Gilmore and Bell and Kutak Rock resulted in the misappropriation of millions of dollars of “saved” tax payments that should have been returned to Plaintiffs along with all other affected land owners paying special assessments levied under the General Improvement and Assessment Laws of the State of Kansas.
Further, the suit alleges that the liability faced by many of the defendants is personal:
Because the Wichita Defendants actively participated in the fraud practiced by Defendant City of Wichita, they cannot escape personal liability for the fraudulent actions of the City of Wichita upon Plaintiffs and all other affected land owners paying special assessments.
While there is one named party as plaintiff, the suit alleges that all similarly situated persons have been harmed, and so a class action is appropriate. That would be all property owners who have paid special assessment taxes to Wichita since 2009, including myself.
The Wichita City Council approves economic development incentives, but citizens should not be proud of the discussion and deliberation.
Today’s meeting of the Wichita City Council saw the council discuss and approve economic development incentives for a project in downtown Wichita.
The item contemplated economic development incentives for redevelopment of an empty building in downtown Wichita to become a Hilton Garden Inn Hotel. The incentives being considered were a Community Improvement District (CID), Industrial Revenue Bonds (IRB), a parking agreement, and a skywalk easement. The discussion by the council was useful for revealing two members who are opposed to some targeted economic development incentives, but it also showed a troubling lack of knowledge and consideration by others.
Property tax
The hotel is requesting industrial revenue bonds. These bonds do not mean the city is lending any money. Instead, IRBs in Kansas are a mechanism to convey property tax abatements and sales tax exemptions.
The agenda packet for this item states: “[Hotel developer] WDH is not requesting abatement of property taxes in conjunction with the IRBs.”1 This is presented as a magnanimous gesture, as something the hotel developers (WDH) could have requested, but did not, presumably out of some sort of civic duty.
But: Property tax abatements may not be granted within the boundaries of a TIF district, which this hotel is located within.23 So the developers did not request something that they are not entitled to request. This is not news. Nonetheless, several council members were grateful.
As to property taxes, Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) asked what would be the increase in value in the building, once finished. Later Wichita City Council Member Jeff Blubaugh (district 4, south and southwest Wichita) praised the property taxes that will be paid. He also mentioned the “nearly-empty parking garage.” When the city built this garage and accompanying retail space it was to be a showpiece, but has been suffering from blight and lack of tenants paying market rates for rent.4
Asking about tax abatements, Wichita City Council Member Pete Meitzner (district 2, east Wichita) asked “They didn’t apply for other …” His voice trailed off before finishing the question, but the “other” tax abatement that could be applied for is the property tax abatement. Except, the law does not allow for a property tax abatement for this project.
All these questions alluded to the increased property taxes the renovated building will pay. Except, being within a TIF district, property taxes may not be abated. So where will the hotel’s property taxes go?
First, the property tax generated by the present value of the property (the “base”) will be distributed as before. But the increment — which will be substantial — will go to the TIF district, not the city, county, and school district. Except: This is an unusual TIF district, in that an agreement between the city and county provides that only 70 percent of the incremental property taxes will go to the TIF district, with the remainder being distributed as usual. This was not mentioned during today’s discussion.
There was talk about a “gap.” Some economic development incentives require documenting of a “financing gap” that makes the project not economically feasible. But that is not required for the incentives considered for this hotel.
Sales tax
Regarding the sales tax exemption: City document do not state how much sales tax will be forgiven, so we’re left to speculate. Previous city documents5 indicate spending $3,000,000 on furniture and fixtures, which is taxable. Sales tax on this is $225,000.
The same city document mentioned spending of $6,250,000 on construction of the hotel, and of $1,000,000 for construction of retail space. Sales tax on this combined total is $543,750. Based on material from the Kansas Department of Revenue, these amounts would be due if not for the action of the city council.6
In total, the development of this hotel will escape paying $768,750 in sales tax. It should be noted that Kansas is one of the few states that charges sales tax on groceries at the same rate as other purchases, making Kansas food sales tax among the highest in the nation.7
Curiously, council members Clendenin and Williams, who represent low-income districts where families may be struggling to buy groceries — and the sales tax on them — did not object to this special sales tax treatment for a commercial developer.
No more cash?
In his remarks, the mayor talked about how we can continue with economic development “without handing cash to corporations.” But when a project is going to buy materials and services on which $768,750 in sales tax is normally due, and the city council takes action to extinguish that liability, well, that’s better than cash to the receiver.
Good news
Kudos to Wichita City Council Member Bryan Frye (district 5, west and northwest Wichita), who actually cited the United States Constitution in his statement from the bench. He said that the issues surrounding this project are a far cry from what our Founding Fathers envisioned as the role of government, saying “I struggle with using city resources to collect and distribute sales tax for the sole benefit of one commercial entity.” He offered a substitute motion which would have approved all the parts of the agreement except for the CID tax. His motion failed, with only he and Wichita Mayor Jeff Longwell voting in favor.
On the original motion, which was to approve all parts of the incentive agreement, Longwell and Frye voted in opposition, with everyone else voting in favor.
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Notes
City of Wichita. Agenda packet for September 6, 2016. Available here. ↩
“Certain property, even though funded by industrial revenue bonds, does not qualify for exemption: … property located in a redevelopment project area established under K.S.A. 12-1770 et seq. cannot be exempt from taxation.” Kansas Department of Revenue. Property Tax Abatements. Available at www.ksrevenue.org/taxincent-proptaxabate.html. Also, Kansas Department of Commerce. Industrial Revenue Bond Exemptions. Available at www.kansascommerce.com/DocumentCenter/Home/View/1082. ↩
Gilmore & Bell PC. Economic Development tools. Available here. ↩
“General rule: Materials are taxable.” (p. 4) Also: “Taxable labor services in Kansas are the services of installing, applying, servicing, repairing, altering, or maintaining tangible personal property performed on real property projects in the general category of commercial remodel work.” (p. 8) Kansas Department of Revenue. Sales & Use Tax for Contractors, Subcontractors, and Repairmen. Available at www.ksrevenue.org/pdf/pub1525.pdf. ↩
The Wichita city council voted to recommend that the Kansas Legislature create drivers permits for undocumented workers so they could drive to their jobs.
In December the Wichita City Council voted to include drivers permits for undocumented workers in its legislative agenda. The item as presented to council members read: “RECOMMEND: The Wichita City Council supports legislation that provides a driver’s permit to undocumented workers for the sole purpose of obtaining vehicle insurance for work-related transportation.”
In his remarks, as presented in the meeting minutes, Wichita Mayor Carl Brewer stated “he has given this a lot of thought and he is the one who has asked for it because he believes it is the right thing to do.”
Wichita City Council Member Jeff BlubaughThe measure passed four to three, with Council Member Jeff Blubaugh (district 4, south and southwest Wichita) voting along with the council’s progressive members.
No matter what one believes about our immigration laws, it is illegal for undocumented workers to hold their jobs. Yet, the city wants to make it legal for them to drive to their illegal jobs.
This also illustrates the problem with resolving our nation’s issues with immigration. We’ve shown that we’re not willing to enforce the laws we have. Here, the Wichita City Council takes steps to help illegal immigrants break our laws. Why do we expect people to respect and obey them?
