Five years ago when the city granted the property tax breaks, the hotel wasn’t eligible for tax increment financing. That’s because the TIF district the hotel is located in, the Old Town Cinema Redevelopment District, was running a shortfall at the time (it still is, as of December 31, 2010). Therefore, the city proposed that the hotel agree to a Payment In Lieu of Taxes, or PILOT, of $45,000 per year. That agreement has been in place for five years.
This week the city is proposing that the agreement be extended for five years. But there’s a hitch. The TIF district is not eligible to received PILOT payments under Kansas law, according to city documents. So the city proposes to charge the hotel a “bond origination fee” of $225,000, to be paid in five installments of $45,000.
To the casual observer, $45,000 seems like a lot to pay. City documents from 2006 describe it as a “substantial contribution,” and that characterization is repeated this week. But it is a small fraction of what a similar hotel would pay, if it wasn’t located in a tax-advantaged part of Wichita.
The hotel property, according to records in the Sedgwick County Treasurers Office, has an appraised value of $8,306,230 for tax year 2010. The assessed value is not given by the treasurer, as the property is tax exempt. But we can perform the calculation ourselves. Since business property is assessed for tax purposes at 25 percent of appraised value, the assessed value is $2,076,557.
If we apply the mill levy of 126.0176 (126.0176 / 1000 x $2,076,557), that means the annual property tax would be $255,453 on this property, if it weren’t tax exempt.
So the hotel, while paying $45,000 each year, is paying only 17.6 percent of what other business property with similar value is paying. As the word “substantial” has no precise meaning, each person will have to decide for themselves whether the hotel’s payments meet that definition. But when this hotel pays just $1 for every $6 that other business property pays in taxes, I think we can say the hotel made quite a deal for itself.
There is some question as to the hotel’s value, too. The recent history of this property’s appraised value, according to the Sedgwick County Treasurer’s office, is this:
Year Land Improvements Total Change 2007 $336,000 $9,634,430 $9,970,430 2008 $336,000 $9,629,420 $9,965,420 0% 2009 $336,000 $11,794,690 $12,130,690 22% increase 2010 $336,000 $7,970,230 $8,306,230 32% decrease
The valuation doesn’t affect the hotel’s tax payments for the next five years, if the city approves extending the current tax exemption. But if the city doesn’t approve the extension, the valuation matters. And in five years when the hotel is no longer eligible for tax exemptions, it will certainly matter then.
Further, there is the curious change in the valuation of the improvements to the property. From 2008 to 2009, the valuation of the improvements increased by 22 percent. Then, the next year the value dropped by 32 percent. The Sedgwick County Appraiser was not able to provide an explanation for these changes.
A question that citizens might be interested in is how in 2006 the hotel received industrial revenue bond financing in the amount of $14,135,000 — presumably all spent on the hotel — but now has an appraised value of only $8,306,230.
Further questions lie in this passage from the city’s agenda report, where it is explained that the proposed deal will “extend the maturity date and add an additional $1,750,000 of debt to Old Town Lodging for a total loan of $15,000,000 to satisfy all outstanding debt with Nationwide.”
Here the hotel proposes to take on debt of $15,000,000 when the property is appraised for just $8,306,230. And, the amount of debt the hotel is carrying is increasing. Sources in the commercial real estate industry tell me this isn’t a good sign.
Pay-to-play laws needed
This episode is another exhibit in the case for pay-to-play laws in Wichita and Kansas. The owner of the hotel, Jim Korroch, has made campaign contributions to at least three members of the current city council. Tomorrow he will ask the city council to extend the favor of allowing him to escape paying $210,453 per year in the taxes that the city demands other businesses pay. That’s a benefit of $1,052,265 over the next five years, and that’s in addition to the benefits already received.
Citizens may also remember that last year Korroch received many millions in subsidy for another downtown hotel he built.
Pay-to-play laws would prevent council members who have accepted campaign contributions from voting to enrich those who gave them. An example is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”
Some council members have said that those who advocate for these laws and ask council members to refrain from voting to enrich their campaign contributors are accusing council members of accepting illegal contributions. That’s not the case. We object to what’s happening in plain sight.