According to a letter of intent approved by the city council — and sure to become law after a public hearing at a meeting of the Wichita City Council on September 13th — the city is planning to build about 8,500 square feet of retail space in a downtown parking garage. The garage is being built, partly, to serve a hotel Burk and partners are developing.
Here are the details of the deal Burk and his partners are getting from the taxpayers of Wichita: The city plans to lease this space to Burk and $1.00 per year. Not $1.00 per square foot, but $1.00 for the entire space — all 8,500 square feet.
That’s the plan for the first five years. For the next 10, the city would charge $21,000 rent per year, which is a rate of about $2.50 per square foot.
For years 15 through 20, the rent increases to $63,000, or $7.41 per square foot. At the end of this period, Burk will have the option of purchasing the space for $1,120,000, which is a cost of about $132 per square foot.
That cost of $132 per square foot is within the range of what sources in the real estate industry tell me top-quality retail space costs to build in Wichita, which is from $130 to $140 per square foot. Rents asked for that space would be from $15 to $18 per square foot per year.
Using the low figure, Burk could expect to collect about $127,500 in annual rent on space he rents for $1.00, leaving a gross profit of $127,499 for him. As the $15 rent is a net figure, Burk’s tenants will pay taxes, insurance, and maintenance.
As part of the Douglas Place Project, Burk and his partners will collect millions in the form of tax increment financing, forgiveness of property and sales taxes, capture of their hotel guest tax, community improvement district sales taxes, and historic preservation tax credits. This sweetheart lease is another layer in the cake — a very tall, many-layered cake of subsidies the city is baking for Burk.
While most citizens might be shocked at the many layers of subsidy offered to Burk, he’s accustomed to such treatment. In 2003, the city offered a similar deal to Burk and his partners for retail space that is part of the Old Town Cinema project. That deal was made with Cinema Old Town, LLC, whose resident agent is David Burk. According to the Wichita Eagle, other partners in this corporation include Wichita theater owner Bill Warren, real estate agent Steven Barrett, Key Construction and seven others.
David Wells, one of the owners of Key Construction, is a partner with Burk on the new hotel project, and Key is slated to build the garage under a process that doesn’t require competitive bidding, even though city money is used to pay for it.
The Old Town project let Burk and his partners lease 17,500 square feet of retail space from the City of Wichita for $1.00 per year for the first five years. Like the proposed project, that’s not $1.00 per square foot, but $1.00 per year for all 17,500 square feet.
Today this retail space probably rents for $15 to $18 per square foot, according to sources in the real estate industry. This means that Burk collected perhaps from $262,500 to $315,000 per year in rent. We don’t know the actual number, but it was likely in this ballpark. He had expenses, but not the main expense that most landlords face: the cost of the capital they have invested in their property. Burk had none of that expense, except for $1.00 per year.
Like the proposed deal, the rent Burk pays for the Old Town space increased over time. For the second five years the agreement calls for Burk to pay $5.00 per square foot to the city. For the third five years, the rate rises to $7.50.
Despite this sweetheart deal, Burk decided his property taxes were too high, and he appealed those taxes in a way the Wichita Eagle described as deceptive.
It’s no wonder Burk and his wife regularly make generous campaign contributions to almost all city council members, regardless of their political stances. He’s developed an efficient machine, and its machinery expose all the problems with crony capitalism and the problem of concentrated benefits and dispersed costs as revealed by public choice economics.
But I don’t think these problems bother the mayor, city council members (except for Michael O’Donnell), or city hall bureaucrats. For them — and most of all for Burk — it’s a process that worked once, and appears to be on the road to working again.