A few months ago in March, SMG, the company that is managing the Intrust Bank Arena (formerly known as the downtown Wichita arena) signed a lease with the Wichita Thunder Hockey team.
Details of that lease weren’t made available to the public. Not to Sedgwick County Commissioners, either. So the public and even elected government officials don’t know anything about this contract, except for its term of five years.
This strikes me as bad government. The county has a deal with SMG that gives the management company broad latitude in operating the arena, including some profit-and-loss responsibility.
The arena, however, is still taxpayer-owned property. Furthermore, reading the management contract between SMG and Sedgwick County, I can see several ways in which SMG can wrangle free of its obligations. Believe me, the taxpayer is still on the hook.
An inquiry sent to Assistant Sedgwick County Manager Ron Holt, the county’s point man for the arena, produced a response (see below) that indicates that the county has no intention of disclosing the terms of this lease agreement. Citizens must simply trust the county.
Part of the problem is that the arena has a competitor in the private sector, the newly-opened Hartman Arena. SMG is justifiably concerned about its contracts with tenants, which it considers proprietary information.
That’s fair enough — if SMG was a private company. But it’s one-half of a public-private partnership. It gets to use an asset valued at roughly $200 million, provided at no charge by the taxpayers of Sedgwick County, to see if it can earn a profit for itself. Our stake in this means we should get a look. The fact that SMG and the county will not disclose means that citizens will always wonder about the details of the deal.
This is especially true when government competes with private industry. Holt is already on record as being opposed to the privately-held Hartman Arena, remarking “overall, it would not be in the best interest of the community.”
Without disclosure, there will always be questions. It would be in the best public relations interest of SMG to agree for public disclosure of the terms of the Wichita Thunder lease.
Bob Weeks Inquiry The Thunder – SMG Lease May, 2009 Issue # 1: Since SMG has committed to a contract/lease agreement with the Thunder in which there is a major revenue stream for the facility and with terms greater than one year, does the County have to approve the Thunder contract/lease agreement? Response: No, the County does not have to approve the Thunder contract/lease agreement because it is in the sole discretion of the Contract Administrator whether or not to approve the agreement, and even then such approval cannot be unreasonably withheld. It is important to understand that there are two types of contracts covered by section 2.3 (c) of the agreement—contracts that involve paying money out (Section 2.3 (c) i), and contracts involving a revenue stream for SMG (Section 2.3 (c) ii). Contracts that involve paying money out, such as a contract to provide security for the facility, must be approved in writing by the County if it involves a term beyond the management term of SMG. As will be discussed later, this approval can be a simple letter from the Contract Administrator and such approval cannot be unreasonably withheld. The Thunder agreement involves a revenue stream and Section 2.3 (c) ii provides that “SMG and the County will have joint approval rights (which approval right shall be at each party’s sole discretion, not to be unreasonably withheld) for all major revenue streams that can impact the profitability of any Facility …with terms of greater than one year.” Section 2.1 (d) provides that “to the extent that the approval of the County is required under the terms of this Agreement, the written approval of the Contract Administrator shall constitute the approval of the County,” Under the definitions in Section 1, the “Contract Administrator” is defined as – the senior administrative official of the County as from time to time appointed by the County Manager, or such individual person as may from time to time be authorized in writing by such administrative official to act fro him/her with respect to any or all matters pertaining to this Agreement. So to address the first issue, it is in the discretion of the Contract Administrator whether or not to approve the agreement with the Thunder. This approval could take many forms and could be established by policies within the County Manager’s Office. While the initial review of the Thunder contract/lease agreement was limited to a discussion between the Contract Administrator and the SMG’s General Manager, subsequently a more thorough review by the Contract Administrator and an Assistant County Counselor with the SMG General Manager revealed the following notable provisions of the agreement: 1.) The term of the agreement is for 10 ½ years with provisions to terminate in the event of default by either party. 2.) There is a provision for a base rental that we agree is standard in the market with accelerators for future years based upon established indicators. 3.) There are other provisions in the agreement for revenue to be derived by SMG to cover staffing costs and other maintenance considerations. 4.) There is appropriate insurance coverage to protect the operator of the facility. After such subsequent review it is our opinion that the agreement provides adequate protection for the County for the entire term of the agreement and there is no reasonable basis for exercising our discretion to disapprove the agreement. For future contracts/lease agreements that fall under the conditions of the SMG Agreement as identified above, the Contract Administrator will meet with the SMG General Manager of the INTRUST Bank Arena and review any agreement in order to understand the terms and conditions of the agreement and how this might affect the County’s interest. Issue # 2: How can Sedgwick County give its approval to a contract/lease agreement that SMG will not let the county see (wouldn’t approval in a meaningful way mean that the commissioners and the public can read the contract/lease agreement)? Response: Obviously the County can’t give meaningful approval to a contract that we can’t see, but our agreement with SMG specifically allows us to review any agreement in order to understand the terms and conditions of the agreement and how this might affect the County’s interest. See Section 2.6 (a) (i) which provides:. (i) To the extent that SMG has any confidential or proprietary information that it reasonably believes is a privileged trade secret and/or should not be disclosed to a third party to protect the privileged, confidential and/or proprietary nature of such information, and upon the approval of the Contract Administrator, which shall not be unreasonably withheld, SMG shall not be required hereunder to deliver such information to the County, but instead, will afford the County an opportunity to review such information at the Facility during reasonable business hours and upon reasonable advance notice, or on terms mutually agreed upon by the parties in order to protect the privileged, confidential and/or proprietary nature of such information. As mentioned above, we have had the opportunity to review this agreement with SMG in a meeting with the General Manager of the Intrust Bank Arena. In our negotiations with SMG, we intended to give SMG significant authority to run the business of the new arena as they deem necessary as a means for them to sign off on an agreement that puts the risk of losses solely on them. The only reason we wanted the authority to review/approve long term agreements was for the purpose of making sure that SMG wasn’t putting the County in a bad financial position for years that they might not be operating the arena. While initially this is a five year agreement, we have provisions in the agreement that will automatically extend the agreement for an additional five years if they meet certain performance criteria. In other words, there is no reason at this point in our business dealings to think that SMG is operating in anything but the best interest of SMG and the County and such there would be little reason to formally approve the Thunder agreement – let alone have a reasonable basis to withhold approval. With Hartman Arena and Sprint Center (non SMG operated facilities) as competitors in this market, it is of high importance to SMG of keeping their proprietary information from being disclosed publicly. In addition, the County’s financial interest is protected with a provision in the agreement requiring SMG to maintain a system of bookkeeping adequate for its operations and for the use of our auditors. SMG is furthermore required to give the County’s authorized representative access to such books and records. The County has the right at any time, and from time to time, to audit and/or cause nationally recognized independent auditors to audit all the books of SMG relating to the operating revenues and operating expenses of the arena.
At yesterday’s meeting of the Board of Sedgwick County Commissioners, questions about a proposed industrial park development reveal that there’s still a long way to go before all issues are uncovered, much less understood.
At the meeting, Chris Chronis, Chief Financial Officer for Sedgwick County, presented information and responded to questions. While Mr. Chronis was thorough in some areas, even some basic information and understanding is missing.
For example, questioning by Board Chairman Kelly Parks revealed that it is unknown at this time who owns the mineral rights to the property.
Commissioner Karl Peterjohn asked Chronis about the relationship between the county and the city of Bel Aire, if the land is not deannexed from that city. Chronis said there is a “complete understanding” about the role each governmental unit would play. Peterjohn then asked if that agreement was in writing. Chronis replied no.
Peterjohn asked about the costs of other things besides land acquisition, citing a figure of $.50 to $2.00 per square foot for specific streets, landscaping, telephone and communications lines, natural gas, and other items. This could amount, Peterjohn said, to $9 to $35 million in costs that aren’t included at this point.
Chronis said “It has not been our plan, nor our intent, to do any infrastructure development within this industrial park. What we are committed to do is to provide site-ready land, build-ready land, to the industrial prospects. They have to make that land serve their purposes.”
Chronis also said it’s not his plan to spend any money on the interior of this land for these things. But sources in the real estate industry tell me that prospective tenants will expect these things to be done. Somehow government will have to provide incentives to cover these costs, and these costs are not being recognized by the county at this time.
The deannexation of the land from Bel Aire is an issue that may be difficult to resolve. Remarks by Commissioner Tim Norton brought up the scenario that platting the land, if it remains in Bel Aire, would go through that city’s planning commission. That could be problematic, said Norton, if that commission wouldn’t allow the types of things the county wants to do.
The commissioners voted unanimously to defer this matter for 30 days and to have a public workshop on this issue. The date for the workshop was not set.
Sedgwick County is considering becoming a developer of an industrial park. The county is limiting itself to deals described as a “home run,” meaning a company that plans to hire more than 1,000 workers.
The problem is that there are few of these deals each year. Maybe just five to eight. But Sedgwick County’s policy makes those odds even worse.
That’s because the county wants to limit tenants of the park to those in “clean” industry, specifically the composites and alternative-energy industries. This likely means the number of deals will be less than five to eight each year.
It could even be none. That’s because of the nature of the two industries.
Consider composites. One of the most promising avenues for their use is in medical devices, and Wichita is actively pursuing that market. Parts used in hip replacements are often given as an example.
The problem with the medical parts market is that it may not exist in its present form after a few years. As the United States considers nationalized health care, we must recognize this means that expensive surgical procedures such as hip replacements will be rationed. Here’s the Wall Street Journal reporting on Canada’s experience:
On the other side of the country in Alberta, Bill Murray waited in pain for more than a year to see a specialist for his arthritic hip. The specialist recommended a “Birmingham” hip resurfacing surgery (a state-of-the-art procedure that gives better results than basic hip replacement) as the best medical option. But government bureaucrats determined that Mr. Murray, who was 57, was “too old” to enjoy the benefits of this procedure and said no. In the end, he was also denied the opportunity to pay for the procedure himself in Alberta.
If the U.S. adopts Canadian-style health care, it doesn’t seem that medical devices will be a growth market.
The other industry Sedgwick County wants to limit itself to — alternative energy — has its own set of problems. Primarily, the industry exists only because of large government subsidy. As the Production Tax Credit for wind energy was about to expire last year, industry advocates warned Congress that without the tax credits, the wind energy industry would be in trouble.
This is a typical quote: “If we move into 2009 and it [the production tax credit] hasn’t been extended, new orders will shrink and it will be a major blow to these new US [wind] manufacturing, investment, and jobs across many states.”
The two industries that Sedgwick County wants to bet on, as you can see, have uncertain futures.
Remarks delivered at the May 20, 2009 meeting of the Board of Sedgwick County Commissioners.
As Sedgwick County considers whether to enter the industrial land development business, there are many considerations that must be weighed before proceeding. My greatest concern is the impact that government land development will have on the private sector in Wichita.
Information prepared by Sedgwick County states that there will be tracts as small as 18 acres, and that the county will be able to subdivide the tracts.
I realize that it is the county’s intent to focus on large companies as tenants in this proposed industrial park. This is to correct an alleged “market failure,” in that the private sector is not providing the product the county believes should be provided.
But as time goes on, the pressure to “do something” with the land will increase. Then, the county will be competing directly with existing private sector land development.
Government has advantages that the private sector doesn’t. It has access to free capital. It can give away land to companies. It can forgive future taxes. It can offer free infrastructure.
The effect of this will be to drive the private sector out of the new industrial real estate market.
It might seem like with government having all the advantages, why not turn over all development to it? The answer is that government doesn’t have something the private sector has: profits and losses. It is the profit and loss system that lets us know whether resources are being used efficiently. The profit and loss system drives the inefficient producers out of the market and tells us who are the effective producers.
Without the ability to calculate profit, government doesn’t know if it is being efficient.
Government land development will also have the effect of harming existing development, too. As existing tenants see the perks heaped on companies that locate in the government’s industrial park, they’ll want the same concessions from their landlords, too.
If the county proceeds with this industrial park, we need some way to minimize the harm to existing private sector development. We might, for example, limit buildings in the new park to a certain minimum size. We could restrict tenants to companies from outside our metropolitan area. We’ll also need to do something to help our existing industrial companies feel like they’re appreciated.
An important and easy thing to do is to limit the size of the proposed industrial park to something much smaller than 808 acres.
If the county decides we need to enter the land development business, let’s try to limit the harm to our existing private sector that’s in the same business.
Sedgwick County seems to be in a rush to make a huge decision that will have far-reaching and long-lasting effects on our county. We don’t have, however, anywhere near all the information we need to make this decision. We need to slow down and decide what role we want to have county government play in economic development.
The stated goal of Sedgwick County’s purchase of the Bel Aire industrial park is to have a site ready for companies of 1,000 or more employees. The Wichita Eagle article Sedgwick County seeks to attract industry with land plan tells us, though, that there are just five or six deals like this each year. Research by the Eagle reporter found more than 100 sites already exist, from all across the country, that meet the necessary criteria. So we’re entering a contest with pretty long odds.
On top of that, according to Sedgwick County, the goal of the industrial park is “to welcome only companies in the composites and alternative-energy fields.” This limits the companies the county would pursue to a number smaller than the five or six deals each year mentioned above.
(It’s worth noting that alternative-energy companies, such as wind turbine companies, exist only because of government subsidy aimed at curing a problem that can’t be fixed. Last year, as the production credit for wind power was about to expire, Congress was told that no further wind power would be developed unless the subsidy was restored.)
If the county asks “do you need rail access?” and it is provided for free, why wouldn’t any company say they need it? I’ve been told, however, that it’s not uncommon for companies to list rail access as part of their requirements, but then never need any rail cars once the facility opens. Some of the industries that composites may be used in are industries like medical devices. These products aren’t shipped by rail.
The issue of needing water and sewer utilities in place before the park can be marketed doesn’t make sense. These utilities could, if government wanted to, be installed very quickly, much faster than a building can be built.
That brings up another point — what about electricity and natural gas service? Depending on the type of industry, these utilities are vitally important. We don’t hear about the lack of these utilities being a problem. The likely reason for this is that electricity and gas are provided by private sector companies (even though most are highly regulated).
If a private utility can provide complicated and expensive electrical service infrastructure quickly to a building, why can’t a government quickly provide water and sewer?
It’s also claimed that the reason Wichita didn’t get the Target Distribution Center a few years ago was the lack of land ready to go. “Shovel ready,” so to speak. But according to reporting in the Topeka Capital-Journal, that city had to use eminent domain to forcibly acquire some of the land needed to assemble the tract.
Topeka used purchase options to secure the availability of land, too. I am told that when this strategy was presented to county staff, they had no idea of what this meant. This is evidence that Sedgwick County is not experienced and equipped to be in the land development business.
If Sedgwick County is determined to proceed and acquire the industrial park, we need to find some way to mitigate the damage to existing real estate developers in the Wichita area. That’s because when government can give away land, when it can dish out tax exemptions and other perks, the private sector is at a severe disadvantage.
Some ideas that have surfaced are these:
Limit the industrial park to large — very large — buildings only. Don’t allow smaller buildings that compete with what the private sector already has made available.
Restrict tenants to companies from outside the Wichita metropolitan area.
When existing Wichita-area companies see the perks — free land, etc. — lavished upon companies that move to the industrial park, they will want the same incentives. These incentives could be made available to companies in all industrial parks in the county. After all, we need to retain existing jobs.
There seems to be a great deal of haste towards making a decision on purchasing this land and the county being in the industrial park development business. This decision process is moving much too quickly. Finding a stable set of facts from which to conduct debate is a problem too, as some of the details in the Sunday Wichita Eagle story are different from what was presented at the commission meeting less than one week before.
A project of this scope would take from four to six months for experienced land developers to consider and perform due diligence. Sedgwick County has been considering this deal for about two weeks. As we’ve seen, the county is in no way experienced in this type of business.
Titled simply “LAND PURCHASE CONTRACT — Presented by Chris Chronis, CFO” and accompanied by a recommendation to approve the contract, this item might have slipped public notice if not for Dion Lefler’s Wichita Eagle story the day before.
Four members of the public — one being myself — attended the meeting to speak to the commissioners on this matter.
There was one other person who attended for the same reason. I’m not including him as “public,” because as chairman of a quasi-governmental body, he seems to hold special status before the commission. He was able to give input to the commissioners, while none of the public were able to do the same.
I don’t fault the commission for shutting off the public speakers. Not too much, anyway, as there will be a public hearing on this matter at next Wednesday’s meeting. We’ll ask our questions then. The problem is that we will likely ask questions that haven’t been asked before — questions that need answers. Will the commission be in the mood to delay action another week or more so that these questions can be answered?
There are many reasons to be skeptical of the claimed need to move forward quickly on this item. One that troubles me is that the organization that wants this industrial park, the Greater Wichita Economic Development Coalition, has been trying to market this very park for over five years. What has changed now? How has this organization earned our trust?
At Wednesday’s meeting, even basic questions such as the width of the railroad right-of-way could not be answered.
There’s also the issue of deannexation of the property by Bel Aire. Part of the deal requires Bel Aire to spend $4.1 million to provide water and sewer service to the park. But if the land is no longer in that small city, what incentive do they have to spend this money?
Perhaps the most important reason is that there are many developers in Wichita who own land — empty buildings too — that are suitable for industrial park-style use. When government gets involved and competes with them, it greatly affects these developers’ business. Government has many advantages that the private sector doesn’t have, such as the ability to buy and develop land, using taxpayer funds, with little consideration of risk. Then, it can — and often does — give it away.
Under these conditions, what motivation do entrepreneurs have to raise capital and assume huge risk, just to have government step in and destroy their investment?
At yesterday’s meeting of the Board of Sedgwick County Commissioners, my nomination to become a member of the county board of zoning appeals was approved. I received a handsome certificate and some recognition for my blogging and activism.
Wichita Eagle newspaper stories from summer 2003 tell of the City of Bel Aire‘s plans for an industrial park. Today Sedgwick County may purchase this land from the small city.
This item, described on the agenda — at least I think this is the item — simply as “Land purchase contract” has assumed a sense of urgency.
The Eagle news stories tell how the city of Bel Aire purchased the land in secret, because it didn’t want the City of Wichita to be aware of its plans.
But the important questions are these:
Bel Aire hired real estate developer Steve Martens to develop the industrial park. Recently the Greater Wichita Economic Development Coalition says they’ve lost out on bids to attract industry to Wichita because we don’t have ready-to-go land available for industrial development. Steve Martens has been the chairman of the GWEDC during some of the time since Bel Aire announced plans to develop this industrial park.
I’m having trouble forming a precise question based on these facts. But I hope you see how I am perplexed by these facts.
Then, what has changed now that would make us believe that Sedgwick County — a different governmental body, but still government — will have a better experience developing this industrial park?
If the GWEDC has a specific prospect in mind for this land — and that may be a very real possibility — it would be reassuring to hear it say so. I understand that the courting of companies looking to relocate or expand may be shrouded in secrecy by necessity. It’s also possible that we’re being used as a bargaining chip. These are problems for a different day.
What is the plan for future ownership of the land in question? Will the county continue to own it, or will it sell it to companies that locate here?
Is it possible to have the private sector develop this land even if it’s owned by Sedgwick County? We have many talented real estate developers in this area.