It’s time to recognize historic buildings for what they are: a premium feature or amenity whose extra cost should be born solely by those who chose to own them or rent them.
Supporters of historic buildings tell us that renovating them is more expensive than building new. Likewise, building a home with granite kitchen counter tops and marble floors in the bathrooms is more expensive than a plainer home. These premium features are chosen voluntarily by the homeowner, and it is right and just that they alone should pay for them.
There’s no difference between these premium features and choosing to live in a historic building. Those who desire them choose them voluntarily, and should pay their full cost. Forcing everyone to subsidize this choice is wrong. It’s an example of a special interest gone wild.
Supporters of historic building preservation subsidy tell us that these historic buildings define the character of a city. They have succumbed to the design fallacy, “the notion that architectural design is a major determinant in shaping human behavior.” It may be so for some people. Let each person decide for themselves, and then pay — or not pay — for its perceived benefit.
It’s often true that historic preservation tax credits go to subsidize the choices of well-off people. For example, at a meeting of government officials with Wichita-area legislators in January, Wichita Downtown Development Corporation president Jeff Fluhr presented examples of several buildings in Wichita that have been rehabilitated, including the Wichita High Apartments, which he said will rent for $1,000 to $2,000. He mentioned condos in the Grant Telegraph building, which he said range in price from $300,000 to $950,000. Do the taxpayers of the state of Kansas need to subsidize people who can afford rents and prices like these?
Wichita developer Dave Burk stood to pocket over $1 million in taxpayer money on this project.
The use of tax credits, however, leads many to believe that what the state is doing is not a direct subsidy or payment. In order to clear things up, maybe we should require that the state write checks instead of issuing credits.
Indeed, if the state issued checks to real estate developers, citizens would look at things differently. They’d wonder why they’re subsidizing the construction of apartments that rent for up to $2,000 monthly, or condos worth nearly a million dollars. They’d be angry. Using a semi-mysterious mechanism like tax credits shrouds the true economic transaction taking place.
These expenditures of tax money — being issued as credits rather than appropriations — go through a different process than most expenditures of state money. Recently some have started to use the word “tax appropriations” to describe tax credits. These expenditures don’t go through the normal legislative process as do most appropriations.
It’s time to recognize these historic preservation tax credits as payments to a special interest group. Unfortunately, as with most special interest groups, the group receiving the payment — tax credits in this case — has an extreme interest in the matter. They benefit greatly. But to the rest of the populace — well, does it really matter to them? John Stossel explains the problem like this:
The Public Choice school of economics calls this the problem of concentrated benefits and dispersed costs. Individual members of relatively small interest groups stand to gain huge rewards when they lobby for government favors, but each taxpayer will pay only a tiny portion of the cost of any particular program, making opposition pointless.
That’s the situation we face with the historic preservation tax credits. A few real estate developers will enrich themselves at state expense. Well-to-do renters and condo buyers will get a better deal. To everyone else, it’s just another way that government nickels and dimes us to death.
It should be noted that one of the most vocal proponents of the tax credits is Christy Davis, a historical preservation consultant who operates a company that assists property owners and governments in obtaining funding for historic preservation projects. She’s the very definition of a special interest group.
Not that it matters much now since the measure has passed, but here are a few things that haven’t been discussed much regarding the subsidy to a proposed hotel in Wichita’s WaterWalk development.
Good public policy requires tax fairness
When people pay taxes, they feel that their tax payments go towards funding the general operation of government, including paying for some services that benefit them specifically as well as everyone else. Police and fire protection, for example.
There’s also the idea of joint sacrifice. Citizens may not like paying taxes, but most are comforted in the knowledge that everyone else pays, too.
The tax policy surrounding this proposed hotel, however, violates sound principles of public policy. On January 12 the developer of this proposed hotel told this council that the hotel would pay property taxes. That’s true, but only on the surface. The property taxes this hotel will pay for many years will go towards retiring bonds that provided benefits exclusively for the WaterWalk development, not the general operation of government.
So when citizens pay their property tax — knowing that some goes to provide public safety protection for their home and neighborhood — that doesn’t apply to the proposed hotel. But will it consume fire and police protection, and other city services? Of course it will, but it won’t be sharing in the cost of providing those services, as do regular citizens and businesses that don’t operate in this special tax-privileged environment.
The same goes for the transient guest tax, or bed tax, that guests of this hotel will pay. That money, according to city budget documents, is designed to be used for certain specific purposes. “The Tourism and Convention Fund, financed through a six percent transient guest tax on hotel and motel rooms in Wichita, provides monies to support tourism and convention, infrastructure, and promotion of the City.” Further, from the same document: “Fund priorities are: 1) debt service for tourism and convention facilities, 2) operational deficit subsidies and 3) care and maintenance of Century II.” But in the case of this proposed hotel, the transient guest tax generated by the hotel will be used to pay off bonds that benefit only this hotel. Is this consistent with the city’s stated policy for use of the transient guest tax?
Who can we trust?
There’s a big issue of trust at stake here. Several members of this council, along with the mayor and city manager, last month heard a consultant from Goody Clancy (the firm that’s helping plan the revitalization of downtown Wichita) tell Wichita that downtown hotel occupancy rates are high, above the level that indicates a need for new hotels. In the consultant’s own words: “There’s a market for additional hotel rooms downtown.”
The finding that there’s a market for hotel rooms should mean that there’s no need to pay someone to build a hotel downtown.
We can’t have it both ways. We can’t have our planning consultant telling us there’s a market at the same time we’re ready to believe a hotel developer who tells us it’s unprofitable to build a hotel downtown.
In light of the Goody Clancy findings, we need to examine the assumptions used to produce the “gap” in financing that the hotel developer claims makes it unprofitable to develop this hotel. It’s not sufficient to check the arithmetic, as Mr. Bell tells us his department does. We need to seriously examine those assumptions, remembering that they are provided by someone who has a multi-million dollar motive to show the existence of a financing gap that the city will fill.
We need to also remember that as long as this city is willing to fill financing gaps, no one will submit a proposal to this city without showing a gap. This sets the template for the development of the remaining empty parcels in WaterWalk, and for all of downtown, for that matter.
This issue of trust extends to Jack DeBoer, the WaterWalk owner, telling us that he doesn’t want any more city money. In response to citizen inquiry, the city has produced a statement of sources and uses of funds that shows that the money to be paid to DeBoer won’t come from the city’s contribution to the project.
This contention would be laughable if it wasn’t disingenuous and self-serving. It’s not credible to tell citizens that money from one source is used only for one purpose. The fact that the city is making a contribution to the hotel developer makes the payment to DeBeor possible. It doesn’t matter whose pocket the dollars come from. As far as public policy is concerned, all dollars are the same.
Leveling the playing field?
Some on this council have said that the subsidy provided to this proposed hotel actually levels the paying field instead of distorting it. What is the source of the burden that downtown developers face? Often it is said that land assembly issues are troublesome, but that isn’t the case for the proposed hotel.
What, exactly, are the difficulties that this proposed hotel faces that require city subsidy?
Pursuit of conventions: good public policy?
One of the reasons Wichita city leaders say we need to provide subsidy to a proposed hotel in the downtown WaterWalk development is that the rooms are needed to support the city’s effort to gain convention business.
But the convention business is in a structural decline that has been declining for many years. At the same time many cities — both large and small — have built vast conventions centers and related infrastructure. The promised economic development impact of this public investment rarely materializes, but cities continue to pour in public investment, chasing something that just isn’t there.
In the release, the Goldwater Institute explains the ruling:
A Maricopa County Superior Court judge upheld the $97.4 million subsidy of the CityNorth shopping center by the City of Phoenix, basing his decision on “indirect benefits” such as jobs, sales tax revenues, and the creation of an urban core. But such indirect benefits “are not consideration under contract law,” the Supreme Court concluded in its opinion written by Justice Andrew Hurwitz. In reality, the only tangible benefit received by the City, the Court ruled, was 200 parking spaces, which the Court found unlikely to be worth $97.4 million.
The Institute’s Clint Bolick said “The ruling should stop schemes that government concocts to subsidize developers based on grandiose promises that often fail to materialize.”
Jobs, sales tax (and other tax) revenues, urban core. That’s just what Wichita is trying to create.
Grandiose promises failing to materialize? What, in Wichita? Do we have these?
What would happen in Kansas if such a suit was filed?
At a recent presentation by Wichita’s downtown revitalization planning firm Goody Clancy, data was presented that is at odds with the city’s plans.
Goody Clancy consultants presented data showing that downtown Wichita hotels are doing better than hotels in the entire Wichita market. Data from the charts shows that Wichita market hotels command an average daily rate of about $78. The rate for downtown hotels is about $110.
Occupancy rates tell a similar story. For all Wichita hotels the occupancy rate is about 65%, while for downtown hotels the rate is 70%.
According to Goody Clancy consultant Sarah Woodworth, when occupancy rates are at 65% or higher, the area is ready for new hotel rooms. So it seems that more hotels are needed in downtown Wichita, and that new hotels could be profitable.
This is according to Wichita Urban Development chief Allen Bell, who says there is a “gap” in the business plan for the proposed hotel. Unless the city steps in and fills the gap, the hotel won’t be built, according to Bell.
The figures that show the gap, however, are provided by someone who has a multi-million dollar motive to create a gap. Bell says his office checks the arithmetic on these figures, but that doesn’t count for due diligence, especially with the city’s recent history of overlooking important facts about proposed projects.
Here’s the real question: with the city’s planning firm saying the downtown Wichita hotel market is strong with the market clamoring for new rooms, why does the city say a new hotel can’t be built without subsidy?
Yesterday the Wichita Eagle printed a letter from citizen activist John Todd concerning the proposal for City of Wichita subsidy for a hotel in the downtown WaterWalk development. This is the unabridged version of the letter.
In 2002 elected city officials leased a prime 20-acre parcel of city owned downtown land known as the East Bank to the WaterWalk developers for $1 per year for 99 years. The lease contained a subordination clause that allowed the developers to place new first mortgage financing on improvements (buildings) they made to the property, thus leaving the publicly owned land in second position to new first mortgage financing. This land was therefore subject to foreclosure action and loss in the event the developers defaulted.
The Wichita Eagle reported that WaterWalk developers have received an estimated $41 million of taxpayer-subsidized stimulus money since the inception of this public/private venture. In addition to essentially free land, government officials have placed the project in a tax increment financing district and have utilized the STAR bond programs, both of which transfer tax revenues away from the public treasury and into the hands of the private developers. The Eagle also reported that WaterWalk developer Jack DeBoer was buying out his other WaterWalk venture partners and said there would be no need for additional government subsidy
Just days prior to the January 12th City Council meeting the public learns that a new proposed WaterWalk hotel developer will ask the Council for a letter of intent approval seeking millions of dollars more of public subsidized funds.
I feel certain that the letter of intent would have been unanimously approved had not several concerned citizens been there asking for a public hearing process that would allow citizens the opportunity to examine this project. (A video of that meeting can be seen at the city’s website by clicking on Wichita City Council meeting, January 12, 2010.)
Is the WaterWalk hotel developer the only hotel bidder for this public/private partnership? Will our City Council issue a RFP (Request for Proposals) from other developers? Perhaps there is another private developer who will build the hotel with less public stimulus money or none. With massive public subsidy already given, why hasn’t hotelier DeBoer built a hotel on the property? He has stated he has no need for additional public money.
How much money will, if any, is Mr. DeBoer receiving from the hotel developer for transferring the $1 per year for 99 year least on the .8-acre parcel of WaterWalk land? Who owns the parking garage next to the proposed hotel site, and how much money will the hotel developer be paying to use 100 parking spaces?
As stewards of the public trust in the WaterWalk public/private partnership, our Mayor and City Council have an obligation to the taxpayers to hold a meaningful public forum to discuss the public’s interests in this public/private project. It needs to be held in a public forum similar to those held by Sedgwick County Commissioners.
Local officials have locked us into an expensive public/private partnership with massive taxpayer provided benefits accruing to the private developer. Isn’t it time for the interests of the “public” portion of this partnership to be protected? Don’t Wichitans deserve the opportunity to discuss this project before additional public money is promised once again to developers?
At the January 12 meeting of the Wichita City Council, several citizens and one council member addressed the “unlevel playing field” and its implications for development in downtown Wichita.
Speaking about the unlevel playing field, council member Janet Miller said: “My own philosophy on that would say that really, incentives are often used to actually level the paying field.” Referring to downtown Wichita, she said that there may be conditions that make development more costly, or there may be other conditions that make development more difficult.
Miller didn’t name specific factors, but often land assembly issues are mentioned as an impediment to developing in downtown Wichita. A parcel may be owned by many parties, the story goes, and it can be difficult and expensive to contact all parties and come to agreement with them.
But land assembly is not an issue with the proposed hotel in WaterWalk. There is no doubt as to land ownership. It’s just one party, and one who is willing to lease it for $1 per year.
On Monday January 25, a group of citizens will hold a public forum concerning the proposal for a hotel in the WaterWalk development in downtown Wichita.
The event is from 7:00 pm to 8:00 pm in the meeting room of the Wichita Downtown Public Library. The meeting room is on the top floor of the library.
Tirza Heflin is the organizer of this forum. She says:
“You and the public are invited to join a group of interested citizens to discuss the proposed Water Walk hotel.
An invitation to join this public forum discussion has been sent to Wichita Mayor Carl Brewer and all of the Wichita City Council members.
The forum is being organized by a group of citizens who are interested in downtown redevelopment, and want to see our downtown thrive. Several citizens have questions about the public sector interests in the WaterWalk public/private partnership before our City Council considers the letter of intent for this project on February 2, 2010.”
Tuesday’s meeting of the Wichita city council featured a lengthy discussion of a proposal that in the past, might have been passed without much public discussion. Instead, some useful information emerged, and the meeting opened the possibility of more citizen input not only on this item, but also on future city initiatives.
As an example of information that was revealed at this meeting, there was concern expressed by council member Sue Schlapp that the proposed hotel might be granted a period in which it would be the only hotel in WaterWalk. Bell replied that we don’t have the answer to this question, and that this has not been addressed. Later, a representative of WaterWalk revealed that the proposed hotel had an agreement that it would be the only hotel in WaterWalk for three years and possibly up to four years.
This is an important piece of new information, as downtown boosters continually speak of the idea of “critical mass.” The idea, I believe, is that multiple hotels may feed off the presence of each other, instead of being in competition with each other. Or it might be that if other hoteliers see this proposed hotel doing well, they’ll be induced to build one on their own. But if there will not be another hotel in WaterWalk for at least three years, that puts a damper on the formation of critical mass. Hotels, of course, could be built in other parts of downtown.
Council member Lavonta Williams asked about the survey the city is conducting to see if the proposed hotel would harm the city-owned Hyatt Hotel: Will it look at nearby hotels that the city doesn’t own? Bell said the consultant may look at those hotels, interview their management, and may be able to offer some information as to that. But Bell said that the present agreement considers only the Hyatt Hotel.
Council member Jell Longwell said we’re sensitive about the burden on our local taxpayers. But the taxes on the proposed hotel would fall on out-of-area taxpayers, he said. His clear implication was that taxing visitors to our city is okay. The problem is that many visitors to a city pay attention to taxes. When a $100 hotel bill blooms to $114.30 with taxes, people notice, even business travelers whose employers may pay the bill.
(The taxes are 6% for the transient guest tax or “bed tax,” 6.3% for our present sales tax, and another 2% for the Community Improvement District tax. Then if the governor has his way, there will another 1% in Kansas sales tax, and if some downtown boosters have their way, there will be yet another 1% city sales tax to provide subsidy for downtown.)
Council member Paul Gray answered his own question with: “why would you?” The question was why would anyone build a hotel downtown privately when there are several subsidized hotels already operating? The unlevel playing field was created long ago, he said, and it’s unlikely that anyone will develop a hotel without receiving similar benefits from the city. He also said that we’re on the hook for the bonds sold for the WaterWalk TIF district. He made reference to the “giant hole that we’ve already created with the financial obligations we’ve placed on that.”
After citizen John Todd spoke, Longwell asked how much lead time the council should give citizens for matters like this. He said that the Wichita Eagle reported the story, adding “I thought everybody read the Eagle.” (I wonder if Longwell has noticed the layoffs at the Wichita Eagle and the poor financial performance of most newspapers as fewer people read them.)
A search of the Eagle for stories on this topic shows a blog column from Wednesday January 6, just six days before the city council meeting where the item was to be considered. The Eagle printed stories on Friday and Sunday. These stories, however, don’t report the detailed information that some people would like to have. There’s simply not room in a newspaper, as the agenda report for this item contained ten pages of small print. Not many people are interested in such detail, either.
(The city’s agenda packet for this meeting, which is the important source of detailed information, became available on the city’s website probably late Thursday. The pdf file indicates that it was created at 4:51 pm that day.)
Longwell pressed Todd: “How much lead time do we need?” I have an answer for him. After I read the agenda packet Friday afternoon, I emailed Wichita public information officer Van Williams with a few questions. By Monday afternoon I hadn’t received a response. I’m not criticizing Williams, as he might have had any number of valid reasons for not replying to my questions right away. But even if he had replied Monday afternoon, that’s just a few business hours away from the meeting. That is definitely not enough time to digest a project of this scope.
Gray then asked Todd how much vetting does the public do on a project like this? The answer to this is: not enough, as the city has a recent history of problems with its development partners. In December 2008 the city was about to enter into an agreement with a developer when Dion Lefler of the Eagle uncovered very troubling facts about the developer’s past dealings. See Wichita city hall: more evidence of lax procedures for a summary.
Since then Wichita has a new city manager, and the city has said it has new procedures in place for investigation of the backgrounds of potential business partners. Other problems remain, however. Last month Wichita Eagle editorial writer Rhonda Holman wrote about missing or incorrect information provided to the city council:
Worse, when the council approved the Big Dog deal on a 5-2 vote, its members reportedly were unaware that the company had hired an investment banker to explore a possible sale or merger. Plus, city documents about Big Dog listed its employment at 115 when the number actually has dwindled to 30 to 40 (from a 2005 high of 336).
A policy meant to guide the use of tax abatements and other tools doesn’t work well if decisions are based on faulty information.
Going back to 2004, we have evidence that city council members were not familiar with even the most basic facts about our economic development programs. The article “Tax break triggers call for reform” published in the Wichita Eagle on August 1, 2004 reported this:
Public controversy over the Genesis bond has exposed some glaring flaws in the process used to review industrial revenue bonds and accompanying tax breaks.
For example, on July 13, Mayans and council members Sharon Fearey, Carl Brewer, Bob Martz and Paul Gray voted in favor of granting Genesis $11.8 million in industrial revenue bond financing for its expansion, along with a 50 percent break on property taxes worth $1.7 million.
They all said they didn’t know that, with that vote, they were also approving a sales tax exemption, estimated by Genesis to be worth about $375,000.
It’s not like the sales tax exemption that accompanies industrial revenue bonds was a secret at the time. An easily accessible web page on the City of Wichita’s web site explains it.
Regarding the present case, Schlapp said she would have liked to have known about the exclusivity period earlier. That’s just one example of something not contained in the agenda packet that is important for citizens and council members to know, and we didn’t know that before this meeting.
Gray also noted the history of some of the people at the council meeting who opposed the project, adding that he didn’t see them changing their minds. That attitude represents a simplistic view of the way public policy ought to be formed.
An issue like this has many facets. Some could possibly have merit, and some certainly are harmful. A discussion like what took place at this meeting can provide a forum for exploring these issues, and perhaps eliminating the bad in favor of the good. The fact that some might still be opposed to the project doesn’t negate this.
In the end, the council voted unanimously to defer this matter until its February 2 meeting.
Remarks to be delivered at the January 12, 2010 meeting of the Wichita City Council.
Mr. Mayor, members of the council:
There are several aspects of the proposed hotel in the WaterWalk development that I find troubling.
Perhaps most important to public policy, the city has now recognized that when it provides subsidy to one business, it may harm other businesses. As you may recall, I’ve spoken to the council several times on this topic over the past few years. I’ve been concerned about the effect on privately-owned businesses and the willingness of entrepreneurs to assume risk only to find themselves competing with a subsidized business. The city has shown little concern for this.
But now that a city-owned business — the Hyatt Hotel — may be imperiled, the effects of city subsidy on competition is now a concern. It’s only now that city hall is measuring the harmful effects of its actions.
This is a slap in the face of all businesses in the city that have faced competition from a city-subsidized competitor. In particular, there is a Holiday Inn and Suites just three blocks away from the proposed hotel. Will the city survey to see if this hotel will be harmed by a subsidized competitor?
Then, why are we settling for such a low rate of return on this project? Promoters of public investment in downtown Wichita like the Wichita Downtown Development Corporation are promising returns of up to 15 to one for future projects. The agenda report for this proposed public investment indicates a benefit to cost ratio of 1.77 to one for the City of Wichita.
Are these two indicators measuring the same thing? If so, why are we about to make an investment with a return of less than two to one, when much higher returns are promised after the planning for downtown revitalization is complete?
I’m also concerned about the economic viability of this project. If we want to have robust development that has deep roots, grounded in solid financials and free market capitalism instead of crony capitalism, we need to turn away from highly subsidized ventures like this proposal. Relying so extensively on public subsidy creates development with shallow roots.
An example of this is the problem the city is currently experiencing with the Broadview Hotel. This hotel was scheduled to be renovated by its new owners. The purchase and renovation were to be made possible by large subsidies by the city. Tax credits from the state were to play a large part, too. But last year when the state realized that it couldn’t afford these tax credits, it placed a lid on them, and now the Broadview renovations are on hold.
There are a few specific questions about this project that need answers. We need to see a development budget for this hotel. It appears that the cost will be around $100,000 per room. I’ve been told this cost is high for this type of hotel.
We also need to have more information about how much of their own money the developers are putting into this deal. Also, I think citizens would like to see the details of the ground lease and the parking arrangements.
Although the governor didn’t mention this last night, there’s movement in Topeka to limit or eliminate tax exemptions, including sales tax exemptions such as planned for this hotel. Is the city confident it can secure the planned sales tax exemption?
Wichita developer Dave Burk stood to pocket over $1 million in taxpayer money on this project.