What the Block 1 amendment says about downtown Wichita

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.

On jobs, we find that employment in downtown continues to decline. On the plus side, Wichita officials no longer blatantly misapply Census Bureau statistics regarding downtown jobs. See Downtown Wichita jobs, sort of and Downtown Wichita report omits formerly prominent data.

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