Wichita facade improvement loan program: questions to answer

Remarks to be delivered at the May 5, 2009 meeting of the Wichita City Council.

Mr. Mayor, members of the council:

Last year, at the January 15, 2008 meeting of this council, there was the notion that city staff would conduct risk analysis of some facade improvement loans that were being considered at that time. I haven’t been able to determine the result of this analysis. Was the risk analysis to be only for the projects in consideration at that time, or is it a procedure that’s in place for all projects, such as the one before you today?

Last December this council indicated the desire to create a system to thoroughly investigate the backgrounds of developers the city is considering partnering with. Is such a system in place? Has this developer, his company, and his partners been investigated under this process?

Why is the developer being paid a fee of $39,227 for overhead and project management? This seems to me as though we’re paying someone to manage themselves.

I realize that we’re not giving the developer this money. Instead, we — the taxpayers of the City of Wichita — will borrow money and then give it to them. They’ll pay back that money as part of their future property taxes.

That leads to the risk that loaning money to this property against its future tax payments increases the financial leverage of this project to the point where it stands on shaky financial footing. Recently President Obama has warned us how highly leveraged real estate deals are a danger to the economy.

So shouldn’t the citizens of Wichita be able to see the financial plans for this project, as well as the financial statements of the developers? After all, now the citizens are a partner in this project.

That brings us to this question: What is the value of this loan program to the developers? Is it the ability to borrow about $700,000 at 6.5% interest, rather than 8.5% or more that private lenders might require?

My calculations show that the difference between these loans, over 15 years, is about $800 per month.

And, if according to the gap analysis mentioned in the agenda material, the project is not feasible without this relatively minor assistance, I would submit that the financial feasibility of this project hangs by a mere thread. It’s not something the taxpayers of the city of Wichita should get involved in.

I’d like to see the city ask for this loan to be personally guaranteed by the developers.

Schemes like this lead to the broader question: Will any project in downtown Wichita ever be accomplished without the taxpayer being involved?

That’s what people — at least me — are criticizing. I’m not against downtown development, Mr. Mayor. I’m against the taxpayer being dragged into deals like this that may or may not work.

It’s entrepreneurs who have the ability to assume and manage risk. They have the potential to earn profits if they do a good job. But the city and its taxpayers don’t have this ability and profit potential. That’s why we need to keep out of these arrangements.

6 Comments

  • The downtown developers have a taxpayer subsidize niche in downtown development. Developers make campaign contributions to Mayor Brewer and others in the City Council and they receive their favorable votes and taxpayer money. As long as the voters stay home and become discourage they will continue to receive the government that they either vote for nor not. Not voting is an outcome.

  • Rothbard -

    Come on Bob. Get with the program. Surely you are aware that without gunvernment involvement we will soon be back in covered wagons.

  • The facade improvement program is a special benefit district program. As such, it is the same as benefit districts that are created to provide water, sanitary sewer, streets and drainage to residential and commercial subdivisions.

    It is not a loan nor is it a subsidy. It is paid back to the city as a tax through special assessments. If the taxes aren’t paid, then the city has legal remedies to protect its position.

  • DerbyDweller -

    It’s time for all this talk about how Wichita subsidizes downtown development to stop. Nearly 50% of the city’s general obligation debt goes to special assessment financing for private development OUTSIDE of downtown. How do you respond to that, Bob?

  • AdamStalder -

    I support special assessment financing — it’s repaid and helps developers launch projects that the market has simply left crumbling. I prefer the improvements to the deteriorating, underused buildings that don’t pay much in property taxes. And to me, renovating those buildings is worth it because it means more tax money for all of us.

  • wichitator -

    For over a quarter of a century the city has been involved in trying to “revitalize” downtown. Hundreds of millions of dollars have been spent and there are government owned buildings, including a bunch of museums, that now exist due to this spending.

    However, downtown Wichita is in worse shape today as we enter the current economic downturn. In addition, taxable assessed valuation has not grown downtown (see value of the special downtown taxing district and their almost 6 mill levy on taxable properties downtown) while the city and county wide total value has expanded. There is a lesson here, but I don’t expect the city council to have learned anything beyond refilling their campaign warchests.

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