WARREN BAILOUT POSES DILEMMA
CITY LOAN, VACANT THEATER BOTH CARRY RISKS
Sunday, June 29, 2008
Section: MAIN NEWS
BY BRENT D. WISTROM, The Wichita Eagle
Wichita taxpayers will give up as much as $1.2 million if the City Council approves a $6 million loan to bail out the troubled Old Town Warren Theatre this week.
That’s because that $6 million, which would pay off the theater’s debt and make it the only fully digital movie theater in Kansas, would otherwise be invested and draw about 3 percent interest a year.
The loan could also set a precedent, leading other businesses to turn to City Hall for a favorable loan, something that Interim City Manager Ed Flentje has warned of since the issue arose two weeks ago.
Bart Hildreth, a Kansas Regents distinguished professor of public finance at Wichita State University, agrees.
“It is a raid on the treasury,” he said. “And every business has a right to ask for any benefit that they think is best for that business. That does not mean the city has to give it.”
While Hildreth said he does not know whether this loan is the right move, he said the City Council should adopt a clear, written policy about loaning businesses money before setting a precedent with its vote.
City Council members say they would consider such a loan only for the anchor of an area the city has heavily invested in, such as the Warren and Old Town Square.
This is the first time Wichita has considered loaning taxpayer money to a business, finance officials and other observers say.
But council members say that as unusual as the loan is, it could be even worse for taxpayers if the theater closes.
The city has already borrowed about $9 million to install the parking garage, fountains and landscaping that makes Old Town Square a major attracti on. Most of the theater’s taxes – along with those of surrounding businesses – go to pay off that debt.
It may be impossible to know which is the better deal because no one knows what might happen if the theater closes.
Lawyers for the city and the theater are still negotiating the loan contracts. The documents are expected to be made public Monday, just a day before the council votes whether to approve them.
If the loan is approved, the theater’s owners would agree to keep it open for 10 years.
Without the loan, the theater will have to close if it can’t break even soon, said Bill Warren, part owner of the theater.
“It’s something that we don’t want to do,” Warren said. “I don’t think anyone enjoys going through the process of asking for some help on a business .”
Warren said the sales and property tax revenue the theater generates would be about four times greater than the interest the city could earn by investing the $6 million.
Tax district at issue
In 1999, the city created a tax increment finance district in hopes of turning patches of vacant lots and run-down buildings into a downtown attracti on.
The district – or TIF -channels the increase in property taxes caused by new developments into a special fund that pays for things like land acquisit ion, roads and parking garages.
In Old Town Square, the city spent about $9.5 million for the plaza, parking garage and fountains.
The city sought someone to open a theater. A group of investors answered: Warren, Mark B. Hutton, president of Hutton Construction; Andrew W. Hutton, co-founder of Hutton and Hutton Law Firm; Steven R. Barrett, an associate with J.P. Weigand and Sons Inc.; David C. Burk, owner of Marketplace Properties; and David E. Wells, president of Key Construction Inc.
“It hasn’t turned out the way we hoped,” Warren said Friday.
He declined to estimate his losses, but Ben Sciortino, a spokesman for Warren, said the investors have lost at least $3 million since the theater opened in 2003.
The weak revenue has also kept property valuations low, and the city has had to subsidize the TIF to make its bond payments.
The theater’s owners have sought to reduce property valuations for each of the past three years.
Those requests are pending with the Kansas Board of Tax Appeals.
Any taxpayer has the right to contest a valuation. In the theater’s case, if the reductions are granted, they would further erode the tax district’s ability to pay off its debts.
The city also gets money to pay off the TIF by charging parking fees to businesses surrounding the garage.
Last year, that was $37,000, according to a recent city report.
Under the proposed loan, the theater would pay about $7,500 less in parking fees each year.
The ‘big picture’
City Council members, none of whom were in power when the TIF was approved, say it will only get worse if they don’t save the theater.
“The taxpayers could be stuck paying off the bonds,” said Vice Mayor Sue Schlapp. “We don’t want to do that to taxpayers.”
She said the loan will save taxpayers money in the long run.
Mayor Carl Brewer said it may save the area from going downhill, too.
“Do we want it to go back to the way it used to be?” he asked. “It’s the thing that set the tone in Old Town and set the climate for this excitement.”
Council member Sharon Fearey said the theater not only feeds the TIF, but it improves the quality of life downtown and helps local businesses recruit talent from out of town because it offers young professionals the type of entertainment they’re looking for.
“We have to look at the whole, big picture,” she said.
Several business owners have said that the theater draws a lot of foot traffic that increases business at their shops, restaurants and bars.
None have said they would go out of business if the theater closes.
Melad Stephan, owner of Uptown Bistro, Sabor Latin Bar and Grill, and Oeno Wine Bar, estimated that 5 to 10 percent of his business comes from moviegoe rs.
He said his restaurants seem to have become a destination of their own. He doesn’t fault Warren for trying to secure a loan from the city.
“If they can convince the city and everybody else to loan them the money, that’s smart on his (Warren’s) part,” he said. “If I could do it, I would.”
Charlie Claycomb, president of the Old Town Business Association, said that the city has already invested in the area and shouldn’t let it falter.
“I don’t know the loan is the right way,” he said. “But I know (the theater is) vital to downtown revitalization.”
Though the exact terms of the proposed loan haven’t been finalized, the risks fall into two categories.
One is that by tying money up in the loan, the city has less money to pay for capital projects, such as a road repair or new city buildings.
The other is that if the theater owners can’t repay the loan, the city would own the theater. But the owners have guaranteed that they’ll repay the loan themselves if needed.
No one knows exactly what the city would do with a theater that even Warren, who is well-known as a successful theater owner, couldn’t make work.
Brewer said he believes the city could easily sell the theater either to a businessperson who has other plans for the space or to another movie theater operator.
Cities often look to the silver screen to draw foot traffic to their revitalization efforts, said Patrick Corcoran, director of media ad research for the National Association of Theatre Owners.
But, he said, there are no clear trends on whether downtown theaters succeed.
Although city finance officials say they’ve conducted some analysis to ensure the loan doesn’t put the city at too much risk, they say no formal study has been conducted.
In a rare move, city finance and development officials did not recommend whether the City Council should approve the loan.
Some have questioned the relationship between the businesspeople and the politicians.
Campaign finance records show that in the most recent elections, theater owners gave at least $6,500 to six council members. All the donations were for $500, the maximum allowed.
(Council member Lavonta Williams was appointed to fill a vacancy and did not raise money.)
The money is just a fraction of their overall campaign funds. And council members say there’s no correlation between contributions and the loan. Hundreds of people donated to their campaigns, and they say they make no promises when they accept a check.
“I would never do anything because of a campaign contribution,” said Fearey, who received $500 from David Burk and $500 from David Wells.
“I don’t think $500 buys a vote,” said Schlapp.
“One has nothing to do with the other,” Brewer said.
Question of fairness
For some, the loan raises a question of fairness.
Bob Weeks, who advocates for limited government on his blog, wichitaliberty.org, said he opposes the loan and tax increment financing philosop hically.
“When the City Council shows their willingness to just dish out these tax breaks, why wouldn’t you try to take advantage of it?” he asked.
And when downtown businesses get a break, business can face more difficult in other parts of the city where TIFs and loans don’t exist.
The loan, he said, just makes a bad situation worse.
“Here we go again on yet another hook,” he said.
Troy Franklin, owner of Franklin’s Barber and Beauty Salon near Douglas and Hillside, said the loan doesn’t make sense.
“We’re not upscale,” he said. “But it’d be nice if we could get money like that.”
But he knows the city probably wouldn’t hand it over.
“It seems like it’s just not fair,” he said.
Reach Brent D. Wistrom at 316-268-6228 or firstname.lastname@example.org.
Take a poll on whether the City Council should approve the $6 million loan and see previous coverage at Kansas.com.
Loan vs. investing
The owners of the Warren Old Town Theatre have requested a $6 million loan from the city to rescue the financially troubled theater. The money comes from a fund that would otherwise accumulate interest. The figures below reflect how much money the city and its taxpayers could lose by not investing the cash.
Opportunity Value of
Loan value interest rate* opportunity lost
$6,000,000.00 3.00% $180,000.00
$5,734,077.66 3.00% $172,022.33
$5,464,831.30 3.00% $163,944.94
$5,192,219.35 3.00% $155,766.58
$4,916,199.75 3.00% $147,485.99
$4,636,729.91 1.75% $81,142.77
$4,353,766.70 1.75% $76,190.92
$4,067,266.44 1.75% $77,177.16
$3,777,184.94 1.75% $66,100.74
$3,483,477.41 1.75% $60,960.85
*Based on averaged interest figures from the city’s March 31, 2008, quarterly financial report. The 10-year loan is set up so that the theater’s owners pay it as if it were spread over 20 years until the 10th year, when they have to make a “balloon” payment. The theater’s owners will pay 1.25 percent interest, so the city would lose only 1.75 percent in the last five years. The city will likely have rights to any interest the Warren’s owners accumulate from city money sitting in the corporation’s bank account, which could slightly reduce the potential losses.