Michael Elzufon laughed at the question: Do you regret coming to Wichita in 2004 to try to kick-start downtown redevelopment?
“It’s been an incredible nightmare,” Elzufon, the Minnesota developer, said this week. “I’ve put everything I had into Wichita – millions, my energy, my vision.
“And now I – my family, my partners, everyone – are getting kicked around, dragged through the mud. It’s destroyed all of my projects.”
But the consultant who designed Wichita’s downtown revitalization master plan said the failure of Elzufon and partner Dave Lundberg – known locally as the Minnesota Guys – was the inevitable fate of chronically under-capitalized developers whose fondness for risk was a recipe for disaster in the 2008 collapse of the American credit markets.
The Kansas securities commissioner filed a securities violation complaint against Elzufon, Lundberg and their companies on Christmas Eve, renewing the state’s allegation that loans the developers sought were actually unregistered promissory notes, a violation of Kansas law.
The complaint isn’t a criminal case, and Elzufon and Lundberg face no jail time. But the case penalties would be significant fines for a company already short of cash.
When the case was announced Tuesday, Elzufon asked for time to analyze the complaint with his legal counsel before commenting further. Lundberg said Thursday that the partnership’s legal counsel is still analyzing the state action.
‘High risk tolerance’
David Dixon, the Goody Clancy planner in Boston who headed the “Project Downtown” master plan for Wichita, called the Real Development story a sad case of how the first developers to venture into a downtown area too often fail in the revitalization business.
Simply put, Elzufon and Lundberg didn’t have enough money to weather any storms, particularly not the fall 2008 economic collapse.
“When you’re under-capitalized, everything has to work in your favor and it has to work quickly,” Dixon said. “That’s tough in the development business, and it’s especially tough in the downtown redevelopment business.”
Wichita’s money now should be on “second developers,” Dixon said – the more risk-averse, better-capitalized developers with “patient capital,” or the money to see difficult projects through.
“Certain developers have really high risk tolerance,” Dixon said. “These are the people who seek to break new ground, who operate on the frontier.
“But they often aren’t the developers with the personality and business models that can make these patient capital projects work.”
Elzufon and Lundberg needed immediate success – immediate financial returns – and a continuation of the easy lending market for commercial real estate that collapsed when the U.S. economy did in late 2008, Dixon said.
One key mistake the Minnesota Guys made was trying to go it alone in Wichita, Dixon said.
“Suppose those guys came in to Wichita and did a partnership with Dave Burk (the Old Town developer),” Dixon said. “Or suppose they’d gotten to know some of the major local players and did partnerships with them. They could have built the alliances and attracted the capital that could have sustained their vision through the credit collapse to some kind of reality.”
Such flame-outs are not uncommon in the development game, Dixon said.
“I just had this conversation before Christmas on a very successful Boston developer with a high tolerance for risk. As a result, he periodically falls flat,” Dixon said. “In this guy’s case, he gets the idea out there, and there may be a different developer with a reputation for more stable, methodical work, politically sensitive with the skills to take on rich projects who will succeed.
“I wouldn’t be at all surprised if that’s exactly what happens in Wichita.”
Dixon took issue with Elzufon’s characterization of Wichita development.
“Wichita absolutely isn’t a downtown investment nightmare,” he said. “Ask anyone in the business to define an urban development nightmare and you get a city and a business community that won’t work together. You get a city that doesn’t know how to invest its own public capital. The mayor’s not sympathetic.
“All the things you customarily hear in our business aren’t true at all in downtown Wichita.”
Wichita officials have made clear for months – and Mayor Carl Brewer reiterated on Tuesday – that the city is finished with the Minnesota Guys.
Starting in 2004, Lundberg and Elzufon bought more than a dozen aging downtown office buildings, mostly with investors’ money. By 2007, they owned or managed nearly 1 million square feet of downtown office space, roughly a quarter of downtown Wichita’s total.
Their plan was to buy buildings cheap, reinvest using borrowed money or sale proceeds, attract new tenants at higher rents, and then refinance at the new, higher value to pull out capital for further reinvesting and profit.
That worked fine at the height of the real estate lending boom, when getting money was easy and property values kept going up. But when credit dried up beginning in September 2008 as the U.S. economy collapsed, the financing the partners needed became impossible to obtain.
This year, another developer took over the Exchange Place project and Security National took over Wichita Executive Centre.
Elzufon and Lundberg still have ownership of a few floors of their office buildings, but generally only because their creditors don’t want to formally claim ownership.