The Wichita City Council is poised for a pivotal vote Tuesday on the future of downtown redevelopment. The council's decision on Real Development's request for a $2.3 million bump in tax increment financing for Exchange Place — a 230-unit condo project — holds an initial key to how quickly residents move downtown and trigger commercial growth, local officials say.
It's a dilemma for a City Council committed to public-private development partnerships that have yielded some successes, but also some high-profile stumbles like WaterWalk, which have suffered from poor planning and oversight.
Real Development partners Michael Elzufon and Dave Lundberg have a resume of Wichita success: the development of office space across downtown, the Lofts at St. Francis condo project, and the redevelopment and leasing of the Wichita Executive Centre, once known as the SC Telcom building.
The developers own 11 buildings downtown, and have options to buy four more and a parking lot. That totals about 1.5 million square feet once the acquisitions are done.
Meanwhile, the city has invested at least $12.1 million in incentives — though Real Development estimated it is closer to $17 million.
Elzufon said that in 2004 their properties represented about 9 percent of the value downtown. After investing $30 million, he now says Real Development — also known as the Minnesota Guys — controls 21 percent of it.
However, the company ran into serious cash flow problems in 2009 as the local economy tanked, amassing almost $2 million in unpaid contractor bills and broker leasing commissions, a fact clearly bothersome to some council members.
And Lundberg and Elzufon have had a number of state and federal tax problems in Minnesota, according to Internet records, problems they attribute to the roller-coaster real estate market and start-up business costs.
There's little doubt in any council member's mind that downtown needs the 230 residences Exchange Place will produce, let alone the 298 parking slots.
But it will take five votes to approve a change to the incentives.
Council members aren't sold on the increase, having committed millions in facade assessments for Real Development buildings and $9.3 million in as-yet undelivered TIF revenue for Exchange Place.
That's one financing piece of the $46.5 million deal, which also includes a 40-year, $30 million government-backed loan that awaits final application. The developers must submit their final application by May 17.
If the council's expecting a significant reduction in Real Development's request Tuesday, it will be disappointed. Elzufon said Friday that cuts in construction costs will drop that number by about $400,000 — still about $1.9 million short.
That might be a tough gap to bridge, given Real Development's cash flow and relatively small $4.9 million equity in the deal, several council members said.
"Absolutely it's a big deal," said council member Jeff Longwell. "If you're looking at somebody who shows all the evidence of being undercapitalized, it shows some concerns."
"These guys have a hefty chunk of money they owe people, and I don't like to hear that they're borrowing money to pay their creditors," Vice Mayor Jim Skelton said. "I'm very reluctant to support the project."
Some of that reticence grows from the past, said council member Paul Gray: The city has been too eager to sign on to sexy economic development projects.
Elzufon's public ultimatum a month ago — no increase in city funding and Exchange Place is dead — rankled Gray.
"I hate that, and too often that happens to us," he said. "If the city doesn't do this, it won't happen, and then the electeds fall in love with this project and say, 'Hey, it's just $2 million.'
"That's happened before, and that's why people don't trust us."
Council member Sue Schlapp said the $2 million gap is too much.
"Seriously, I don't see how we take that on," she said, noting she's withholding judgment until a new analysis of the project by Wichita State University officials comes out Monday morning.
Schlapp said a no vote by the council shouldn't be viewed as the council closing the door on its relationship with Real Development.
"They won't be happy with us," she said. "But we're not just here to pass money though the window."
But Longwell and council member Janet Miller want to take a closer look because the 230 residences — yielding an estimated 350 people — are a key plank in the first steps to revitalize downtown.
"I think we've done pretty darn well as a council leveraging our assets," Longwell said.
What the market says
Commercial brokers and analysts marketing Wichita's downtown agree with the council — more rooftops equals more opportunities for retail and commercial development. All of those elements will lead to downtown's revitalization.
They raise doubts about the quality of the investment, though, questioning whether the condos can be sold in five years in an economy rocked by aviation layoffs.
Real Development plans to market the condos first as rentals with hopes of selling them as condos to the renters.
"My perception with a project the public side is involved in is not so much their degree of participation but the wisdom of the investment," said David Dixon, the Goody Clancy official leading the downtown revitalization planning process.
"How will it be managed? What equity does the private sector have? Is it equally at risk with the public sector? Are we looking at this proposal as plugging a hole, as opposed to is it a good investment for us?"
There is "complete uncertainty" in the financial markets over where local and national economies will be in the next five years, said Steve Martens, president of Grubb & Ellis/Martens Commercial Group.
"It will be a challenge to see a variety of projects in this city reach their potential without a healthy, strong aviation sector," he said.
Jeff Fluhr, president of the Wichita Downtown Development Corp., said the project is important as an element of downtown revitalization.
"In looking at the overall development of downtown, success is not defined as a single project, but by a series of projects working to build a community's vision," he said.
Because Real Development applied for the tax increment financing and facade loans before the city developed a policy on checking the backgrounds of potential business partners, the city didn't formally background Real Development.
A check of court records shows that Lundberg and Elzufon have no criminal histories or bankruptcy filings.
They do have about $1.9 million in unpaid bills from the construction work and leasing on the Wichita Executive Centre, ranging from delinquent contractor bills to unpaid commissions for commercial real estate leasing agents.
Those bills will be paid, both men have stated publicly, once a $7 million refinancing loan is closed on the property.
"If there wasn't this loan coming to the table... you wouldn't hear anybody step out and say they're ready to vote for this," Longwell said. "I saw this going down in an 0-7 beforehand."
Lundberg said he resolved a $500,000 lawsuit against a partner filed in March 2004 by Mercyhurst College, located in Erie, Pa.
The suit, filed over an apartment building the college purchased from the partner, was settled when Lundberg paid about $50,000 to obtain a deed for the college.
Both men had tax problems, according to public records. Lundberg and his wife, Barbara, paid an $18,560 Minnesota tax lien in 2004. Two years earlier, Lundberg and MBZ Communications paid a $7,268 Minnesota tax lien.
In 1996, Lundberg and his wife paid a $63,511 federal tax lien, and two years earlier, they paid a $5,999 federal tax lien, Internet records indicate.
Elzufon paid a $9,023 Minnesota tax lien in 1997.
"Public records don't reflect the good things you've done," Lundberg said.
Lundberg's civil record also includes two significant lawsuits brought by current partner Steve Cheney, one that ended in a January 1994 judgment for $1.25 million and a November 1993 judgment for $406,058.
Coming to Wichita
How does a real estate dealer and a self-described carpetologist from Minnesota end up owning nearly a quarter of downtown Wichita?
The answer starts in Las Vegas.
In 2000, Lundberg attended a real estate exchange meeting where players examine each other's holdings and set up property trades.
Lundberg said he traded for a property in Las Cruces, N.M. A year later, he swapped it for a shopping center in west Wichita.
In the summer of 2004, a broker who knew Lundberg had property in Wichita tried to set Lundberg up with a building at 110 S. Main.
After a visit, he decided not to buy it. But he saw a lot of depressed properties, read the listings and started making deals.
Lundberg started thinking about what downtown St. Paul used to be.
"It looked just like St. Paul 25 years before," he said.
Though downtown St. Paul is larger than Wichita, has a capitol, the Mississippi River flowing through it and is connected to Minneapolis, Lundberg thought perhaps Wichita could go through a renaissance like St. Paul's.
He wanted to do a loft condo development for the first time, got his friend Elzufon involved and in the fall of 2004 they came to Wichita to turn the Bitting Building into a loft condo project. Their first purchase in Wichita came in 2005 when they bought property at 201 S. St. Francis, which became the Lofts at St. Francis.
"We just continued to be involved, continued to buy more properties," Lundberg said.
But just buying does nothing, Elzufon said.
"Let's just be frank, what did we really buy? We bought yesterday's news — vacant, dormant, ugly, stinky... it's all what you make of it."
Over the next four years, they acquired 10 more downtown properties through a variety of partnerships — and they have purchase options on four more.
It has become their lives. But they still live with their families in Minnesota — Lundberg about an hour northwest of Minneapolis in Annandale and Elzufon in Maple Grove, a suburb.
Both say the extra $2.3 million in city funding is critical.
Exchange Place, they say, is a catalyst, a project that can help transform downtown.
"The time is now," Elzufon said emphatically. "We have spoken. We have gone to Richmond. We have gone to Jacksonville. We have gone to Chattanooga. We have talked. We have Visioneered. We have Goody Clancyed.
"We have all of the things we said we were going to do and you simply right now have the absolute custom-ordered solution to everything that we said we were going to do, and we now simply need to go do everything we said we were going to do."