Special Reports

Wichita's downtown land leases a jigsaw for developers

The time-honored custom of passing down land through generations is complicating plans to begin drawing developers to downtown Wichita, with the city's comprehensive revitalization plan a month away.

Several pieces of key Wichita downtown property, including the Wichita Executive Centre, the old Woolf Bros. building and Exchange Place, "have the land lease problem," according to downtown planners.

Those tracts, jigsawed out into small pieces with leaseholders scattered across the country, could slow development in certain parts of downtown, city leaders say. They could even chase developers away.

Here's the issue: More than a century ago, the land under several of these key Wichita buildings was broken up, frequently among some of the city's founding families, and then leased off in small chunks for 99 years.

Those leases, which frequently yield the landowner little or no money, have been passed down through those families for generations, drifting into an obscurity that makes finding a leaseholder today difficult, if not impossible.

"It's going to present a significant obstacle to us as we get started," said Wichita City Manager Robert Layton. "We don't have the power of condemnation, so how do you go ahead with redevelopment when in some cases there are numbers of different parties involved?

"They don't live in this area, and they don't really have an interest in downtown. How do you find them, and how

do you get them interested in selling?"

The answer to part of Layton's question is "hours and hours spent breaking your neck pouring over abstracts," said Dave Lundberg of Real Development, whose company has been trying to assemble the downtown puzzle pieces since 2004.

"The land situation is a huge detriment to development," Lundberg said. "It's an extremely difficult problem when it comes to financing a building."

Here's why: Commercial lenders prefer the "fee simple" transaction: Absolute ownership of land and the improvements that sit on it.

But there's nothing simple about owning a building that sits on land controlled by dozens of people scattered across the country.

"If you own a building and don't own the land under it, then the bank says you're not the fee owner of the building," Lundberg said.

"They want you to deal with the guy who owns the land, if you can find him, and you'd better. Because if you're not making your land lease payments, the bank worries that you won't make your mortgage payments either."

Wichita's downtown land puzzle

According to several accounts, four or five of the city's founding families decided around 1850 that downtown land was going to be valuable. Not a bad bet.

So, they leased it out in small chunks for 100 years. Many of those leases were renewed in the mid-1950s for another 99 years.

And in some cases, they built in a troublesome incentive in most of those leases for renewal: When the lease ends, the improvements on the land revert to the leaseholder.

Take Exchange Place, for example, the Real Development downtown housing project that remains hung up over financing issues.

The land the building sits on was a hodgepodge of leases, Lundberg said.

"When we bought it, one had already defaulted and one had already expired," he said. "It was a mess. The owners were in various states, and many hadn't been paid on for three or four years."

So Lundberg's developer hired real estate brokers and attorneys to track down the owners.

"At one point, of the seven leases under Exchange Place, we owned 3 and 25/48ths of the leases," Lundberg said. "There were approximately 100 people who owned the rest of the land. It took us three years to get the last 1/48th away from a person in Arizona to get clear title to the building. Without it, you can't finance it."

Or the Woolf Bros. land downtown, owned by NAI John T. Arnold Associates.

"When we bought it, there were 16 different heirs on one parcel," said Marlin Penner, president of the commercial real estate firm.

"Multiply that by three or four and you can see the complexity right there."

The solution

First, the good news: There are several key pieces of downtown land that haven't been carved up.

And the city owns several others, so Layton and Jeff Fluhr, president of the Wichita Downtown Development Corp., believe they have a good initial inventory to take to developers.

Now, the rest of the story: City and downtown development officials are considering a massive research effort to identify all the land lease issues downtown.

They want to create a "one-stop shop" where developers can walk in and get an immediate, accurate picture of the status of a property, Fluhr said.

But the city may also need intervention from the Kansas Legislature, said David Dixon, the Boston-based planner with Goody Clancy, who is leading Wichita's downtown revitalization planning.

Dixon said other state legislatures have moved to regulate the land lease market, creating laws to remove the ability of land leases to stall development.

Some of those legal changes include statewide lease databases and formulas standardizing the valuation of land, he said.

"The state is going to need some regulatory intervention," Dixon said. "None of us do a great job of anticipating problems like these. We have a crisis and respond.

"When downtown real estate isn't going anywhere, then you don't need to change the way these leases are regulated. But it will matter going forward in Wichita, and this is the time."

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