Monday, June 15, 2009

Rialto Theatre to City Council: Delay the Vote on the Downtown Deal

Posted By on Mon, Jun 15, 2009 at 1:32 PM

4d2c/1245097865-rialto_theatre2.jpgAttorney Michael Crawford, president of the Rialto Theatre Foundation, is urging the Tucson City Council to delay voting on the downtown development deal that is scheduled for a decision at tomorrow evening's council session.

The deal, which would give downtown developers Scott Stiteler and Don Martin roughly $4 million in city land in exchange for certain investments downtown, has been in the works for months. Dave Devine has done extensive reporting on the proposal in the pages of TW. (His most recent story can be found here.)

One key element: Stiteler and Martin own property surrounding the city-owned Rialto Theatre. The operators of the Rialto, including former TW owner/publisher/editor Doug Biggers, are trying to ensure that the deal includes two "bays" either side of the Rialto lobby and a green room/office behind the theatre. In the most recent version of the development agreement, Stiteler and Martin have agreed to sign over the bays to the city and are offering to rent the back building to the Rialto Foundation. The rent would be free for the first five years and then at market rate thereafter.

With many points in the deal changing in recent days, Crawford is urging the council to delay a vote on the deal until details can be ironed out.

Here's Crawford's letter to the mayor and council:

Hon. Mayor and Council,

On behalf of the Board of the Rialto Theatre Foundation, I respectfully request that you to delay voting on the proposed Development Agreement (“DA”) with the Downtown Tucson Development Company LLC (“DTDC”) currently on the Mayor and Council agenda for June 16, 2009, because it does NOT protect the Rialto Theatre (“Theatre”).

As the Arizona Daily Star stated in a major opinion piece in Sunday’s paper: “The City Council must protect its asset. It must not approve any deal unless the Rialto Foundation’s board of directors agrees that it is acceptable.” As of today, the Foundation has not been afforded the opportunity to come to an acceptable agreement with DTDC.

Neither the Mayor and Council, nor the public at large, has had a chance to properly review the final version of the DA, which involves $4.3 million of taxpayer property. The current version of the DA has completely changed from

the one presented to the Council on June 2, 2009, and was not available to the public until Friday after 5 p.m., one business day before the council meeting.

The current DA is 46 pages long, single spaced, and contains over 17,000 words. As a lawyer, I have a hard time understanding portions of the agreement. How can the public, let alone the Council, properly review and evaluate this DA? This rush to a council vote by DTDC does not provide the public the level of transparency this Council has said should be mandatory with these types of agreements. For that reason alone, a vote on the DA should be delayed until there is sufficient time to allow for a level of due diligence on behalf of the citizens of Tucson by the Mayor and Council.

If DTDC will not agree to a reasonable extension of time, that refusal would say much about the level of good faith evidenced by the developers. How does a short delay harm DTDC? Likewise, a delay does not harm the City, even if DTDC does not concur. The maximum damages under the Preliminary Development Agreement (“PDA”) total $950,000, which, in my opinion, is not an accurate amount of actual damages potentially due the developer. In other words, I think DTDC would be owed significantly less given their overall performance under the terms of the PDA since its approval in December 2008.

If the Council approves the deal as submitted last Friday, DTDC immediately receives $800,000 of city property for submission of their “concept plan,” which had a value of $250,000, according to city staff, during the PDA discussions. In the end, there is no reason to not delay this item. As they say, the cake has not yet finished baking. We all want to make sure it tastes good when we are done.

In regard to getting it right, the portions of the DA dealing with the Theatre and the Foundation MUST be changed. The Foundation’s attorney, Michael McGrath, and I negotiated in good faith with members of DTDC following the June 2, 2009 council meeting. Abruptly and without notice, DTDC broke off negotiations and all communication last Wednesday. The Foundation was close to a deal when DTDC simply said: “Here is our final offer,” and “see you next Tuesday” in an email from Don Martin. The language they have proposed makes promises that are illusory, just like the Thrifty Block deal! The City needs to protect itself and the Theatre. We have done our best to do so. We need your help!

First, and most importantly, the promises made by DTDC in the DA regarding the Theatre are NOT mandatory. As an example, conveyance of the 1,500 square feet (the “Bays”) for which the city is paying $300,000 does not transfer to the City immediately upon the Effective Date of the deal. Why not? Based on the vesting schedule and Option Agreement in the DA, the DTDC can acquire title to the front of the Ronstadt Center 10 days after the Effective Date of the DA. Thus, no matter what happens with regard to the rest of the deal, that property is gone. Why are the Bays not transferring to the City within 10 days from the Effective Date? That is the only way to protect the City and the Theatre under this deal. (It may be worth noting that an affiliate of DTDC paid the city $350,000 for the MLK building under the terms of the Depot Plaza development agreement approved by Mayor and Council in November 2006.)

Further, if DTDC does not fulfill portions of their obligations under the DA they simply do not get the land credit associated with the obligation and there are no other consequences for a failure to consummate their obligations to the Theatre. Thus, DTDC can still receive $3.3 million of taxpayer property regardless of what happens with the Theatre portion of the deal. This needs to be changed to ensure that the Theatre-related promises must be kept before DTDC is eligible for ANY other credits or options.

In their proposed language regarding the Theatre, (which DTDC changed again in the most recent version distributed at 5 o’clock on Friday without notice to the Foundation), DTDC gets everything it wants, including access to the Theatre’s customers with a recorded easement that runs with the land forever, yet they are not required to pay the $400,000 they promise they will contribute so the Foundation can complete necessary improvements to the Theatre.

The Foundation never agreed to an easement; we agreed to enter into an “access agreement” between the parties. We also proposed that access to the Theatre be tied to the term of our lease on the Green Room/Office property, were we to enter into such a lease. That linkage is a reasonable request. By mandating an easement, DTDC will get full access to our lobby, stairway and balcony area in a way that subordinates the Foundation’s current rights under its lease with Rio Nuevo. This simply is not acceptable.

We have requested that the $400,000 be put into an escrow account to be controlled by the City within 30 days after the effective date, or they get no access to the theatre. The existing language in the DA regarding access to the Theatre is also too vague and leaves too much room for interpretation. We had agreed on language with them, but again, they changed it in their “final” version when they terminated negotiations via an e-mail from Don Martin. This is not acceptable.

Finally, the portion of the DA that concerns the Green Room/Office building does not ultimately give the Theatre adequate protection, and is therefore inherently not acceptable. It is basically a 5-year lease, and then the lease can be terminated at DTDC’s sole discretion. The Theatre cannot operate without a Green Room for our artists and offices for our outstanding staff. DTDC has refused to sell the Green Room/Office building to the City at any price, because as Scott Stiteler said during negotiations, “we want to maintain leverage over the Theatre.” Why do they want to maintain leverage over their neighbor? As the Foundation board has consistently maintained, the City needs to make acquisition of the Green Room/Office building a mandatory provision of the DA, so no one has “leverage” over the Theatre that could jeopardize its existence.

DTDC repeatedly pulled a “bait and switch” in its negotiations with Foundation counsel and me. Its members would commit to deal points verbally and then change them in the writings they would send us, keeping the part of the deal that we capitulated to and removing what we were promised in return. They did this repeatedly. Then they had the audacity to accuse us of changing the deal points. It has been a rather surreal experience, to say the least, and not one that augurs well for future good faith dealings with DTDC and its affiliates. This is all the more reason to ensure that every detail in the development agreement pertaining to the Rialto Theatre and DTDC is absolutely acceptable to the Foundation.

After the Thrifty Block fiasco (no reversion clause) I would think the City and the Council would be extremely careful to ensure that it never happened again. Well DTDC’s DA, which they drafted, does it again! It’s got to be changed.

The overall DA is NOT value for value. This deal is value for illusory value. It is potentially “Thrifty Block II, The Sequel.” Under the current proposed DA, the City is giving DTDC $4.3 million of land ($4M of City Land and the DTDC also gets the Depot Plaza worth $300,000 by signing the DA and negating the previous Depot Plaza DA) for less than $2M in actual investment.

• Concept plan = $250K,
• Cash payments to artists and Skrappy’s = $600K,
• Theatre lease = $200K (worth $75K at FMV),
• Theater Bays = $300K (worth $75K at FMV) and
• Theater Improvements = $400K (DTDC is getting a $500K credit for this. The $100,000 to be allocated for an elevator and $100,000 for a balcony on Herbert Avenue are improvements solely for DTDC’s benefit and should not be included as legitimate credits for the Theatre.)

Additionally, the DTDC is getting $1.6 million for simply leasing out 20,000 square feet of their own space. Value for Value? And some would say the City can’t require DTDC to deed over the Green Room/Office worth approximately $125,000 to the City as part of the deal, so that the Theatre and its operation can be protected?

The DA needs to be modified to protect the City and the Theatre. The Foundation is not overreaching as we have been accused of doing. We are simply trying to protect the Theatre, the City and Rio Nuevo’s number one success story. The Mayor and Council should do the same!
Michael Crawford
President, The Rialto Theatre Foundation

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