Friday, December 23, 2011

Steve Kozachik on the Rialto-Rio Nuevo Dispute

Posted By on Fri, Dec 23, 2011 at 3:48 PM

From City Councilman Steve Kozachik:

I’m on my honor with the City Attorney not to mess with our mediation effort with respect to the City and Rio (Nuevo). So I won’t mention that, except to say that some of the dynamics appear similar to what is happening over at the Rialto.

Should the Rialto get a free ride? No, and when you’re reading through this and start to feel as though I’m suggesting that, come back and re-read this paragraph. And, for the record, the Rialto Foundation is not asking for a free ride.

The Rialto lease began in 2004. The purchase was done using cash on hand. Rio Nuevo does not have any debt on the building and so any money it receives in lease, or other payments is simply cash flow to the District. The Rialto Foundation is paying lease money directly to Rio. It’s gravy to the Board. The deal is not at all like the County Bonds where there is debt being paid from taxpayer money. That transaction happened, and now the issue is how to earn a legitimate return on that investment for the taxpayers.

Small clubs are in a tough market. The Rialto is paying in the neighborhood of $3,600 per month to Rio. They’ve asked to have Rio take another look at that. The Rialto Foundation is a nonprofit. Rio is its landlord.

The way the lease reads is that starting in 2014, the Foundation can purchase the building. They won’t have the money. In addition, after 40 years, ownership of the building automatically reverts to the Foundation, or if it doesn’t exist at the time, to Rio — which will sunset well before that, so effectively, the City will own the theater if it is not purchased ahead of the end date. The current Rio Board wants to ensure that doesn’t occur — a curious goal for a group that won’t be around to see it play out.

The media has carried some surface level reports about this issue, leaving readers with the impression that the Rialto Foundation is asking for a free ride. The fact is that they requested a reduction in their current lease agreement (remember — cash flow to Rio, not the payment of any existing debt service) but increasing over time as the
theater recovers along with the economy.

Rio rejected that notion and sent this “Draft” of a counter proposal to the theater: Draft_Rialto_Ltr_Reponse_Rev_12_16_11_rev.pdf

Note that this was not sent to the Foundation, nor was it sent to the Foundation’s counsel, but to the G.M. of the theater — a person not empowered to cut a deal. And, the theater was given 2 days to reply.

(I was not given this Draft by the G.M. I do not want him to take any heat from Rio about my having, or sharing it. In my opinion, it’s a public document and you should have an opportunity to see how the District is dealing in your downtown area.)

Let me make a couple of points:

First, the statement that the District’s revenue stream has decreased is simply factually incorrect. TIF dollars are up, and increasing by several millions of dollars per year since this lease was first signed. Next, the District raises the red herring of it being locked in by the “Gift Clause.” That’s the State Constitutional issue of a governing body not giving away taxpayer money in excess of the value received. The truth is that Rio is exempt from the Gift Clause under the
Constitution. It’s a taxing district. The claim is bogus.

Looking at the terms of the Draft that they are calling “abatement” is also an interesting journey. In Orwell’s 1984, there were terms called “newspeak.” Some of this would qualify. (In case you never read the
book, “newspeak” is deliberately ambiguous and contradictory language used to mislead and manipulate the public.)

a) It is now ‘abatement’ to tell the Foundation to sign a lease for more space with the owner of other parts of the block.

b) It is now ‘abatement’ to tell the Foundation that Rio will take a percent of its gross bar receipts.

c) It is now ‘abatement’ to tell the Foundation that it must make a minimum amount of capital improvements.

d) It is now ‘abatement’ to tell the Foundation that it must relinquish its option to purchase the theater.

e) It is now ‘abatement’ to tell the Foundation that it must take out insurance naming Rio as additional insured.

f) It is now ‘abatement’ to tell the Foundation that it must fire one of its managers.

g) It is now ‘abatement’ to tell the Foundation that it must take out additional Liquor Licenses.

h) And it is now ‘abatement’ to tell the Foundation that it must pay Rio’s attorney’s fees.

Newspeak. Some of those items are perfectly legitimate. The insurance requirement is legit / the Liquor License is legit / if they agreed on personnel issues, so be it — but those are hardly “lease abatement” items. And to place the Draft in the hands of the GM two days before a response was due is bad faith.

I am not suggesting a free ride. The Rialto is not asking for one. What I am suggesting is that every penny Rio receives from the Rialto is free money to the District. To the extent that it suggests the Rialto is in the driver’s seat as it relates to going bankrupt, that’s false. Rio holds that trump card, and in the same manner as it appears
to have unclear motives with the City in mediation, the terms of this Draft struck me as being cut from that same bolt of cloth.

Rio can close the doors of the Rialto by forcing them into bankruptcy. Or, Rio can realize that every dime it gets from the facility is found money, and work with them to be successful. There are private sector supporters willing to assist. I would hope a rational solution is found so that corner doesn’t go dark, and we don't end up with a change on the marquee from “We love you Gabby” to the seal of the Great State of Arizona.

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