City council rejects financial partnership in Armory Square

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The Park Rapids Economic Development Authority (EDA) resoundingly rejected a Park Rapids Community Development Corporation (PRCDC) proposal that the City of Park Rapids assume the costs of capital maintenance, insurance, taxes and water/sewer for Armory Square.

PRCDC members met Nov. 14 with the EDA, which consists of the full city council.

The proposal is a change from the current 10-year lease agreement between the two entities, in which the PRCDC pays all ownership costs, including repairs, maintenance, building improvements, taxes, programming and insurance. A loan from the EDA is calculated at 4.25 percent with a five-year term.

The PRCDC presented both budget options, or "statements of sustainability," with five-year forecasts for Armory Square on Tuesday.

Both were drafted with expert input from Stu Omberg, executive director of Detroit Lakes Community & Cultural Center; Kathy Anderson, executive director of Bluestem Center for the Arts/Trollwood Performing Arts School in Moorhead, and Jill Moore, executive director of Great River Arts in Little Falls.

"We want to know we're being realistic in our revenue projections and similarly thoughtful in what it's going to cost to provide the level of service that we want in this building," said Vicki Chepulis, a consultant hired by the PRCDC.

A new proposal

Chepulis said the new budget proposal represents "a new lease agreement in which the city assumes the role of owner/landlord," beginning in 2019, and with more favorable loan terms: 1 percent interest with a 10-year term. It also makes Armory Square more sustainable.

"We're not here to ask for not a subsidy, but rather for the city to assume the role as the building owner with PRCDC being the building operator/manager," she said. "Our question is, will you partner with PRCDC in making this investment in the community for hopefully a greater, long-term award."

Earlier this year, the City of Park Rapids agreed to take ownership of the historic Armory under the condition the PRCDC run the facility as an arts and events center with office and meeting space.

Year-round programming at the facility will include performances by touring artists, community events, conferences, conventions, trade shows, weddings, banquets, reunions, private parties, classes and multi-day workshops.

Armory Square will be a "significant economic driver," Chepulis said, attracting thousands from throughout the region all year long.

But, first, the City of Park Rapids must reach a purchase agreement with private developer Alan Zemek and the Armory Square Management Corporation. This has proven to be a challenge.

Easement questions have "stalemated this project," Chepulis said.

Hanging in the balance is a $2.5 million state grant that will be allocated once the city purchases the Armory. The purchase agreement, as well as the lease agreement with the PRCDC, must be approved by the state before the grant funds are allocated.

Budget challenges

Both budget statements from the PRCDC anticipate a deficit between 2019-2022. If the PRCDC is responsible for all building costs, the project runs $21,195 to $35,377 in the red, excluding depreciation. PRCDC member Kathy Grell stated this budget was "heavy" in wages (two full-time and one part-time employees), marketing and loan payments. She assured the EDA the PRCDC would make adjustments in order to operate in the black.

If, on the other hand, the city paid for ownership costs, projected shortfalls are between $9,862 and $10,705 in 2019, 2020 and 2022.

Council member Erika Randall challenged the projected space rental revenue of $65,200 for 2019.

"I'm concerned that's quite inflated. You'd have to rent that out eight times per month at $700 per day," Randall said. "How are you going to get a bride looking for a unique venue to pay $700 for that space when there's no tables, chairs, linen, silverware?"

"We would have that included," Grell said.

Once the city owns the building, Grell said, the PRCDC can launch its capital campaign.

"The capital campaign has an elevator to pay for first and theatre seating" before acquiring receptions items, Randall retorted.

She also questioned whether the Armory could attract 26 multi-day events in 2019.

"I just don't see that's realistic," Randall said.

The budget can be revised over time, Grell said, adding if revenues are less, expenses will also be reduced.

"It's a little late to ask the city to be financial partners," Randall said, adding the PRCDC should have made this offer three years ago and that the City has made it clear "we want no monetary portion of this."

Grell noted the City receives cheaper property insurance rates through the League of Minnesota Cities, which would be unavailable to the PRCDC. They are asking that water/sewer fees for Armory Square be waived, and that the building would be added to the City's list of regular maintenance.

Randall said the budget projections "just tell me the city is going to get this building back."

The EDA's loan to the private developer is already at risk, Grell pointed out.

"The loan would be at risk, but we wouldn't end up with the building back in our hands," Randall said. If the City couldn't use the building as an arts center, per the terms of the state grant, it would remain under private ownership.

Randall said she dislikes being told the city "should take a risk."

"The problem I have with it this is you went through your presentation saying, 'This is what we have to do.' You had this much time to to do that and failed. You haven't shown us this will work," said Mayor Pat Mikesh.

"We don't manage the building yet," Grell replied. "We can't book events in a building we don't own. The PRCDC has had no influence, or very little, on the current owner."

Council member Liz Stone agreed that Zemek, not the PRCDC, cancelled 2017 events that had been committed to Armory Square.

"We're all waiting for this one person with all the power. I don't know that's necessarily fair," Stone said.

The legal fees are "getting up there," Mikesh said. "To me, it's not a good business sense to keep dumping money into that scene."

It could be a good investment, Randall said, but city staff calculated the City would have to invest $22,000 per year into Armory Square over four years. She argued the PRCDC should've presented a "bare bones" budget to begin with.

"I'm losing confidence in the PRCDC to come up with a viable budget," she said.

"I can't see myself giving any support, as a partner, putting our neck out like that," said councilmember Ryan Leckner. "Hopefully, like you said, you can go back to the drawing board and find other resources."

Voices of support

On behalf of the Park Rapids Downtown Business Association, Cynthia Jones noted that the major revitalization of Main Street about seven years ago was "risky" then.

"We did it and it took a lot of work," Jones said. "Six years ago, we started 2nd Street Stage on a shoestring. It was a private-public partnership. So your businesses have really, really helped maintain a downtown. We're beginning to lose business. That in itself should alarm you because there's taxes and assessments attached to each business. When the Armory is full, believe me, the restaurants are full. The gas stations, the grocery store. So if you're looking at $20,000 a year, that's coming back into your economy. From a retail and business perspective, I don't see where you're going to lose money. You're going to gain money as a city."

Perhaps mistakes were made in the past, Jones said, but "we're in the second phase of revitalization and that is economic development."

Park Rapids Chamber of Commerce Director Butch DeLaHunt offered to support programming at Armory Square.

DeLaHunt expressed confidence in its success. The Chamber receives requests "to utilize a facility in our community that we don't have," he said. "So what do they do? They go elsewhere."

Conferences, conventions and trade shows bypass Park Rapids as a result.

DeLaHunt urged the EDA to analyze the risk versus "doing nothing."

"We have an opportunity, I think, to take a grant and transform a building in our community that we can call our own" and "help local businesses thrive," he continued. "We'll never get this opportunity again in this magnitude."

In order to host the Governor's Fishing Opener, DeLaHunt noted that tents had to be rented because there was no facility.

David Collins, executive director of the Hubbard County Regional Economic Development Commission, also spoke in favor.

Collins agreed the budgets need refinement, but there's still time to do so. "I have confidence they can do that. I think it can be done," he said.

Stone was the only council member to speak favorably about the project.

"I also feel it's a huge risk for our future if we don't do it, but we need some guarantee," she said.

"I guess what people are trying to do is say this is an opportunity once in a generation that may not come to Park Rapids again and believe we should try to make it work," Chepulis said.

The PRCDC initially believed it could make Armory Square work without the city's financial help, she said, noting they are "incredibly committed who personally have nothing to gain."

The PRCDC will review the budget in which they pay for all ownership costs.

The EDA agreed to discuss it further at 5 p.m. Tuesday, Jan. 9 at the Park Rapids Area Library.