Kenai offers new options to 10 businesses on city land

In another effort to reform land practices that critics say have hampered business development in Kenai, the Kenai City Council gave owners of 10 Kenai businesses located on city-owned property new options for buying the land beneath their buildings.

In August 2017 the council passed a resolution allowing owners of these 10 businesses — which include Olga’s Jewelry Store, the Main Street Bar and Grill, the Big Dipper Car Wash, Paisley Boutique, Summit Cleaners Dry Cleaning and the Decor Building office complex — to buy their lots for 125 percent of their assessed value, an offer some owners said was too high.

After six months in which none of the 10 businesses made offers on their land, the sponsors of the August 2017 resolution — Kenai Mayor Brian Gabriel and council member Henry Knackstedt — worked with council member Tim Navarre, who had sought to lower the price requirement in the earlier resolution — to introduce the new alternatives, which passed Wednesday with one opposing vote from council member Mike Boyle, a consistent opponent of selling city land to private interests.

Owners of businesses on the 10 properties have been leasing land from the city — the oldest since 1967 — for monthly payments which fund operations of the Kenai Municipal Airport. Some are looking to sell their businesses and retire, but say prospective buyers have been turned off by not owning the land and the prospect of unpredictable rents. Business owners have said banks have also been reluctant to loan them funds to invest in their businesses because the land beneath belongs to someone else.

The new alternatives would “encourage investment in existing businesses on leaseholds, avoid land speculation, and recognizes that capital investments made by existing businesses in the City have created jobs, increased economic activity, and stimulated the business environment,” according to a memo from Gabriel, Knackstedt, and Navarre.

In addition to the option of purchasing land for 125 percent of its raw value — the value it would have with nothing built on it— the Wednesday amendments would let business owners buy land for its market value if they can demonstrate that they’ve already invested four times the land’s value in constructing buildings on it. A third alternative would allow lesees to buy the land at market value if they commit to spending 25 percent of that value on improving their buildings within three years.

Three local business people wrote supporting letters to the council, including Duane Bannock representing Schilling Rentals, a company that owns the Trading Bay Professional Center office complex and another office complex, the Decor Building, next door at the corner of Main Street Loop and Trading Bay Road. Schilling has leased the municipal land beneath the Decor Building since 2012, and Bannock has been advocating a sale of the land on behalf of Schillings since at least September 2015.

Bannock has said the city lease arrangement has stalled Schilling’s plans to expand the building into a wooded section of the property. While he didn’t say whether this expansion would qualify Schilling to purchase the property under the future investment condition, he said he believed improvement the company has already made on the property would qualify it under the past investments options.

Before the August 2017 resolution, Schilling had offered to buy the land for what Bannock stated was 120 percent of its fair market value, while Navarre had unsucessfully attempted a resolution to sell it to Schillings at market value. Neither made it through the council, and Schilling declined to make an offer under the 125 percent requirement.

Gabriel said the earlier 125 percent requirement had been set based on a calculation by former city manager Rick Koch of a property’s net present value.

“We’ve been approached in the past to look at selling airport lease properties, and in the past there was a practice of doing that based on appraised value,” Gabriel said. “Mr. Koch took that upon himself to sort of draft a chart of what a leased piece of property’s true value is. If you have a lot that is under a 40 or 50 year lease, and you’re getting eight percent on that lot, then every approximately twelve years, you’re going to realize the appraised value of the lot and still have the lot for the next thirty years. So the thought on that… was that yes, there is a value to that for properties under lease, called net present value.”

The new options, Gabriel said, put that additional value into the property and avoid the possibility of land ending up with speculators, who would hold it unused in order to drive up its price — a persistent worry in Kenai land sale decisions.

“If we apply the 25 percent as capital improvements, there’s a win-win there — they increase the value of the property and once they get to 25 percent they can buy their property, or if they reassign the lease the new owner can buy the property,” Gabriel said.

Kenai’s municipal government is also its largest landowner — about a third of the town by area, equal to about 5,057 acres, is city property. Kenai’s large land holdings have brought municipal revenue, but also many long-running disputes over the use and value of its land.

Leasing city land to businesses brings Kenai’s city government about $735,000 a year, according to a presentation at the Kenai Peninsula Economic Development District’s Industry Outlook Forum in January by Assistant to the Kenai City Manager Christine Cunningham, but hasn’t necessarily led to a robust economy. About 81 percent of Kenai’s lease land is unleased, and of the existing leases, 12 percent are over 80 years old and “offer no real incentives to develop the lease,” Cunningham said.

Kenai’s city administration began an effort to reform its land practices in February 2017 with a working group of eight administrators, who introduced their recommendations to the council in December 2017. The city unanimously made the first of these recommded changes at their Jan. 17 meeting, rewriting the city code that governs how properties are valued and lease requirements set in the airport reserve.

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.

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