Delay of downtown convention hotel prompts concern: Will it ever be built?

A series of obstacles is delaying an ambitious downtown convention hotel, enough so that some city officials have doubts about whether it will proceed.

“I think it could go either way,” said Tammy Queen, Kansas City’s deputy finance director. “I’d put it at 50-50.”

Obstacles include trouble arranging financing, a clouded title on city-owned property where the hotel is planned and yearlong talks to buy the American Hereford Association’s building, which sits on part of the proposed site.

The $311 million, 800-room Hyatt across the street from Bartle Hall was announced in May 2015. Still, more than a year later, ground hasn’t been broken.

In announcing the hotel, city boosters heralded a financing arrangement that left taxpayers off the hook for debt payments if the hotel didn’t drum up enough business.

But interviews with people involved in the project indicate that the development team approached the city after that announcement to ask if it would consider guaranteeing bond debt on $62 million in catering revenues. City officials and hotel developers couldn’t reach an agreement.

Mike Burke, a Kansas City lawyer who is part of the development team, said he remains confident that financing will come together for the project in time to break ground early in 2017.

“We will get the financing done,” Burke said. “I really can’t comment beyond that.”

The developers had hoped to begin construction of the hotel last May, with a grand opening in mid- to late-2018. Now, because of the problems getting the plan going, hotel backers think work won’t begin until early next year. That would mean the hotel won’t open for business until mid-2019.

City manager Troy Schulte said the longer it takes for work to start on the hotel, the tougher the project gets.

“It’s very possible that this deal could still not go forward,” Schulte said. “If this deal isn’t settled by the end of the year, then I think we’ll have to have conversations about a plan B.”

Debt questions

Kansas City leaders for years sought a new convention hotel, the first of its kind since the Vista International Hotel (now the Downtown Marriott) opened in 1985. Political and business leaders want to restore the city’s standing from decades ago as a leading convention destination.

The prospect that the city would have to commit loads of public money or guarantee the debt on such an expensive development stymied progress. Stung by annual payments of $10 million or more to support the debt on the Power & Light District, city leaders shied away from hotel plans that involved City Hall debt guarantees.

That’s why the plan put forth by Burke and the rest of his development team, one that was two years in the making prior to the announcement, was so inviting to the city. For the announcement on May 11, 2015, a large crowd gathered at Bartle Hall, overlooking the block at Truman Road and Wyandotte Street where the hotel was expected to open by 2018.

City leaders and the hotel’s developers crafted a maze of two different tax increment financing plans, a community improvement district, a complicated arrangement that granted the Hyatt exclusive catering rights to Bartle Hall’s Grand Ballroom, and $35 million from the city, through a bond paid off with tourism tax dollars over 25 years.

That let the hotel’s developers and city leaders boast that taxpayers were safe from a financial millstone in case the hotel didn’t reel in conventions as expected.

While an absence of a city debt guarantee looked good to taxpayers, it meant a more difficult project for the hotel developers to market to private investors.

“This was an aggressive private approach,” Schulte said. “This deal, we’re getting hammered (by critics), but this deal really favored the city because it limited our exposure. If we wanted to put more of it on our books, it would already be under construction.”

But after the announcement, the development team approached City Hall to ask if it would consider at least some level of debt guarantee for the hotel.

“Was there a discussion? Yes,” Burke told The Star.

According to Schulte, the development team asked if the city would support debt on $62 million in bonds in case expected catering revenue didn’t materialize. The team wanted the city’s guarantee so it could sell bonds with a good credit rating, and thus making them more attractive to investors.

But those negotiations ended without a deal. Politically speaking, a request for a debt guarantee was likely untenable.

“We knew what the council approved, and we can’t go beyond that,” Burke said.

More bonds needed

Last week, Burke and Polsinelli attorney Roxsen Koch appeared before the Land Clearance for Redevelopment Authority, a city agency that grants tax breaks for developments.

Among the issues the authority took up with the hotel was an agreement to sell up to $200 million in bonds for the project.

That’s up from the $160 million the authority agreed to last year. Investors buy these bonds, which provide upfront cash to finance the construction of the hotel. Investors get repaid, with interest, over years through revenues generated by the project.

For every additional dollar that the developers can raise in the bond market, that’s one less dollar they have to borrow themselves.

Institutional investors can be skittish about lending money to developers of convention hotel projects. Such projects have recently underperformed in cities like Baltimore, Phoenix and St. Louis.

“What’s the market comfort? What’s the private sector risk level for a large-scale convention hotel in a market that hasn’t built a new, large convention hotel of any size since the Marriott?” Schulte said. “It’s an improving market, but our room rates are still much below the national average.”

Construction prices are largely the same across the country. But in markets like Kansas City with lower room rates, financing projects is more difficult than in a place like Miami, where travel and lodging demand and pricing are higher, and developers stand to gain better cash flow.

Hotels.com reported that Kansas City’s average room rate in 2014 was $114, according to the most recent information available; the national average was $137 for the same year.

Cloudy title

The city also is trying to untangle an arcane property title issue.

Kansas City owns about three quarters of the block, between Baltimore and Wyandotte streets along Truman Road, where the Hyatt would be built.

But before the city considered the block for the hotel, it offered it, along with a parking lot in the West Bottoms, as collateral to support financing for Bartle Hall’s expansion.

The city insured the bonds to pay for the expansion through a company called Ambac Financial Group. Ambac got clobbered during the financial crisis of 2008, eventually plunging into bankruptcy.

To clear a lien that Ambac has on the hotel property, the city has to trade another city-owned property to the insurer.

Schulte said the city has offered up the Municipal Service Center, a public works building near Chouteau Trafficway. He acknowledged that the process has taken longer than he had hoped, but he thinks it could be resolved in the coming weeks.

“So what Mike (Burke) is saying is, ‘Even if we were ready to go, the city still has to work that out,’ and he’s right,” Schulte said. “We’ve got to get that thing done.”

In another site problem, the American Hereford Association owns the northwest corner of the hotel block. The city, the hotel developers and the association have negotiated for more than a year on acquiring the property.

City officials understood they were close to a deal to buy the property and relocate the association to a building near Kansas City International Airport.

But Jack Ward, executive vice president of the association, said no deal is in place.

“It hasn’t gotten near that far,” Ward said.

Price not yet set

Burke is also waiting on JE Dunn, his contractor for the Hyatt, to come back with what the construction industry calls a guaranteed maximum construction price. Burke can’t sell bonds without it.

Dirk Schafer, Midwest regional president for JE Dunn, said developing a guaranteed maximum construction price requires getting a hold of blueprints and specifications of materials. From there, a team of subcontractors and other trade partners is assembled.

“We’re in the phase of creating the team,” Schafer said. “It’s a 16- to 18-week process to establish the GMP (guaranteed maximum price). Plus, you need partnering to be sure you have minority- and women-owned businesses involved.”

The project also awaits a development agreement between the Land Clearance for Redevelopment Authority and the Tax Increment Financing Commission. A meeting to ratify the deal is expected in October.

“We have six or seven funding bits that we have to close simultaneously,” Burke said. “It’s a chicken and egg issue that we’re solving one at a time, but it’s slow. It’s frustrating. It’s complex.

“It will be very difficult to close a deal this size at Christmas time, so it’ll probably be after the first of the year before we can close.”

What if the Hyatt deal never materializes? Not long after announcing the hotel deal, the city booked several conventions, including the Shriners International Convention in 2020.

The city may have an answer just up the street.

The Marriott and Muehlebach hotel complex is working on securing portions of the city’s hotel tax and sales tax proceeds from a community improvement district to pay for half of a $33 million renovation of the complex’s 980 rooms.

Dave Frantze, an attorney representing the Marriott’s ownership group, described the renovation as a way for Kansas City to market nearly 1,800 brand new hotel rooms near the city’s convention facilities, when adding in the Hyatt’s 800 new hotel rooms.

If the Hyatt never happens, at least the city could still have 980 brand new rooms at the Marriott and Muehlebach.

This story was originally published October 1, 2016 at 5:00 PM with the headline "Delay of downtown convention hotel prompts concern: Will it ever be built?."