In a good day for a proposed convention hotel in downtown Kansas City, its developers say they’ve obtained commitments for a loan and are under contract to purchase land for the project.
According to KC Hotel Developers LLC and City Manager Troy Schulte, during a meeting Monday the developers showed Schulte a term sheet for a $110 million construction loan from an undisclosed lender. A term sheet spells out the conditions upon which a bank will extend credit.
The loan would pay for the building of an 800-room hotel, run by the Hyatt, at the northwest corner of Baltimore Avenue and 16th Street. The total cost of the project, including purchasing the land and making other improvements, amounts to $311 million. The balance of the project’s cost would come from a bond sale and private investors.
After the Monday meeting, Schulte said the term sheet fulfilled the development team’s obligations under an agreement and means he and the developers won’t have to ask the City Council for an extension beyond Tuesday’s deadline.
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“They have the land, they have the financing and they’ve completed all the regulatory requirements,” Schulte said. “We have a convention center hotel deal.”
The hotel project’s tentative opening date remains September 2019, but it still has hurdles to clear before construction starts. The general contractor still hasn’t given the developers a guaranteed maximum price for the project.
The developers have tweaked the hotel design in order to cut certain costs. For example, the size of the hotel floors will be larger, and it won’t be built quite as high as originally contemplated.
Also, meeting spaces will be built atop the parking garage instead of higher up within the hotel tower itself. Both alterations mean the costs of construction will be somewhat lower than the original design.
Mike Burke and Steve Rattner, partners in KC Hotel Developers LLC, say they hope to receive that price this spring, around the same time they plan to line up other pieces of a complicated deal. In late March, they hope to close on the construction loan and a bond sale, while making final equity commitments and property transfers.
Also, Kansas City still hasn’t cleared up a lien on the property where the hotel would be built near Bartle Hall and may end up pledging City Hall to a bond insurer in place of the hotel property.
Some members of the City Council have expressed reservations about the project. A flurry of activity at City Hall last Thursday nearly resulted in a resolution that would have rescinded Schulte’s authority to grant an extension without council approval.
That resolution never got introduced.
A long road
Since Burke stood alongside Kansas City Mayor Sly James during a May 2015 announcement of the 800-room Hyatt, getting the city’s first new convention hotel since 1985 to a groundbreaking date has been a bumpy ride.
First, Citizens for Responsible Government, a watchdog group, filed a lawsuit trying to force the use of public subsidies on the hotel to a vote. Although that effort ultimately failed, it slowed movement toward the hotel.
KC Hotel Developers LLC, which includes Burke, a local real estate attorney; Rattner, a New York financier; and Tim O’Byrne, a Denver developer, also got caught up in long negotiations with the National Hereford Association to buy its property, which makes up about a quarter of the block where the hotel would be built.
Burke said he went under contract with the National Hereford Association on Monday to finally purchase the property. He didn’t disclose the purchase price.
“It’s for a price that Hereford should be very happy with,” Burke said.
While there’s progress on the Hereford property, Kansas City still has not resolved an encumbrance on the land it owns at the development site. Kansas City once pledged that property, along with a West Bottoms parking lot, to a bond insurer when Kansas City issued debt to expand Bartle Hall.
For months, Kansas City has tried to offer up the Municipal Service Center, a public works building near Chouteau Trafficway and Front Street, to swap out the collateral. Now it appears that property might not be worth enough, and Kansas City may have to consider pledging City Hall as collateral. (Clarification: Subsequent to the publication of this story, Schulte clarified that city staff discussed the pledge of City Hall internally after the bond insurer had inquired about obtaining downtown office space as collateral, but the offer of City Hall as collateral had never been formally extended to the bond insurer.)
That leaves open the possibility, however remote, that City Hall could fall in the possession of a private entity if the city defaulted on its Bartle Hall bonds.
“We’ve never defaulted and never will,” Schulte said.
A council dispute
Multiple sources in City Hall have told The Star that James quelled an effort against the hotel by some council members prior to last Thursday’s City Council meeting.
The sources declined to comment on the record because of the sensitivity of the matter.
The sources said council members with reservations about the project sought to introduce a resolution that would strip Schulte of his sole authority under the city’s deal with the hotel developers to provide them another extension without council approval.
An August extension gave the developers until Tuesday to sew up their responsibilities under the contract. Recently, the council went into closed session to discuss the possible ramifications if the city opted to let the deal with KC Hotel Developers lapse if the group hadn’t made enough progress.
After that meeting, Schulte said a commitment to a first mortgage would probably be enough to convince him that the developers were making sufficient progress, but added that he would only provide an extension with the council’s advice and consent.
James kept the proposed resolution at bay through the threat of a veto, which he has never had to invoke during his time as mayor. It would have taken eight votes on the council to override a veto.
Still, going back to the council for another extension would have been a dicey proposition for a hotel project that isn’t as popular with the current council as it was with the previous one that passed it.
“Hopefully, the council will get the details of the transaction here soon,” said Teresa Loar, a Northland council member and critic of the hotel plan. “I’m very pleased to see that the development has moved in a positive direction. Let’s hope it continues.”
For Burke and his partners, it meant several pieces falling into place in a short amount of time. On Monday, the Land Clearance for Redevelopment Authority, an agency that grants tax breaks for development projects, approved a sale-leaseback arrangement between it and KC Hotel Developers.
That, along with the developers going under contract to buy the Hereford property and then meeting with Schulte, were enough to keep them from going before the council Tuesday.
“This is a big step forward,” James said in a statement Monday night. “Development of a convention hotel means Kansas City can realize the type of economic opportunities we are so capable of taking on. The deal itself positions our city well. It protects taxpayers’ dollars and mitigates our financial risk. I’m pleased to see the continued progress on this essential project.”
Rattner said interest rates in the last six weeks have increased. He said the development team has several term sheets from different banks, which they hope will result in negotiations to get better rates.
The structure of the hotel financing, where lenders and bondholders only have the hotel property as security for the debt, means banks and bond investors will generally request higher interest rates to offset the risk.
The precise cost of the hotel won’t be known until JE Dunn comes back with what in the industry is referred to as the guaranteed maximum price.
“The next big number is a mid-March number where Dunn has to deliver a guaranteed maximum price,” Schulte said. “So if there’s a huge change, the deal could potentially default because the developer can’t make the financing.”
While Schulte and the developers said they were confident that JE Dunn could deliver a price around $311 million, it still means March is the next big month for the hotel.
“At this point, the city doesn’t have anything to do with that,” Schulte said. “Nothing else the City Council has to sign off on. And we don’t spend a dime until it goes to closing, and we only spend a dime based on the way it works out. We’re the last dollars into the deal. They spend the equity and the mortgage first before our $35 million in cash.”