Caterers who for years have done business at the Kansas City Convention Center say a financing plan for the proposed downtown convention center hotel isn’t just unfair to them — it’s a bad deal for the city.
The plan to give exclusive convention center catering rights to Hyatt, the expected hotel operator, is almost impossibly optimistic about future catering revenues and will leave taxpayers on the hook, the caterers say.
But the city thinks business will grow and city coffers are protected by the plan.
The dispute over catering rights to the Grand Ballroom and Conference Center is the most specific challenge to the convention hotel proposal to date. The City Council is expected to take a crucial vote July 23 to move the hotel project forward.
The dispute is why many eyes are looking closely at the two-page “Exclusive Catering Agreement Terms,” a small part of a hefty memorandum of understanding between the city and the hotel developers.
Under the agreement, the plan would draw from future catering revenues in the Bartle Hall Grand Ballroom and conference center to make fixed annual payments to the hotel developer, designed to help the development team cover financing costs for building the hotel.
But some of the eight local caterers who now have convention center catering rights contend the proposal is starry eyed. They say it’s highly unlikely revenue will grow as much as the 15-year catering agreement proposes.
Privately, some city officials agree that the plan calls for projected catering revenues to rise rapidly, and projected catering growth may be overstated. But unlike the deal that requires the city to cover revenue shortfalls in the Power & Light District, they say, safeguards for the city’s general fund are built into the Hyatt deal.
“This has got about as limited exposure as you could possibly get,” said City Manager Troy Schulte, calling the revenue projections “conservative.”
Here’s the reasoning behind the plan:
Over the last four years, according to city records, the current caterers together have generated an average of $4.6 million in revenue a year from the convention center’s ballroom and conference center. To make the proposal work, the city expects those revenues to bump up to $5.6 million in 2018, the first year targeted for Hyatt operations.
From that $5.6 million, the first annual payment due to the developer specified in the catering deal is $2.44 million, which is about 40 percent of the expected revenues.
According to the terms, catering revenues also would have to cover the exclusive caterer’s expenses and make other payments to support the convention center and city coffers.
The deal calls for the annual payments to the developer, called “fixed fees,” to rise every year, to nearly $2.61 million in year two, to $2.93 million in year three, and upward each year until it reached $5.37 million in year 15.
At that point, total ballroom and conference center catering revenues would have to reach at least $12 million a year to generate enough for the fixed fee and other requirements. The growth rate prompts caterers’ concerns.
“The money doesn’t add up,” said Brownie Simpson, with KC Catering and a spokesman for the caterers. “The city will have to subsidize the balance.”
Some of them point to a sentence in the proposal as a reason why taxpayers should worry about the lofty projection:
“In the event Gross Revenues are insufficient to pay the scheduled Fix Fee Payment, as required by the Qualified Management Agreement Rules, the City shall pay from any legally available City Funds.”
But Schulte and other city officials say the broader financing plan protects the city by building in other financing sources, including a proposed Super TIF agreement.
Under the Super TIF tax incentive, the city will redirect the new sales and earnings tax revenue resulting from the hotel’s business activity back into the project to pay off the development costs.
But if the catering revenues aren’t enough to meet the fixed fee annual payments over the 15-year catering contract, then the city can use the annual Super TIF pot of money to make up the difference, explained Brian Rabineau, an assistant city attorney who helped draft the memorandum of understanding.
That arrangement, Schulte and Rabineau said, helps assure that the city won’t have to resort to general taxpayer dollars to make up any shortfall. If the money doesn’t come in as expected, they say, it’s more risk for the developer rather than for the city.
Hotel developers and civic boosters put faith in the idea that the new hotel will generate higher revenues because of more high-end convention business attracted by Kansas City’s increased hotel room capacity. Higher pricing and more aggressive marketing also are expected to boost revenues, according to a convention center consultant hired by the development team.
The hotel backers believe that, over time, a reserve fund will build up as catering revenues exceed expenses. They say the reserves could be available to cover catering revenue shortfalls that might occur if, for example, the convention business crashes during a future recession.
But the way the caterers interpret the proposal, the convention center’s Grand Ballroom would have to produce more than twice the catering revenue it does now to cover the fixed fee schedule.
That’s folly, Simpson said. And the deal, he said, adds to the bruise caterers already feel about being cut out of convention center business. They’ve previously made it clear that they think the city is treating them shabbily.
“The city said there would be open catering because we’re the ones helping pay off the Bartle Hall expansion bonds,” said Steve Shalit, who has been an executive with the Westin and Sheraton hotels at Crown Center, two hotels with current food catering rights at the convention center. “It’s unfair to collect our taxes and then hand the business over to Hyatt.”
But Schulte, the city manager, has said exclusive catering contracts are the norm in other cities, and he was considering going this route in Kansas City even without the Hyatt deal.
According to the plan, the Hyatt, as the presumed exclusive caterer, would transfer its gross catering revenues from its convention center catering business to a special account maintained by the city.
From that account, the city each month would reimburse Hyatt for its convention center catering expenses. Those expenses are expected to take 35 to 40 percent of gross catering revenue.
The plan also calls for other “third party reimbursable expenses” to be allowed under the agreement.
Also from the proposed special account, the city each month would deposit 4 percent of gross catering revenue into an upkeep account solely for convention center upkeep.
The city also would retain 14 percent of gross, capped at $800,000 a year with an annual 3 percent increase in the cap, “to be used by the city as it sees fit.”
Finally, the city would pay the “owner” (the development team/hotel) the annual fixed fee.
From the $5.6 million in projected catering revenues in year one, the hotel gets its expenses reimbursed and the city gets its share, leaving about $2.5 million, which is enough to cover the first fixed fee payment, Rabineau said.
The development team headed by Kansas City lawyer Michael Burke and co-developer Bob Swerdling of Denver say the 15-year catering plan was conservatively conceived with economic forecasting input from David O’Neal, a convention center financing specialist at Conventional Wisdom Corp.
“With more robust targeted marketing initiatives, additional occupancy from higher value business … could be placed in the ballroom,” said the Conventional Wisdom report.
“We can’t see that happening,” countered caterer Simpson. “We’ve grown the business we have because of competitive catering, which attracts convention center users.”
With a single caterer, Simpson said, conventions won’t be able to bargain for better deals with other caterers. Conventions will go somewhere else, perhaps to another hotel in the city, if not to another city, he predicted.
And, he asked, what if total Ballroom and conference center catering revenues don’t grow to about $12 million by year 15, as the fixed fee schedule appears to require?
Shalit, with the Starwood hotels, said the current caterers hope the best for Kansas City taxpayers and are not against a new convention center hotel. They’re just against the catering deal as a financing mechanism.
Simpson hinted that even that concern might go away if the Hyatt were just one of the caterers eligible to compete for the convention center business.
But developer Burke said the catering plan is a crucial piece of the hotel financing, and it doesn’t allow for multiple caterers in the ballroom and conference center.