Schlitterbahn mortgage lender fears Verruckt indictments could endanger repayment

Schlitterbahn: A dream gone bad

EPR Properties is warning investors that criminal indictments against the water park operator and its co-owner could hurt Schlitterbahn's chances of repaying the $174.3 million balance on the loan.
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EPR Properties is warning investors that criminal indictments against the water park operator and its co-owner could hurt Schlitterbahn's chances of repaying the $174.3 million balance on the loan.

A company that holds the mortgage on the Schlitterbahn water park in Kansas City, Kan., is warning investors that criminal indictments against its operator and co-owner could hurt Schlitterbahn's chances of repaying the $174.3 million balance on the loan.

EPR Properties, a Kansas City-based real estate investment trust, reported in a filing Monday to the Securities and Exchange Commission that the March indictments against Jeff Henry, Schlitterbahn and other defendants "may negatively impact the likelihood of repayment of the related mortgage loans."

The filing is the first public indication that the indictments could imperil Schlitterbahn's business in Kansas City, Kan., if not the entire company itself.

EPR Properties said that if Schlitterbahn defaults on the KCK mortgage, EPR may restructure the mortgage loan or foreclose on collateral that secured the loan. That collateral includes the KCK property as well as Schlitterbahn property in New Braunfels, Texas, and South Padre Island, Texas.

EPR also said that news of the indictments could hurt attendance at Schlitterbahn, and not just in KCK.

"(N)egative publicity may have a negative impact on attendance at the Schlitterbahn water parks, which may reduce the funds available to (Schlitterbahn) to repay the mortgage loans."

Henry, the co-owner of Schlitterbahn, faces one count of second-degree murder and a slew of other felony charges related to the 2016 death of 10-year-old Caleb Schwab on the 17-story Verruckt water slide in KCK. Schlitterbahn as a corporation in Kansas has also been indicted on similar charges.

Schlitterbahn also faces fines in the aggregate of $3.5 million if it is found guilty. Schlitterbahn has strongly denied the claims in the grand jury indictment.

EPR's filing with the SEC said Schlitterbahn was counting on sales tax revenue bonds issued by the state of Kansas to repay the loan. So-called STAR bonds, used as a development incentive, let developers pay off certain costs by capturing state and local sales taxes generated by a project. STAR bonds are meant for major destination projects that are likely to attract out-of-town tourists.

"There can be no assurance that the recent criminal indictments will not delay or cause the State of Kansas or the local government to refuse to provide the necessary approval for future issuances," the EPR filing said. "If additional STAR bonds cannot be issued, the likelihood that (Schlitterbahn) will be able to fully repay the mortgage loans will be negatively impacted."

EPR said the Schlitterbahn loans accounted for 3 percent of EPR's total revenue in 2017.

The Kansas Commerce Department, which analyzes and decides whether to approve STAR bonds, told The Star it was studying the Schlitterbahn situation.

"At this time, Kansas Commerce is continuing the process of evaluating the situation and considering whether and to what extent the current legal proceedings will impact future decisions regarding the issuance of additional STAR bonds for the Schlitterbahn project," said Kevin Doel, a department spokesman. "We will continue monitoring the situation and will consider future STAR bonds requests using all available information and our standard criteria for determining if the investment would benefit Kansas."

Winter Prosapio, a spokeswoman for Schlitterbahn, said the company remained committed to Wyandotte County. The park is due to open May 25.

"We continue to maintain our long-term commitment to Kansas and Wyandotte County, and are proud of our investment and role in state and county efforts to catalyze significant economic development, including the U.S. Soccer National Training Center and the Dairy Farmers of America’s world headquarters to the community," Prosapio said in a statement. "EPR has been an excellent partner in the development project, and we maintain a strong working relationship with EPR."

Schlitterbahn so far has received $100 million of the $225 million in STAR bonds approved for the Schlitterbahn project, according to Mike Taylor, spokesman of the Unified Government of Wyandotte County/Kansas City, Kan.

"There are plans being contemplated to issue additional STAR bonds for new development and attractions, but we have not made a decision about actually issuing those bonds," Taylor said in an email.

Trouble was looming

Even before Caleb Schwab's death in 2016, there were signs that the Schlitterbahn company faced distress.

Its original 2005 plans for the water park on the western edge of Wyandotte County displayed visions of hotels and cabanas surrounding a massive resort. It was originally cast as a $1.2 billion project.

But the park, Schlitterban's first foray outside Texas, encountered delays during the economic downtown of 2008. By the time it opened for its first full season in 2010, it was described as just a $180 million project.

In 2014, Verruckt opened to the public. The international attention that the record-breaking slide received figured to help revive the original vision for the KCK park. Instead, two years later, it brought the opposite kind of worldwide attention when 10-year-old Caleb died on the slide.

Meanwhile, other Schlitterbahn projects are also flagging.

A 500-acre resort project on Padre Island, Texas, which included plans for a Schlitterbahn water park, is mired in bankruptcy amid allegations that the Henrys mismanaged and misappropriated funds.

Schlitterbahn's portion of the Padre Island project was supposed to have opened in 2014, the same year Verruckt opened in Kansas. Later phases would include hotels, a marina, a golf course and a commercially developed canal that would look similar to the San Antonio River Walk.

Henry & Sons Construction, the contracting company controlled by the Henry family, was responsible for any cost overruns beyond the original $27.3 million budget, according to a court filing from one of the partners in the Padre Island project.

The same filing accused the Henrys of blowing through that budget with unauthorized changes and expansions to the project, and later borrowing from a line of credit to cover its cost overruns.

By 2015, the budget for the project grew to $58 million. A last-minute foreclosure on May 1, 2017, headed off a foreclosure that was planned for the following day. The bankruptcy remains ongoing.

"At Schlitterbahn Corpus Christi we anticipate ownership changes in the next 30 days – changes that have been underway since September 2017," Prosapio said. "The Trustee has announced the water park in Corpus Christi will open on May 26; the restaurant, golf course, and resort remain open."

Also in 2017, plans for a Schlitterbahn water park in Fort Lauderdale, Fla., which Jeff Henry had called the "biggest and baddest we've ever built" when the $110 million project was first proposed in 2015, went by the wayside.

A federal judge blocked the project when he ruled that the city had not followed its procurement procedures in awarding Schlitterbahn the bid for the project.

A family rift

The problems of the last four years have been a reversal of fortunes for a family-run company that draws from humble roots more than 50 years ago.

In 1966 Bob and Billye Henry, the parents of Jeff, Gary and Jana, got the idea for what would later become a water park enterprise when they would send tourists on inner tube rides on the Comal River near San Antonio. What started as a way to attract visitors to cabins they owned in the area would become the first Schlitterbahn park in 1979 in New Braunfels, a suburb northeast of San Antonio.

Mindful of the history of German immigration into New Braunfels, the Henrys called their company Schlitterbahn, which combines the German words for "slippery" and "route."

Jeff Henry would go to work for his father's business, like his siblings Gary Henry and Jana Faber. Jeff Henry, who has no apparent formal training in engineering or physics, became the designer of future Schlitterbahn rides. The indictment against Henry describes him as a high school drop out, but records with the New Braunfels Independent School District indicate he earned a diploma in 1979.

In the 1990s, Schlitterbahn started expanding in Texas, eventually launching new water park locations in Corpus Christi, South Padre Island and Galveston.

Martin Lewison, assistant professor for business management at Farmington State College of New York who tracks the amusement park industry, said Schlitterbahn was an anomaly in the fragmented water park industry.

Many water parks are expansions of larger theme parks, like Six Flags. Others are independently owned and operated.

Schlitterbahn was somewhere in the middle: An independently owned chain of water park locations.

"They have a very, very strong reputation," Lewison said.

The New Braunfels and Galveston locations routinely make the top 10 in water parks with the highest attendance, according to a survey by the Themed Entertainment Association and AECOM.

The patriarch of the Schlitterbahn business, Bob Henry, eventually left the company to the three children.

Records in the Padre Island bankruptcy proceedings suggest a rift between Jeff and Gary Henry.

As Bob Henry lay on his death bed in 2016, Upper Padre Partners investor Paul Schexnailder sent Jeff and Gary an email offering condolences.

"I am sorry you will face this inevitable loss," Schexnailder wrote in an Oct. 25, 2016, email.

The next day, Jeff Henry shot back with a fiery rejoinder to his brother and Schexnailder.

"I am extremely tired of both you guys, consider me your lifelong enemy now, as I have sworn on dads grave to avenge," Henry's email reads. "...Believe me now, I'm going to blow both of you out of the water or worse sink you below it. You may win in court, but let me assure you you will not win in the end. Hell is where you both belong. Don't worry Paul, Gary, one in the same, judges will eat you both!!!"

Schlitterbahn would not comment on relations between Gary and Jeff.

But other records in the bankruptcy proceeding offer clues about financial distress facing Jeff Henry and the company.

In a Dec. 17, 2015, email to Schexnailder, Henry references his home in New Braunfels being at risk.

"(I)t's at risk because of you Paul," Henry's email reads. "So, my point is that it's personal now, I'm at risk with the one place I loved."

Another email from June 1, 2016, said that the Upper Padre project was in default with a lender.

"If we lose the incentives (it) will be a bad day," Henry wrote to Schexnailder.

Uncertain future

It's not clear how Schlitterbahn will fare with one of its key employees under criminal indictment and financial pressure building on the company.

Precedent for amusement parks following high profile incidents is mixed. Worlds of Fun in Kansas City remained open and recovered after the death of a teenage guest in 1995 on the Timber Wolf roller coaster.

In 2007, a severed cable on a drop tower at Kentucky Kingdom cut off a teenage guest's feet . The Louisville, Ky., was reportedly the only Six Flags park to shut down in 2010 amid the company's bankruptcy.

"As I said before, 99.99 percent of the time, nothing goes wrong" at water parks and amusement parks, said Lewison, the New York professor. "It's a tragedy for everyone. It's a tragedy for the family, it's a tragedy for the company and it's a tragedy for the public if the legal ramifications are too great and parks take less risks."

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