In another troubling sign for bricks-and-mortar retail, Zona Rosa, the outdoor shopping district that was dubbed as the Country Club Plaza of the Northland when it opened in 2004, has defaulted on its mortgage.
And due to a financial subsidy deal structured in 2007, Platte County taxpayers may be on the hook to cover debt shortfalls later this year.
Investors who bought publicly issued bonds on Zona Rosa's expansion in 2007 were informed by bond trustee UMB Bank in a letter last month that after spending down a previous letter of credit late last year Zona Rosa Development LLC failed to obtain a new $500,000 letter of credit.
That failure triggered a default.
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Zona Rosa Development is an affiliate of Olshan Properties, a privately owned New York real estate firm. Olshan declined to comment. In public documents filed with the Municipal Securities Rulemaking Board, Olshan has said it is in "ongoing discussions" with its lender regarding the default.
Previously, Zona Rosa Development had been unable to pay its mortgage on Zona Rosa when it matured in 2017.
The Platte County Commission has set aside $500,000 in anticipation of having to cover debt payments to bondholders, which is due in December.
Dagmar Wood, a Platte County Commissioner, said the county's options include covering debt payments with taxpayer money, not making the debt payments to the detriment of the county's credit rating or using a portion of a three-eight cent transportation sales tax to cover payments.
"All of that is basically bailing out bondholders, is what it is," Wood said.
That $500,000 had previously been designated for a jail basement expansion project, Wood said.
When Zona Rosa expanded after its 2004 opening, a deal in 2007 meant that the Platte County Commission and the Platte County Industrial Development Authority would support debt payment shortfalls if the project could not generate enough money on its own.
The situation is similar to the Power & Light District, where Kansas City agreed to guarantee debt on the downtown entertainment district if it did not generate enough sales to make payments to bondholders. The district has never made enough money on its own, and likely never will so long as the debt remains outstanding.
"This is a classic example of why government should not be taking on developer risk," said Ron Schieber, Platte County Presiding Commissioner. "Developer risk should be taken on by developers. We have no upside and all this downside."
Schieber said it's too soon to know what the Platte County Commission will do.
Zona Rosa has been on and off the market for sale.
"My understanding from our underwriter is that until new owners are set in place, it is very unlikely that anyone will want to refinance this," Wood said.
Cities and counties sometimes agree to guarantee developer debt in order to issue bonds with better interest rates. Doing so is a risky proposition in the event that the project doesn't create enough revenue on its own to cover debt payments. When that happens, taxpayer funds are used to make up the difference.
"Revenue projections were overly optimistic from day one, for sure," Wood said.
Bonds issued for Zona Rosa in 2007 helped pay for a parking garage.
Tom Pryor, a Platte County Commissioner at the time, opposed the deal.
"I just didn't think the county should be backstopping a parking garage for a private developer," Pryor said.
Jim Plunkett, a commissioner in 2007 who voted for the Zona Rosa arrangement, said the county insisted on requiring the $500,000 letter of credit as protection for the deal. The letter of credit was available if Zona Rosa revenues could not cover debt payments.
"When we set this agreement up in the beginning, every year that was supposed to be renewed," Plunkett said.
That $500,000 was spent down in 2017 and Zona Rosa Development could not obtain a replacement letter of credit.
Zona Rosa's occupancy rate has fallen from 85.9 percent in 2014 to 60 percent in 2017.
UMB Bank told bondholders last month that it had hired Scott Goldstein, a Spencer Fane attorney who specializes in bond defaults, and Kersten Holzhueter, also a Spencer Fane attorney who focuses on litigation for financial firms, to assist the bank on the Zona Rosa matter.
The Zona Rosa situation may reflect broader pressure on bricks-and-mortar retail as consumers continue to shift toward online purchasing. Toys R Us is expected to liquidate unless a last-minute buyer materializes, and industry experts expect that more retail bankruptcies are in the offing for 2018.