Reaching a deal with developers for a new $300 million convention center hotel took 18 months of complex negotiations designed to limit public financing, city officials said Monday in announcing the project.
The key challenge was Mayor Sly James’ demand that the city not be on the hook if the proposed 800-room Hyatt, across the street from the Kansas City Convention Center’s Grand Ballroom, fails to perform as expected.
The city said that in order to avoid the kind of multi-year funding commitment it incurred when tax revenues at the Power & Light District failed to meet projections, it will not back debt on a convention hotel.
“The task of bringing in mostly private dollars for this kind of deal was herculean,” said Bob Swerdling, who along with Kansas City development lawyer Michael Burke has formed the development partnership of Burke Swerdling & Associates.
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Recent convention center hotels in other cities are all city-owned, said Swerdling, a national expert in hotel financing who has helped construct deals for convention hotels around the country.
The Kansas City hotel plan would require the city to commit about $2.3 million a year for 25 years with funds generated by convention and tourism taxes, which are mostly paid by out-of-town visitors.
The plan also calls for two Tax Increment Financing incentives and the creation of a Community Improvement District to allow the hotel’s operators to collect a 1-cent sales tax.
Under a standard TIF incentive, all of the additional city and county taxes generated by improvements to the hotel site would be diverted to the developers for 23 years. Under a Super TIF deal, all of the additional city taxes generated for 30 years would go to the developers.
The incentive plans require TIF Commission and City Council approvals, which developers hope to get by Aug. 1.
Burke said the private investors will start writing “big checks immediately” and will account for about $150 million in equity and debt to finance the project. The rest of the project’s costs will be covered by the capture of the TIF funds and the 1-cent improvement district sales tax. The developers expect to sell securities backed by the flow of captured TIF taxes to other investors.
Major private investors assembled for the hotel announcement said the time was right to attract private money to the deal.
“Lots of capital now is coming off the bond markets,” said Tim O’Byrne, a lead investor with KC Hospitality Investors LLC, a group of equity investors formed for the Kansas City hotel project. “Lots of money is coming into these higher-yield real estate deals, so the time is right.”
A year and a half ago, “we couldn’t have done this,” O’Byrne said, but “the financial markets have really changed.”
O’Byrne is with Inland Pacific Companies, a real estate investment company that specializes in the hospitality industry. His primary partner in KC Hospitality Investors is Steven C. Rattner, a New York financier formerly with Credit Suisse and DLJ Merchant Bankers.
Planners said Rattner was unable to make the Monday morning event in Kansas City because his flight from New York was canceled.
O’Byrne said Monday that four or five other persons might join the investment team, which is still being assembled.
James, Swerdling, Burke and O’Byrne were among a crowd of civic leaders at the official unveiling of the Hyatt plan, held in the Grand Ballroom’s foyer overlooking the intended hotel site.
In the crowd were some who expressed concern about any public participation in the hotel project.
“The Power & Light District is exactly the concern — that we limit our exposure to the taxes generated on the project,” said City Councilman Ed Ford, in reference to 2006, when the city guaranteed the debt on $295 million in bonds issued to help build the downtown entertainment district. District sales tax receipts have covered only about one-fourth of the annual debt service, and the city has been covering the rest out of the general fund.
Former City Cuncilman Dan Cofran said in an email that he prefers taxpayer funds to be used for “needs” such as public safety and infrastructure improvements rather than “wants.” He also addressed the intended use of tourism tax funds to satisfy the proposed city share of the hotel financing.
The development team has said about $2 million a year in tourism tax funds are being used to pay down Kemper Arena expansion bonds. That debt is due to be paid off in early 2016, allowing a rollover from the Kemper use to the Hyatt use. But Cofran said those payments have been coming mostly from the city’s general fund rather than the tourism fund.
“Since 2004, there have been $25 million in total bond payments, but $20 million from the General Fund and only $5 million from the Tourism and Convention Fund and other sources,” he said.
Another voice against public financing came from Patrick Tuohey, a Kansas City field manager for the Show-Me Institute, a think tank that advocates for low taxes.
“They can say the city is not on the hook if the hotel underperforms.” Tuohey said. “Technically, we’re not on the hook for the Truman Sport Complex or the Citadel project (a faltered urban renewal plan), but we still give them money. If it doesn’t make economic sense to build a convention hotel downtown with private funds, well, we’ve been burned in the past.”
Bob Mayer, a long-time participant in Kansas City economic development efforts, also noted that public participation in any single hotel deal could be disadvantageous to other hotel operators or developers who work with totally private funds.
A Hyatt hotel official at the event said he was not authorized to speak publicly at this time. But developers provided a prepared statement that said Hyatt was delighted to return to Kansas City. Hyatt had operated one of two Crown Center hotels before the hotel was rebranded in 2011 as a Sheraton, a sister Starwood operation to the nearby Westin Crown Center.
One resident who seized on Hyatt’s return to the Kansas City market was Sol Koenigsberg, who came to the announcement event to seek a $125,000 donation to the Skywalk Memorial Foundation from Hyatt. Hyatt operated the Crown Center hotel when Koenigsberg was among hundreds injured or killed in the 1981 collapse of lobby walkways.
One pot sweetener in the proposed deal would grant Hyatt exclusive catering rights for 15 years for events held in the Grand Ballroom across the street from the new hotel. Eight area caterers, including the Marriott, which is downtown’s other major convention-center hotel, now do business at Grand Ballroom events, and some of them are unhappy with that aspect of the deal, the developers acknowledged.
The hotel tower and accompanying parking garage are planned for the city block bordered by Wyandotte Street on the west, the freeway loop (Truman Road) on the north, 16th Street on the south, and Baltimore Avenue on the east. The city already owns three-fourths of the property, which is used for surface parking.
Developers are negotiating with the American Hereford Association, which occupies the only building on the site. It would be razed for the project to proceed.
Among those at the formal announcement were James and Kansas City City Manager Troy Schulte, who have been working on the hotel project with Burke for nearly three years.
The mayor acknowledged the planning participation of Mayor Pro Tem Cindy Circo; Jackson County Executive Mike Sanders; Economic Development Corp. CEO Bob Langenkamp; Polsinelli attorney Roxsen Koch; Kansas City Finance Director Randy Landes; Oscar McGaskey, the city’s director of convention facilities; representatives of JE Dunn Construction and HNTB Architecture; and Visit KC CEO Ronnie Burt.
“Game on,” Burt said. “Step two is putting the shovel in the ground.”
Burt said the city’s convention marketing team will begin immediately to put the planned hotel in its marketing tool kit.
The developers hope to begin construction early next year and open the hotel in 2018.
Also cited for their involvement were a communications team from Trozzolo, which handles publicity on the project; Ruben Rodriguez, with Roder Levett Bucknall, representing the developers as construction manager; and Brenda Tinnen, current chairman of Visit KC and general manager of the Sprint Center.
Design plans still in process call for a hotel tower of perhaps 30 stories and a parking garage of 450 to 500 spaces. The facility is to include ballrooms, meeting rooms, a health facility, a restaurant and other retail.
“Job creation is key,” said Jermaine Reed, 3rd District councilman in Kansas City. “I want to make sure minorities are being hired on the front end, as it relates to construction, but then on the back end when it’s opened … in a number of capacities, not just cleaning the rooms.”
Most response at the unveiling was positive. James said “persistent patience has paid off” and the Hyatt will be a “rising tide that lifts all the boats,” including convention and tourism activity throughout downtown and at 18th & Vine, Crown Center and the street car corridor to the Country Club Plaza.
City Councilwoman Jan Marcason said, “I think they’ve come up with a really workable financing plan. We’re getting a little bit smarter. With the Power & Light there was a real burning need to jump-start something. Now I think we’re in a much better position to add to our current successes.”
The Star’s Dave Helling and Lynn Horsley contributed to this report.