Prairiefire in Overland Park seems as if it’s jumped off to a good start.
The huge mixed-use development has leased out most of its storefronts. It features the architecturally renowned Museum at Prairiefire, which hosts traveling exhibits from the American Museum of Natural History in New York.
It’s all Overland Park leaders had hoped for.
When it opened in 2014, Overland Park Mayor Carl Gerlach boasted it would attract hundreds of thousands: “This project will help further distinguish our city and soon will be a premier attraction not only for the metropolitan area, but also the entire Midwest.”
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Two years on, it’s a different story. Retail sales have been sluggish, enough so that the developer hasn’t been able to pay a dime of principal on $13 million in bonds that underpin the development’s financing.
What’s more: Twice within the last year, the development has dipped into a bond reserve fund — think of it as a savings account — to make interest payments on those bonds.
Prairiefire bondholders were told that reserve fund had been tapped. The bond offering for Prairiefire requires that they be notified when certain circumstances develop. Among those conditions: “unscheduled draws on debt service reserves reflecting financial difficulties.”
Fred Merrill Jr., the well-respected developer of Prairiefire, acknowledges that retail sales have been slow.
“The sales did not reach the projections we originally thought,” Merrill said. “Why is that? Some of that is because some of the tenants have not performed the way we thought they would perform.”
Merrill is due before the Overland Park City Council later this year to present scaled-back plans for a second phase of development. That expansion will add office space, a boutique hotel, apartments and more retail, all situated around what he calls a “civic community park.”
What started as a $575 million project on 60 acres along 135th Street between Nall and Lamar avenues has been pared back to about $350 million.
But key tenants have shut down, including Fresh Market, a boutique grocery store. Another departed tenant — sushi restaurant Wasabi — sued Prairiefire in March, alleging that smoke and odor issues damaged the business. (Prairiefire denies wrongdoing and says Wasabi owes $31,815 in rent.)
The museum has met just three-quarters of its original attendance projections. To cover operating expenses, it took out a separate $2.5 million loan.
Despite that, Merrill remains ready to push on. He adds investors are committed to the project.
“They take a long-term view of it and feel those types of situations can be made up with sales tax in the next few years,” Merrill said in an interview. “We’re pretty much an open book, and every time they come in and look at the project, it reinforces that there some blips to begin with but long term, it’s solid.”
Merrill said he has been “a little bit disappointed” in sales at Prairiefire. He pins much of that on competitive pressure on Cinetopia, the large movie theater that anchors the project.
More specifically, Merrill blames slow sales on a concept called “movie clearance.” That’s a long practice in the film industry where major theater chains make deals with studios to show certain titles exclusively in markets where nearby competitors exist.
In Merrill’s scenario, AMC Theatres managed to get the first run on popular blockbusters at its multiplex less than three miles away in Leawood, cutting into Cinetopia’s ticket sales.
The Justice Department and attorneys general from several states have investigated AMC and other large theater operators over the practice, wondering whether they are violating antitrust laws.
Merrill said he testified before Justice Department attorneys earlier this year. Other smaller theaters have sued over movie clearance. Under the Prairiefire concept, Cinetopia was supposed to lure customers in for a film and perhaps a stop at a restaurant or nearby retail store beforehand or afterward.
Merrill adds he was aware of movie clearance when he added Cinetopia to Prairiefire, but underestimated the effect it would have.
“When we originally did the master plan, we really believed in mixed use and we believe in different levels of attractions,” Merrill said. “The days of bullet shopping are over. You have to have these communities where there are a number of reasons for people to come to stay for three to four hours. That’s the reason for a Cinetopia, Pinstripes and REI.”
The movie clearance practice appears to be waning. Twentieth Century Fox announced it would no longer make such deals with theaters, according to a March 30 story in The Wall Street Journal. Merrill said he understands that AMC may let up on movie clearances as well.
An AMC representative did not respond to a request for comment. In its most recent quarterly report, AMC acknowledged that the Justice Department’s antitrust division had contacted the company about movie clearances in 2015, along with civil investigative demands by attorneys general in Kansas, Ohio, Texas and elsewhere. AMC maintains that it is cooperating with authorities but does not believe it violated state or federal antitrust laws.
“I think now that the movie clearance thing is starting to fade away, that’s going to be changing everything that’s going on,” Merrill said. “Obviously, that’s weathered the storm.”
Prairiefire’s sales difficulties are reflected in its ability to make bond payments. Overland Park issued $13 million in bonds in 2012 to help finance the project. The bonds are to be repaid by sales tax revenues generated by the project. Prairiefire is part of a community improvement district, which charges an additional 1 percent sales tax beyond city, county and state sales tax rates.
So far, no principal has been paid. Twice in 2015, the development spent down its reserve fund in order to make interest payments. The most recent payment was disclosed in a May 16 semiannual report to bondholders.
Overland Park taxpayers are not on the hook for shortfalls on the bonds or if they go into default.
“The city is not obligated to any of the debt,” said Overland Park deputy city manager Kristy Stallings. “It was wholly revenue-backed.”
Prairiefire also qualified for sales tax revenue (STAR) bonds on account of the museum project. STAR bonds are a Kansas program that redirects local and state sales taxes generated by a project back into itself. The bonds are meant for destination projects that can expect a sizable number of visitors from 100 miles away or farther.
Prairiefire received $64.9 million in STAR bonds. Merrill said Tuesday that a $130,000 principal payment was made on those bonds in 2014.
The museum has been successful in attracting far-away crowds. Merrill said it draws people from at least 1,800 ZIP codes. Its current exhibit is a look at the human brain. Other exhibitions have included dinosaur displays and another on mythical creatures.
But the crowds have not met original projections. A market study by consultant Development Strategies predicted crowds of 340,000 in its first year.
Merrill said the museum drew 250,000 visitors in 2015. He expects 2016 will end with 300,000 visitors.
The consultant’s report expects crowds will drop over time.
“(B)ased on conversation with museum professionals in the Kansas City area and with Museum of Prairiefire management, it is not expected that this high rate of attendance during the first year of opening will be sustained in the future,” the report reads. “Some special exhibits will not attract large crowds of people, and the ‘newness’ of the museum may wane over time.”
Top staff at the museum changed in November. Uli Sailer Das, the original executive director, left the position. Merrill said Das’ husband took a job out of town.
Replacing Das is Donna Deeds, a former Sprint director, administrator with the Blue Valley School District and consultant.
“She has both a business and education background,” Merrill said. “Museums, to really survive in the future, really need to be run as a business.”
In July 2015, the museum took out a $2.5 million loan from Morrill & Janes Bank and Trust Co. to fund operating expenses at the museum.
Merrill calls this a common practice among museums.
“It kind of bridges the initial operations over the first two or three years,” Merrill said.
Wyona Lynch-McWhite, a board member of the American Alliance of Museums Leadership and Management Network, said new museums or those that are seasonal in nature may take out operational loans to help with cash flow.
“Having that line in and of itself is not unusual,” said Lynch-McWhite.
The Museum at Prairiefire has an agreement with the American Museum of Natural History in New York to host two of its exhibitions in Overland Park each year. That agreement expires at the end of 2018.
The museum is owned by the nonprofit Museum of Prairiefire Foundation.
Its 2014 return with the Internal Revenue Service, the most recent available, shows the foundation received $2.9 million in contributions and grants. Overland Park engineering firm Black & Veatch made a $750,000 grant to the museum that year. Merrill also extended a $279,500 loan to the foundation.
The museum itself made $773,364 in program revenue — sales of tickets, memberships, merchandise, rentals and the like in 2014. Its total expenses that year were $2.1 million.
That means the museum’s income clears its expenses, but that’s largely due to grants and contributions.
“We’re on track,” said Deeds. “We’re a 501(c)3. Our goal is to be in the black. Our goal is not to make money.”
Over time, Deeds said she would like to decrease the museum’s reliance on contributions and grants and increase recurring revenue.
“We are on what I would call a good trend line to become more dependent on other slivers of the revenue pie,” Deeds said.
Updated on Tuesday with additional information on Prairiefire STAR bonds.