Government & Politics

‘I’m not sure the votes are there’: Concerns over KC’s role in funding new office tower

A proposed downtown officer tower project will sit on the City Council’s docket for another week as members continue to debate whether it merits public investment and another developer claims that approval would violate its rights.

The proposed tower, called Strata, would sit above existing restaurants and retail on the southwest corner of 13th and Main streets. It would be the first multi-tenant office building downtown in nearly three decades, and developers are planning to build it speculatively, meaning they haven’t yet secured a tenant to occupy the space.

Because of that risk, they’re asking the city to help subsidize the tower and parking garage, arguing Kansas City desperately needs the high-end office space to attract out-of-town companies and jobs. But the prospect of becoming a partner in the venture gives numerous council members pause.

They voted 6-5 on Thursday to once again hold the proposal. A vote on the deal itself may have ended in rejection of the plan.

“Right now, I’m not sure the votes are there,” said Mayor Quinton Lucas, who plans to vote no.

“For the moment, we don’t seemingly have the support for the project without different ideas,” said Jon Copaken, a principal at Copaken Brooks, one of the project’s developers.

Copaken said the development team, which also includes Jury & Associates and H&R Block, would look for other solutions over the coming week.

One option, suggested by Councilman Lee Barnes, 5th District at-large, is to find a private equity investor to replace the proposed city subsidy.

In the meantime, another firm, the Cordish Companies, is arguing the proposal violates the 2004 agreement that underpins Kansas City’s most significant downtown projects.

“We believe that the ordinance as currently drafted is a violation of our rights, and unfortunately will leave us with no choice but to take declaratory legal action,” said Nick Benjamin, a vice president at Cordish, which developed the Power & Light District and luxury high-rises One Light and Two Light.

Councilwoman Teresa Loar, 2nd District at-large, expressed concern at Cordish’s objection, saying the project made her “very uncomfortable.”

But neither Lucas nor City Manager Troy Schulte said they were gravely concerned about a lawsuit from Cordish.

Lucas called litigation threats “one of the world’s greatest red herrings.”

“I hear it all the time. We’re told often in government of the things we have to do,” Lucas said, adding that he’s “not worried we’ll be in the Jackson County Courthouse tomorrow.”

City Investment in Strata

Strata first appeared on the previous City Council’s agenda in December. In January, members approved an ordinance allowing City Manager Troy Schulte to negotiate a deal with the development team.

Previously, the developers sought about $63 million in public subsidies — including a direct investment of $27 million from the city — to help build the $132 million office tower and parking garage.

But the developers have since offered what they said is a much more favorable package for the city.

Rather than putting cash up front, Strata asked the council to serve as a financial backstop, guaranteeing privately financed debt. The risk is that if the project doesn’t perform as expected, the city would be have to make debt payments. The city’s reward would be 28 percent of the profits.

Schulte said the worst-case scenario looks something like this: if the tower sat empty, the city could be responsible for as much as $63 million — or about $5.5 million in annual debt payments.

More than three-quarters of the city’s general fund goes toward public safety, he said. Those potential debt payments would become a top budget priority and threaten funds for police, firefighters and city code enforcement officers.

“That’s an obligation that comes off the top,” Schulte said in committee Wednesday, “and that means there’s less of everything else.”

That answer cemented Councilwoman Melissa Robinson’s objection to the project.

“That’s why I’m not able to support this,” she said, “because of the risk to the taxpayer and the risk to all the other priorities we have.”

Lucas, too, has said he’ll vote against the project because of the major financial investment asked of the city.

“I’d love new downtown office space. I’d love like eight new buildings downtown and lots of cranes...” Lucas said. “I don’t know if the taxpayers should fund them, nor should the taxpayers be the guarantor on almost every bit of development, significant development in the urban core.”

Councilwoman Katheryn Shields, 4th District at-large, chairs the Finance, Governance and Public Safety Committee, which on Wednesday voted to send the plan to the full council without a recommendation for passage, a relatively rare move.

Shields took issue with the significant ask, noting that the city already makes debt payments because KC Live! in the Power & Light District doesn’t generate enough revenue to pay off its loans.

Cordish’s Involvement

Strata was born out of a 2004 arrangement the city made to kick start development in the Power & Light District. H&R Block was given the right to develop a second office tower to expand the world headquarters the company opened in 2006. That oval building sits across Main from the proposed Strata site.

If H&R Block didn’t act, the agreement said the airspace would revert to Cordish.

Cordish argues that because H&R Block is partnering with Copaken and Jury & Associates to build a multi-tenant tower instead of expanding its own business, it is in violation of the 2004 agreement.

In two separate emails from David Cordish — one to Copaken and city officials and another solely to city officials — obtained by The Star, Cordish asserted that H&R Block had run out of time to exercise its exclusive rights to the airspace above the existing businesses on the corner, which are owned by Cordish.

“That time period has come and gone,” he wrote.

Those arguments aren’t persuasive to the city. Schulte said H&R Block’s involvement was sufficient to abide by the terms of the 2004 arrangement and that the company had until 2027 to develop the site — even if the council rejects Strata.

When contacted by The Star, H&R Block did not weigh in on the controversy about development rights.

“H&R Block made a commitment to downtown by moving our world headquarters to be one of the anchor tenants for downtown’s redevelopment,” the company said in a statement. “We continue to be excited about the growth of downtown.”

Cordish also expressed concern for the existing retail and restaurants at 13th and Main that the company developed. The tower would be built atop those existing structures.

Schulte said the city will continue to work to find a resolution.

Why is Strata needed?

At the center of the argument for the project is what advocates say is a dearth of office development in Kansas City. While many downtown buildings have been converted to restaurants, bars and apartments, the same isn’t true for office space. No new speculative office building has gone up downtown in more than 30 years.

Copaken pointed to his firm’s recent redevelopment of Corrigan Station in the Crossroads Arts District.

“Very soon after opening it was 100% leased,” he said Wednesday. “So we think the desire is there.”

Data from commercial real estate firm Cushman & Wakefield show that Kansas City’s office space does lag behind other Midwest cities.

Kansas City had about 377,352 square feet of speculative office space under construction during the second quarter of the year. St. Louis had more than 516,608 square feet under construction and Omaha nearly 700,000 square feet last quarter.

Miles McCune, a senior director at the firm, said there’s a need for high-quality office space in Kansas City. Strata could help fill that void, though he said its high rents won’t make it easy to quickly fill the space. If it’s successful, though, he believes it could be a catalyst, encouraging investment in multi-tenant office buildings.

“I don’t know what’s keeping it from happening,” he said. “But I think if the product was there it’d be leased.”

But even as office development here lags other metros, Kansas City still has office inventory downtown.

During the second quarter of this year, the company counted a downtown vacancy rate of 16.9 %. Some other firms will report higher occupancy rate, but Cushman & Wakefield’s methodology only counts Class A and Class B office spaces that are leased or for lease — excluding government buildings and owner-occupied buildings.

Still, Richard Martin, director of government affairs at JE Dunn Construction, told the city council committee Wednesday that the local market for office space was “robust.” He said his firm had recently built new office buildings in Nashville, Oklahoma City, Denver and Omaha. Companies frequently look for large amounts of office space in Kansas City but have trouble finding it, he said.

Barnes agreed that the city needs more Class A office space.

“But my problem still becomes whether the city needs to put this on their books,” he said. “And that’s what I’ve been struggling with.”

The mayor said he did think the market would support Strata and that he didn’t have concerns about it under-performing.

“That’s part of the reason why I think there’s probably a different way to get the deal done,” he said.

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Allison Kite reports on City Hall and local politics for The Star. She joined the paper in February 2018 and covered Midterm election races on both sides of the state line. She holds a bachelor’s degree in journalism with minors in economics and public policy from the University of Kansas.
Kevin Hardy covers business for The Kansas City Star. He previously covered business and politics at The Des Moines Register. He also has worked at newspapers in Kansas and Tennessee. He is a graduate of the University of Kansas