Johnson County development under fire as Kansas lawmakers weigh expanding STAR bonds
This story has been updated to correct which Wyandotte County sporting venue had left an unpaid utility bill. It was the baseball park where the Kansas City T-Bones played.
As Kansas Senate last month debated whether to extend and expand a decades old economic incentive program one project kept coming up.
Prairiefire.
Critics of STAR Bonds, a 20-year-old incentive program designed to draw tourists to Kansas, held up the south Overland Park development as the ultimate failure. The picture of everything that could go wrong in a STAR Bonds development. And the reason the program should be changed or dropped altogether.
Sen. Molly Baumgardner, a Louisburg Republican, said a fifth of STAR Bond projects failed, and that was before a potential expansion of the program.
Prairiefire benefited from nearly $65 million in STAR bonds, along with another $14 million in bonds supported by a community improvement district that tacks on an additional sales tax to purchases in the shopping district.
But the shopping center has barely made a dent in repaying those obligations.
Prairiefire continues to grow with new retail coming on board in the coming years. But nearly nine years after $64,990,000 worth of STAR bonds were issued, only $130,000 in principal has been paid off, according to a January public disclosure. That leaves a remaining balance of $64,860,000.
Last month, the Kansas Senate voted to extend and expand the controversial program after a long and heated debate over its merits. The House Commerce, Labor and Economic Development Committee held a hearing on the bill Tuesday but has not yet held a vote.
The proposal mirrors one from Kansas Commerce Secretary David Toland last year. That was put on hold after the coronavirus shortened the 2020 legislative session.
STAR bonds have faced perennial criticism from Republicans and Democrats alike.
Developments that qualify for one of the region’s most lucrative incentives often over-promise and under-deliver on returns. They’ve also been warped beyond the original intent of creating large, regional tourist destinations and have been used to fund more mundane projects like adding turf to soccer fields in Wichita. And despite stipulating that developments should draw a certain percentage of visitors from out of state, Kansas has no mechanism for tracking those figures.
“It’s the ultimate pork project,” Baumgardner told The Star in 2019 in reaction to an analysis of the program’s failures.
While the proposed legislation would implement some guardrails on the incentive program — like requiring third-party feasibility studies — it would also greatly expand it. The Commerce Department wants to allow rural communities to qualify for STAR bonds by lowering their minimum project threshold to $3 million.
Those communities designated by the U.S. Census Bureau as part of a metropolitan statistical area — which includes much of the Kansas City area, Topeka, Lawrence, Manhattan and Wichita — would not qualify for that lower threshold.
Toland, a reliable proponent for the program, wants to see more communities qualify.
“STAR bonds are kind of a big tool that has worked really well on developing large-scale attractions in urban areas,” Toland said in a recent interview. “But we haven’t seized the opportunity that it provides in creating Main Street-type destinations that can draw new money into communities. So what we’re trying to do is make it easier to use for small communities and smaller projects.”
How STAR bonds would change
If passed by the House, the latest measure to extend STAR Bonds would authorize the program for another five years while allowing the smaller rural development projects to qualify. Likewise, the bill would open up STAR bonds to business headquarters and corporate offices, which Toland argues should be allowed to compete for incentives because of the potential business travelers they bring to an area.
Under the proposal, developers in metro areas would have to propose projects worth at least $75 million — up from the current minimum of $50 million.
Toland said $3 million in a smaller community could help revitalize several downtown buildings or spur development of a new amenity like a movie theater.
“We still do see STAR bonds as a tourism tool,” he said, “but it’s also a quality of life tool that can be used whether we’re talking about an urban, a suburban or a rural place.”
Toland said the state will seek to better track visitor numbers in the future, one of the changes in this year’s bill. But he said much of the criticism of the program is unwarranted.
“STAR bonds work. They’re a very effective tool for developing these types of attractive destinations,” he said. “There have been 19 STAR bond projects in the history of the program. There has never been a default on any of them. It has been a transformative tool in nearly all the cases in which it’s been used.”
Here’s how the program works: Cities sell bonds to provide upfront capital that a developer can pour into a project. The bonds are paid back over 20 years with the sales tax generated by the development.
The commerce department has sole power to authorize STAR bonds.
Only three projects have fully paid off their initial debt. Those include Children’s Mercy Park in Kansas City, Kansas, and the first phase of Wichita’s riverfront redevelopment and the first phase of a sports complex near K-96 in Wichita. Collectively, nearly half a billion dollars is still owed in STAR bonds.
And debt is growing on some of those approved projects.
More than $87 million in bonds are still outstanding for the U.S. Soccer Training Center near Village West in Kansas City, Kansas. That’s well above the original $65.2 million in bonds the state issued in 2015, according to last year’s annual report.
Developers are seeking STAR bonds in Wyandotte County to help redevelop the defunct Schlitterbahn waterpark. Some $65 million is still owed on STAR bonds issued to help fund the park, though the state says those bonds are now at risk of default.
Overland Park’s Prairiefire remains a prime example of the chasm between the promise and reality of some STAR bond projects.
Developers applied for STAR bonds with the promised attraction of the $27 million Museum at Prairiefire, which at its inception was supposed to host traveling exhibits from the American Museum of Natural History in New York. But the museum’s contract with the famous New York museum concluded, and its exhibits are no longer on display in Overland Park.
Developer Fred Merrill has offered varying explanations for the development’s performance over the years. He initially blamed what he said were anti-competitive practices by movie theater chain AMC, which hurt the attendance at the former Cinetopia theater that was an anchor tenant at Prairiefire.
AMC later bought Cinetopia and has its brand festooned on the Prairiefire location.
Merrill also blamed initial overly rosy projections for attendance and revenue by a consultant when the bonds were sold in 2012.
Despite not hitting revenue projections, Merrill said the shopping and entertainment district has been a success. It’s fully occupied and major tenants have renewed leases, he said.
“So to say that the STAR bond program is unsuccessful I think is ludicrous,” he said. “Because none of this stuff would have been built.”
Prairiefire’s STAR bonds weren’t backed by the city. So Merrill said the only potential losers are investors who bought the bonds.
“That’s no different than investors putting in money in any kind of business, real estate, entrepreneurial kind of venture and it doesn’t work out the way they thought it was going to work out,” Merrill said. “But it doesn’t affect the viability of the property.”
Merrill said major tenants have renewed their leases and more retail is in development. He said a grocery store is under construction, along with a new bank and a Chicken N Pickle location.
He said the project has never defaulted on any private loans. Tenants are paying rent, but he said he has no control over sales taxes, which he said have been hit by the rise of online shopping and the pandemic.
“But I do think as time goes on that will get better and better,” he said. “It’s just taken longer than what was projected.”
Aside from STAR bond obligations, Prairiefire is also struggling to pay off $14 million in community improvement district bonds. No principal has been paid since those were issued in 2012. On Dec. 15, bondholders were notified that Prairiefire was delinquent on an interest payment due that day.
A statement to bondholders indicated that $312,208 in interest was due on Dec. 15, but only $162,583 — barely more than half — was paid. The original bond issue was cut up and sold in three slices. The first slice, worth $15 million, is due in 2023.
Projections in 2012 estimated that Prairiefire in 2020 would have made $73.6 million in taxable sales, resulting in nearly $5 million in STAR bond sales tax collections for the year.
Still, the commerce secretary said the mixed-use development has been successful. Toland said more than 300,000 people visited the area in 2019 from numerous zip codes.
“This is a project that has brought a lot of new money into the state,” he said. “It has not hit the projections that it hoped for in the beginning. But it has shown growth, steady growth. And we’re going to focus on making it a success like we do with all our projects.”
‘Fox watching the hen house’
In the Senate, several amendments proposed to scale back the program or place more oversight over bond approval failed. Though some Democrats were critical of the program, the bill to expand it passed the Senate with bipartisan support on a 24-11 vote. The 11 nay votes came from conservative Republicans.
Even with new accountability measures seeking to prevent future failures, some lawmakers scoffed at the bill. Sen. Caryn Tyson, a Parker Republican, said those measures were akin to the “fox watching the hen house.”
Proponents pointed towards success at places like the Kansas Speedway in Wyandotte County, where the state issued $24.3 million in bonds in 1999. While $15.6 million remains outstanding, civic leaders often regard the race track as a transformational development that helped bring in new businesses and visitors to the region.
Sen. Rob Olson, an Olathe Republican and chairman of the Senate Commerce Committee, warned against imposing too many limits on developers seeking STAR bonds.
“We need the revenue, we need the growth in this state, we need the investment in this state,” he said.
But Sen. David Haley, a Wyandotte County Democrat, voted present on the measure. He noted that, although the Speedway and other nearby projects in Wyandotte County had brought money into his county, that benefit was not equitably distributed across the area.
Haley said at the hearing that a sporting venue had left a major unpaid utility bill that taxpayers had to pick up. The stadium for the Kansas City T-Bones, which was part of a STAR bond district, had not paid its bills to the Board of Public Utilities under the baseball team’s previous ownership.
“I’d like to see something that brings balance when we pick winners and losers,” Haley said. “It brought a certain benefit, no question about it, to our state, to Wyandotte County to see the Kansas Speedway and the ancillary development brought into play but only for a part of the state and the trickle down has not been realized.”
As the proposed legislation is debated in the House, Rep. Sean Tarwater, a Stillwell Republican and chairman of the commerce committee, said he’s considered amending the bill to remove the expansion into business headquarters. Protections against further abuse of the program, he said, will be essential.
He pointed to Prairiefire, which occupies one of the wealthiest areas of Johnson County. He noted that sales taxes there are being diverted for two decades to pay off the development.
“You can’t tell me that somebody is gonna wake up in Texas tomorrow and say I want to go to that dinosaur museum in Overland Park,” Tarwater said.
This story was originally published March 17, 2021 at 5:00 AM.
