Don’t demonize the developers. They deserve fair incentives to build in Kansas City

In order to grow, Kansas City must compete both locally and nationally for developers and high-quality projects. However, developers are flexible. If they can’t make their numbers work here, they will simply adjust and build in Overland Park, Nashville or elsewhere. Unfortunately, our city has a broken incentive system and is not welcoming as much new development as we need, and the result can be a declining tax base that has led to deficits. 

As an example, our proposal to build the Hotel Bravo on a vacant, low-taxed lot across from the Kauffman Center has been discouraged and delayed for over three years. Why? To be clear, we followed all the rules. We agreed to a financial structure that would pay immediate cash to city entities of about $1 million per year in the first 23 years, and $4 million per year after that. We received a positive recommendation from the Economic Development Corporation and paid for an expensive third-party financial review, which was also approved. Regardless, the Tax Increment Financing Commission rejected our proposal, which would now require a two-thirds majority vote of the City Council to proceed. 

We still believe more than ever that we have the best project for this location and excellent timing for our city’s post-pandemic growth. But we need to overcome a hostile political process. Who can build in a city where developers are portrayed as the enemy? We are simply offering our energy, creativity and capital to partner with the city and to create something mutually beneficial. 

Developers are not a net drain on the city. In fact, they provide 100% of our growth. Without new development, our tax base and business activity would dwindle, and Kansas City would face budget deficits such as those in the the 1980s, ‘90s and 2000s. Post-pandemic, we are again facing deficits, and as we know, government’s automatic reflex is to raise tax rates. Wouldn’t more development be a better option? 

Typically, incentivized projects do not take net cash from the city during the incentive period. They create jobs and pay taxes, but they get back a portion in order to offset early operating losses. A new real estate project is like a new business venture: It needs time to expand its market and normalize its operations. Existing tax levels are just too high for most new enterprises, so these ventures need a break to get established. However, the viewpoint of taxing jurisdictions is that development incentives are net cash investments in projects. This is not correct. Actually, they are offsets to taxes paid under an agreement made years earlier to induce more development. These new taxes would not exist if the project were not built, and it will not be built without reasonable incentives. 

After an initial incentive period, a typical project will pay 100% of its tax bill. This phenomenon of projects rolling off their incentive is occurring now in Kansas City in a big way. Some people call it a “tsunami” of new cash flow to the city, which will go a long way to balance the budget. This year, nine formerly incentivized projects will start paying their full tax load, and that number will keep increasing until 2026, when 39 projects will newly come 100% onto the tax rolls. Unfortunately, after that, year-by-year the numbers will steadily drop down to only three projects in 2034.

Clearly, Kansas City needs to replenish the stream of new projects to provide for our community’s future financial strength. This will not be accomplished by demonizing developers.

City officials and developers need to shoulder together to boost our city’s economic future. We need our elected officials to use their best discretion to encourage new development while also negotiating good deals for the taxpayers. And developer perspectives should be included on the boards of incentive agencies.

Finally, while The Star and others advocate for a central clearing house for developer incentives, we believe such a system would exacerbate the prevailing anti-developer echo chamber at City Hall and will further cause our city to stagnate. Let’s instead get back to the original idea for public-private partnerships — that is, working together for mutual prosperity.

This story was originally published March 3, 2021 at 5:00 AM with the headline "Don’t demonize the developers. They deserve fair incentives to build in Kansas City."