Hard Rock Hotel plans in a hard place amid battle over bond proceeds

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The leaders of a small Kansas town who were promised a Hard Rock Hotel are stuck waiting as the bond trustee and developer wage a legal fight over bond proceeds.

The town of 4,650, Edwardsville, Kansas, 16 miles west of Kansas City, envisioned the hotel and conference center project as benefiting from the crowds drawn to the nearby Kansas Speedway, a NASCAR track that has an adjacent casino.

A Hard Rock Hotel lobby in New Jersey. Plans to bring a Hard Rock Hotel to the Kansas City exurbs have run aground in a dispute over bond proceeds.

The attorneys for developer One10Hotel HRKC, John Edgar and Matthew Limoli of Kansas City, Missouri-based Edgar Law firm, filed a lawsuit against trustee UMB Bank, claiming it failed to reimburse the developer for expenses the city approved.

UMB filed a separate lawsuit seeking a judge’s opinion on the matter, and claimed in a June 22 filing on the Municipal Rulemaking Board’s EMMA website that the developer failed to secure a $52 million construction loan required as part of the bond indenture, so it considers the $23.3 million in taxable revenue bonds to be in default.

Neither the developer's lawyers, nor UMB Bank's attorneys responded to a request for comment.

The developer claims it is working out replacement financing, and needs the bond proceeds to continue work on the project and for reimbursement for work already completed, according to its lawsuit. The conference center hotel, a Hard Rock franchise site, was expected to be completed in April 2021.

The bond payments on the four series of bonds issued by the city are dependent on hotel taxes from the promised hotel and tax increment from the multi-use commercial district of which the hotel and convention center represent the first phase.

The leaders of Edwardsville had gone through several iterations as they sought ideas to develop the 15.5 acre Village at South Project site at the city’s north end, before settling on the $80 million project currently envisioned.

The city struck an agreement with Compass Commodity Group, LLC, a Texas limited liability company in 2018. For phase one of the project, One10Hotel HRKC would build a 10-story hotel with 231 rooms and a 39,213 square foot conference center. The project would also include a ground-floor restaurant and a rooftop bar and restaurant facing north to the Kansas Speedway.

The city had issued four series of bonds Oct. 30, 2019: $11 million in special obligation tax increment revenue bonds, $1.6 million in taxable community improvement district revenue bonds in two series, and $10.7 million in taxable special obligation transient guest tax revenue bonds.

The developer’s lawyers wrote they are seeking specific performance against the trustee for withholding the bond proceeds, because One10Hotel HRKC is “entitled to reimbursement from the bond proceeds for certain eligible expenses incurred in developing and constructing the hotel,” according to the lawsuit filed June 17 in the circuit court of Jackson County, Missouri.

“The developer’s right to reimbursement is automatic so long as the city has approved and certified the expenses sought to be reimbursed,” Edgar and Limoli wrote in the filing.

The bond proceeds were to be used by Compass Commodity Group III, LLC, a Texas limited liability company, and its assigns, the developer, including One10Hotel HRKC LLC, a Delaware limited liability company, to acquire, construct and equip the hotel and adjacent event center in the Village South at Edwardsville Redevelopment District.

HRKC is controlled principally by D. John Monson, who owns Landschute, an Excelsior, Minnesota, architectural and development firm, and Anthony John Jacobson, founder and principal of Newport Beach, California-based Vernal Bay Capital Group, according to the UMB lawsuit.

UMB claims the developer failed to close a $52 million construction loan and failed to disclose to purchasers of the bonds that the construction loan the owner closed on prior to issuance of the bonds, in the amount of $48.8 million, was unfunded and wholly reliant on a third-party line of credit, and to comply in full with the covenants in the development agreement.

“For this, and other reasons, the trustee has declared that events of default have occurred and are continuing under the development agreement and indentures,” according to the lawsuit filed by UMB in the fourth judicial district civil court in Hennepin County, Minnesota. “However, the developer and owner dispute that events of default have occurred and have demanded that the trustee continue to fund the project notwithstanding the foregoing and the developer and owner’s tacit acknowledgment that it is presently unable to complete the project, and absent completion of the project, there can be no source of revenue to repay the bonds.”

UMB is seeking confirmation from the court that “events of default have occurred, and are continuing under the indentures and related covenants, and the trustee is not required to make any further disbursements to the owner under the indentures; confirmation of the trustee’s authorization to accelerate all amounts due and owing under the bonds; and upon direction from a majority of the owners of the bonds, authorization for a limited redemption under the TGT and TIF indenture, respectively,” according to its lawsuit.

According to the developer’s lawsuit, UMB demanded the return of $15,000 together with any other monies paid to, or for the benefit of AltosGroups, LLC, and its senior loan, for re-deposit into the Project Fund for the TIF Bonds; and the release of any encumbrances affecting land, improvements and materials related to Project Area 2, including the non-performing senior loan.

UMB also demanded the developer respond in full to prior requests for documentation and information necessary for the trustee to evaluate the developer’s compliance with the terms of the development agreement to date and confirm the developer clearly and unequivocally is willing and able to perform in accordance the development agreement, including the current performance milestones as they related to the Project Area 2 redevelopment project, according to the developer’s lawsuit.

The hotel developer’s lawyers also said in its lawsuit that One10Hotel HRKC LLC has filed a lawsuit in the District Court of Wyandotte County, Kansas, against AltosGroups LLC, with whom it had entered into a loan agreement to finance a substantial portion of the hotel project. The financier had “misrepresented the source of its funding for the loan and did not, in fact, have the ability to fund the loan,” according to that lawsuit.

“After discovering AltosGroups’ fraud and misrepresentation, developer assured the city and the trustee that it remained committed to complete the hotel project,” according to the lawsuit filed against UMB by the hotel developer’s lawyers.

The trustee has alleged that the developer has breached, without basis, the development agreement, a contract to which the trustee is not a party and has no right to enforce, the developer’s attorneys claimed in the lawsuit.

The trustee’s conduct “has cut off developer’s flow of working capital for over a month, while the bonds accrue interest for which developer and its guarantor principles may ultimately be responsible,” according to the complaint.

In addition to the funds being requested for reimbursement, the attorneys for the developer said the developer has “sustained damages in an amount to be determined at trial.”

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Litigation Bond defaults Taxable bonds Revenue bonds Tax increment financing district Kansas