CHICAGO – Kansas City, Mo., officials expect to break ground later this month on a new convention center hotel after they close on a $120 million revenue-supported debt sale to support the project.
The city will also sell $35 million of special obligation bonds to support the plan.
The city has for years explored plans for a new hotel and in 2015 reached initial development agreements that called for a city contribution of $35 million and other incentives, but it took two years for the developers to put together a feasible capital structure.
“This is the moment the city has been waiting for,” Kansas City Director of Finance Randall Landes said at a December council committee hearing, referring to the developer’s completion of a capital structure.
The Land Clearance for Redevelopment Authority of Kansas City sold in a limited offering to qualified institutional buyers on Tuesday two series of unrated bonds to support the 800-room project. Stifel Nicolaus & Co. Inc. and Valdes & Moreno were underwriters. Hilltop Securities was financial advisor to the land clearance authority. Kutak Rock LLP and the Hardwick Law Firm LLC served as bond counsel.
The project has faced obstacles involving land title issues, efforts to put the project to a public referendum, and the loss of the city's initial developer and hotel operator, so the bond sale this week marked a milestone.
The city believes the hotel will draw bigger conventions to complement its downtown revitalization that’s benefited from city support for an arena, the renovation and expansion of its convention center, and an entertainment district.
The $60.4 million of taxable series A bonds are secured by special assessments from a community improvement district. The A bonds sold in three tranches maturing in 2040 and 2049 with initial offering yields of between 6.4% and 6.7%.
The $63.4 million of series B tax-exempt bonds are secured by pledged economic activity taxes generated within the tax-increment financing district surrounding the project subject to an annual appropriation.
In city TIF districts, incremental increases of property taxes are diverted for qualified projects while 50% of economic activity taxes are set aside. The project will enjoy a property tax exemption through the land clearance authority’s 30-year ownership of the project so all EATs will be diverted under the financing agreements.
The bonds sold in three tranches maturing in 2031, 2040, and 2050 with initial offering yields of 4.47%, 4.94%, and 5.07%.
The bonds are “not on our balance sheet, not a city debt obligation,” Landes said during the hearing.
The developers hoped to wrap up the financings last month but faced delays as they finalized some pieces of the financing agreements.
The TIF support generated opposition from the city’s public school district over concerns that it would lose $115 million over the 23-year diversion of revenues, and several council members voiced frustration at the December council committee hearing as they sought more details on the final financing package and guarantees.
The TIF support generated opposition from the city’s public school district over concerns that it would lose $115 million over the 23-year diversion of revenues. Several council members initially voiced frustration at the December hearing that they hoped to see final version of documents and various guarantees, but most were appeased by the level of financial detail provided at the hearing.
The LCRA opted for a limited public offering due to the complexity of the capital structure for the project but the finance team also believed there was wide enough institutional interest to conduct an offering over a private placement.
“It’s a story bond. You have to tell the story of what this project means for the city and involves a lot of investor outreach,” said Tammy Queen, deputy director to Landes.
The city this spring will sell $35 million of special obligation bonds. The bonds will carry the city’s appropriation pledge credit which allows it to tap a range of revenues but officials intend to repay the debt with a portion of its tourism and convention taxes. The 20-year bonds will require $2.7 million in annual revenue to repay.
In addition to the borrowing, the key pieces of the complex financing scheme for the $322 million project include a $59 million equity contribution from the developers KC Hotel Group LLC and hotel operator Lowes Hotels Group Inc., and a $110 million first mortgage loan from Wells Fargo.
The city is donating land valued at $7 million and the developers will also raise about $30 million from a loan that is to be repaid from city catering revenues the city will transfer to the company. If those funds fall short, the city will tap convention and tourism taxes or general revenues. The developer must cover project cost overruns beyond a guaranteed price.
As the city devised its commitment to the project, it sought to limit fiscal risks. The city has come under criticism for putting its special obligation pledge that’s subject to annual appropriation behind debt issues for past downtown projects without sufficient revenue streams in place. Some of those projects have resulted in draws on the city’s general revenues.
The city later adopted debt practices that require future special obligation borrowing have a defined source of repayment such as the tourism taxes cited in the $35 million borrowing planned for the hotel.
Groundbreaking is slated after the closing on the land clearance bonds which is expected Jan. 18. The project is the first new major hotel in downtown Kansas City since 1985, and is expected to be completed in early 2020. A walkway will connect the hotel with the city’s Bartle Hall convention center.
City finance officials were aware of the struggles of other hotel convention projects that have struggled and in some cases resulted in big headaches for municipal managers, including a project to the east.
The St. Louis Industrial Development Authority issued $98 million of senior lien revenue bonds in 2000 as part of a complicated $266 million financing that included public funding to acquire and renovate two hotels. They struggled and the bonds fell into default and the bondholders took ownership in 2009.
The Chicago suburb of Lombard put its pledge behind a portion of borrowing for a hotel conference center but its struggles have led the project to file for a reorganization under Chapter 11. The city lost its investment grade for reneging on its pledge.
The offering statements outline a long list of investor risks on about seven pages that warn the absence of a rating could adversely affect the ability of holders to sell the sell their holdings, of hotel occupancy and rate risks, that there are risks associated with tax collections supporting the bonds, and that there’s no mortgage securing the bonds.
The taxable bonds were purchased by a total of 11 institutional accounts that included a mix of insurance companies, money managers, trading and bond fund firms, and the state Department of Transportation. The tax-exempt paper was purchased by 23 accounts that included bond funds, money managers, and insurance companies.
At the end of the 30 years, the developer takes ownership of the hotel.