The upcoming convention hotel is getting a lot more than $35 million in public funding

For as long as Kansas City officials have worked behind the scenes to develop a plan for a major convention hotel, conventional thinking held that the city would commit a huge helping of taxpayer money to make the deal happen.

Credit is due to City Hall leaders, who last week announced plans for an 800-room Hyatt near Bartle Hall that wouldn’t put taxpayers on a Power & Light District–style hook. (The Pitch has learned that Kansas City was negotiating three different proposals at the same time, one apiece from Marriott, Omni and Hyatt. The next-best offer asked for $75 million from city coffers, which turned out to be too rich for City Hall’s blood.)

Of the various bond issues that will patch a quilt of financing for the $300 million project, taxpayers won’t guarantee hotel debt to bondholders — as they’ve had to every year since 2008 to the tune of about $14 million, to offset the Power & Light District’s inability to sell enough Bud Light. It’s the stinging legacy of that expensive P&L deal which for so long has hindered KC’s effort to land a convention hotel. City leaders have said the public subsidy for the hotel project will be just $35 million. 

That’s true on its face. But the public-financing aspect of the hotel is far more extensive than that.

The $35 million represents the amount of bonds the city will sell to drum up quick cash for the hotel. Kansas City will repay that $35 million from $2 million a year in convention and tourism taxes over 25 years. The extra $15 million ($2 million a year over a quarter century works out to $50 million) represents interest and finance charges.

Also in the financing package for the hotel: $100 million worth of bonds repaid through tax-increment financing. It’s an atypical TIF plan in two key respects.

First, it’s proposed as what’s called a Super TIF. Ordinary TIF repays a developer 100 percent of future increases in property values for land within the district, along with 50 percent of economic-activity taxes generated by the hotel (earnings taxes from employees, sales taxes and so on). Super TIF pays the developer 100 percent of both revenue sources.

 Second, the project will also include a community-improvement district, which will raise the sales-tax rate at the hotel by 1 percent and add special assessments. All of those proceeds also go back to the developer.

The property upon which the hotel will be built (bound by Truman Road and 16th Street and by Baltimore and Wyandotte) is mostly city-owned, which means that it currently generates no property taxes. Troy Schulte, the city manager, has said the land is worth $13 million.

Assuming that valuation is correct, it means that the land — if the city sold it to a developer and it returned to the tax rolls — would generate $333,998 a year in property taxes. Under TIF, the development captures all that money. 

Given these arrangements, then, the public subsidy for the hotel is going to be a lot more than $35 million. About half the cost of the $300 million project will wind up being paid for by public taxes.

Still, even critics of public subsidies aren’t complaining just yet. One vocal opponent of many TIF deals, Crosby Kemper III, CEO of the Kansas City Public Library, lauds the project for bringing $150 million worth of private equity and debt to the hotel. (He still has concerns about the viability of chasing convention business; more on that in a bit.)

The private partners in the hotel project include Michael Burke, a Kansas City real-estate lawyer; Timothy O’Byrne, CEO of hospitality-development firm Inland Pacific; and Steven Rattner, a New York financier who resigned from Credit Suisse in 2008 after details of his marital infidelity surfaced on the Internet. The private partnership assumes most of the risk of this venture, ensuring that taxpayers aren’t in the uncomfortable position of guaranteeing the project’s debt if the hotel goes under.

Still, Kansas City risks damage to its reputation if the hotel underperforms — a distinct possibility, given how competitive U.S. convention business is. 

Heywood Sanders, a Harvard-educated professor at the University of Texas at San Antonio, researches the convention industry. He tells The Pitch that there were 52.1 million square feet of convention and exhibit-hall space in the United States in 2000. By 2013, that had grown to 71.2 million, an increase of 36 percent. But the amount of convention business has not grown in proportion over the same timespan. “Put those two things together, and you get an overbuilt convention market,” Sanders says.

Cities that build convention facilities are in something like an arms race, perpetually looking to erect new hotels and expand event space to keep up with, or to stay just ahead of, competitors. The results aren’t always encouraging.

Chicago’s McCormick Place, that city’s main convention center, attracted 1.4 million attendees to conventions and trade shows in 2000. The facility expanded in 2007. In 2014, it attracted 881,919 visitors for such events. So Chicago is building a 1,200-room convention hotel nearby.

A number of cities closer to KC’s size — Pittsburgh, Milwaukee, Minneapolis, Indianapolis — are in various stages of contemplating their next convention-center or convention-hotel project. “The dilemma you have here is, everybody is doing this and doing it on the assumption that you do one more thing to make it work,” Sanders says.

Kansas City knows this dilemma well. The city has paid to expand Bartle Hall twice since 1994, with the second expansion sold as a means to stem the decline in Kansas City’s convention business. (Future Farmers of America left in 1999, saying it had outgrown the city.) Shortly after that second expansion was finished, in 2007, Sam’s Club, Wal-Mart and SkillsUSA (all major conventions at the time) announced that they, too, were leaving.

Asked why Kansas City should expect to gain market share in an increasingly competitive convention industry, Mayor Sly James cites discussions he has had with unnamed people from unnamed organizations who say a hotel can bring back business.

Ronnie Burt, CEO and president of VisitKC, offers more concrete reasons. He says Kansas City’s central location, affordability and downtown walkability make the city an attractive choice in tandem with the convention hotel. “This just positions Kansas City in the right place to capitalize on new business and the old business that was here before,” Burt tells The Pitch. He points to Austin, Texas; Nashville, Tennessee; and Indianapolis as cities that have put up convention hotels in close proximity to their convention centers and seen positive results. He adds that growth in Kansas City’s hotel business before last week’s announcement also helps.

“In 2014, Kansas City saw its highest hotel occupancy and highest rates in 13 years,” Burt says.

Whether Kansas City can reclaim its convention glory from the 1970s, though, remains to be seen.