KCK got a pile of federal cash to invest in its downtown. Most of it went into a money-pit hotel

In the mid-1990s, like today, Kansas City, Kansas, leaders were working to figure out how to spark a renaissance in that community’s downtown.

In the mid-1990s, unlike today, Kansas City, Kansas, had a bundle of cash available from the federal government.

In 1994, KCK received several million dollars from a federal program aimed at reversing decline in distressed communities. And downtown KCK was nothing if not distressed, after decades of out-migration and neglect. With Kansas City, Kansas, and Wyandotte County governments consolidating to form the Unified Government, political leaders were trying to get their act together to foster the core’s revival.

Unlike the breakneck speed with which western Wyandotte County would soon develop, progress downtown in the 1990s was — and remains — intractably slow. Just demolishing the old Huron Building and the Civic Centre Hotel seemed to take a long time. Funding from Uncle Sam, UG leaders thought, might accelerate the pace of downtown’s renewal.

The money, from the U.S. Department of Housing and Urban Development, was earmarked for the broad mandate of economic development in the urban core. Small businesses applied for loans and grants under the program, but the bulk of the funds would end up in the downtown Hilton Garden Inn, a hotel half-owned by the UG. The hotel has operated at a loss from its opening day.

In 1993, the Mid-America Regional Council issued a blistering report about the condition of the metro’s urban core.

The document was produced by the Kansas City metro planning agency’s Urban Core Growth Strategies Committee, whose co-chairmen were development lawyer Jerry Riffel and former Kansas House Speaker Wendell Lady. It said policymakers on both sides of the state line had allowed the urban core to decay, and that city leaders should fix it. The problems associated with the core — crime, concentrated sectors of poverty, disinvestment — would metastasize throughout the metro, the report cautioned: “Urban decline is costly. It is spreading. And it affects everyone in the region.”

City leaders wondered how they would pay for the repairs called for in the report. “The challenge is to figure out ways to motivate the population to pay the taxes to implement the strategies,” said then–Kansas City, Missouri, Mayor Emanuel Cleaver in The Kansas City Star when the MARC report came out. “People are not willing to increase their taxes.”

So officials turned to the federal government, taking advantage of a time when Uncle Sam could be more generous. That was particularly true in 1994, when HUD announced that it would award $100 million to combat urban decline in six communities. The pledge sparked a flurry of applications from metropolitan areas around the country. KCK and KCMO leaders figured that they stood a better chance of winning the $100 million Empowerment Zone prize if they applied together. Kansas City learned later that year that it wouldn’t get the $100 million prize. Instead, $25 million was coming, under the Enhanced Enterprise Community program.

By 1999, UG leaders had decided that they wanted a downtown hotel. The old Civic Centre Hotel, at 424 Minnesota Avenue, had been razed years earlier, making way for a new building for the U.S. Environmental Protection Agency.

To finance its dream hotel, the UG primarily used HUD grants and loans, such as the money shepherded by the Enhanced Enterprise Community program. The new Hilton Garden Inn would go next to the Jack Reardon Convention Center, a small facility built in 1981 that would undergo renovations at the same time as construction on the $16.8 million Hilton Garden Inn. The aim was a new convention nexus — just the thing to spark that downtown renaissance.

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To sweeten the pot, the UG entered into an ownership agreement with a private entity called KCK Investors. The money behind KCK Investors came from some of the wealthiest families and businesses in the Kansas City area. There was JE Dunn Construction, the contracting behemoth based in Kansas City, Missouri. And there was Broadway Square Partners, a joint real-estate venture between software company DST and the Joe Jack Merriman Estate. In 1998, the year before KCK sought federal grants and loans for the hotel project, DST reported $1.1 billion in revenue. Merriman owned Financial Holding Corporation in Kansas City, which had stakes in several life-insurance companies, amounting to $4 billion in assets.

Another partner in KCK Investors was an entity called WYCO Hotel Partners, whose manager was Kevin Pistilli, a Kansas City hotelier whose Raphael Hotel Group owned the Country Club Plaza’s luxurious Raphael Hotel. (That consortium sold the Raphael in 2005.)

It’s unclear why KCK Investors wanted to get involved in the downtown KCK hotel business. JE Dunn referred questions to Pistilli, who did not answer a request for comment.

KCK Investors would have shared in the profits from the hotel, but it appeared to have little in the way of skin in the project, thanks to a favorable agreement struck with the UG in 2000.

The hotel’s construction was financed mostly through a $5.2 million grant from KCK’s part in the federal Enhanced Enterprise Community designation. (JE Dunn, unsurprisingly, was named the general contractor for that project.) Another $6 million came from a HUD Section 108 grant; $1.5 million more was from another federal grant program. And $2.3 million came from the sale of industrial revenue bonds issued by the state of Kansas.

KCK Investors put up $1 million in cash equity and said it would offer up to $1 million to cover any operating deficits at the hotel for the first five years. Somehow, that bought half of the hotel.

“It’s one of the wealthiest families in the world, and we’re going to partner with them to loan them money?” David Haley, a Kansas senator representing Wyandotte County, says today of the deal. He criticized the Hilton Garden Inn financing back in 2001, asking HUD to withhold its funding from the project because of his belief that HUD money should go toward small-business loans and high-paying jobs, not “servile positions” that a hotel would create in an Enhanced Enterprise Zone.

The agreement also had sweetheart provisions for the KCK Investors. The private investors, not the UG, would receive annual distributions of $120,000 for 25 years. The UG, not the private investors, would advance $500,000 to pay the architects and the engineers. (The UG also covered the costs for environmental studies and land surveys.) The UG also leased the land to KCK Investors for 99 years for the grand total of $1. And the private companies could leave the project if their $1 million letter of credit got spent down within the first five years of the project.

Joe Vaught, a UG commissioner at the time, also voted against the hotel deal.

“They [KCK Investors] didn’t really have any risk,” Vaught says.

But he was the minority voice on the commission, which approved a hotel ownership structure that allowed the UG 49.95 percent ownership of the project. KCK Investors would hold an equal 49.95 percent. The Raphael Hotel Group would own the remaining fraction and be paid an annual fee to manage the hotel.

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Lavert Murray, the county’s economic development director at the time, says the UG’s partnership made sense if the hotel became profitable in the future.

“It was a way of maintaining a sense of interest and ownership, and, of course, the hope at the time was the rest of the block would follow and be developed,” he says. “If that had happened, and if in fact the hotel had been sold or refinanced, the UG could recapture, if you will, the EDI [economic development initiative loan] to use for other economic development initiatives in the eastern part of the county.”

The UG never recouped that federal financing, which covered the bulk of the construction costs for the Hilton. Instead, it has picked up most of the financial slack for the hotel’s snoozy performance.

The UG hired a consultant to project how much money the hotel would make when it applied for the HUD loan in 1999. The consultant predicted that by 2005 the Hilton Garden Inn would hit $3 million from room revenues alone. Actual financial records show that the hotel has stooped below that $3 million figure. In 2006, the hotel reported only $2.2 million in room revenues. The hotel itself has always operated at a loss, and every independent audit of the hotel project since 2006 has sounded the same warning: The Hilton Garden Inn is a money loser and can’t stay afloat without subsidies from its owners.

The UG has provided most of those subsidies, despite its equal share in the hotel’s ownership. According to a 2013 audit of the Hilton Garden Inn, the UG pumped $5.3 million in advances to keep the lights on. That amount doesn’t include an additional $2 million that the UG spent for the hotel’s renovation.

KCK Investors, by contrast, has advanced just $1.4 million in subsidies over the life of the hotel.

There’s little sign that the hotel’s performance will turn around, and its failure sends ripples through the community. For each of the next two years, the UG will take $280,000 in federal Community Development Block Grants awarded to the county (money normally used for affordable housing, infrastructure or poverty programs) to service debt on the hotel. Every CDBG dollar used to fill the hotel’s shortfall is a dollar that can’t be used for the program’s actual purpose.

“I think they over-presumed how many people would be coming to town to transact business,” says Hal Walker, a UG commissioner who once worked as the county’s lawyer. “The real problem with the downtown hotel is, you come out of your hotel and you want to turn right or left and go somewhere, whether it’s a bar, a restaurant or a movie. And there’s nothing to do out there.”

Where KCK visitors go instead, if they stay in Kansas, is western Wyandotte County, which has enjoyed a real-estate boom so far this century. It started with the Kansas Speedway more than a decade ago and has continued today with recently approved plans for a large, mixed-use development anchored by a training facility for the U.S. men’s national soccer team.

But KCK’s downtown looks about the same today as it did when the Hilton Garden Inn opened: tired and uninhabited.

“The problem with that hotel, with 20/10 vision 14 years later, is, it should have never been built,” Walker says. He and others view the struggles of the Hilton Garden Inn as emblematic of KCK’s difficulty in revamping a stale downtown. KCK banked on a renaissance driven by municipal and federal jobs assured by the downtown federal courthouse and the construction of the Board of Public Utilities building. Add these to KCK’s City Hall and the county courthouse — and a convention hotel — and it seemed like a safe bet.

But those things don’t necessarily exist in perfect harmony, and the government jobs haven’t lasted.

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The EPA opened a new, 200,000-square-foot building at 424 Minnesota Avenue in 1999, putting 500 jobs in the heart of KCK. But the agency stuck around barely longer than its 10-year lease before moving, in 2012, to Lenexa. In one of the metro’s typical games of occupancy hopscotch, the government took over office space left vacant by Applebee’s when the restaurant chain moved its corporate headquarters to Kansas City, Missouri. The building the EPA left behind, considered at its opening to be a top-of-the-line, environmentally friendly structure, shows no signs of regaining tenancy.

Meanwhile, little private business investment has occurred in downtown KCK. The only employers of size that have taken a chance on this urban core are the software company Epiq Systems and automotive-related businesses in the Fairfax Industrial District.

Across the state line, downtown Kansas City, Missouri, has at least enjoyed the construction of an entertainment district, a new arena and, more recently, a spate of housing developments that, even counting heavy taxpayer subsidies, has given that area a new sheen.

“It’s been slow to redevelop,” Murray says of his side of the state line. “I think the conditions are a bit better today than they were years ago.”

Murray adds that Kansas’ restrictive liquor laws and the redevelopment of KCMO’s downtown have stunted the private sector’s interest in KCK’s core. That’s why he still believes that the UG did the right thing when it used part of its Enhanced Enterprise Community funding for the Hilton Garden Inn: “Just think about what downtown KCK would look like without the hotel.”

But others say the county squandered its opportunity by pumping federal money into the 150-room hotel.

“Here our city is a partner in a hotel, and while property taxes continue to escalate in Wyandotte County, part of that was because the county was obligated to support private contracts to build hotels that don’t achieve their end,” says former University of Missouri–Kansas City professor and Wyandotte County Taxpayers League chairman Nolen Ellison. “And the only way those projects remain viable is through taxpayer subsidy.”

On June 3, 2013, a KCK resident named Murray Anderson shared a novel idea with the UG’s Standing Committee on Economic Development and Finance. He advised commissioners to sell the UG’s stake of the Hilton Garden Inn and use the money to start a venture-capital fund for minority businesses.

Anderson, with his penetrating gaze and low, gravelly voice, is among Wyandotte County’s more persistent gadflies. He has been an advocate for selling the county’s ratepayer-owned utility, BPU, to private interests. Anderson says the UG’s share in the hotel is worth around $5 million on the open market. The UG hasn’t embraced Anderson’s idea, and probably won’t. But Anderson’s thinking reflects a widely held view of the UG’s use of those federal funds from the 1990s: The money should have been used to spur smaller businesses in the urban core rather than distributed among wealthier holders.

Murray argues that this idea would have been harder to carry out than people think. He points out that the larger $100 million HUD pool to which KCK applied had no strings attached. The smaller $25 million came with several restrictions that required levels of private investment and job creation — levels that he says would have been difficult for small businesses to meet.

“It’s because you had to create so many jobs per the level of investment,” Murray says. “It created a problem for a mom-and-pop small business to borrow.”

The other major beneficiary from the HUD loans was manufacturer Thompson’s Pasta Plus Pet Food, a company started by Richard Thompson, who was also a founder of American Italian Pasta. The latter was once a powerhouse company in Kansas City. Then federal investigators realized that executives were cooking its financial books.

Thompson’s Pasta Plus Pet Food filed for bankruptcy in 2000 and then went out of business.