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Neighborhood Backgrounder: Cleaver TIF

4. Development risk.

Another view from Cleaver Blvd.

There are potentially significant development risk and timing issues with this project. This Development risk is similar to what we have actually experienced a half-block away with the 45th Street TIF.

Much of the time there’s nothing wrong or ill-intentioned when we experience development risk. It’s just the way things work – business plans change, and they often change due to circumstances beyond the control of the developer.

Expectations are created. They're created honestly, and sometimes with enthusiasm to get the development deal done.

Development plans frequently change. They change due to circumstances beyond the developer's control; mismanagement (developers aren't perfect); and sometimes things just go the wrong way for many different reasons.

We have to understand and be prepared for development risk, because the risks are real.

A good example of this is what we experienced with the 45th Street TIF.

The 45th Street TIF would replace the Holiday Inn that is currently on the site and the corner of 45th & Main. The TIF was approved with a 12 story office building, grocery store, a restaurant and a luxury hotel. Construction was set to begin soon after the TIF was approved, in 8-12 months. It is an approx. $220M project that includes $69M in TIF for multi-level underground parking.

Construction hasn't started yet and the new TIF developer owns and operates the Holiday Inn profitably at the corner of 45th & Main.

Below is a picture of the TIF development as it was initially approved by the TIF Commission and City Council.

Click to enlarge

Let's look at the expectations created and the reality we experienced with this project.

Expectation created...		Reality...

Developer lives and works in KC, no chance the project would be sold! The developer was committed to the community and this project for the long haul.		Development sold within 6 months of TIF approval, at a profit, to a developer in Chicago.

Grocery store was a "sure thing".		Grocery store cancelled after less than 6 months after TIF approval.

Developer had "solid" financials.		We're told one of the reasons the deal was sold was because of financial concerns.

Office Tower design that was approved would be the design that was built.		We're 99% certain that the design of the building will change. We have reviewed a new design, and in this case (pretty much by the luck of the draw) it's much better than the previous design. We say this because a new developer coming into this project doesn't have any obligation to improve it.

Construction needed to begin ASAP because of the strong, pent-up demand for commercial office space on The Plaza.		Construction is expected to begin when an anchor tenant is recruited, estimated to be in 3 - 5 years. Now - we're quite happy with the profitable Holiday Inn that is there now. However, if the neighborhood really needed the project, we would be very upset. Fortunately our neighborhood is not clamoring for additional high-rise commercial office space.

If it seems like we're critical of the 45th Street TIF it's because we are. Howver we separate the way the deal was initially managed from the current developer who had nothing to do with that. This TIF deal occurred in a different era in KC development with different people involved. We're committed to working constructively with the current developer And we're even more committed to NOT getting taken advantage-of again. Based upon our real-world experience and a few additional issues , we may have a better than 50% chance of significant development risk with the Cleaver TIF. How many high-end hotel do we need in Kansas City? And where should they be? This is a speculative hotel and condo project. While we’re not experts about the condo and hotel markets, we have enough information to know that there is a high degree of uncertainty regarding these markets. There are a lot of hotel projects going on, with many more to come. Below is the front page of the 12/18/07 KC Star Business section.

Click to enlarge this page

Based upon the December 18, 2007 KC Star Business section there were at least 20 hotel projects planned. There are probably more, but these are the hotels in “mixed-use” developments.

A few more details provided by the 12/18/07 article:

Click to enlarge.

One thing is for sure, there are a lot of unknowns and uncertainty.

We don’t know how many of the planned hotels will be high-end hotels.

We don’t know how many luxury hotels Kansas City can support. We have two planned within a block of each other, surrounded by two more hotels on the same block.

We don’t know where the demand for hotel rooms really is.

We don’t know what flag will fly over either of the high-end hotels planned for Southmoreland.

We don't know what either hotel will look like.

There is also an important perspective from Rick Hughes, president of the Kansas City Convention and Visitors Association, on the recent loss of our largest convention (SkillsUSA):

“Hughes said he hoped SkillsUSA's concerns over space would increase pressure for more downtown hotels and an expansion of the downtown Bartle Hall convention center.

'You can't build for one group,' he said, adding that the new Sprint Center and Kansas City Power & Light entertainment district will meet the demand. 'Over the next five to six years we'll see the need for real expansion, and we'll have the demand to fill it.' " (AP, 1/17/08)

So where do we need additional hotels? According to Rick Hughes it's downtown, not 2 blocks east of the Plaza.

So here are a few of the potential risks:

The development will delayed indefinitely because the hotel market can’t support a 20th additional hotel in Kansas City. One of the risks in this outcome is that the developer will change the development in such a way they can make an economic return. And the existing buldings will continue to deteriorate.

The project will be sold. If it is sold, the development will likely be changed.

No hotel will be built, which means the condo’s won’t be built either. However, the property will then require different development for the developer to make an economic return.

A hotel will be built, but under flag we weren’t expecting. The developer is setting the expectation of a high-end luxury hotel (which is also the expectation set at the 45 th Street TIF) but we risk getting a discount or down-market hotel that may be at odds with neighborhood expectations.

The look of the hotel will not meet our expectations. The design and configuration of the hotel will also be determined by whatever flag is flown over the development, and is currently undetermined

It’s very important to note that these risks aren’t simply “scare-talk”, we’re dealing with them in a very real way in our neighborhood today.

Condo Risk

Condo risk in Kansas City is a major, well publicized issue. We’ll be posting more on this, because we don’t have hard data around the Plaza. However, we can reasonably conclude we are far from a “hot” market for high-end condos. This is what we do and don’t know:

The real estate market is in a well-publicized slump nationwide and in Kansas City with no credible estimates as to when we will emerge from it. No one knows how deep or sustained this correction will be.

We have reason to believe the conventional wisdom of real estate professional indicates that the high end condo market in Kansas City is well past saturation. If we think this is an important piece of information, we need to do a little more research.

In our neighborhood the high-end Rockhill Condos recently went into receivership (44th & Rockhill) Unfortunately, the developer gutted some of these historic buildings, including removing the old windows. This was done before the out-of-state developer realized the buildings were in a designated historic district, subject to oversight by The Landmark’s Commission.

How does this affect us?

It might not, but we should be prepared for whatever reasonable outcomes are possible, including preparing ourselves for the condos to remain unsold for a relatively long period of time.

We should also know when the condos would be built in relation to the hotel.

Short takeaway: We have a history of experiencing significant development risk in Southmoreland, and we need to understand the development risk we face with this development.

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