Sunday, December 5, 2010

Kansas City Leaders Throw Good Money After Bad For Convention Hotel

The same consulting company that appears to have significantly overshot financial projections for the Kansas City Power & Light District has been rehired for a new city project.
This time, the city engaged Chicago-based C.H. Johnson Consulting Inc. for $130,000 to short-list requests for proposals to build Downtowns next big project: a convention center hotel.
Downtowns most recent big project, the $850 million Kansas City Power & Light District, was the subject of financial performance projections by C.H. Johnson that city officials now say missed their mark.
They were wrong, werent they? said Mayor Mark Funkhouser, a critic of the hotel project. They were spectacularly wrong.

Kansas City used C.H. Johnsons 2005 financial projections to help form the basis of a $295 million bond issuance to support mostly infrastructure work. City officials used C.H. Johnsons report, particularly its most favorable projections, to argue that the city should back the bond. Because the district has not generated enough revenue to meet bond obligations, the city has made up the difference $12 million in the current budget.
C.H. Johnsons report projected that annual sales for the district in 2009 would be $240.7 million based on 570,794 square feet of retail space. In 2009, the district made about $65.2 million in sales, based on tax records, with about 308,000 square feet open. That means revenue hit about a third of its projection with just more than half its space in use.
The projections did not account for the hit to retail sales from the Great Recession, which started a few years after the report arrived. But even in the context of the profligate times, the projections appear overly optimistic, and city officials were skittish about the financing even before the recession came.
Charles Johnson, CEO of the consulting firm, did not return phone calls and an e-mail seeking comment.
Deb Hermann told the Kansas City Business Journal in July that she doubted the district could generate enough revenue to cover its bond. She said projections expect district revenue to cover 104 percent of the bonds debt service.
I questioned them at the time, said Hermann, who maintains that the district was a good idea because of the business it has attracted to Downtown. Even if they werent optimistic, it only had (104 percent) coverage. At best, we usually shoot for 150 percent coverage.
Former Kansas City CFO Deb Hinsvark said in 2006 that the Power & Light Districts bond was very skinny.
Still, she said then, a bold risk has to be taken, a bold move has to be made.
C.H. Johnsons report projected that the most likely sales per square foot estimate was $358 a year. The Urban Land Institute reported that retail centers not centered around department stores fetch a median annual sales rate of $271 a square foot. Officials now anticipate that the city will have to pay bond obligations each year until they are retired in 2033.
We are making a budgeting structure on an estimation that the performance would stay essentially at the same level it is right now, Bob Langenkamp, assistant city manager for economic development, said in an interview in July.
Councilwoman Cindy Circo said hotel committee members discussed C.H. Johnsons work on the Power & Light District. She pointed out that the firm is performing a different scope of work.
This time around, its helping the city evaluate an indeterminate number of RFPs to develop the hotel, not casting overall financial projections. Thats the work of Piper Jaffray.
Circo also said that in the case of the Power & Light District, city officials accepted C.H. Johnsons most optimistic projections of annual performance $224.6 million in sales in any given year when formulating finances. The hotel committee, she said, will go with the least optimistic projections.
Consultant projections can be useful initially, said Dave Herron, a Kansas City-based architect for BOKA Powell LLC who has worked on a big hotel project in Dallas. But developers typically formulate their own, he said, and initial projections can be used as momentum-builders for politicians or marketers.
When you get to this point and people are looking at the real issues, they dont put a lot of credence in that, he said. It becomes more of a security blanket for the city.
C.H. Johnson has found critics elsewhere. The firm evaluated a similar hotel and convention project in Nashville.
Nashville Councilwoman Emily Evans said C.H. Johnson was replaced in 2009 after crafting some draft projections. C.H. Johnson was paid $500,000. Evans said that some of C.H. Johnsons representations were troublesome.
I would tell you from the perspective of this councilperson, and I think that view was shared, Mr. Johnson was wholly lacking in credibility, she said.
Evans said he reported that the convention center and hotel project would attract more than 1 million new visitors.
Thats just ludicrous, she said. It was things like that.
But the firm has achieved satisfactory results among other city officials locally.
It performed a feasibility study on the Overland Park Convention Center before it opened in 2002. Kristy Stallings, interim city manager for Overland Park, said she had no objections to C.H. Johnsons work.
They projected that the convention center would break even and begin to generate operating revenue in five years, Stallings said. In fact, it did in its second full year of operation.

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