Keep the Ball Moving, plus Warehouse Culture, Composite Supply Chain, Take Two, It’s All In the Master Planning and St. Joe Puts HQ Money Where Mouth Is

There may be no state line more innocuous in appearance but meaningful in substance than State Line Road in Kansas City. Early this year, just over six years since it dedicated a US$70-million expansion of its headquarters in North Kansas City, Mo., healthcare information management systems company Cerner Corp. officially crossed that line with a new project in Kansas City, Kan. It will create more than 4,000 new jobs, a new stadium for Major League Soccer’s Kansas City Wizards and an athletics complex with up to two dozen new fields.

Retail growth will naturally follow the $414-million investment. But in this case, retail growth also helped make the deal, in the process pulling it from its original destination at a former mall site in Missouri.

The project is rising in Village West, an area of Wyandotte County that over the past decade has welcomed the Kansas Speedway and destination retail stores from Nebraska Furniture Mart and Cabela’s in a district called The Legends. A successful vote to form the Unified Government of Wyandotte County/Kansas City, Kan., took place on April 1, 1997, which according to press accounts was also the day Mayor Carol Marinovich first met with the company wanting to build that speedway.

Growth has rocketed forward ever since, with the latest surge coming in January 2010 when the Unified Government, led by Mayor Joe Reardon, approved the deal, 10 months after the idea was first broached. The agreement calls for the Cerner campus to be home to at least 4,000 new Cerner jobs with an average annual salary of $54,000 by 2016.

The developer of the project is Unified Kansas Development, composed of retail real estate developer Lane4 Property Group and Wizards owner OnGoal LLC, whose principals include Cerner Vice Chairman Cliff Illig and Cerner CEO Neal Patterson. Cerner and OnGoal executives were not made available for comment.

In early April, fill dirt from the stadium site was being used to help solve slope issues on the adjacent site of the new 600,000-sq.-ft. (55,740-sq.-m.) Cerner office complex, which will be populated by staff for an entirely new line of business, and will form a triangle with Cerner sites in North Kansas City, Mo., and southeast K.C. near Grandview. Excavating one part to build up another is the perfect metaphor for the project’s financing arrangement, which will use funds derived from an existing STAR bond district that overlays the area and generates approximately $40 million a year in sales tax revenues. STAR bonds were originally approved in 1998 in connection with the development of tourism-related projects.

That existing stream of cash put the site over the top vs. the former Bannister Mall site on the Missouri side, where a proposed $1-billion, 460-acre (186-hectare) redevelopment would have been paid for in part by $250 million in tax-increment financing and tax credits from the State of Missouri and the city of Kansas City, Mo.

“We were able to tap into that existing stream of STAR Bond revenues,” confirms Tim Weaver, who was promoted to vice president at Lane4 in early 2010 in large part due to his lead role in bringing this project to fruition. “In Kansas you have STAR bonds. In Missouri, there is similar horsepower, from the city super TIF and then the state TIF. There was also a state program for Cerner called IMPACT that was part of the incentives package on the Kansas side.”

Weaver also leads the Missouri-side redevelopment project, called The Trails, which is still moving forward and which may attract a separate software development facility investment from Cerner.

Sticky Wickets

At one time, Kansas Unified Development wanted up to $173 million in STAR bonds, a request later modified to $155 million. The Kansas Dept. of Commerce offered $147.8 million of STAR bond authority, with a limitation of $144.5 million on the state sales tax revenue portion, for the stadium project, in addition to another $85 million in other incentives for the Cerner part of the deal. At one point an OnGoal executive blogged about the need to remove the limitations on use of the sales tax revenues, so that both principal and interest payments could be covered. But that limit to the state’s exposure remained.

“What the state agreed to do to that limit was to allow the existing sales tax stream, plus the incremental, enhanced portion from the new development, to go towards paying down the bonds at the date when the existing bonds are paid off, anticipated in late 2013 or early 2014,” says Steve Kelly, deputy secretary for the Kansas Dept. of Commerce. “Up to this point the revenue from the district is required to pay off the existing bonds. We agreed in this document that upon the completion of the repayment, the state and local sales tax generation would apply to the new debt of $147.8 million in principal.”

In other words, in a dynamic similar to tax-free-zone expansions for projects all over the globe, the project was allowed to be “tacked on” to the original district plan.

“We had looked at some of the statutory requirements related to STAR bonds for a project like the Wizards stadium, and our legal staff felt comfortable that what they were proposing to do was allowed under statute,” says Kelly.

The project’s scope and intensity steadily escalated from the spring through the fall of 2009, say Kelly and Kansas Secretary of Commerce Secretary William Thornton. Projected average salaries and the number of newly created jobs rose, and the commitments of IMPACT funding were enhanced accordingly.

In April 2010, a Unified Government sales tax increase measure passed by a 70-to-30 margin, a somewhat surprising result in hard times. The increase will provide $8.25 million over its 10-year life to support infrastructure and services, with $2.25 million of that going toward paying off STAR bonds, by state law.

Whose Side Are You On?

In October 2009, the project process appeared to be further complicated by the sudden departure of David Kerr from his position as Kansas secretary of commerce to a post as director of the Missouri Dept. of Economic Development, when the ink was barely dry on Kansas‘ negotiated offer to the project development team.

“There was not a firestorm in our agency, but a lot of interest from media and Kansas legislators, saying that this was terrible, awful, that we’d lose the project,” says Kelly. “It really didn’t do much to what we were doing.”

Thornton was immediately thrust into the negotiations. He says his background as an attorney helped his comfort level as he dove into the process.

“One thing that Secetary Kerr said he would do is that he wouldn’t continue to work on this deal,” he says. “I imagine Missouri continued to work on it, but David didn’t. The other thing that made me feel good was the people in Commerce. A lot of negotiations had been worked on over a long period of time.”

Kicking, Not Screaming

“When you’re doing projects like this, the challenges are pretty intense,” says Kelly. “No matter where you are in the process, there are people saying, ‘this is crazy, you should never do this’ at the same time people are saying ‘this should be done at any cost.’ We were trying to get the deal done but at appropriate costs. It’s like walking a gauntlet, with people clubbing you from both sides. That’s just the way this business is. It’s a tribute to the parties involved that people were able to stick to it and keep moving the ball.”

Lane4’s Weaver spent a decade as event director for the University of Kansas Athletic Department, in addition to other work with athletic endeavors. So he knows a bit about the relatively undersold potential of the new development’s $30-million athletic field complex. He cites a study that projects some 2.5 million people will be coming to the new development for the athletic purposes, with two-thirds of those using the fields.

“Five years ago, there was a 200-field deficit” in the area for soccer and other field sports, he says. This goes at least a way toward shrinking that deficit, while also filling the coffers of the restaurants, shops and lodging establishments nearby. Weaver sees the new project as the culmination of the original 10-year plan for Village West.

“It called for office and for major entertainment use. There is also a casino going in on the speedway property. There’s a new waterpark. There are a lot of complementary uses now existing or under construction. It really does fortify what they have, and would seem to pave the way for a very solid future.”