Riverfront boutique hotel development raises questions about Kansas City tax incentives
Port KC has approved the Origin Hotel with an exemption of roughly 62% of its total property tax over 20 years. Kansas City Public Schools called it an “inappropriate ask.”
With help from controversial tax exemptions, a new boutique hotel is coming to Kansas City’s Berkley Riverfront.
The Port Authority of Kansas City (Port KC) voted in late July to issue bonds for the Origin Hotel. It will be constructed across the street from the Union Apartments and will offer 118 hotel rooms as well as a full-service restaurant, a bike library and a fitness center. Port KC estimates it will bring at least 70 jobs to the neighborhood to staff the hotel and restaurant.
The project’s developer, The Thrash Group, is receiving a total of $6.8 million in tax exemptions over 20 years. Port KC has exempted the hotel from 75% of its property taxes for the first 10 years and 50% for the second 10 years.
Some public entities, including Kansas City Public Schools and the Community Mental Health Fund, have voiced frustration with the tax exemptions. They believe that Kansas City gives developers larger tax incentives than necessary, at the expense of taxing jurisdictions that depend on property tax revenue.
Origin Hotel will bring mixed-use development to the riverfront
Up until this point, development at the Berkley Riverfront has been primarily residential. The two major developments are the completed Union apartment complex and the Core apartment complex, which is still being constructed.
Port KC CEO Jon Stephens said the agency has prioritized bringing a mixed-use development into the neighborhood.
“While [housing is] wonderful, and you always want to have places where citizens live … you have to have more than that if you’re going to really build community,” he said. “We know that to really be successful, we need those jobs and we need people spending money down there. So this is that next step.”
The Thrash Group is a Mississippi-based developer that has built hotels in Austin, Texas; Lexington, Kentucky; Raleigh, North Carolina, and two in the Denver area.
Although Port KC leaders have said they’ve had difficulty recruiting developers for a riverfront hotel project, Stephens said The Thrash Group meets important benchmarks.
“They have stated, and we will be holding them to it, that a large percentage of the construction and operations will be prevailing wage” and union, he said. “All public improvements for this project will be 100% prevailing wage.”
Stephens also noted that the project does not contain a parking structure, which has been tough to negotiate with some other developers. The project has surface parking for 50 vehicles.
“We know that’s usually one of the most expensive components of projects and one where people are rightfully critical and say, ‘Why should the public pay for all of this parking?’” Stephens said.
Local taxing jurisdictions have concerns about tax exemptions for a boutique hotel
Tax exemptions in Kansas City have long been contentious, and some government agencies are displeased with the use of this tool for a luxury project that they do not believe offers public benefit.
“While the school district does not oppose every incentive ask, we do have serious concerns about a quarter-century of abatement for a hotel project,” Kathleen Pointer, senior policy strategist at Kansas City Public Schools, said at a Port KC development committee meeting in May. “It’s an inappropriate use of potential public funds, especially in the current market.”
Port KC’s primary tool for incentivizing projects is tax abatement, which reduces the amount of property tax that developers are required to pay.
Its rationale is that the undeveloped land that Port KC owns is empty and not producing any property tax revenue, so any property tax revenue from a new development is a net positive, with or without abatement.
But taxing jurisdictions question the degree to which Port KC needs to incentivize its projects, if at all.
A large portion of property tax revenue funds the school district, and KC Public Schools has not been shy about its view on tax incentives.
The school district has a web page devoted to the impact of tax abatement on its revenue. In 2021, the district lost $37 million due to tax abatement. In the 2018–2019 fiscal year, tax abatement losses amounted to $1,069 per student. By comparison, this number was $379 per student in North Kansas City and $95 per student in Raytown.
The Community Mental Health Fund, which supports agencies that provide mental health services, is another taxing jurisdiction whose revenue is affected by property tax abatement. Its executive director, Bruce Eddy, is less than enthusiastic about the Origin Hotel.
“We give it a ‘meh,’” Eddy said. He said Port KC hasn’t demonstrated that there is a market for a boutique hotel at the riverfront, or hired a third-party analyst to critique the project.
Concerns about how Kansas City uses tax exemptions
Nathan Jensen, a political science professor at the University of Texas in Austin, has studied the use of tax incentives in Kansas City — particularly how they have been used to move economic development back and forth across the state line.
“There’s a lot of criticism of the overuse of economic development incentives,” Jensen said. “Most scholars have identified that they’re overused in the sense that often they’re given to companies that don’t need it, or they’re excessively generous.”
Support for tax abatement often relies on a “but for” argument: The idea is that “but for” incentives, a development might not occur. Jensen questions whether this argument holds water, especially when the incentivized development is a retail project, such as a hotel.
“There’s been a movement over the last 20 years to not incentivize retail,” he said. “The idea is that it just displaces other retail.”
Although a project like the Origin Hotel advertises about 70 new jobs, Jensen said these jobs will likely be displaced from another hotel or restaurant in a different part of Kansas City.
“If it’s not generating a lot of jobs — or if it’s generating jobs, but probably displacing jobs — the only real value is the tax benefit, that you get to tax this hotel,” Jensen said. “But often, that’s exactly what the governments give up.”
KC taxing jurisdictions ask for transparency and independent analysis
After a developer presents its financial analysis for a project, Port KC works with the developer to see what kind of tax incentive would make the project suitable for bank financing, Stephens said.
While some development agencies in Kansas City obtain independent studies of a project’s financial viability, Port KC relies on its own financial analysis. Stephens said the Port KC staff has financial expertise and uses third-party data in its analyses. He questions whether a third-party analyst would have the expertise necessary for the variety of projects that Port KC handles.
“I am absolutely not opposed to third-party analysis,” Stephens said. “We show our work. We show all the data, we show where it changed, where it was headed, which is exactly what the other parties do. But we are exploring if we could use an auditor.”
Port KC’s reliance on internal expertise has become a point of contention for tax incentive skeptics.
“Jon’s lovely, but ultimately it’s a secret sauce, and it’s very disturbing,” said Eddy, from the Community Mental Health Fund. “When you’re doing public investments, then I don’t understand how anybody can allow that to happen, other than the fact that the environment is ultimately developer-driven.”
This story was originally published in the Kansas City Beacon.