Financing

A Public Financing Solution

When representatives of regional developer Lane4, the Kansas City Wizards Major League soccer franchise, and medical information technology company Cerner Corp. walked into my office a year ago, they had a massive project in mind: A 4,000-employee office campus, an 18,000-seat state-of-the-art sports and entertainment stadium, and a national caliber youth sports tournament complex. It was a worthy project in need of a financing source and structure, but coming seven months after the collapse of Lehman Bros., the chances of its success seemed small.

Today, the stadium is under construction, the youth complex is in final design, and Cerner is poised to become the largest employer in Kansas City, Kan. The estimated annual economic impact of the project's operations is $500 million dollars.

How did we finance this $400 million project in the face of an economic meltdown? Obviously there is no bank debt or other traditional financing. There is a lot of private cash and a healthy dose of government assistance -- $85 million in state tax credits and cash incentives. And the delegation that descended on my office came up with the idea of building the project in a Kansas Sales Tax and Revenue, or STAR, bond district -- an area where state and local sales tax from large retailers like Nebraska Furniture Mart and Cabela’s was being used to pay bondholders who had purchased public debt in 2001. Those bonds were overperforming and were set to pay off much earlier than the state law required. The plan was to tap the power of that sales tax revenue stream and extend the life of those 2001 bonds to their original termination date. The $150 million in new bonds would provide part of the revenue necessary for the new project.

In addition, the creation of 4,000 healthcare technology jobs provides a significant reservoir of state income tax. The state of Kansas was willing to issue state IMPACT –- Investments in Major Projects and Comprehensive Training -- bonds on the anticipated amount of that income tax over time. These funds, amounting to almost $50 million, will help build the office complex.

These public tools were necessary gap fillers in the pro forma. More importantly, in a post-Lehman world, the tools also had to be creditworthy for a risk-averse bond market. We knew this from the outset and focused on state backing for the IMPACT bonds and a proven revenue stream in the case of the STAR bonds.

The political and legal complexities of this project were enormous. We approached the project with following three rules from which we never deviated.

1. Be open with the public officials. We made sure to get the law and facts agreed to with the governmental authorities as a starting point for negotiations.

2. Stick to your core principles but be willing to consider compromise on everything else. We had a public financing need and required strong credit to stand behind the revenue source that filled that need. All three components -- stadium, office, fields -- were essential to success. Everything else was negotiable.

3. Be willing to consider new deal making structures at every turn. It is truly a new world in real estate, finance, and government. This project would have died on day one in our conference room if anyone had been intimidated by breaking new ground.

Chase Simmons

Chase Simmons is a shareholder at the law firm of Polsinelli Shughart PC. Located in Kansas City, he advises clients on large-scale redevelopment projects and all manners of public financing. Contact him at csimmons@polsinelli.com.

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