Cities are in the Real Estate Business

by Bill Crandall

Increasingly, cities are reshaping their communities and increasing their tax base by taking a more active role in causing real estate development where it did not previously occur. While there are many cities in America that have chosen to lead development, one need only look at each side of our state line for successful public/private partnerships. Kansas City, Kansas and Kansas City, Missouri each took a leadership position to develop projects in their respective communities that, in many respects, are competitive, but in all instances will have a long-lasting impact on the face of the entire community as measured by tax base and economic vitality. The following projects are national examples of success.

 

Village West: Kansas City, Kansas

In Kansas City, Kansas/Wyandotte County, the governing body purchased 400 acres of land, which was a real estate play. Leveraging STAR Bonds, they created more than two million square feet of retail and entertainment development, known as Village West. Including the Kansas Speedway, total investment is well over $800 million, of which 40 to 50 percent was funded using the robust TIF financing referred to as STAR Bonds. Village West will create more than $750 million in annual retail sales, which will result in the additional jobs, increased property tax and future sales tax in excess of $45 million annually that shore up the economics of this community.

 

KC Live: Kansas City, Missouri

Similarly, in Kansas City, Missouri, the city supported KC Live, a nine block urban redevelopment project that will result in an estimated 425,000 square feet of retail, entertainment, office and residential development. The city’s role in actively assembling the land necessary for the Sprint Center and in seeking qualified managers was a real estate play. Including the Sprint Center and the Kauffman Center for the Performing Arts and the Power Light District, total investment will exceed $2 billion.  

 

A True Partnership

The bottom line is that municipalities get into real estate development for different reasons than the traditional real estate development community. Developers are capitalists and primarily interested in a definitive return on their investment; their lenders and investors require it. While there may be a “feel good” component, if it does not cash flow, the project generally will not be a go.

On the other hand, municipalities are interested in the secondary and tertiary benefits of development, which come in the form of more sales resulting in increased sales tax, real estate and personal property taxes, more jobs and the overall stimulation of the economy.

But there is a delicate balance between elected officials and the private real estate development community. Indeed, this is a true partnership, so both parties must perform. Developers must trust that if they commit hundreds of thousands of dollars in predevelopment expenses, the municipalities will have the courage to make the tough decisions for the long term betterment of their community. Translated, this means that when one or two citizens present the negative impact this development may have on their individual case, the cities must have the courage to stand by the developer and keep the greater good in mind.

Similarly, if a city partners with a developer by providing substantial public incentives or use of eminent domain, the developer must perform within the expected time lines and at the same quality level outlined in the initial proposal. This relationship is a journey and the best advice is taken from Ronald Reagan’s play book: “Trust, but verify.”

In addition, such complex real estate developments take time. Although rare, the city and development communities may be able to create a market. But in general, the market must be ready to receive a development project, which simply takes time. A typical development cycle can take between three and six years, which is longer than most elected officials are in office.

Taking a few more years to do it right is a small price to pay for the economic diversity and stability created by a successful development.

Bill Crandall is president of Crandall + Company. He can be reached by phone at 913.660.9445 or by email at bill.crandall@crandallcos.com.