Strata Office Tower Financing Plan Endorsed by Council Committee

By Kevin Collison

A plan for 25-story downtown office tower that is seeking significant public incentive help, including a $27 million city investment, won unanimous backing from a Kansas City Council Committee Wednesday.

The $132 million Strata development is proposed for the southwest corner of 13th and Main in the KC Power & Light District atop a current retail building.

The goal of the speculative Strata project is to more quickly provide quality office space for companies wanting to locate or expand in downtown Kansas City.

Last year, Starbucks decided not to locate a large employee operation in downtown partly because of the lack of readily available high quality office space.

The project site originally was reserved in a 2004 development agreement for an anticipated second office tower for H&R Block.

Instead, Block is teaming up with Copaken Brooks and Jury & Associates as a development entity called Power Tower to build the 250,000 square-foot premium office building and a 780-space garage.

The downtown office vacancy rate is currently 7.7 percent, its lowest in 20 years, according to the Downtown Council, and it’s been almost 30 years since the last multi-tenant tower was built there.

“In order to remain a vibrant and balanced downtown, we must reinvigorate the office market downtown to ensure we continue as a major employment center,” Bill Dietrich, president of the Downtown Council, told the Council Finance Committee members.

The Strata project is planned for the block between Main and Baltimore, from 13th to 14th streets immediately west of the H&R Blocks headquarters. It would be built above the existing retail building. (Image from Google Maps)

The Strata office plan was first introduced to the city in December and won preliminary support from the Council. Over the past six months, the deal has been refined to reduce the city’s financial risk.

The financing plan calls for the seven-level garage to be financed using revenues generated from parking revenues and a state program called the Advanced Industrial Manufacturing (AIM) Zone.

Port KC would be the administrator for the AIM program funding and would own the garage making it tax exempt. AIM allows half of the state employee withholding taxes generated by employees in the new project to help finance its cost.

The office building could accommodate up to 1,100 employees.

The city would use the parking revenues generated by the garage to pay for its share of the cost and would be guaranteed the first $75 for each space per month. City Manager Troy Schulte said that guarantee mitigates the city’s risk in backing the garage bond.

The garage deal also is far less costly than the city’s commitment in the original H&R Block office deal. That earlier deal called for 1,330 parking spaces for the potential tower, an $85 million obligation as opposed to the $63 million in the Strata plan.

As for the office tower, the city is committed to funding 28 percent of that project, an estimated $27 million. It would be repaid over 20 years by an arrangement where the city would share in the building’s rent revenues.

The developer is estimating the project would generate $38- to $39 per square foot in rents.

The Corrigan Station redevelopment at 19th and Walnut is achieving some of the highest downtown rents, a three-story addition in the foreground is opening soon. (Image from Helix Architecture + Design)

The current downtown Class A office rent averages about $22 per square foot, although the relatively new Corrigan Station office project has been obtaining rents in the $25- to $30 per square foot range, according to its developer.

If it wins the necessary city approval, construction would begin Fall 2019 with completion in Fall 2021. The existing retailers would continue operating throughout construction, according to the developer.

Schulte said the city has calculated it would break even on its investment if rents in the new Strata tower were $32 per square foot.

The project also is in a tax-increment financing district and 50 percent of its city economic activity taxes (EATs) such as earnings, sales and utility taxes will be returned to assist its financing.

Shannon Jaax, director of planning and real estate services for the KC Public School District, asked the committee to delay its vote to allow more time to negotiate what are called payments in lieu of taxes (PILOTs) from the developer.

The Finance Committee voted to recommend the full Council approve the Strata financing plan, but delayed its introduction to the Council for two weeks to allow more time to pursue a PILOT agreement.

The proposed Strata project also picked up some unusual support from the Kansas City Area Development Council, the region’s umbrella development organization.

The KCADA, which was instrumental recently in helping the region land two premier facilities being relocated by the U.S. Department of Agriculture from Washington, rarely takes a position on a city development matter.

“While we’ve seen growing demand for corporate office projects needing large, contiguous Class A office space in the KC region, with a lot of interest in the KC CBD (central business district), the supply doesn’t meet the growing demand,” Tim Cowden, KCADC president and CEO, said in a statement.

“KCADC supports the Strata development along with any other Class A office construction in the region, speculative or otherwise.”