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On the last day of 2009, the state of Missouri gave $19.6 million to developer Paul McKee.

It came in the form of tax credits, from a program never before used, to pay back some of the cost of the land McKee spent five years secretly buying in north St. Louis.

It was a good day for McKee, and for his hugely ambitious $8.1 billion NorthSide project.

It was also a good day for his bankers.

Because after McKee sold the tax credits for cash, he used the money not on NorthSide itself but to pay down his debt, mostly to the small Washington, Mo., bank that is his primary lender on the project.

Yet nearly half of the $19.6 million was reimbursement for interest and fees already paid to lenders. In a sense, the bank got some added protection and a quick payback.

This is exactly how the new tax credit program was intended to work, supporters say. The credits provided the backup a bank needed to see before accepting the risk of financing a long, complex process of assembling land in beleaguered north St. Louis neighborhoods.

"We’ve got to understand, these are high-risk loan areas," said Missouri Sen. John Griesheimer, who pushed the Distressed Areas Land Assemblage tax credit in the Capitol. "This is where bankers and developers don’t want to go."

But the way the program has worked so far speaks to the heart of a lawsuit against it to be heard this week in Cole County. The tax credits won’t create jobs, said attorney Irene Smith. They won’t build buildings or generate any other public good, at least not directly.

"You’re basically just incentivizing the collection of land," she said. "You’re not incentivizing any development."

When state lawmakers established the program in 2007, they designed it to encourage lending on a speculative project such as NorthSide, something risky that might take years to pan out. Indeed, many say it was written specifically for McKee.

Griesheimer, a Republican from Washington, Mo., chairs the Senate’s economic development committee and helped author the credit. Early on in that process, he said in a recent interview, the senator consulted with McKee and with L.B. Eckelkamp, a constituent of his and chief executive of McKee’s primary lender, the Bank of Washington.

They met, Griesheimer said, "to explain what they needed." And after talking with a few other experts, he inserted the tax credit program, worth $95 million, into a massive state economic development bill. It had the vocal support of Lt. Gov. Peter Kinder, St. Louis Mayor Francis Slay and St. Louis County Executive Charlie Dooley. And it passed.

The measure included a 100 percent reimbursement for money spent on interest and loan fees to buy at least 50 acres of land in low-income neighborhoods, and a 50 percent reimbursement for the cost of land itself. It was structured that way, Griesheimer said, to protect any banker willing to take a chance on a major project such as this. It was, he said, the only way NorthSide would happen.

"It was a very high-risk area," he said. "The banks and everybody wanted to make sure that they’re going to recoup at least some of their losses, some of their money."

Indeed, beyond a $27 million loan from the Bank of Washington, McKee has struggled to attract lenders, even with the support of the tax credits. He has pitched NorthSide to a number of local banks, but none has publicly committed to him.

The Bank of Washington’s money did not come cheap. Since 2005, McKee’s NorthSide Regeneration has paid at least $9.25 million in interest and fees on loans held by the bank, according to documents obtained from the Missouri Department of Economic Development under state open records laws. Another $529,000 in interest went to a small Illinois bank that’s now defunct. Now, every cent of that has been reimbursed by the state.

In a recent e-mail, McKee acknowledged that his interest costs were high. But so, he argued, was the risk.

"The loans were unique," McKee wrote. "They were the only loans made in decades for large-scale site development in north St. Louis that were not backed by government guarantees."

Once he sold the tax credits in January, McKee used the proceeds to pay a substantial portion of his debt. The bank "required a pay down," he wrote, and it makes sense for the project. Paying off debt will reduce interest payments — which were nearly $3.8 million last year — and free up cash for actual redevelopment.

But some say all this focus on protecting lenders reflects misplaced priorities.

"Half of the money is going to pay interest on loans," Smith said. "What public benefit do we gain from a tax credit being used to pay someone’s interest?"

That question will be up to a judge.

Smith said she planned to focus her case on the constitutionality of the tax credits, an issue, she says, that’s never been thoroughly vetted in court. It’s a fairly narrow legal question, Smith said, and she expects the trial, set for Wednesday, to be brief.

In the mean time, McKee continues to buy property in north St. Louis.

His tax credit application says he has spent $25.1 million on 98 acres across two square miles near downtown. It estimates another $66 million in land-buying costs to come. And there’s still about $75 million in the pot of money available through the Distressed Areas credit; McKee’s financial plans project his getting nearly all of it.

Even the program’s critics express little surprise in how it’s been used so far. In floor debate three years ago, Sen. Brad Lager, R-Savannah, raised questions about so much reimbursement for borrowing costs and whether the state should spend $95 million on this sort of project. But he lost that debate.

"And right, wrong, or indifferent, they’re using the credit exactly how it was written," Lager said recently. As for whether it will work, he said: "Only time will be the judge."

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