2010-10-14 / Front Page

Hotel bond validation packs Superior Court Monday

By KIP BURKE, news editor

The Wilkes County Superior courtroom was standing room only for Monday’s hotel bond verification hearing. The Wilkes County Superior courtroom was standing room only for Monday’s hotel bond verification hearing. A series of Washington city employees, expert witnesses, and lawyers stood for a hotel revenue bond verification hearing before the bench of Superior Court Judge Harold A. Hinesley Monday, recounting the twoyear history of the proposal to build a hotel adjacent to the city’s underused convention facility.

The hearing began at 9:30 a.m. and lasted until 8:40 p.m. with a break for lunch for participants and the 200 citizens who packed the courtroom in the Wilkes County courthouse. The court bailiffs put out chairs to increase the seating, and at least 30 spectators stood the whole morning.

At the end of the hearing at 8:40 p.m., there were still more than 140 citizens present to hear Judge Hinesley announce that he would render a decision next week.

Witnesses from the city and from the opposing Concerned People of Washington (CPOW) testified throughout the day. In the city’s opening statement, Washington City Attorney Barry Fleming recounted the history of the Pope Center and the decisions that led up to building a hotel adjacent to the center. “The city must look for new pastures for economic development,” he said. “Tour buses do come here, but they can’t stay. One reason we can’t sell Washington as a tour destination is our lack of a hotel, and overnight visitors spend twice as much as day-trippers.”

Fleming quoted the feasibility study by Interim Hospitality Consultants that predicted a 65 percent occupancy of such a hotel. “Forty-five percent is the break-even point,” he said, “but if you count tax revenues, payroll taxes and other impacts, the city would break even at a 35 percent occupancy.”

Bond attorneys Douglas Selby and Matt Calvert went over the legal basis for the Washington Urban Redevelopment Authority to issue the revenue bonds that were under consideration at the hearing. Saying that what the city plans to do is a standard financing procedure for municipalities, Calvert described how the bonds would be issued, sold and repaid.

David Walbert, attorney for the intervenors CPOW, said that his group is all for economic development, but they have concerns with several aspects of the hotel deal, including the fundamental legality of paying off revenue bonds with money from the city’s general fund, and whether or not the debt is allowable under the state constitution.

Also at question, Walbert said, was the feasibility study, which was “flawed, flimsy, a lot of fluff.” The information for the study was drawn from hotels in Athens, Augusta, and other places, not Washington, he said. “The URA never got meaningful information on Washington in this feasibility study.”

Walbert also pointed out that the feasibility study was initiated by Raymond McClendon, who, Walbert said, had been convicted of securities fraud in 2000. “That should give us pause,” he said. “Why did the city retain someone like this?”

A final consideration is that the city apparently never looked at the consequences to the tax payers if the hotel deal goes bad. “Ad valorem taxes in the city are only $900,000 a year,” Walbert said. “Adding $600,000 to that burden would be catastrophic. Is it reasonable to take a chance on raising property taxes 60 to 70 percent?”

For the city, bond attorney Matt Calvert led City Administrator Mike Eskew through a history of the state of the Washington economy, tourism in the city, and upgrades to the Pope Center. Eskew recounted the talks with first Baymont Inns, then with Gourmet Hospitality and Country Inns, then the winning proposal from the Somata Group and LaQuinta. Eskew also described the feasibility study by Interim Hospitality Consultants in 2009 that concluded that market analysis supported the development of a hotel, and the appointment of the Urban Redevelopment Authority in the fall of 2009.

In his cross examination, Walbert asked Eskew a series of pointed questions about the projected occupancy percentages in the feasibility study. “Did you know that Washington hotels were left out of the study?” he asked. “Was the Chamber of Commerce or other Washington businesses consulted?”

Eskew replied in the negative to both questions, and admitted that he did not know how the hotel consultant had come up with the projected occupancy numbers.

To defend the study, Edward Xanders, president of Interim Hospitality Consultants, described how the feasibility study was conducted. After his company was hired for the study by Raymond McClendon, a representative of his company spent two days in Washington in May 2009 doing a site survey and looking at competitive sites.

During Walbert’s cross examination of Xanders, Xanders admitted that his representative had never asked any Washington hotel what their average occupancy percentages were, instead using four hotels along Interstate 20 to compare.

The company’s representative stayed at the Jameson Inn in Washington, and guessed that it averaged 50 percent occupancy rather than the 30-35 percent reported by the owner. He also revealed that the predicted 65 percent occupancy rate was based on the regional average of the four I-20 hotel chains, not any particular small-town hotel in Georgia.

“So the feasibility study on which this entire project depends contained no real data on local hotel occupancy,” Walbert said. “You talked to no one in the lodging business here.”

“No,” Xander said. “We determined that the hotel would be needed to spur economic growth, but we didn’t talk with anybody here except the Washington economic development office.”

Called by the city, real estate developer Andrew Ackerman of the Somata Group LLC said that his company “feels very good about Washington. It’s an underserved market with a lot of potential.”

Members of Washington’s Urban Redevelopment Authority were exacting in the questions they asked him, he said. “The URA was one of the most stringent groups to satisfy I’ve ever dealt with.” Because of that, the pro forma that he prepared used a more conservative 60 percent occupancy projection.

On cross examination, Bill deGolian established that Somata Group would be paid 6 to 8 percent of the $5 million construction cost, and that the company has no financial stake in the project. “No matter what happens, you get paid anyway.”

Ed Wall of Stern Agee described to the court the underwriting process for tax-exempt municipal bonds, the certification, the rating, and the selling of the bonds. After familiarizing himself with the project, Wall said, “I came to the conclusion that these figures were reasonable and sound, and that the project was financially feasible based on the feasibility study, the contract, and the intergovernmental agreement.”

On cross examination, Wall confirmed that if the city were not backing these bonds with the city’s general fund, they could not be sold.

Testifying for the COPW intervention, Michael Horgan, said, “These numbers don’t work. This is not feasible. Nobody I’ve talked to thinks these numbers can work.”

Master accountant Bruce Fitzgerald, after reviewing his career as an accountant for major companies involved in economic development, testified against the bond. After reviewing the proposal’s profit and loss predictions, he said, he saw that the margin of safety was “awfully thin” before the hotel was in danger, even based on 60 percent occupancy.

Fitzgerald said that he ran the numbers based on a 35 percent rate of occupancy, “a rate more in line with reality,” and found a $3.4 million loss over 10 years. “The city is on the hook for any deficit, and will transfer that to the taxpayers.”

In closing, Matt Calvert for the city said that the only issue in question was whether the bonds are sound, feasible, and reasonable, not whether the revenue will be sufficient or not. Barry Fleming reminded the court that several hotel companies still say the hotel is a good idea. “What is the plan to help Washington if not this?”

Closing for the CPOW, David Walbert pointed out the arbitrary nature of the feasibility study, “picking out four hotels with nothing to do with Washington, in a radically different location, and making no effort to get any data from Washington. It’s a conscious blindness to the truth.”

Both parties submitted orders that they wished Judge Hinesley to sign. The judge said that he would take them into advisement and would have a decision on the matter next week.

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