|
Payback
Despite owing $20 million to the city, 20 years of sales tax benefits from Charleston Place outweigh non-repayment of loan, mayor says
By Dan McCue
Staff Writer
Twenty years ago, it was a controversial proposal championed by a mayor whose record of accomplishment was growing, but whose national reputation as an enlightened urban planner was still very much ahead of him.
Today, no one would dismiss the notion that when the Charleston Place hotel opened its doors on Sept. 2, 1986, it touched off a downtown commercial development boom that continues unabated to this day.
Vicky Legg, spokeswoman for the hotel’s Britain-based management company, Orient-Express Hotels, estimated that it has made $260.6 million in local purchases in the years since Charleston Place opened.
Orient-Express also maintains the hotel has been a financial windfall for the city and state, reporting that from 1986 through 2005, Charleston Place has paid $82.7 million in sales, use and hospitality taxes; $1.7 million in business and liquor licenses; $16.3 million in property taxes; and $10.3 million in utilities.
In spite of these numbers, the Charleston Place Hotel has yet to do the one thing most people looking at those numbers and its constant flow of well-heeled visitors would expect.
In 20 years time, the hotel has reportedly never made a net profit, and as a result, it’s never paid back a cent of the $10 million city loan that seeded its beginnings. As a result of the deferred payments and interest, that outstanding debt has now ballooned to $20.5 million.
Deal’s vision to revive blighted area
The saga of the financing deal that begot Charleston Place hotel started in 1977, when Mayor Joseph P. Riley Jr., having been in office just two years, began a full-court press to develop a hotel and convention center between Meeting, Market, King and Hassell streets.
The $40 million proposal immediately ignited opposition from preservationists and neighborhood groups who complained the planned development was too large and too modern and would destroy the historic nature of the city’s then-struggling downtown.
Despite the opposition, the Charleston City Council spent nearly $12,500 on a feasibility study, which in turn prompted a series of lawsuits against the plan. Although the city ultimately prevailed in those lawsuits, the projected cost of the proposal began to skyrocket, and its first developer, Ted Gould, had to step aside after his company failed to receive its construction loan.
These events led to three important developments. First, the project was significantly downsized. Gone was the convention center, and the hotel would contain 450 rooms.
The next development was that the city would hire Baltimore developers The Cordish Co. to bring the project to fruition with significant financial assistance from Alfred Taubman, the industrialist and philanthropist who made his fortune developing shopping malls. The new team provided the experience and leverage to bring significant new retailers into the project, Riley said.
Those changes opened the door for the most important development in the formation of what would become Charleston Place.
In mid-1984, the city obtained a $10 million Urban Development Action Grant from the U.S. Department of Housing and Urban Development and loaned the money to the project.
Action grants, instituted by the Carter administration, are available to cities and urban counties that are experiencing severe economic distress, with the goal of enabling development activity that will lead to economic revitalization, curb blight and create jobs.
According to both Riley and Orient-Express, which did not get involved with Charleston Place hotel until several years later, the original loan agreement stipulated that no payments would be due until the first year its owners declared a positive net cash flow.
These individuals said the document defined “net cash flow” as operating revenue minus debt service, real estate taxes and “reasonable operating expenses” that would be allowable as federal income tax deductions.
In early 1991, the loan agreement was revised to allow the developers to reserve money for future operating expenses, capital expenses and debt repayments and exclude this money from the net income calculation.
The revised agreement also said that any revenue generated by a sale of the hotel or a syndication of partnership interests would be excluded from net cash flow calculations. Prior to the revision, the loan agreement defined “developer investment” as money put into the project prior to the issuance of the hotel’s certificate of occupancy in 1986.
Both the original loan and the revised document stipulate that the loan and its accrued interest must be repaid in 2028.
In 1995, the developers sold a 20% ownership stake in the hotel to Orient-Express, which now holds an option to become the majority owner in 2020.
As part of the deal, Orient-Express has paid management fees and interest on developer loans, both of which are deducted from the net income side of the hotel’s ledger.
Loan triggered lender involvement
While the deal would appear to be highly favorable to the developers, Orient-Express’ Legg said it reflects the tattered state of Charleston’s tourism at the time the decisions were made.
“Prior to the development of the Charleston Place hotel, the site was an empty lot, and there was a limited tourism industry,” she said. “As a result, prior to making the grant money and its long-term repayment structure available, the city was unable to attract a developer or hotel company (to the project).”
Riley offered a similar assessment.
“What you have to remember is that at the time we were talking about this, inner cities across the nation were quite distressed, and Charleston was no exception,” he said. “Frankly, the (downtown) area was on the skids, in desperate condition both economically and otherwise.”
It was those very conditions that torpedoed Gould’s efforts to secure a construction loan, Riley said.
“Given the realities of the area, the lender, Chemical Bank, decided that the plan just didn’t make economic sense,” Riley said. “It was a risky deal. So our task, as we brought in Cordish and Taubman, was to find a way to reduce the lender’s exposure, and that’s where the HUD loan came in, because it was specifically intended to fund projects that otherwise could not happen.”
The terms of the loan were developed by HUD. The reason the repayment plan was structured that way was to ensure the project would never be at risk due to loan requirements, Riley said.
“In essence, it was recognized that at some point the developers would have to put more money in or borrow from their personal funds to keep the project going, and this simply ensures that (the developers’) money gets paid back before the loan,” he explained.
Riley also said there are two things critical to remember about the loan: It wasn’t drawn from existing municipal funds, and while the money would initially come from the federal coffers, it eventually would be repaid to the city.
Repaid before 2028?
Nearly 10 years ago, on the heels of Orient-Express entering the picture, the Charleston Citywide Local Development Corp., which manages the loan, hired the accounting firm of Biddlecomb, Game and Wise to audit the records of the hotel to determine whether it was making a net profit.
Prior to that development, the city had simply relied on audited records provided by the hotel to determine if it was meeting loan conditions.
The report found the hotel was in fact living up to the terms of the loan.
The hotel’s failure to show a profit then was completely in line with the hotel industry, Legg said.
“Like all major hotel developments, the Charleston Place hotel experienced an operating loss as it took time to build awareness, set up the necessary infrastructure and increase the number of leisure and group visitors,” she said.
Legg describes the city’s investment in Charleston Place as an unqualified success. Since its opening, she said, the number of visitors to Charleston has more than doubled, from 2 million visitors per year in 1986 to 4.7 million in 2004.
While the hotel has yet to turn a net profit, it is operating as a “successful long-term business,” Legg said.
“Per the repayment agreement for the grant, revenues from the hotel are first used to cover all operating costs, partnership financial expenses, amounts paid to banks and capital investments,” she said.
Since Orient-Express acquired an interest in the property in 1995, it has invested more than $30 million in the hotel, she said, and collects about $10 million in management fees from it annually.
“In addition, the Charleston Place Hotel has created over 500 jobs and pays out nearly $16 million in wages every year,” Legg said.
Riley said he wasn’t surprised the hotel continues to report that it hasn’t posted net profit since the decade-old city audit.
“Bear in mind,” he said, “the definition of net profit contained in the contract takes into account that the success and value of this project to the community is directly related to the developers’ willingness and ability to risk their own capitol to achieve a level of quality Charleston deserved.
“With real estate ventures, the thing that you’re constantly doing is building equity, and equity is being built here. Obviously, the Charleston Place Hotel is doing extremely well, it’s exceedingly well-managed, and when the loan is repaid, the amount will greatly exceed the original loan. It’s a boon to our community and, really, a boon to the entire region.”
Mayor would do it all again
Riley also addressed an issue that has long bubbled beneath the surface: whether the non-repayment of the loan to date has impacted the activities of the Charleston Citywide Local Development Corp., a nonprofit, city-affiliated agency that makes loans to businesses to foster economic development, eliminate blight and preserve Charleston’s identity.
“No, I don’t believe it has at all,” he said. “And when you look at how wonderfully the interest is accruing, you can see that, at some point in time, the local development corporation will get a huge infusion of funds.
“At the same time, don’t lose sight of the fact that the purpose of the Charleston Place hotel project was to spur economic development, and what’s happened in terms of the revitalization of King Street is well beyond what anybody could have imagined. Remember, before the Charleston Place hotel, a national retailer hadn’t invested in that area in a generation. In fact, I’d suggest that no retailer had invested in that area for a generation.”
Asked whether he’d do it all again, Riley was succinct.
“Absolutely,” he said. “Without the Charleston Place hotel, the city of Charleston would be a very different place.”
Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.
|
E-Mail This Article
Printer-Friendly Version