Granite Falls Hurdles CDA
PRINCE EDWARD – Granite Falls CDA members (consisting of the eight board of supervisors representatives) met in March and-following a lengthy report on the progress of the Granite Falls Hotel and Conference Center project as well as financial information planned just south of Farmville-gave their approval on the first of three votes for the project.
The CDA recommended, and county supervisors later approved, a resolution of support for the project.
“I'm happy to report to you that after about 14 or 15 months of scouring the countryside looking for a hotel lender, we have a bank who is willing to make the loans for the Granite Falls project,” Robert “Bob” Fowler, of Prince Edward Development, reported.
He reported that it is a bank headquartered in Pennsylvania that will be doing the loan.
“So, given that, we are now in a position to proceed and get some approvals for the final piece of the financing, which would be the TIF (tax increment financing) bonds…that would be issued by the CDA,” Fowler said. “So, in addition to finally nailing down the bank for the loan, the other thing we've done is we've begun working on developing the daycare component of this project.”
That, he cited, would provide service to the hotel employees, guests and students at the training center as well as the general public. Specifically, he reported, they have been talking with a local organization about joint venturing. He offered that they're looking at a facility that would house about 86 children, serving the gamut from infant to after-school programs, reserving about 20-24 of the slots for hotel usage.
It would a separate on-site facility, costing about $1 million (generated through additional equity put up by the owners) and adds about 15 employees, or probably 10 full-time equivalent, to the project, according to Fowler. Collectively, the project is expected to have about 140-150 employees-about 115 full-time equivalents.
“…At the conclusion of these presentations, you're gonna be asked to give a preliminary approval of this plan and that vote, if it's a positive vote, will be the first of three votes that you'll ultimately take to approve this project,” Fowler told the CDA. “And only at the conclusion of the third vote will… finally be committed to issuing the bonds.”
Supervisors, he would also note, would have to take the same three votes. The second will come just prior to when the bonds go out to the public to be marketed, and the third when the bonds are sold for approval of the final purchase agreement.
All are expected to come over the next 120 days.
Specifically, as part of the resolution approved and recommended, the preliminary financing package for the project includes issuing of approximately $17 million of CDA bonds by the CDA with proceeds used to finance construction of infrastructure related to the project including 35,000 square feet of the proposed conference center and related project and site infrastructure costs.
The hotel component is separate.
“…If you do approve the preliminary plan today, this will trigger three months of intense work by all the members of the financing team finalizing all the components of the financing,” Fowler said. “The latest count is we have six different law firms involved in this financing as each component, each party has counsel.”
There are a lot of different rules and requirements that they need to mesh together, he also cited.
It was explained that the bonds are not the liability or debt of the county; they are the debt of the district. It was also cited that there are 21 CDAs in Virginia that have issued CDA bonds. John Markowitz, of bond underwriters Stone and Youngberg, noted that his firm is the largest distributor of “these bonds in the country” and that were his firm's bankers have been involved in the underwriting, none have experienced any payment defaults.
Fowler noted, one of the “reasons Stone and Youngberg's deals haven't defaulted is the pain that this structure inflicts on the owners of the property is so severe…”
Still, there was much discussion on the what if.
“…If any given year the taxes from the project that the County pledges are not enough for debt service then there's…an assessment lien on his property. So if the personal property, the real estate taxes, the food and beverage taxes, if they're not enough in a given year, then there's actually an assessment made on Bob and he has to pay the shortfall. So, again, it's not the county giving its general obligation to this project. It's saying, you developer, you go out and you do this project and if you're not successful, you're gonna lose your project. That's why they're so popular,” Markowitz outlined of CDA structure.
Specifically, as proposed, bonds would be issued and in any given year, taxes (as they apply to properties in the CDA district that essentially includes the hotel, conference center and training center project) agreed upon in an economic development agreement go to pay the bonds.
If for some reason the taxes were not enough, the assessment was levied and Fowler and the owners did not pay it, Markowitz explained, the debt service reserve fund would be drawn upon.
“And because it's a tough economy and we have a single project here, to sell these bonds, we would need a moral obligation from the county to say within a given year…tax revenues are down, something happened that we couldn't foresee, there was a war with Iran or something like that and the County would agree to replenish the debt service reserve fund and then would get…reimbursed the next year from taxes paid for the project,” he said.
It's an additional security mechanism, he outlined.
The risk, he would also note, is “all being transferred to Bob.”
Supervisor Jim Wilck asked about the County's obligation in a worst-case scenario, what it would be for a given year, Markowitz said. (It is never to be more than the reserve fund, which is set at 10 percent of the amount of bonds. So, if the bonds total 17 million, ten percent translates into $1.7 million. Bartlett clarified it's the amount of the annual debt. Newly elected CDA Chairman Robert “Bobby” Jones also pointed out, the only way the County could be liable for $1.7 million is if they did no business at the hotel.)
“After that, if the project wasn't going well, the project would be foreclosed upon and there'd be a tax sale, so there'd be no liability past that…The project would be now in the hands of bond holders. But the County would be reimbursed for that year because there would be a tax sale and the County would get repaid for that,” Markowitz said.
Fowler would also detail that for about the first four or five years the annual debt service is about $900,000 with the bonds paid semi-annually. If they fail to pay it, then the draw would occur on the debt service reserve fund.
A tax lien is put on the hotel at the closing of the bond issue for the full term of the bond issue and Fowler noted that the tax lien takes superior position to any other lien on the hotel.
“So the hotel itself has about $16 million worth of debt,” Fowler said. “So my bank lender…is sitting there with, right now he has a first lien on the hotel property as long as that tax lien isn't filed and actually becomes effective. The moment we fail to make that payment…he becomes junior and he's suddenly lost a $30 million hotel as collateral for his loan. And…it's been our experience, and from situations that have been related on other projects that have run into difficulty, is that in many instances the hotel lender or the property owner lender thought he had a first mortgage and thought he had collateral will step up and they'll pay the assessment in order not to lose the property as collateral for their loan.”
In addition, Fowler detailed, “between the new market equity and the hotel owner's equity, they'll have a total of $21 million of equity in this deal. They get completely wiped out if this goes to tax sale.”
He noted, “…We were hoping market conditions were such that we wouldn't have to ask you for this. That…hasn't been the case. The market's improving, but it's not improved that much. So what we've worked towards is to try to minimize the risk that we're asking the County to take.”
The bonds would have a provision, Fowler said, that once the bond issue can be rated on its own without the county's pledge, there would be “an automatic burn off” of that pledge. Typically, he cited, a rating agency will require three to five years of operating history before they'll rate a revenue project on their own.
Fowler detailed that if they open in 2014 and all they do is the bottom of the ranges of another hotel he cited-have 70 percent occupancy at $100 per night-that “everything gets paid. There are no shortages. There are no shortfalls. There's sufficient money to pay all the hotel staff. There's sufficient revenues generated under this TIFF program to pay off the bonds…We actually have…a little bit of cushion. Now, the hotel owners don't make much profit under that scenario, but at least all the debt and the obligations are paid.”
Still, they are looking at opening with a higher average room rate.
Fowler detailed revenues (including special assessments in the district) available to pay the debt service on the bonds, but also noted that there would be a separate road tax levied on the hotel to reimburse the County on the $1.5 million the County borrowed to cover the local share of Granite Falls Boulevard.
CDA members, in addition to electing Jones as their new chairman, also selected Don Gantt vice chairman.