Lancaster First, Lancaster PA

Lancaster, Pennsylvania

Convention Center Bonds May Be Taxable
Investors Face Potentially Costly Surprise

The following letter was received by the IRS in mid-January 2007

January 12, 2007

Steven Chamberlin, Director
IRS
Tax Exempt Government Entities
SE:T:GE:TE3:CMP:O
Room 5P7
1111 Constitution Avenue N.W.
Washington DC 20224

Re: Lancaster County Convention Center Project

Dear Mr. Chamberlin:

The Lancaster County Convention Center Authority ("LCCCA") has been struggling for seven years to secure financing for construction of a convention center which includes a hotel. Members of the Lancaster community have been in contact with your predecessors concerning this project and raising their serious concerns about it from a tax perspective. If the information already provided to your predecessors is not available to you, I would be happy to provide any previously communicated information to you. Further, if you need any additional information, please let me know.

By way of background, the LCCCA seeks to construct a publicly owned convention center and hotel which will be privately owned but which will share space, expenses and management without appropriate remuneration from the hotel owner, Penn Square Partners ("PSP"). The latest financing plan for the project includes the ownership of the property by the Redevelopment Authority of the City of Lancaster ("RACL"); added State funds; and a condominium regime, all of which are purported to cover millions of dollars of a funding gap. The LCCCA and PSP remain partners in the project. Each of these participants is promised the opportunity to profit from one or more elements of the project, including the lease purchase arrangement between the RACL and PSP under which a portion of the payments from PSP are equity and, at the end of the 20-year lease, PSP will own the building upon payment of $2 million.

As a cornerstone of this financing project is the issuance of tax-exempt bonds by the LCCCA.

I believe that there are obvious problems with the tax-exempt financing under the current project development plan:

The property on which the project is to be located was sold by PSP to the RACL. Portions of the project which are to be used as part of the Convention Center are to be leased back or made available to PSP for either no cost or on a bargain use basis (including the banquet, kitchen and meeting room facilities; corridors, elevators, offices, etc., per Mr. Hixson, the LCCCA Executive Director who stated that this "is all shared space as we consider this is one big project...").

The common management and control of the hotel and the Convention Center with a sharing of costs which does not reflect the hotel's de facto ownership (for tax purposes) and use of significant portions of the Convention Center.

The hotel's operating costs will, in part, be defrayed by "sweetheart deals" for the use of the Convention Center's kitchens, banquet facilities, offices, lobby, etc., thereby conferring the benefits of the proposed tax-exempt financing on still other "partners" of the project in addition to PSP.

The Convention Center Authority described the project as representing "the integration of a Hotel and Convention Center into a single complex." That statement was made in 2004 and since then, the structure of the project has increased that interrelationship, so that the Convention Center and hotel are a single public-private project.

Based on this and the advice of consultants, among what appear to be several violations of tax laws, this project fails the test of tax-exempt under the anti-abuse Regulations.

I believe that the LCCCA, if it has not already done so, will be seeking tax-exempt status for its bonds to be issued to finance this project. I urge you to be proactive and investigate the project. I am sure that you will come to this same conclusion.

After you have had the opportunity to consider this letter, I would appreciate a response.

Very truly yours,

April M. Koppenhaver

updated January 27, 2007 at 2:00 PM

For feedback about this site, please contact our webmaster at: news@LancasterFirst.org

For ideas about Lancaster First, please contact us at: Idea@LancasterFirst.org