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Legal Brief Reveals Details of Complex Project Financing

In preparation for the hearings in the lawsuit brought by the Lancaster County Convention Center Authority, the Penn Square Partners, and the Redevelopment Authority of the City of Lancaster against the Lancaster County Commissioners, special counsel Howard Kelin wrote a brief outlining the facts in this case. This legal brief explains in some detail the complex financing that has been planned for this project.

Here are some of the issues regarding the project financing, as reported by Howard Kelin in his legal brief, along with information taken from City Council resolutions and reports in the media:

  • In early 2005, Lancaster City Council approved a partial guarantee for a $24 million construction bond for the hotel project. This construction bond is to be paid for by "lease" payments from the PSP to the RACL. "Administration Bill No. 12 - 2005" clearly states that the agreement would be "with the Authority and a bank, trust company, or bank and trust company". Howard Kelin's brief clearly states that "the RACL announced in the spring of 2005 that it would obtain a letter of credit from a 'consortium of local banks' that would cover debt service on the $24 million bonds in the event Penn Square Partners fails to complete its obligation." However, this "consortium of local banks" never materialized. Instead, the PSP and RACL now plan "to have an insurance company provide a $24 million mortgage on the Marriott Hotel". No potential sources for this $24 million mortgage have been mentioned.

    The catch is, according to Howard Kelin's legal brief, "Nothing in the City's $24 million guarantee protects RACL in the event Penn Square Partners is unable to fulfill its duty to pay rent covering debt service on the $24 million bonds over 20 years. RACL is not authorized to levy taxes." In other words, since RACL would hold title to the hotel building, the RACL - NOT the PSP - would be ultimately responsible for any shortfall in lease payments from the PSP. This could result in the RACL, a government agency, being forced into involuntary bankruptcy. Ultimately, the taxpayers would be stuck with the bill. Patrick Hopkins, Lancaster City's Director of Administrative Services, has stated repeatedly that this places no risk to the City, because the City would then own the hotel building. This means Lancaster City taxpayers would be stuck paying over $2 million a year in payments for the $24 million mortgage, until and unless the City could sell the hotel building for more than the remaining balance owed on the mortgage and construction bonds. Does anyone actually foresee a demand for a hotel building that went bankrupt IN SPITE OF massive government subsidies?

  • At the same time Lancaster City Council approved the partial $24 million guarantee, it also approved a guarantee for a $12 million construction bond for the proposed hotel, to be backed by $1.1 million in Act 23 "Tax Increment Financing" grants. The "TIF" economic development grants are designed to return sales tax and State income tax revenue generated by the operation of a facility, to help pay for the construction costs of that facility. The terms of Act 23 required that such a facility be owned by a government agency, which is why the Watt & Shand building was transferred from the PSP to the RACL.

    The initial estimates by the State indicated that $1.1 million a year in sales and State income tax should be generated by this project, therefore this would be the amount granted by the State to subsidize its construction bonds. However, in early 2006, the State Department of Community and Economic Development reduced their estimated revenue from the project to $1 million a year. To make up the difference, the RACL asked for and received a private bond issuer's opinion that the construction bonds would be tax-free, because a government agency (the RACL) would own the hotel building. RACL asked City Council to change the City guarantee to $14 million at $1 million a year, because of the anticipated lower interest rate; however, the proposed resolution was tabled indefinitely by City Council because of the other questions surrounding the financing of the project.

    The catch is, the TIF grants are reviewed every three years. If the State tax revenue would fall below $1 million a year, the TIF grants would be reduced accordingly. The difference between the TIF grants and the bond payments would be made up by Lancaster City taxpayers. These TIF grants are now in jeopardy because of the recent lawsuit by the County Commissioners against the DCED, as well as a lawsuit initiated by Horst Hotels and Ephrata Motel Partners against the "Hotel Tax".

  • Howard Kelin's legal brief spells out in detail the sad saga of the $40 million bank loan that was made in late 2003. At that time, County Commissioners Paul Thibault and Ron Ford had been both defeated in their bids for re-election. To guarantee that future County Commissioners would be forced to proceed with the proposed convention center project, they passed a County guarantee for bonds sold by the LCCCA. To secure that guarantee, and for NO OTHER REASON, the County Commissioners authorized the borrowing of $40 million from Citizens Bank (County Commissioner Pete Shaub voted AGAINST these actions). The terms of the County guarantee are such that the $40 million bank loan must be converted to tax-free bonds before construction can begin. This bank loan cost $423,674 for legal fees, and the difference between the interest collected on the money deposited in Citizens Bank and the interest cost of the loan from Citizens Bank is over $230,000 a year.

    However, the terms of the "Guaranty Agreement" between the County and the LCCCA do NOT correspond to the terms of the County's guarantee. This calls into question the validity of that guarantee.

    Unfortunately, what has been outlined here is only the tip of the iceberg. There have been NO solutions discussed regarding the very real possibility of what would happen if convention center losses are greater than currently anticipated by the RACL. Nor does this short article discuss many other issues that are mentioned in Howard Kelin's legal brief; please read it for more information.

    CLICK HERE to read Howard Kelin's legal brief.

    updated July 15, 2006 at 11:00 PM