Horse Park hotel has risks for state: IF LUXURY ENTERPRISE FAILS, KENTUCKY FACES $42 MILLION BURDEN (The Lexington Herald-Leader, Ky.) By Linda B. Blackford, The Lexington Herald-Leader, Ky.McClatchy-Tribune Regional News Mar. 2--In addition to $118 million in tax-exempt bonds issued by the state, the private developers of a proposed luxury hotel at the Kentucky Horse Park also are eligible for up to a $39 million tax rebate and a $3 million loan to help them make debt payments in case they run short on cash. Although the deal has been billed publicly as risk-free for the state, the Commonwealth could be on the line for $42.17 million if the hotel doesn't succeed as projected, according to participants. Supporters have billed the complex deal as a creative combination of public and private enterprise, but critics question the project's scope and viability and the state's responsibility. "I am completely comfortable with this," said Jonathan Miller, secretary of the Finance and Administration cabinet. But Rep. Jim Wayne, D-Louisville, a previous critic, said: "The more we learn about this, the more ridiculous the whole thing is." The unique financing deal was the brainchild of developer Brad Burgess, a Florida businessman who now lives in Lexington. He worked for Koll Development, a Texas company that bid on the first two requests for proposals put out by the state to build a hotel at the Horse Park. A hotel on the property has been in the Horse Park master plan since the 1980s, but its time line was moved up after the park won the 2010 Alltech FEI World Equestrian Games. Although the state accepted Koll's bid in 2006, their financing fell through. Then Burgess and others came up with a plan to create a non-profit foundation, allowing the state to issue tax-exempt bonds to build the 265-room luxury Westin hotel, spa and retail project. Burgess told the Herald-Leader the deal was the first of its kind in the United States, and he had met with IRS officials for approval before he launched it. In March 2007, he created the Bluegrass Equine and Tourism Foundation. Two weeks later, he created KHPWESLUX LLC, a for profit company made up of his own Thayer Group and Boorn Partners, founded by John Boorn, Mary Lynne Boorn and Joseph Straka. KHPWESLUX bid on and won the last state proposal to build the hotel, beating out Corporex of Northern Kentucky. KHPWESLUX will make a $5 million development fee on the deal. After debt service is paid off, the foundation will distribute any profits to local equine and tourism groups. Burgess and Straka said that they will gain in reputation, rather than getting much monetary value. Because the hotel will revert back to the state in 42 years, it cannot be resold as an asset, making conventional investors wary. "We get to be associated with a once-in-a-lifetime facility," Straka said. Refinancing peril Under the deal, the Kentucky Economic Development Finance Authority will issue $118 million in two series of bonds. The first series of bonds, $75.96 million, are the responsibility of the developers, to be paid back by proceeds from the hotel. That is supposed to happen with the second series of bonds as well. However, the second series of bonds would be up for remarketing in 2014. If that does not happen because the hotel is considered a financial risk, the state could be responsible for the $42.17 million. The bonds have not yet been sold, but time is crucial if the hotel is going to open as planned in January 2010, in time for the Alltech FEI World Equestrian Games at the Horse Park. Volatility in the bond market has made the sale more challenging, said Roger Peterman, the foundation's bond counsel, an attorney with Peck, Shaffer & Williams in Covington. A feasibility study paid for by Burgess said the hotel would have 75 percent occupancy with room rates of $175 a night. However, local hotel managers have dismissed those projections as unrealistic. The Marriott Griffin Gate Resort has an occupancy rate of 64 percent. In addition to the bonds, KEDFA voted to give $3 million to the Commerce Cabinet to lend the foundation in order to set up an escrow account. That money will help pay debt service on the bonds if project revenues aren't sufficient, said Peterman. He said he has studied the financing exhaustively and believes it will work. "The state was actively involved in trying to structure this in a way that would be financially sound," Peterman said. The $39 million sales tax rebate to the BETF comes from the Kentucky Tourism Development Act, a law created in 1996 to lure more private development of tourist attractions to Kentucky. The first recipient was the Newport Aquarium. Most projects can qualify for up to 25 percent rebate of sales tax; parks projects are eligible for 50 percent. However, the hotel's retail space will have to generate sales tax for the rebate to be awarded. Each project's suitability is determined by an independent consultant funded by the developer, according to tourism officials. In this case, Economic Research Associates determined that the proposed hotel would meet the state criteria because it meets the definition of a tourist attraction, it will be open more than 100 days a year, it represents an investment over $1 million and most of the guests will come from out of state. In the study, ERA also concluded that it agreed with Burgess' original feasibility study that the project would have a positive economic impact on the state. The sales tax rebate stops after 20 years. Although KEDFA members asked numerous question about the loan at their meeting on Feb. 15, they approved the conduit bonds and the $3 million loan. "You always have various questions about a project," said board member Aubrey Hayden. "Some people see risk, some see opportunity." KEDFA chair Jean Hale declined to comment on the matter. Commerce Secretary Marcheta Sparrow said she was fulfilling a commitment made by the Fletcher administration to build a hotel at the Horse Park in time for the Games. "We knew if we did not get started, we would not have a hotel," Sparrow said. "I think that realistically there's always concern when you enter into a project like this. It's a big investment; we'll have to do a lot of good marketing." Gov. Steve Beshear's administration has been supportive of the project even though it was devised under Fletcher's administration. Spokeswoman Vicki Glass said that although Beshear did not choose any of the players in the project, he is also supporting former commitments. "The governor is comfortable with the financing portion of the Horse Park Hotel," Glass said in a statement. But others are worried about possible state liability. "I'm very concerned about the economic viability of the project," said Lexington Vice Mayor Jim Gray. "If the rosy projections aren't met, taxpayers may be left footing a big bill." Premium upgrade Questions over financial soundness stem from whether Lexington and the Horse Park can support a five-star luxury hotel. Originally, the project was proposed as a more modest Sheraton. A place-holder of $27.5 million was put in the 2004-2006 budget for hotel construction. That sum was for construction only, not design or furniture. But officials from Starwood Hotels, a national chain that owns the Sheraton and Westin brands, visited the park in the spring of 2005, Burgess said. "They said, 'We want to upgrade this to a Westin because of its unique location and proximity to the Kentucky Horse Park,'" Burgess said. With the Westin brand, officials decided the park and its activities could support a large luxury hotel, conference center and spa. That's when the price tag went up to nearly $90 million. (The bond issue for $118 million covers interest on debt service.) "It was their research and their expertise that said this will be a viable, profitable endeavor as a luxury Westin hotel," said John Nicholson, Kentucky Horse Park director. Burgess and Straka said they believe that the hotel -- which preliminary designs show as a limestone-clad, green-roofed equivalent of a horse barn with cupolas -- will soon lead convention business in the Bluegrass and boost hotel occupancy all over. In addition, Nicholson projects an increase in Horse Park events after an indoor arena is finished. Starwood officials declined to comment on their reasoning, saying they couldn't talk until the deal was finalized. ------