January 15, 2009 Letter Sent by Senator Jeff Chapman to the
Jekyll Island Authority Board of Directors
As a preface to the questions below, I want to make it perfectly clear, once again, that the concerns I have expressed over the Jekyll Island Authority’s revitalization efforts deal with matters of transparency, accountability, and fiscal responsibility as well as with adherence to Code sections dealing with Jekyll Island State Park. I fully support necessary park improvements but am troubled, as are thousands other Georgians, over some of the board’s actions and behavior in recent years.
With that said, I trust that you will reply to the following questions without confusing legitimate concerns over Jekyll’s revitalization with opposition to revitalization itself.
I have stated my questions as clearly as possible and provided context when necessary in an effort to ensure that you fully understand my concerns and will be able to respond to them directly.
1. HOTEL REDEVELOPMENT CONTRACTS
The JIA board has painted a bleak picture for the Authority’s revenues. This financial situation suggests the need for board to be tight-fisted when negotiating lease terms for hotel redevelopment projects.
Arguably, the lease agreement with Jekyll Ocean Oaks, LLC, which was signed in December of 2006, was designed to maximize the revenue earned by the Authority from the redevelopment of the Holiday Inn property by providing a 2.5 percent reduction in the percentage of gross receipts to be given to the JIA over the first 3 years of the hotel’s operation and by setting percentage rent at 4.5 percent thereafter.
According to former JIA board chair Richard Wood, the Jekyll Ocean Oaks agreement, which he helped negotiate, was intended to serve as a broad model for future hotel development contracts. The partners in Jekyll Ocean Oaks understood this to be the case as well.
Having concluded the above stated agreement, the JIA had in hand a contract that gave the Authority the full, 4.5 percentage rent after 3 years, and was well-positioned to negotiate similar arrangements for the redevelopment of other hotels properties within the park.
Why, after having set a precedent with the Jekyll Ocean Oaks contract, would the JIA board, just 4 months later, sign a lease agreement with Trammell Crow, LLC, for the replacement of the Buccaneer Hotel giving the developer a 10-year reduction in the percentage of gross receipts it pays to the Authority, beginning with zero percent in year one of the deal and ending at 3.5 percent annually? Why exempt food and beverage sales (roughly $100 million, according to Trammell Crow’s own figures) over the full term of the 10-year rent reduction?
In responding to the above questions, note that the following previously cited excuses stated by JIA do not justify the JIA’s actions, nor can they be validated:
•The size of the investment: The two hotels to be built by Linger Longer Jekyll, LLC, are less than half the investment cost of Trammell Crow’s Canopy Bluff project yet have the same lease terms as given to Trammell Crow. The hotel redevelopment projects for the Oceanfront Resort and for the Georgia Coast Inn, which represent an investment less than half the size of Trammell Crow’s, also received a 10-year rent reduction nearly as generous as that given to Trammell Crow, proving that investment amounts do not correlate to rent reduction size. •The Location of the property: Each of the hotel properties mentioned above, with the exception of the Oceanfront Resort, are located on prime oceanfront sites and have equally convenient direct access to attractive, wide beaches. Location, therefore, is not a variable. •The element of risk: The hotel development projects in question rest on oceanfront land. With this fact in mind, a marketing study done for Trammell Crow in December of 2006 concluded that the new hotel was ideally situated and would be highly profitable. The JIA, having received a copy of the marketing report, knew, in advance of agreeing to the 10-year percentage rent reduction, that Trammell Crow had been advised that the project was a low risk venture. Jekyll Oceanfront Development Investors, LLC (owners of the Jekyll Oceanfront Resort) also discounted the ‘risk’ factor stating, in a November 18, 2008 press release, that, "Because beach-access real estate is a rare and limited commodity, this property is probably one of the safest purchases in the country today. At a time when many other investments have lost their luster, investment oceanfront real estate is highly attractive.” The risk factor, which is simply a part of our free enterprise system, (?) exists, is thus relatively small for investors in Jekyll’s beachfront property. •“Standard practice”: If rent reductions of the type given to Trammell Crow are customary, then Jekyll Ocean Oaks would have received a rent abatement similar to Trammell Crow’s. That did not happen. Why the different treatment?
•The economic slump: The Trammell Crow agreement, which has provided a framework for more recent hotel/condo contracts approved by the JIA, was negotiated at a time when the economy was robust and coastal real estate was in exceptionally high demand. Current economic conditions, therefore, cannot be cited as a reason to repeat the overly generous terms of a lease agreement reached nearly two years ago.
2. THE REVITALIZATION PARTNERING AGREEMENT
The Jekyll Island Master Plan Update (2004) recommends that, if the JIA takes on a private partner, the Authority should consider “contributing land with a performance-based lease or without a lease for a period of time, or infrastructure costs to facilitate development and redevelopment.” The recently approved Revitalization Partnering Agreement (RPA) has the JIA doing both in the town center project, resulting in the loss of millions of dollars of potential revenue for the JIA through generous land lease terms and minimal profit-sharing, and in a bond debt for project-related infrastructure needs that will cost the Authority more to repay than it will earn in direct revenue from the town center project.
Questions on the town center project:
Why has the JIA agreed to give 99 percent of a projected $163 million in time-share sales to Linger Longer? The JIA is providing Linger Longer with prime, beachside land which gives the time-shares’ much of their value, and Linger Longer is being given virtually free use of this valuable land since the vast majority, if not all, of the ground lease will be paid by the time-share buyers, making Linger Longer’s profit on the venture exceptionally large. Why, then, has the JIA settled for 1 percent of the $163 million in gross sales after having signed agreements for three condominium projects (Canopy Bluff Resort, Jekyll Oceanfront Resort, and the Cottages and Inn at Georgia Coast) that require the payment of 2 percent of total sales to the JIA?
Why isn’t the JIA requiring Linger Longer to fund the replacement of Jekyll’s most heavily-used beachside parking area and public facilities which will be displaced to make space for Linger Longer’s time-share complex?
Why has the JIA accepted full financial responsibility for the building of a north side ‘signature park’ that will, in part, serve as a replacement for the facility being lost to Linger Longer?
Is it not fiscally responsible and good public policy to insist that private development which displaces a public facility or amenity within a state park should require the developer to replace in kind and value what is being lost?
Please note that the town center’s small public square and the parking area that will service Linger Longer’s mid-scale hotel, the retail shops, and the convention center do not come remotely close to compensating for the displacement of the amenity in question, despite suggestions to the contrary made by the JIA in its November 26th “Revitalization Update.”
The Authority has cited a figure of $799,000 net present value per acre as the return it expects to receive from the town center’s private components over the first 15 years of the center’s operation. Why is the cost of servicing the JIA’s $25 million bond debt not factored into this “net” figure, given that the public and private sides of the town center project are intertwined, with both relying on bond proceeds to build the infrastructure that the project requires? While the project’s public components, such as the convention center, will have some island-wide benefits, the private partner will be the main beneficiary. Linger Longer obviously believes that the bond money is essential to the success of the private side of the project, as shown by Article 11.1(d) of the RPA, which gives Linger Longer the right to terminate the contract if the full $25 million in bond funding has not become available by December 31, 2009.
What rationale was used in giving Linger Longer a 10-year rent reduction for its two hotels?
How was the built-in client base for Linger Longer’s two hotels that will be provided by the JIA-renovated convention center factored into the rent reduction equation? If it was not factored in, why is this the case?
In view of the projected revenues to be generated by the two hotels, what is the estimated rent reduction, in dollars, for each of the years that the abatement is provided?
Linger Longer’s estimate for the occupancy rate for its two hotels peaks by the third full year of the hotels’ operation. In view of this fact, what support is there for the argument that a 10-year rent abatement is needed to help the hotels get off to a good start?
Questions on other aspects of the RPA:
One of the six main goals stated in the RPA is “to revitalize Jekyll Island as a unique vacation and convention destination that includes lodging options for all Georgians.” How does the expression “lodging options for all Georgians” translate into an appropriate balance between high-end, mid-priced, and economy lodgings within the state park? How does “lodging options for all Georgians” equate with O.C.G.A. 12-3-235, which calls upon the Authority to make its facilities available to people of average income, or with the intent of the Jekyll Island State Park Authority Act, Section 8 (1950), which mandates “the operation of the public facilities of the park at rates so moderate that all of the ordinary citizens of the State may enjoy them?”
The RPA aims to have financial responsibility for some or all of the park’s key assets assumed by Linger Longer. Where in the Partnering Agreement are the provisions which ensure that private management of public recreational facilities will result in a fee structure that is consistent with O.C.G.A. § 12-3-235, which requires the Authority to make the park’s facilities “available to people of average income?”
The RPA does not include a provision allowing for public review of future proposals regarding park operations or further development. How do you justify avoiding public disclosure before approval?
Other key initiatives undertaken by the JIA board—such as the selection of Linger Longer as the JIA’s private partner, the Bleakly study on the long-term impacts of development on Jekyll Island, and the revision of the town center plan—were described in broad strokes at regularly scheduled board meetings at which public comment was allowed. Why did the RPA’s approval take place at a specially called JIA board meeting at which the public was denied an opportunity to ask questions or comment? Why was the RPA handled differently? (Please note that this question does not suggest that the public should be part of the negotiation process but rather simply asks why the public was not given a chance to learn about and comment on the contract’s main terms, even though the board is under no legal obligation to respond to the public’s concerns.)
Why has the JIA board yet to make public Linger Longer’s financial pro forma?
How can the financial fairness of the private-public partnership be determined when one of the partners refuses to make its profits known?
3. THE FEASIBILITY OF INVOLVING A PRIVATE PARTNER IN JEKYLL ISLAND STATE PARK’S REDEVELOPMENT
Georgia law requires the Jekyll Island Authority to formally evaluate the feasibility of involving the private sector in any capital project in excess of $1 million.
Specifically, code section § 12-3-235 (6) states that, “The authority shall not undertake any activity having a projected cost of over $1 million unless it has first evaluated the feasibility of involving private persons or entities in the development, construction, operation and management of the authority’s existing projects and such proposed activities and has filed a copy of such evaluation with the Office of Planning and Budget and with the Recreational Authorities Overview Committee.”
Please note that § 12-3-235 (6) does not require that the JIA enlist private partners for capital projects. It requires only that they evaluate the feasibility of doing that. Such an evaluation would necessarily include the feasibility of finding a private entity willing to take on the proposed capital project while adhering to code sections dealing with the restrictions placed on private development within Jekyll Island State Park. Most notable among these restrictions are the requirements that park development takes place at “the lowest rates reasonable and possible for the benefit of the people of the State of Georgia” (§ 12-3-271) and that the authority makes the park’s facilities “available to people of average income” (§12-3-235).
The feasibility issue is also addressed in the 2004 JI Master Plan Update. In discussing the technical aspects of the redevelopment and development process, the Update states that, “Issues addressed in this portion of the plan should include identifying an appropriate entity or entities in which to engage development and redevelopment and identifying deal structures that are both attractive to encourage appropriate development on the island while both maximizing potential benefit to the Authority and staying true to the legislative requirements and context of the island” [emphasis added]. In view of the Update’s statement that Jekyll’s affordability mandate is among the “key tenets” of the Master Plan, it is safe to say that one of the “legislative requirements” that the JIA must stay true to is the “average income” requirement.
In light of state law and the Master Plan Update’s recommendation cited above, please indicate how the JIA has complied with the feasibility study requirement.
If a formal evaluation was not conducted, which appears to be the case according to the Attorney General’s office, was the feasibility issue directly addressed in either Request for Proposals that led to the selection of a private partner or in the RPA itself?
If the economic feasibility question was not directly addressed in the RPA or elsewhere, how did the JIA determine that its private partner, Linger Longer, was willing to participate in Jekyll’s redevelopment and, at the same time, honor the statutory restrictions contained in park law?
I thank you in advance for giving this your full attention. The concerns that I have expressed are on behalf of the thousands of Georgians who are interested in the future of their only barrier island state park. I look forward to a timely response to my questions and to having the opportunity to continue our dialogue on the issues I have raised, should there be a need to do so.
Senator, Third District