Hotel's tax break barred Judge's ruling halts plan for Wyndham's lucrative incentive

City, developers undaunted

But one analyst calls$134 million project 'more problematic'

November 25, 1998|By KEVIN L. McQUAID | KEVIN L. McQUAID,SUN STAFF Sun staff writer Ivan Penn contributed to this article.

A Baltimore judge struck down a city ordinance yesterday that would grant millions of dollars in tax breaks to the planned $134 million Wyndham Inner Harbor East hotel.

Baltimore Circuit Judge Richard T. Rombro's decision represents a likely setback for the 31-story project, but the hotel's developers - and Mayor Kurt L. Schmoke - vowed that it would proceed.

"Given that the city has been in litigation regarding this matter, the city has been considering alternatives to keep the project moving forward for some time," Schmoke said.

"I have spoken with the city solicitor, and we will seek reconsideration. If that fails, we will appeal, but the project will move ahead. We will simply seek alternatives. But in my opinion, it won't slow the project down," he said.

The Wyndham's developers - John Paterakis Sr.'s H&S Properties Development Co. and two other companies - echoed the mayor.

"There's nothing in the judge's opinion that we and the city can't deal with," said Stephen A. Goldberg, an attorney with Gallagher, Evelius & Jones who is representing the developers. "We anticipated the ruling and feel that it won't be an impediment."

Goldberg said the development team's tax breaks will only become important two years from now, when the 750-room hotel is scheduled to open.

But even with the developers' pronouncements, hotel analysts said the ruling could have a potentially devastating effect on the project.

"This is certainly going to make this transaction even more problematic in an environment where capital and debt are extremely tight," said Robert T. Koger, president of Molinaro Koger Inc., a Virginia hotel brokerage company. "Without question, this has a huge economic impact to the project."

In April, the Baltimore City Council passed an ordinance that provided a payment in lieu of taxes (PILOT) that would have saved the developers roughly $3 million per year, or $75 million over the next 25 years. PILOTs are programs that allow developers to negotiate property taxes with governments, rather than pay the full amount as assessed by the state.

The Wyndham PILOT would have required the developers to pay a property tax of $1 per year through 2025. The city said the PILOT was necessary and legitimate because the Wyndham will encourage economic development, create jobs and promote tourism.

In his ruling, Rombro said state law and a city ordinance prohibit the city from enacting a hotel PILOT for land the city does not own. The 20-acre Inner Harbor East site is owned by Paterakis, and Patriot American is scheduled to purchase the hotel upon completion.

Rombro dismissed arguments by the developers' attorneys that, under an agreement with the city, the project would fall under city ownership for 25 years.

The judge noted that the city is "severely restricted in its use of the property. It cannot mortgage the property, it cannot convey the property," and the developer has perpetual rights to renew the ownership agreement - which would provide the tax break - "in perpetuity."

"It does not seem to this court that this arrangement complies with any definition of ownership," Rombro said in his decision.

City Councilman Martin O'Malley, chairman of the Taxation and Finance Committee, which reviews all the PILOT bills, worried that the judge's decision also could stall other projects.

"It's the only tool we have for economic development," O'Malley said of PILOTs.

Rombro's ruling, however, appears to apply only to hotel PILOTs.

The Wyndham is one of three major hotel projects planned for the city by 2002 that together would add more than 2,100 rooms and support the Baltimore Convention Center, which last year completed a state-funded $151 million expansion.

The other two projects, a Westin hotel planned for the former News American site downtown at 300 E. Pratt St. and a Grand Hyatt on a city-owned tract across from the convention center, are also working to obtain financing.

The Wyndham, part of a planned $350 million mixed-use development, recently began initial grading work on its site.

Paul Courtnell, a Patriot American attorney, said the hotel company intends to continue with the project despite the judge's ruling.

In recent months, Patriot American has faced an onslaught of troubles stemming from huge debt payments and a collapse of capital markets, which has made obtaining financing difficult.

Monday, the company said it would skip a scheduled dividend payment to shareholders of $23.45 million. In the next 16 months, the company must find a way to restructure or repay $1.7 billion in debt.

NEED TRANSITION: The ruling concludes one of three lawsuits brought by a group of East Baltimore businesses and community groups known as the Waterfront Coalition Inc., which is also challenging the hotel's rezoning and amendments enacted to change the Inner Harbor East master plan.

The rezoning case, settled in favor of the developers in September, is under appeal. The case involving the master plan is expected to be heard by a judge early next month.

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