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St. Petersburg took too much risk when setting up deal for stalled hotel, experts say

ST. PETERSBURG — Mayor Rick Baker and the City Council really wanted a new luxury hotel downtown.

When a swanky hotel chain stepped forward with an offer, they sold the developer a prime public lot downtown even though the company could not pay the city's asking price up front. City officials granted the company a $1.5 million IOU to close the deal.

Nearly three years later, Kessler Enterprise of Orlando has informed City Hall it might default on the loan. City officials blame the economy and have expressed confidence that the Grand Bohemian hotel will eventually get built.

But a half-dozen legal scholars and real estate lawyers who reviewed the deal at the request of the St. Petersburg Times concluded that the city did not include enough safeguards in the deal to protect taxpayer money or public property.

Their review found:

• City officials entered into the agreement with Grand Bohemian SP LTD, a small company Kessler created to develop its St. Petersburg project, a move that could limit the city's ability to recover its money if the local offshoot goes bust.

• City officials did not give the city any interest in the property, meaning the city could lose the land, the hotel and its money if the project fails.

• The city's one financial protection in the deal hinges on an uncertain term. The city requires Kessler to back up its loan with a letter of credit from a private borrower. Such letters, however, have limited terms, requiring Kessler to frequently renew the line during the span of its 20-year loan with the city.

"If they would have asked me if it was a good transaction, I would have said it was not," said Darryl C. Wilson, who teaches property law at Stetson University College of Law. "For me, it does not seem sensible for the city to deed a property free and clear based on a promise."

Bruce Grimes, the city's real estate director, said the loan agreement allows the city to seek the full debt in civil court.

The city did not ask to have an interest in the property to make it easier for Kessler to obtain a private loan to begin construction, he said.

"If you would have had a mortgage on the property, you would have been behind any construction loan they put on it," he said. "Functionally, it wouldn't have worked."

Not quite true, said Mark Fox, a real estate lawyer at Silver, Feldman, Bass and Brams in Tampa.

"I would really feel uncomfortable telling my client to accept a promissory note without a mortgage," he said. "You are the driver. Someone wants that property. You can command the terms."

The city should have known Kessler could not obtain a long-term letter of credit, leaving the deal susceptible to market fluctuations, Fox said.

"I see that as not looking forward," he said.

The original loan called for Kessler to pay the city 36 monthly installments of $6,250 starting in September 2007. The rest of the loan and interest would be paid off starting in September 2010 with monthly payments of $9,899 over 20 years.

Kessler has been making steady payments, but advised the city last month it could not renew its current letter of credit when it expires at the end of the year. Kessler offered to keep making payments without the letter of credit.

City officials sent Kessler a notice this week that it would be in default if it could not obtain a new letter of credit or immediately repay the loan in full.

Kessler officials said they intend to continue with the project.

"There has been no default in payment or performance under the express terms of the note," Foltz Martin, an attorney for Kessler, responded in a letter Wednesday to City Hall.

The company said it will meet with Baker and Mayor-elect Bill Foster soon to discuss the deal.

However, it might be too late.

"The city didn't protect themselves," said Carlton Waterhouse, who teaches property law at Florida International University College of Law in Miami. "They didn't get an interest in the property. That would have been the best way to protect themselves."

Cristina Silva can be reached at (727) 893-8846 or csilva@sptimes.com.

St. Petersburg took too much risk when setting up deal for stalled hotel, experts say 11/20/09 [Last modified: Friday, November 20, 2009 11:52pm]
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