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HomeMy WebLinkAboutTetherow Dest Resort Memo DESCHUTES COUNTY LEGAL COUNSEL MEMORANDUM TO: Board of County Commissioners FROM: LAURIE E. CRAGHEAD Assistant Legal Counsel Ext. 6593 RE: Tetherow Destination Resort – changing the form of the Overnight Lodging security DATE: August 27, 2009 CC: Dave Kanner, Nick Lelack; Mark Pilliod, Marty Wynne FILE NO.: Don Bauhoffer and Tia Lewis asked to meet with Dave Kanner and me on Friday, August 21, 2009, to discuss switching the Tetherow destination resort security for the overnight lodging improvement from the bond secured by the Westchester company to an Irrevocable Letter of Credit ("ILOC") secured by Wells Fargo base on Joe Westin's (a long-time Portland developer) credit and secured on the property itself. I recommend that the Board agree to amend the Tetherow improvement agreement to allow for the substitution of an ILOC for the existing bond. The reason Don wants this is that Arrowood Development LLC (I believe they may now be Arrowood Tetherow LLC) secured the Westchester bond with a Wells Fargo ILOC for which a developer by the name of Joe Westin is the obligor. Both the bond and the ILOC are in need of being "rolled over" and both will result in Arrowood having to pay tens of thousands of dollars in roll over fees ($86K for the bond alone). Don would like to eliminate the 3rd layer by having the ILOC issued directly to the County and eliminate the bond all together. Then, he only has to pay the roll over fees on the ILOC. With the bond, its term already runs for the duration of the improvement agreement and any extensions. The county takes a chance, however, that the company will cease to exist and the money will not be there at the end of the land use and improvement agreement extensions if the overnight lodging still is not built. To learn more about ILOCs, I called the county’s bond counsel in the K&L Gates law firm. Since this bond is actually a construction bond and not a municipal bond, the county’s bond counsel recommended that I speak to Barbara Jacobson, which I did. Memo to BOCC Tetherow ILOC Page 2 of 4 Barbara said that an ILOC is generally more secure than a bond, particularly in this situation. First, the banks will probably not fight the county if the county needs to draw on the ILOC. The surety companies usually make it difficult for the obligee to draw on a bond, and the surety companies try to find any way out of paying on it. Second, Wells Fargo is a much more stable financial source than Westchester. The main issue we face with having an ILOC as the security is that someone will need to carefully monitor the impending expiration date of the ILOC. That is because the banks will not issue an ILOC for more than a year at a time. Some are willing to do what is known as an "Evergreen" ILOC, which is a 1-year ILOC with an automatic 1- year renewal unless the bank gives the obligee a 30 or 60 day notice of the impending expiration. This is the type of ILOC that Wells Fargo provided to secure the Westchester bond. The banks, however, have all been giving that 60-day notice lately with all their Evergreen ILOCs. Thus, Barbara suggests that the ILOC expiration date be tickled in the about four places in the county. The improvement agreement will then have to be amended to say that Arrowood must replace the ILOC 60 days prior to the expiration of the existing ILOC. Barbara also said that there will need to be some specific instructions on when and how to draw on the ILOC. If the ILOC is not going to be renewed, the Board will have to choose between calling on the then existing ILOC and not having the units built at all. One other thing Barbara said is that Joe Westin is probably in his 70's and is one of the largest investors in the Pearl District in Portland. Thus, right now, he is holding a lot of empty condos. Therefore, while the bank may be willing to issue the ILOC based on Mr. Westin's credit right now since it is secured by the Tetherow property, it may not be willing to issue extensions of the ILOC at the end of the year. On the following pages, I included two charts of the pros and cons of the two sources of financial security. Memo to BOCC Tetherow ILOC Page 3 of 4 ILOC TABLE OF PROS AND CONS Factor PRO CON Duration May be able to get Evergreen provision May get notice of non- renewal The county will get notice by the bank of any intention not to renew the ILOC. If get notice of non- renewal, and developer does not provide new ILOC, the Board will have to decide whether or not to call on the ILOC and build the units Administration Because it will be another amendment, it will be another opportunity to determine whether the dollar amount is sufficient to be able to cover the county’s costs should it have to call on the ILOC Will have to carefully monitor Have the opportunity to amend improvement agreement to stop draw downs for partial construction Financial stability Wells Fargo is more stable than Westchester Any financial institution is at risk these days Risk during the year not dependent on financial ability of Joe Westin because the bank has already set aside the money for that ILOC Financial ability of Joe Westin might affect whether the bank would be willing to extend the ILOC for additional years if the developer wants another extension Ability to draw on the ILOC Banks do not generally fight obligees when they call on the ILOC Will have to carefully craft the draw provisions. Suggest that Marty Wynne and Barbara Jacobson review the ILOC. Fees for developer Fewer for developer so more money for putting into the project making the building of the units more likely There is no guarantee that the money will go into the project to build the units. Memo to BOCC Tetherow ILOC Page 4 of 4 BOND PRO AND CON TABLE Duration For the life of the Improvement Agreement For the life of the agreement only if Westchester still exists at the end of the Improvement Agreement period Administration No further amendment to the improvement agreement needed. No chance to request more funds. Still have to monitor the expiration of the improvement agreement. When stages of construction are completed and a reduction is requested by developer, have to release security amount if remaining bond is sufficient to complete the remaining units Financial Stability Not dependent on Joe Westins’ financial ability Is still dependent on Westchester’s financial stability Ability to draw on the security Westchester may not be difficult to work with when requesting to draw on the security Sureties usually fight the obligees in order to get out of paying Fees for developer The fees are hefty for the developer, leaving less to be spent on the project