Friend Presents Vetting List To Hotel Consultants

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Letter to Brad Devael with Crowe Horwath from John Friend, CPA Chairmen of the City of Evansville Budget Committee

Brad,

City Councilman John Friend
City Councilman John Friend

The following is background to my best knowledge and requested procedures.  Please call me to discuss.

Per our conversation with Ted Ziemer, City Attorney for Evansville, IN, the Common Council of Evansville, IN, in which I’m Finance Chairman, will be deciding whether to go forward with a downtown convention hotel. We have selected HCW Developers, LLC to be the group to make this happen. However, during my discussions and review of the administration’s procedures, it appears that a business plan was not prepared which would have included imperative information. As such, missing in the process are pro forma’s over a five year period of time, income statements, cash flows, balance sheets, presumably, the ramping up period coinciding with our development and management agreement. We did receive an income statement plus add backs for depreciation and interest at the stabilization period, but, do not have any idea when and how they achieve stabilization and lacks assumptions and assertions, except for average daily rate and capacity

HCW, to the best of my knowledge, has twelve motels/hotel. The crown jewel is Branson Landing, located in Branson, MO. This hotel is touted as a full service hotel, with retail shops, and associated condos. It appears that this development came on line in 2005/2006. Apparently, Branson issued TIF bonding in the amount of $18,500,000. Five of the assumed twelve, are level one motels, under the flag of Value Places. These units cater to extended stays, $149 per week customers. They have two Hampton Inns, one each in Scottsdale, AZ and Tucson, AZ, and a Hilton Garden Inn, located in Manhattan, KS. In addition, their website indicates 4,000 rental units, however, during their presentation to Council, they touted 6,000 units. Also, they indicated that the oldest motel/hotel has been in operations for eight years and they had fourteen operations. [concerns about rapid growth, under-capitalization].

Agreed Upon Procedures:

A. Determine the total number of entities [brother/sister] associated with HCW and their principals.

B. Determine the principals in each entity.

C. Evaluate the debt structure of the entities terms, conditions, covenants and etc.

D. Evaluate the construction budget of the Branson Landing project vs. the Actual, including the timetable, together with the Hilton Garden Inn.

E. Evaluate the performance of the Branson Landing operations from opening day to the present, including the amount, if any, of capital injection during the period and cap-x [debt v equity] Determine additional subsidies by any governmental unit beyond the TIF, together with the Hilton Garden Inn.

F. Review the income tax returns of the principals, emphasis on required sources of income and K-1 activity

G. Review personal financial statements, (purpose to determine depth of free capital) of principals.

H. Review the five year pro forma’s of our project compared to the actuals of Branson Landing to determine a baseline over the first five years. Determine the  assumptions and assertions[pro forma’s needs to be line item detailed].

I. Spread the financial data of all entities in the determination of global EBITDA and the  Debt Coverage ratios.  In this process, emphasis on Branson Landing compared to Industry Standards [RMA comparisons plus others].  Common-size the historical financials in the process. Separate the results of operations, i.e. rental, condo sales, motel/hotel, and retail, if applicable.

J. Determine that the principals and the associated entities have free capital to inject into the Evansville project and adequate reserves to meet the provisions of the city’s agreement relative to over-budget issues.

K. Regards to the above, review documentation relative to performance bonding.

L. Determine the entities structure of ownership, individuals, other LLC’s and the dates of organization.

M. Inquire into any pending or threatening  litigation against any of the entities and principals

N. Review other sources of inquiry, such as Dunn-Brad Streets reports.

O.  Determine if any surety has encountered claims and defaults involving any of the above entities and principals.

P. Determine the exactness of the total rental units and motel/hotel units and the flags that they fly.

Q.  Determine entity by entity debt/equity ratios and all other pertinent ratios expected in the RMA comparison. Emphasis on Branson Landing.

R. Manhattan, KS – place emphasis on this project – Construction Budget v. Actual – ramping up to stabilization.

S.  Determine the final debt structure of the Evansville project,i.e. recourse v. non-recourse financing. CEO indicated non recourse financing at the conclusion of construction and injection of REIT financing.

T. Determine if any particular entity is considered insolvent [bankruptcy] together with any principal.

Required Data: 

1. All associated entities’ audited/reviewed financial statements for the past five years. Except for Branson Landing, need from inception to present. [No in-house Financials].

2. All Federal Income Tax filings from those entities and 1040 on the principals over the same period.

3. Loan documentation on the debt structure in the global.

4. Signed Representation Letter from Mr. Richard Huffman, CEO that all information provide is complete and accurate to the best of his knowledge…the Council will leave this to Crowe’s discretion.

5. Current personal financial statements.

6. Five years pro forma’s, income statement, cash flow statements, and balance sheets, together with assumptions and assertions. Detailed by line items.

7. Copy of executed agreement between HCW and the City of Evansville, IN
8. Original Construction budgets in detail and depreciation schedules of Branson Landing and Hilton Garden Inn.

As we discussed, the Common Council will be the client. Our organization will be conferring with the President of the Council, Ms Connie Robinson, VP Dr. H. Dan Adams, and myself, Finance Chair. In regards to proprietary information, I will be executing a confidentiality agreement with the principals of all direct and indirect entities. Assurances have been given to Mr. Ziemer in this regard. As a practicing CPA/CVA, I every much aware of the extreme sensitivity of this form of information. Without this agreement, this engagement most likely will be hindered in obtaining conclusions about going forward under the current condition. Obviously, our President and VP will not execute the confidentiality agreement and, thus proprietary information will remain with only the Finance Chair.

We need this engagement to be concluded as soon as possible.

Sincerely,

John E. Friend
Finance Chairman
Common Council of Evansville, IN

13 COMMENTS

    • That CP editorial bordered on brain dead. There were many mistakes in it and to encourage the city council to take fast action on an unvetted project is irresponsible. Let Scripps-Howard pay the $37.5 Million tab if they are so convinced. The CP and all of the “life is a cabaret” crowd need to take a class in thinking.

  1. According to Rick Huffman’s testimony before the City Council on August 12th, HCW has something like 200 legal entities under its umbrella!

    That came out of his own mouth. Furthermore, I heard him also say HCW ran 14 hotels. If 12 is the real number, that means he doesn’t know how many hotels he has? It’s scary that I’m actually not surprised by that revelation.

  2. Councilman Friend,

    Quit the grandstanding immediately ! You know you will vote ‘yes’ for those Union votes (ala Johnson Controls). We deserve this Hotel, please stop being an obstructionist (as claimed by former Mayor Weinzapfel).

    • Damn about time someone questioned this stupid idea of giving away 37.5 million dollars for something we get no stake in!!!!!!!!!!!!!!!!!!!!!!! And yes voting for the Johnson controls deal was a major kick in the groin!!!!

  3. Damn about time someone questioned this stupid idea of giving away 37.5 million dollars foe something we get no stake in!!!!!!!!!!!!!!!!!!!!!!!

  4. We need assurance that the condos/apartments/rental space will not subsidize the hotel portion of the project.

    Weinzapfel/Winnecke have not been transparent thus far. Friend is trying to force them to be so.

    • Yes, I still want to know who the good ole’ boys are waiting in the wings to jump in on the condos and apartments part of this project. Names please, and no hiding behind some LLC. With the amount of public money being requested, nothing but FULL DISCLOSURE will suffice.

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  5. CCO: Will the firm of Crowe Horwath be giving the City Council their OPINION on the viability of the project, or is this firm simply the ones who will gather and collate the information needed ?

    I see no reason why this work can’t be done and reviewed by the Council in time for the September 9th vote.

    alberto
    p.s. September 9, 2014

    • I see no need to rush this thing. We have mid term elections coming up, lets put it on the ballot and let the citizens weigh in on giving away $37.5 (+ interest) to a private, for profit, developer/owner.

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  6. Why doesn’t someone contact Vanderburgh County Clerk Debbi Stucki (435-5160) and see what the deadline for placing a question on the ballot this November?

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    • there is not an election this year, why would we waste even more money to have a “special election”?

      • Since there would only be one question on the ballot, and since that would be the case you could use the “voting center” model to limit the number of polling places, thus saving money, I do not see it as unreasonable.

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