Aug. 14, 2011--PANAMA CITY -- Local government officials could finally get some answers to questions about the hotel and marina proposed for downtown by the end of the week, but there are still obstacles to overcome.

City and county officials tentatively have scheduled a meeting with state Housing and Urban Development (HUD) representatives for Friday, according to an email from Panama City community development director Michael Johnson. Both entities have sought answers to the hotel's eligibility for the HUD Section 108 loan guarantee program since the developers proposed local governments pledge Community Development Block Grant (CDBG) money -- $1.5 million from Panama City and $23.8 million from Bay County -- as collateral on the loan.

While the development company, Massalina Investments LLC, and its principals, Lacy Curry, Joel Cowan and Joel Cowan Jr., have said they stand by their assertion the project is eligible, Johnson said there could be a possible hang-up. Panama City is an entitlement community and receives an annual CDBG allocation. Bay County is not an entitlement community and would have to apply for the funds through the state. Section 108 rules say non-entitlement funds cannot be spent for the benefit of an entitlement community, Johnson said. The project application, however, contends the project will benefit Bay County and the Panama City waterfront site is the most "logical, feasible and convenient location" to deliver those benefits.

After weeks of asking state officials about the project's eligibility, Johnson received a cryptic email from the state HUD office, saying the city and the county "should make a determination, in consultation with HUD, that it can meet this policy requirement before proceeding with a formal application."

"If HUD's consultation provides that this is acceptable, the state will provide the City and County with their options and guidance on how to proceed ..." the email continues. "Absent any further guidance, a recommendation is for management to take a conservative approach and convey to the City and the County that the interpretation of the May 26, 2006, Memorandum is that use of non-entitlement funds in an entitlement is not acceptable in this instance."

Assistant county manager Dan Shaw said Bay County will need clear answers to questions of the project's eligibility and their financial liability in the event of default before moving forward, and new research reveals Massalina Investments has not yet been awarded the $11 million in highly competitive New Market Tax Credits they are counting on in their budget.

Occupancy projections

Among local government officials' concerns about the hotel's ability to make payments on the Section 108 loan is the plan's projection for estimated occupancy rates 36 percent higher than last year's average occupancy rates for hotels in Panama City for the first year and even higher for subsequent years.

In its application, Massalina Investments calls for the hotel to have an occupancy rate of 68 percent its first year and increase to 72.5 percent by the end of the third year of operation. According to STR Global, a leading hospitality research group, the average hotel occupancy rate for the Panama City area was 50 percent in 2010. While the Deepwater Horizon oil spill affected last year's occupancy rates, the average was lower in 2009, at 49.4 percent. The highest occupancy rate reported by STR for Panama City was in 2005, the first year for which data is available, when the rate was 65.3 percent.

"The biggest factor in a hotel's bottom line is occupancy and average rate, and you really need both," said Paul Wohlford, vice president for sales and marketing of The Resort Collection of Panama City Beach. Wohlford did not comment on the viability of the proposed hotel.

At the predicted occupancy rate and an average room rate of $123 -- which is set to increase by 4 to 5 percent annually -- about half of the hotel's projected revenue is devoted to repayment of the loan, according to a 20-year cash flow proforma summary in the application packet.

Curry questioned the accuracy of the STR data, and added the Embassy Suites Hotel would be "first-class all the way," which would yield a higher-than-average occupancy rate. The hotel would have a waterfront location with a marina, quality restaurant, ice cream parlor and convention space, Curry said.

"Those are the types of things people are going to be excited about," he said.

Brian Hinton of the Downtown Improvement Board said he has not reviewed any occupancy studies and can't specifically speak to occupancy rates, but he said a direct comparison to other hotels in the downtown area might not be appropriate. The proposed hotel would have more amenities than the others, he said, and the facilities would be nicer.

He acknowledged it's not yet clear what liability Bay County could face with the project, but "if the liabilities were somewhat minimal ... then I would strongly endorse it" because of the jobs, visitors and activity it would bring downtown.

Financing security

Beyond the Section 108 loan, which if approved would represent about 65 percent of the financing needed for the $39.5 million project, $10.09 million in New Market Tax Credits (NMTC) -- the lion's share of Massalina Investment's contribution to the project -- also have not been secured.

The deadline to submit applications for the competitive federal program was in July and an announcement about who qualifies for the $3.5 billion in tax credit authority is scheduled to be announced early next year, according to Scott Berman, a spokesman for the U.S. Treasury Department. The hotel was not on the list of 2010 approved projects.

The NMTC was established in 2000 to encourage investment in low-income communities. It works by allowing individuals and corporations to receive tax credits in exchange for making equity investments in Community Development Entities, organizations that act as financial intermediaries to bring investment capital to qualified businesses.

The tax credit is 39 percent of the original investment amount claimed over seven years, meaning 39 cents for every dollar invested can be claimed as a tax credit. The tax credits are allocated to CDEs through a competitive application process.

This year 314 applicants requested $26.66 billion in NMTC allocation authority, more than seven times the amount available.

"The contingency plan is to seek other avenues if any of our assumptions should come up short, but never losing sight of the overall goal of building a first class Embassy Suites with the new prototype on the Massalina Bayou that will operate in a safe and sound manner and generate jobs and 'foot traffic' to boost the local economy," he said.

Massalina Investments also plans to provide $3.99 million in project equity. Curry didn't specifically explain what that includes, but said they "have over $5 million invested."

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