THE FREE LANCE-STAR

Kalahari incentives called necessary

Consultant gives Kalahari project good marks
BY EMILY BATTLE

Date published: 3/19/2008

The incentives that Fredericksburg has offered Kalahari Resorts to build a water park hotel and conference center in Celebrate Virginia are justifiable, and may be crucial if Kalahari is to secure financing for its more than $225 million project.

That was part of the message that James Prost, of Maryland-based Basile, Baumann, Prost, Cole & Associates, delivered to City Council members at a work session last night. Prost called Kalahari the "gold standard" of water park hotel operators, and said its claims that it will generate nearly $6 million in new annual tax revenue for the city are reasonable.

But as the market for hotel financing tightens, lenders are demanding that developers show higher projected annual incomes relative to what they'll owe on their loans.

The city--by returning to Kalahari 47.5 percent of the new local taxes that it generates for a 20-year period--can help Kalahari meet that threshold, and gain a powerful new tax-generating engine in the process.
Based on Kalahari's tax projections, the incentive breakdown would mean that over that 20-year period, the city would get $64 million in new tax revenues, while Kalahari would get $61 million.

Prost said this arrangement, where the city and Kalahari share new tax revenues, puts most of the risk on the private project developers, since the city won't be writing any checks before new money starts rolling in.

"There really is very limited direct risk to the city, which is very important," Prost said. "A hotel project, and particularly a major resort hotel project like this, is going to bring in net revenue that the city would not otherwise receive."

City officials have proposed to distribute Kalahari's incentives by creating a tax-increment financing district. That means all the new revenues generated in that district after Kalahari opens for business would be put into a special fund.

Of that money 47.5 percent would go to the Economic Development Authority, which would give the money back to Kalahari as a grant. The rest would go to the city's general fund.

The TIF district would include the new Kalahari property, along with the Fredericksburg Expo and Convention Center. Council members said last night that the Expo Center would become part of the Kalahari development.

Vice Mayor Kerry Devine emphasized that the tax money the Expo Center generates now will not be part of the revenues subjected to the 47.5 percent rebate. Only the additional revenue that property generates once Kalahari begins operating would be divided between the city and Kalahari.

Councilwoman Debby Girvan, who has said the city "can't afford" the Kalahari incentives, asked whether the fee waivers that are included in that package put the city at risk.

The proposed incentives package includes waiving $3.2 million in water and sewer fees. About half of that amount would be the sewer fees, for which the city must, by law, reimburse its standalone sewer fund.
Assistant City Manager Bev Cameron said that would be done over a 10-year period, costing the city about $160,000 a year.

When Girvan asked about the risk that Kalahari's new revenue wouldn't cover that, Prost said, "The performance would have to be pretty abysmal to not generate sufficient revenues to cover $160,000 a year."
Girvan asked what would happen if Kalahari went out of business within 10 years of opening.

"To say that someone would construct a project of 700 hotel rooms and 150,000 square feet of water park and not in the worst of all worlds generate some sort of revenues is pretty unlikely," Prost said.

He also said that because Kalahari's business model draws from both the family tourism and group meeting markets, and because the resort has such a diverse array of revenue streams, the project is likely to be more resistant to economic downturns than a simple hotel or retail operation.

Council members will hold a public hearing on the proposed Kalahari incentives package, and on the TIF district that would be created to distribute those incentives, on April 8.

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