Analysis: Another Way to Finance Yacht Haven Hotel?

Concept drawing of proposed hotel at Yacht Haven Grande presented to the V.I. Legislature in 2018. (V.I. Legislature image)
Concept drawing of proposed hotel at Yacht Haven Grande presented to the V.I. Legislature in 2018. (V.I. Legislature image)

Why can’t Tax Increment Finance loans pay the $10 million still needed for a hotel at Yacht Haven Grande?

Gov. Kenneth Mapp’s convoluted deal to borrow money from Limetree Bay as part of a refinery deal, then loan part of the borrowed money to hotel developers fell apart in the face of a skeptical Legislature. The public and media also questioned the wisdom of the V.I. government using unconventional borrowing schemes for a private enterprise when normal lenders declined to lend to the USVI and the government is unable to pay its electric bills, tax refunds or operators of its sewage treatment plants.

But there is reason to think a hotel would be good for the area. And if it really is a viable project, lenders should be up for lending $10 million secured by the hotel’s future tax revenues. Plus, changes made to the Tax Increment Financing law last year make it easier for a developer to use the program.

Yacht Haven Grande is sputtering along. A hotel would provide new energy to the area. More activity and more energy would make it more attractive for cruise passengers.

“Since the hurricanes last year, our inventory of hotel rooms has diminished and air traffic is subsequently down, the shortage of inventory of hotel rooms on island has been damaging to our economy,” Pash Daswani of the V.I. India Association and St. Thomas/St. John Chamber of Commerce said in an editorial last year.

“It is time that this new hotel is built. It will not only boost the overall tourism on St. Thomas but this 110 to 125-room hotel will help to create new jobs. It is well known fact that overnight guests spend more money on the island, helping all facets of our community, including but not limited to our taxi drivers, restaurants, tour operators and retail businesses, which in turn ultimately leads to higher gross receipts taxes for the territory.”

He argued then in favor of Mapp’s direct loan scheme, which is now dead in the water.

Thomas Mukamal, chief executive officer of IGY, the company that owns Yacht Haven Grande, told the Legislature last year that a new, 110-room hotel “would reinvigorate the existing site at Yacht Haven as well as the nearby shops at the Havensight Mall and downtown Charlotte Amalie.”

He projected a 110-room hotel would generate about $750,000 per year in new hotel occupancy taxes.

If those are realistic numbers, surely a private lender would jump at the chance to lend $10 million secured by that income stream?

TIF financing pledges the future increase in tax revenues, the incremental difference between what sort of taxes, especially property taxes, that are paid on a property and the expected increase in tax revenue that results from developing the property, as security for loans to pay for that development.

Enacted during Gov. John deJongh Jr.’s administration, this sort of TIF financing was used to pay for government infrastructure for the shopping center that houses St. Croix’s Home Depot. The idea is to bootstrap development without directly paying out of government coffers, by pledging only tax revenues that would not exist without the development.

While the larger shopping center originally envisioned has not materialized, Home Depot itself has been a success and the funding mechanism worked.

The V.I. law originally only allowed the financing for government-owned infrastructure. But Act 8031, enacted in April 2018 over Gov. Kenneth Mapp’s veto, expands this financing option to private buildings. And it expands the sources that can be used to secure the financing to include hotel occupancy tax revenues.

The Public Finance Authority and the Legislature would have to approve a TIF loan.

There is another piece of legislation: Act 8030, which makes changes to the territory’s Hotel Development tax benefit program largely pointed at enhancing the security for a potential lender. Under existing law, enacted in 2011, a hotel developer can have the Public Finance Authority set up a trust fund into which its casino and hotel occupancy taxes will go. Those funds can be used to pay off loans incurred to build the hotel.

Changes in 2018 allow the tax money to be paid to a trustee or a trustee’s agent, bypassing the PFA. It would also create a statutory lien on the funds, preventing the V.I. government from doing anything else with the funds. And it allows the “note issuer” to “(p)ledge, mortgage or assign monies, agreements, property or other assets of the PFA or the Government, either presently in hand or to be received in the future or both.”

This is for a slightly different borrowing vehicle: “Hotel Development Notes,” rather than TIF financing, and is under a different section of V.I. law. But the mechanisms are very similar to one another.

The government cannot borrow any more. But neither of these mechanisms would add to the government’s debt load.

Act 8030 says “notwithstanding any other provision” the loans “are not in any way a debt or liability of the Government” and the debt is not secured by the full faith and credit or the taxing power of the government “other than the revenues authorized under this chapter.”

If this project is truly feasible, IGY and Mukamal should pursue a TIF loan or a hotel development note secured by future tax revenues under one of these two laws.