The Oread Hotel, 1200 Oread Ave.

Developers of The Oread hotel, accused of filing incorrect sales tax returns to receive improper rebates from the city, sent the city the nearly $500,000 it demanded on deadline Thursday, but they did so “under protest” and accompanied the check with a letter refusing other demands.

The letter stated Oread Inn, L.C. disagrees with the findings of a city-ordered audit; contends it is not obligated to go forward with the city’s other demands; and sent the nearly $500,000 merely to meet the city’s deadline, but not as intended as a payment.

Interim City Manager Diane Stoddard said the city is “reviewing the letter in order to determine its next steps.”

Oread Inn’s check and letter were hand-delivered Thursday in response to the city’s Dec. 16 demand letter, which told developers of the hotel that it was required to pay $492,914.86 and agree to changes in its redevelopment agreement with the city in order to avoid risking termination of that agreement.

The city’s demands were sent after Wichita-based auditing firm Allen, Gibbs & Houlik accused developers of creating a wholesale company to fake sales in a special taxing district at the hotel — established through the redevelopment agreement — to boost the amount that would be reimbursed back to themselves.

The city, complying with a redevelopment agreement that calls on it to rebate a large percentage of all local sales taxes collected at 1200 Oread Ave., improperly paid Oread Inn $429,914.85 from January 2010 through June 2015, according to the audit. The city charged Oread Inn $63,320.11 in interest when demanding repayment.

Oread Wholesale — the business at the heart of the controversy — is owned by Lawrence businessman Thomas Fritzel, a leader of the group that developed The Oread hotel.

The development group’s response letter, signed by attorney Roger Walter of the Law Offices of Morris Laing, states that Oread Wholesale has retained its own experts to analyze the auditors’ report. Oread Inn will respond further to the report once that review is complete, it states.

The review is expected to be finished sometime in January.

Besides the money, the city required Oread Inn by Thursday to agree, in writing, to include a clause in its redevelopment agreement that would allow the city to audit any sales tax records of Oread Inn, its tenants or anyone doing business with The Oread hotel.

The response from Oread Inn said this demand exceeded their obligations under the agreement. The development group questioned the city’s right to demand revisions to their arrangement.

“Oread Inn has abided by the terms of the Redevelopment Agreement, and it will continue to do so,” the letter reads.

The city also demanded Oread Inn to pay the cost of hiring the auditors, which, as of Dec. 5, was $27,455.65.

Developers took issue with that demand, too, saying in the letter that they were not obligated to reimburse those costs under their agreement with the city.

If the city could establish a lawful basis for Oread Inn reimbursing those costs, the letter stated, there are “more than enough funds” available in the city’s tax increment financing fund account. Funds in that account are used to reimburse developers, such as Oread Inn, that are part of special taxing districts. The city has not been reimbursing Oread Inn since June, after the audit began.

Oread Inn’s response also said the group did not have to comply with the city’s last demand: to get all of Oread Wholesale’s sales tax records and documents that the business used to prepare its original sales tax returns and provide them to auditors by Jan. 18.

Auditors, in their report, cited trouble early on in reviewing Oread Wholesale’s books and records. Oread Wholesale filed forms with the state to amend some of its sales tax returns — reducing its net sales within the special taxing district by nearly 62 percent — after the city contacted the business about the audit.

“Oread Inn has no right or authority to commit its current tenants any new obligations, or to unilaterally amend current tenant leases,” the letter states.

Oread Inn’s redevelopment agreement with the city, approved by the City Commission in 2008, has generated more than $3 million for the development group in the past seven years, one-third of which is sales taxes reported from Oread Wholesale.

If the agreement lasts, it could bring in another $8 million for developers.

The city made its demands under a clause in the redevelopment agreement that calls for mutual assistance in carrying out the agreement’s intent. If Oread Inn were not to follow through on the demands, the development group may be deemed as in default, potentially giving cause for the agreement to be terminated, the city’s letter stated.

Some of the group’s actions were thought by auditors to be illegal. Stoddard said earlier this week that the city has had preliminary discussions with law enforcement.

“This is certainly a situation that was not contemplated by the city, that something like this would be occurring,” Stoddard said in a Dec. 16 interview. “In this particular case, we worked hard to get to the bottom of what was occurring, and, in the end, we want what is fair to the city.”

The Journal-World’s calls to Fritzel since Dec. 16 have gone unanswered. Stoddard said Dec. 16 that she had spoken with Fritzel, and that he had wanted to resolve the matter.