City: Oread hotel developer admitted to much of alleged tax scheme

Fritzel silent since lawsuit was filed against hotel

Lawrence developer Thomas Fritzel watches a video presentation of a Rock Chalk Park proposal during the city commission meeting on Tuesday, Feb. 19, 2013, at City Hall.

It has been more than two weeks since the city filed a lawsuit alleging Oread hotel developer Thomas Fritzel committed a fraudulent tax scheme, and Fritzel and his attorneys have yet to publicly comment about the high-stakes case.

When they do, they will have a big allegation to tackle from the city: A city report contends Fritzel essentially admitted to much of the scheme in a conversation with City Manager Tom Markus.

Tucked among the details of a 24-page report released by the city in mid-November is a description of an alleged conversation between Fritzel and Markus.

In the meeting with city leaders in March, Fritzel said he used the hotel’s special taxing district to create a “revenue stream” to recoup the cost of public infrastructure completed during the hotel’s construction, according to a city-commissioned report.

The taxing district was intended to cover only the hotel’s retail sales, but Fritzel maintained his use of it was acceptable, the report states:

“Thomas Fritzel stated to Mr. Markus that the Fritzels were running the sales through the district to create a revenue stream to amortize the public improvement costs they had fronted for the Oread Inn project. Thomas Fritzel told Mr. Markus that they had done nothing wrong.”

The city disagrees. On Nov. 16, the city filed a lawsuit citing personal purchases and faked retail sales as grounds to terminate the multimillion-dollar incentive agreement with The Oread hotel. The city took the legal action based on findings of the report, which was completed by the accounting firm Allen, Gibbs & Houlik and released by the city along with the lawsuit.

Attorneys representing Fritzel communicated with the Journal-World multiple times since the lawsuit was filed and said that a press release was forthcoming. The distribution of the press release was pushed back several days for additional “review.” Now, more than two weeks since the lawsuit was filed, a press release has yet to be sent out. Fritzel previously had denied the allegations prior to the lawsuit being filed, but he nor his representatives have commented since the filing.

Bradley Russell, the attorney representing the city in the lawsuit, said the city has not heard any response or had additional communication with Fritzel. Russell said that the report tries to summarize the exchange between Markus and Fritzel in March, and that he would not likely have further information until a response is received from Fritzel.

The report states that Markus met with Thomas Fritzel, Thomas’ brother Tim Fritzel and Nancy Longhurst on March 30. According to the account of the meeting in the report, Thomas Fritzel made the statement that he had “done nothing wrong” in response to Markus saying that Fritzel had reported transactions within the taxing district that they “clearly were not expecting.”

The incentive agreement between the city and the developer was intended to at least partially pay the developer back for the infrastructure and parking garage improvements made to the area as part of the hotel’s construction in 2008. The 20-year agreement could generate up to $11 million in rebates for the development group if left in place.

As the tax district is based at the hotel’s address, only retail sales made within the hotel itself should be attributed to the district. The report claims that documents and invoices provided by Fritzel entity Oread Wholesale show otherwise.

“All the transactions evidence intent to create sales within the special taxing district for the sole purpose of wrongfully receiving reimbursements of sales tax,” the report states.

Fritzel did not seem to dispute that conclusion.

“(Thomas) Fritzel admitted what the documents reflect,” the report states.

The documents include “invoices” between DFC and Oread Wholesale, both Fritzel companies implicated in the city’s lawsuit. Oread Wholesale has its registered address at the hotel, and issued “invoices” to more than 30 customers for hundreds of projects, which allegedly functioned to create the false link between the unrelated purchases and the taxing district.

Only 24 pages of the report were made public — the city declined a request from the Journal-World to release the actual invoices — but the report does include a summarized list of transactions that it says occurred outside of the taxing district but were nonetheless billed through it.

That list summarizing the documented transactions is long and varied. Purchases for Fritzel, his family members and his business dealings are included. Furniture, countertops, landscaping, car batteries and rental of a party tent make the list. Equally notable are purchases of construction materials — concrete, plumbing, lighting, flooring and drywall — for Fritzel projects throughout the city, state and region.

Lawrence projects on the list include Rock Chalk Park, Hutton Farms, Varsity House, the Eldridge Hotel and two elementary school renovations. There are also various entries that list names of Fritzel family members or associates, some referencing home projects, furniture or simply “rentals.”

According to the report, those details are a summary of the findings, and the documents in their entirety consist of more than 15,000 pages that Oread Wholesale provided to the accounting firm.

Despite the city’s claim that Oread Wholesale was created and used to defraud the city, it appears the company is still operating. The company isn’t illegal in and of itself, and the main question is whether it is charging its taxes to the right place.

Russell said that Fritzel has three weeks from the date he was served the lawsuit to file a response. An extension for up to two weeks is allowed, and Russell said those are common. Based on the date Fritzel was served with the lawsuit, a response or extension request would need to be filed by mid-December.