Lawrence declares Oread Inn in default of redevelopment agreement; developer says city is in default
In quick succession Thursday in the months-long $500,000 tax dispute between the city of Lawrence and developers of The Oread hotel, both the city and the developers slapped the other with notices of default on their redevelopment agreement — the city because Oread Inn wasn’t cooperating, and Oread Inn because the city was withholding sales and property tax reimbursements.
Interim City Manager Diane Stoddard said in a default notice to the development group, Oread Inn, that if the group doesn’t address a list of issues in 30 days, the city has the grounds to terminate the agreement. Oread Inn’s notice of default was sent to the city just hours later. It stated that if the city does not rectify the issues brought up by Oread Inn, the development group would pursue legal action.
At stake is $8 million: the amount Oread Inn could still generate in city reimbursements if the redevelopment agreement were to stand. Since its creation in 2008, the agreement has brought in $3 million for developers.
Stoddard’s letter to Oread Inn states the development group defaulted on a section of the agreement that requires mutual assistance in carrying out the agreement and its intent. But Oread Inn’s letter to the city late Thursday decried that allegation, saying the development group tried to resolve the dispute through discussions but that the city was unwilling.
“It appears the city has no interest in pursuing these discussions and instead wishes to pursue an aggressive agenda that will most likely result in litigation between the parties,” wrote Roger Walter, Oread Inn’s attorney.
Because the city had suspended reimbursements to the group starting June 9 during its investigation into the special taxing district established in the agreement, the city had broken the pact, Walter’s letter stated.
Oread Inn also said the city’s move to declare default earlier Thursday was “aggressive,” and the group demanded back the nearly $500,000 it paid to the city Dec. 31 “under protest” at the city’s demand.
The city has made multiple demands of Oread Inn in the two months since city officials announced the findings of an audit that alleged Oread Wholesale, a wholesale company listed as a tenant of The Oread hotel, manipulated sales tax data to inflate sales within a special taxing district at the hotel. The redevelopment agreement requires the city to rebate back to the development group a large percentage of local sales tax dollars collected in the special taxing district at 1200 Oread Ave. “Improper” reimbursements, paid from January 2010 through May 2015, totaled $429,594.74, the audit found.
Sending a check for nearly $500,0000 to the city — including reimbursements for the overpayment plus interest — was the one demand Oread Inn complied with.
Oread Inn has contested the remaining demands, which included agreeing to amend the redevelopment pact to allow the city better access for audits; handing over financial documents Oread Wholesale used to prepare sales tax returns; and paying for the city’s audit of Oread Wholesale.
Oread Inn answered the city’s default notice Thursday with its own set of demands.
First, Oread Inn demanded the city give back the $429,592.74 it paid Dec. 31. It also demanded the city pay the reimbursements it withheld from Oread Inn since it halted payments June 9; that it reimburse $158,245 Oread Inn paid in property taxes in 2015 and that the city assure, in writing, that it will keep monthly sales tax returns from the group confidential.
In a statement Thursday evening, Edward Frizell, Oread Wholesale’s attorney, said the response was intended to “set the record straight and set out the real facts of this matter.”
The response included more information about a letter and report sent to the city Jan. 27 in response to the audit. Oread Inn had said previously that Oread Wholesale retained its own experts to review the audit and write the report. The city and an attorney for Oread Wholesale declined to release the report Wednesday, but Stoddard’s letter Thursday states the report attempted to legally justify Oread Wholesale’s actions.
Stoddard said in an email that the report and letter “did not alleviate the city’s concerns.”
“The city has reviewed the letter and report thoroughly and find them, legally and equitably, to be wanting,” Stoddard wrote in the letter to Oread Inn.
Later in the city’s notice to Oread Inn, Stoddard states that Oread Wholesale has admitted to having a warehouse at The Oread hotel. A warehouse is listed under the redevelopment agreement as a restricted land use there. The city “brought that to Oread Inn’s attention” in November with a cease-and-desist letter, Stoddard’s letter reads. The city decided not to pursue the cease-and-desist based on feedback from Oread Wholesale and its attorneys, the letter states, but “now, it appears … Oread Wholesale has reversed course on the issue.”
The letter goes on to allege that Oread Inn has acted indifferently about the warehouse violation and that the development group “has not given any assurance to the city, written or otherwise, that it will cooperate with the city in the event of a similar future occurrence.”
Stoddard’s letter also says the city has “growing concerns” that “legal formalities were not maintained” in transactions made between Oread Wholesale, Oread Inn, DFC Company of Lawrence — the name of the group that owns Varsity House — and other entities. Part of that concern stems from the “significant overlap in ownership” of the companies, the letter reads.
Lawrence businessman Thomas Fritzel leads Oread Inn, Oread Wholesale and DFC.
One of the audit’s findings was that Oread Wholesale would buy items from vendors — everything from construction materials to supplies for The Oread hotel — without paying a sales tax. Oread Wholesale then would “sell” those items to other companies in which Fritzel has an ownership interest. The sales would be recorded as occurring at 1200 Oread Ave., which means the sales taxes paid by Fritzel’s companies would largely be rebated back to the Fritzel-led development group.
Oread Inn struck back Thursday, saying the city’s findings — compiled by Wichita-based Allen, Gibbs & Houlik — were based on “inaccurate and unsupported conclusions.”
Kansas City-based BKD, LLP did an analysis of Oread Wholesale’s sales tax procedures and a site visit, the letter states. The letter went on to list nine observations from BKD’s report, including that Oread Wholesale was a legitimate business; that transactions between Oread Wholesale and its customers were valid retail sales and qualify for reimbursement under the redevelopment agreement; and that the city’s allegation that Oread Inn received “improper” reimbursements was false.
“In good faith, the Oread companies have attempted to work, communicate and cooperate with the city of Lawrence in a thoughtful way,” Frizell said. “The companies have reached out on numerous occasions to the city of Lawrence and offered many opportunities to resolve any issues and avoid costly litigation.”
He called the city’s process “flawed and improper” and said Oread Inn and Oread Wholesale have “acted with integrity” and had “the upmost respect for this great community.”
Oread Inn’s letter states that when the city questioned whether Oread Wholesale had made sales outside the special taxing district but still counted them toward the reimbursable amount, Oread Wholesale voluntarily amended its sales tax returns to apply only sales to Oread Inn and DFC to the redevelopment district.
Under the redevelopment agreement, the city and Oread Inn each have 30 days to remedy issues before the other can take action.
Stoddard’s letter reads that the city has the right “… in its own behalf and in behalf of the citizens of this community, to take those actions necessary to ensure that the terms, provisions and intent of the redevelopment agreement are carried out.”