Developer-commissioned analysis: Oread Inn owes fraction of what city says
Report contends Oread Wholesale 'properly' charged sales taxes
The latest disagreement between the developers of the Oread hotel and the city of Lawrence boils down to this: $90,000 vs. $500,000.
A new report commissioned by the Oread developers concedes the development group was overpaid about $90,000 in taxpayer funds as part of a special taxing district for the hotel near Kansas University’s campus. But the report vigorously denies that the development group owes nearly $500,000, which is what a report commissioned by the city earlier found.
Members of the Oread development group recently provided a host of documents to the Journal-World, including an analysis by BKD, LLP, a Kansas City, Mo.-based accounting and advisory firm that was hired by the development group to study the dispute. The report, and an accompanying five-page document titled “Setting the Record Straight: The Facts of The Oread Redevelopment District,” express concern that the city is positioning itself to unfairly void the entire $11 million special taxing district that is designed to pay for public infrastructure and a private parking garage for the hotel.
“Oread Inn and Oread Wholesale have attempted to cooperate and work out this matter throughout this entire process with the city of Lawrence, however at every junction… have received a message of rejection…” the fact sheet states. “At the present time, it appears the city of Lawrence wants to litigate this matter in an attempt to negate the redevelopment agreement and go back on its promise to reimburse Oread Inn… This is not reasonable.”
The development group on Feb. 16 asked for an immediate meeting with the city to try to resolve the tax dispute. Interim City Manager Diane Stoddard said in an email Feb. 17 that the city was “considering the meeting request.” She did not have an update when asked about it Monday.
The letter and fact sheet allege that the BKD report is more credible than the city-ordered audit of Oread Wholesale, the company at the center of the tax dispute. The documents sent Friday call the city-ordered audit — which was conducted by Wichita-based Allen, Gibbs and Houlik — “flawed,” “erroneous” and “nonsensical” and its process superficial. The documents also say the city violated numerous Kansas laws by both hiring the analysis of Oread Wholesale’s sales tax procedures and making public a final report about it.
Further, the documents contend Oread Wholesale does have an office in a special taxing district at 1200 Oread Ave. — a point that’s been argued — and that the Kansas Department of Revenue has previously audited the business and found it’s legitimate, and not a “sham,” as the city-ordered audit alleged.
Now a yearlong dispute
City officials and representatives for Oread Inn and Oread Wholesale previously declined to release the analysis from BKD and a 22-page letter that accompanied it from Scott Lindstrom, with Polsinelli, a Kansas City, Mo.-based law firm that Oread Wholesale has retained.
Since the letter and the BKD analysis were delivered to the city Jan. 29, both the city and Oread Inn have exchanged letters of default on their redevelopment agreement.
In its notice of default to the city, Oread Inn said Lawrence was failing to reimburse the group and broke the agreement by paying for the city-ordered audit out of the funds that should’ve been used to pay Oread Inn. According to city documents, the last check sent to Oread Inn was June 9. Payments have been halted during the dispute.
In the city’s letter to Oread Inn, Stoddard listed five demands with which Oread Inn has failed to comply, breaking a clause of the agreement that calls for mutual assistance. The city demands had been made in December, when the city-ordered audit alleged that Oread Inn had used Oread Wholesale to manufacture sales within a special taxing district, boosting the amount developers received from the city.
City officials began questioning last February whether sales made by Oread Wholesale should be sourced to the special taxing district.
Lawrence businessman Thomas Fritzel is an executive with Oread Wholesale, Oread Inn and other companies Oread Wholesale made sales to, including DFC Company of Lawrence LC and The Eldridge Hotel.
The redevelopment agreement between the city and Oread Inn created a special taxing district at 1200 Oread Ave. that could generate up to $11 million for the development group — intended to be payback for the infrastructure and parking garage improvements the business made to the area when it built the hotel in 2008. The tax district has brought in $3 million for the group since the agreement was signed.
In the notice to Oread Inn, Stoddard said that if Oread Inn didn’t address the issues in 30 days, it would be grounds for the city to terminate the agreement. The fact sheet says Stoddard sent the notice to developers “without any attempt whatsoever” to talk with the Oread groups about the BKD report.
“The only conclusion that can be drawn here is that the city of Lawrence intends to claim that Oread Inn is not to be repaid any of the approximately $11 million plus interest that Oread Inn financed for the benefit of the city,” the group’s fact sheet reads. “There can be a reasonable difference of opinion perhaps about whether some sales reported by Oread Inn should not have been reported as occurring in the redevelopment district. However, no one can responsibly claim that NO sales have occurred in the redevelopment district.”
The fact sheet states that Oread Wholesale wanted to share the information from BKD because it is “in the best interest of the public and the citizens of the Lawrence community.”
What Oread Inn owes
The analysis by a BKD partner, Robert Johnson, was an “independent audit,” Lindstrom said in his letter. The accounting and advisory firm had never previously worked with the Oread groups, he said.
The 56-page analysis contained eight findings, including that Oread Inn owed the city and county $78,490.62, and not $493,234.96 — the amount the city-ordered audit found due and what has already been paid to the city “under protest.”
The $493,234.96 comprises $232,604.54 reimbursed by the city, $49,383.29 by the county and $147,606.91 in transportation development district dollars, all of which AGH said was “improperly” received by Oread Inn because Oread Wholesale’s transactions should not legally be seen as retail sales.
The hotel, at 1200 Oread Ave., is a transportation development district (TDD) as well as a tax increment financing district. The development district allowed Oread Wholesale to charge an additional 1 percent sales tax to its customers. In his analysis, Johnson said that even if the city were correct about the improper reimbursements, the $147,606.91 in TDD dollars would actually be owed to Oread Wholesale’s customers to which the additional sales tax was charged, and not to the city. Lindstrom’s letter said all of Oread Wholesale’s customers are companies affiliated with Oread Wholesale.
Johnson’s analysis goes on to say Oread Inn does owe $90,274.09, most of which should be paid back because of amendments Oread Wholesale made to its sales tax returns after the city first questioned Fritzel about sales inside the special taxing district.
The fact sheet attempts to explain this. According to the document, city officials told Oread Inn in March 2015 that some sales reported in the district were incorrect. Oread Inn contacted the Kansas Department of Revenue to discuss how it was reporting sales, and, based on a letter from the Kansas Department of Revenue about sourcing rules, Oread Wholesale voluntarily amended its sales tax returns from January 2012 through March 2015.
Through the amendments, Oread Wholesale excluded half of its sales, more than $4.5 million of $8.9 million in total sales. The sales it kept intact were made only to Oread Inn or DFC Company, the name of the group that owns Varsity House on Indiana Street.
The amended tax returns are what was provided to the city for its audit and what BKD analyzed.
Johnson said in his analysis that Oread Wholesale made the amendments through the state “in attempt to resolve the city’s inquiry and to maintain a good standing business relationship.”
Johnson’s analysis explains that because Oread Inn received reimbursement for the sales that were now amended, Oread Inn owes that reimbursement — $87,159.71 — back to the city. Another $45,089.07 in TDD dollars is owed back to Oread Wholesale’s customers.
But Johnson also found some instances, though rare, where sales were misapplied to the special taxing district. Of 1,328 sales made by Oread Wholesale to Oread Inn, 12 should not have been eligible for city reimbursement, he said. Of the sales made to DFC for Varsity House, Oread Inn received reimbursements on five sales that it should not have. The money owed to the city for these instances is $3,114.38.
It was found by Johnson, however, that the city never reimbursed Oread Inn for $11,783.47 for sales taxes Oread Wholesale paid the state in 2013 after it was audited by the Kansas Department of Revenue. That KDOR audit found that Oread Wholesale had $38,391 in unreported sales tax on audio and video equipment purchases, though, according to Johnson’s report, KDOR said nothing similar to the complaints raised in the city-ordered audit.
With the city owing $11,783.47 on the amount Oread Wholesale paid after the KDOR audit, Oread Inn actually owes the city a total $78,490.62, according to Johnson’s analysis.
The analysis also determined:
• Oread Wholesale is properly using a Kansas resale exemption certificate, which the city-ordered audit alleged it wasn’t.
• Oread Wholesale is required to charge Kansas sales tax for sales to its affiliated companies, including Oread Inn, The Eldridge hotel and DFC Company. AGH had found in its audit that transfers between the affiliated companies shouldn’t been deemed retail sales under Kansas law.
• Sales from Oread Wholesale to Oread Inn happened within the special taxing district at 1200 Oread Ave., making Oread Inn eligible to receive reimbursement from the city and county on those paid sales taxes.
• Sales from Oread Wholesale to Varsity House occurred within the special taxing district and qualify for reimbursement. It was brought up in the city-ordered audit that even if sales to Varsity House were deemed legitimate, they should not have been eligible for reimbursement by the city because the Varsity House property, 1043 Indiana St., is located outside of the special taxing district. But Oread Wholesale owners have said deliveries of materials were made to the alley adjacent to Varsity House, which is included in the special taxing district. BKD interviewed the construction foreman for the Varsity House project, who confirmed the materials were delivered to the alley.
• Oread Wholesale has offices, a showroom and three storage areas inside The Oread hotel.
The Kansas Department of Revenue audit of Oread Wholesale in 2013 didn’t dispute the company’s practice of procuring items at wholesale prices and reselling them to its affiliated companies, both the BKD report and Lindstrom’s letter state.
That led Oread Wholesale to believe its practices were acceptable.
“Based on the Kansas Department of Revenue audit, Oread Wholesale believed, and still believes, it was properly sourcing and charging the applicable tax rates for its sales,” Lindstrom wrote. “We do not believe the city or its representatives are more qualified to interpret and enforce Kansas sales tax law than the Kansas Department of Revenue auditor who previously conducted a state audit of Oread Wholesale.”
City officials have maintained since the AGH audit was completed in December that Oread Inn owed the $493,234.96. Officials have also held steady on their other demands.
The city’s last correspondence to Oread Inn — the notice of default — stated city officials had reviewed the BKD report and the accompanying letter by Lindstrom and found them “legally and equitably, to be wanting.” Stoddard wrote that the report “”did not alleviate the city’s concerns.”
“…based upon its review of the invoices and Oread Inn’s actions to date, the city has a growing concern that, with respect to Oread Inn, Oread Wholesale, DFC Co. and other entities, legal formalities have not been maintained, especially with regard to those intramural transactions claimed to have been brought under the redevelopment agreement,” Stoddard wrote.
She went on to say the city’s concerns were “exacerbated” by the overlap in ownership of the companies and a “tepid” response to the city’s Dec. 16 letter outlining the issue and asking Oread Inn to meet several demands.
Stoddard said Monday she had no further update on the city’s position.