City leaders approve Oread hotel settlement that reduces incentives, removes Fritzel from management

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.

The Lawrence City Commission unanimously approved a settlement in the city’s lawsuit against The Oread hotel that will cut millions from the hotel’s incentives agreement and force the hotel’s developer to resign his management position.

Brad Russell, the attorney representing the city in the case, told commissioners at their meeting Tuesday that the settlement was the best move for the city financially. He said if the case were to move forward, it could continue for more than two years and cause the city to spend more money in litigation than it’s owed.

“At some point in time, you risk tipping points where both sides have invested so much time and money that now the city has to get a million dollars to break even,” Russell said.

The civil lawsuit accuses hotel developer Thomas Fritzel of fraud and racketeering. As part of the settlement, The Oread will have to reimburse the city $650,000 and agree to significant reductions in the hotel’s multimillion-dollar incentives agreement. Fritzel will have to resign as a manager of The Oread for the remainder of the hotel’s 20-year incentives agreement, and hotel managers would be subject to city approval. Also, Fritzel or any entity that Fritzel or his wife are affiliated with must agree to a five-year ban on seeking incentives from the city that involve sales tax reimbursements.

Some of those who spoke during public comment, however, said they didn’t think the settlement went far enough, and that the incentives agreement should be completely rescinded as originally sought in the city’s lawsuit. Commissioner Matthew Herbert said he understood that there is a lot of anger in the community, but that he thought the settlement was the best way to be a steward of taxpayer money.

“This is a win for the City of Lawrence and our taxpayers,” Herbert said. “This, from a dollars standpoint, is a no-brainer.”

The 20-year incentives agreement between the city and the hotel was intended to at least partially pay the developer back for the infrastructure improvements made to the area as part of the hotel’s construction in 2008. The agreement created a special taxing district at 1200 Oread Ave. that requires the city to rebate the development group a large percentage of local sales taxes collected in the district.

Commissioner Lisa Larsen said that she was disappointed that the incentives agreement that the city made in good faith was broken not only in the technical aspect but also in the spirit of the agreement. Still, she said the amount of money and staff time already spent on the lawsuit was significant, and that the settlement was the best option.

“I kind of look at the mediation process as somewhat of a gift,” Larsen said. “It gives us, the parties, the opportunity to control the outcome, their destiny, so to speak. We don’t get that in a court of law, we don’t get that through a jury, yet we get it through a mediation process.”

The judge in the case ordered the mediation, which will conclude with a status conference on April 28. Russell said the two mediation sessions, which totaled more than 18 hours, were a rarity in his time as an attorney and characterized them as “contentious.”

In November, the city filed the civil lawsuit alleging that Fritzel had engaged in a fraudulent scheme to generate undue tax rebates from the city. The lawsuit alleges that Fritzel used other companies he controlled to improperly attribute retail sales at the hotel to collect inflated tax rebates.

A city-commissioned audit report indicates that hundreds of purchases — such as landscaping for Fritzel’s personal residence, rental of a party tent, and construction materials for unrelated projects — were all improperly reported as retail sales that occurred at the hotel. The lawsuit sought to terminate the multimillion-dollar incentives agreement for The Oread, as well as recoup monetary damages.

In addition to the $650,000 in damages, the settlement will reduce the value of the hotel’s incentives agreement by millions of dollars. The threshold for when the city will begin receiving a share of tax proceeds from the hotel’s taxing district will be reduced from $7.1 million to $5.75 million. In addition, the amount the city is required to reimburse the developer for infrastructure will be reduced from $11 million to $8.5 million. The hotel will also have to pay for annual audits.

Commissioner Mike Amyx said he agreed with the comments of other commissioners. Amyx added that, for him, the worst part was the loss of trust, but that he thinks safeguards are in place to prevent problems in the future.

“I think that there was a lot of work that was done to make the city whole, but also to protect against other things that may happen in the future,” Amyx said. “And I think this agreement has done all of those things.”

In other business, the commission:

• Took no action regarding a proposed transit hub location study for the city’s bus services. The commission directed staff to review the study’s timing in relation to a referendum for the sales tax that helps fund transit and the deadline to allocate the grant money earmarked for the study. The topic will come before the commission again next month.

• Directed staff to proceed with bid proposals and lease agreements for phases one and two of changes to Eagle Bend, the city-owned golf course. The commission also directed staff to review whether the third phase of the project, a clubhouse expansion, could be funded using the course’s revenue.