LITTLE ROCK — The federal government will tax interest earnings on bonds intended to be tax exempt that were issued by a Little Rock public authority in 2004 to finance the renovation of a midtown hotel,a member of the authority’s board confirmed Thursday.
The Internal Revenue Service has determined that interest earnings from about $3 million in bonds issued by the Arkansas Residential Housing and Public Facilities Board to finance the renovation of the former Hilton Little Rock hotel would be taxable because the hotel developers couldn’t meet a requirement to hire enough workers from a specified zone within the city, said board member Mike Watts.
The hotel is near the intersection of South University Avenue and Interstate 630 but no longer bears the Hilton name.
“For those bonds to be tax exempt there were a number of requirements that the Hilton and their owner had to meet, and one of them was that they had to hire 35 percent of their workers from within a targeted area, and they failed to do so,” Watts said, referring to an enterprise zone that encompassed midtown Little Rock and extended a few miles out in each direction from the hotel.
“As a result of that, the bonds lost their tax-exempt status, and the interest becomes taxable to the recipients who thought it was going to be tax-exempt,” Watts said in an interview late Thursday.
The Bond Buyer, a national municipal-bond publication, first reported the IRS decision late Thursday, citing unnamed sources.
Watts said the IRS’ decision doesn’t have any impact on public funds, which weren’t used in the hotel project.
“There is no public money involved in this or at risk in this,” Watts said.
The Bond Buyer report also noted that the IRS’ ruling might be a moot point going forward because the bonds are in default and bondholders may not receive any additional interest payments. The report specifically cited a federal Chapter 11 bankruptcy filing last year by Bruce Burrow, a Jonesboro developer involved in the hotel’s renovation.
According to the Arkansas secretary of state’s office, Burrow is the registered agent for HLR LLC, the entity that received the bonds’ proceeds to help finance the purchase and renovation of the hotel.
The secretary of state’s documents list both “Clarion Hotel Medical Center” and “Little Rock Hilton Inn” as names associated with HLR. A phone message left late Thursday for Bradley S. Waterman,who is listed as HLR’s special tax counsel, wasn’t immediately returned.
The revenue bonds in question were part of an issuance approved by Little Rock voters in 2002.
At the time, voters approved the issuance and sale of up to $19 million in bonds to renovate the Hilton, which now bears signs identifying it as the Clarion Hotel Medical Center.
According to an Arkansas Democrat-Gazette article published in July 2002, the Peabody Hotel Group, which acquired the Hilton out of foreclosure in 2000, lobbied for the passage of the bond issue and paid for the special election.
The Bond Buyer report said Martin Belz, the Peabody group’s chairman and president, was linked to HLR, but neither he nor the hotel group are noted in the secretary of state’s documents accessed Thursday.
Pulaski County assessor’s records list a billing address for the hotel that is the same post office box publicly listed for Belz Investment Co. in Memphis.
The bonds were used per Amendment 65 to the Arkansas Constitution, which requires public votes on revenue bonds to finance facilities such as hotels.
Watts said he doesn’t know exactly how many people or entities purchased the bonds, which he said is a difficult process to track.
“I asked that question one time when we were discussing that question in a board meeting ... and we really couldn’t get a good answer to that question,” he said.
He referred questions about the number of bondholders to the board’s attorney, Jane Dickey of the Rose Law Firm. A message left after business hours Thursday on Dickey’s office phone wasn’t immediately returned.
The Arkansas Residential Housing and Public Facilities Board’s role in the decision was to agree to the IRS and HLR LCC’s settlement because the board was the “issuing conduit,” Watts said.
“My understanding is that at this point, we’re really out of it,” he said of the board. “We just wait and see what happens in terms of the default.”
Watts, who served on the board when the bonds were issued, said the board has been aware that the IRS was reviewing whether the requirements of the bonds were being met for several years.
Clay Sanford, a spokesman for the Internal Revenue Service in Dallas, said he wasn’t authorized to comment on any particular taxpayer case such as HLR LLC or the Arkansas Residential Housing and Public Facilities Board.
The IRS’ dispute with HLR is outlined in a public notice filed Feb. 8 with the Municipal Securities Rule making Board on its Electronic Municipal Market Access website,
According to the notice, the IRS first began examining the bonds in 2006.
In April 2008, the IRS entered into an agreement with HLR and the public-facilities board that required outstanding bonds be redeemed by Aug. 1, 2008.
“HLR reasonably believed ... that it would be able to arrange financing to redeem the bonds. It diligently attempted to arrange financing both before and after Aug. 1, 2008,” according to the notice. “It was unable to do so because of unanticipated financial circumstances beyond its control.”
The IRS conducted a second examination in January 2011 and issued a determination five months later that cited the failure to meet the 35 percent employment level. Later in 2012, the notice notes, the IRS made a finding that the interest was taxable.
“Each bondholder who receives interest on the bonds on or after January 1, 2012, should consult with his/her/its tax advisor and/or legal counsel,” the notice reads, to determine whether the interest is taxable under either the 2008 agreement or the 2012 agreement.
The findings come amid Burrow’s bankruptcy, which was filed July 30, 2012.
According to the filing in the U.S. Bankruptcy Court for the Eastern District of Arkansas, Burrow listed between 50 and 99 creditors. The Chapter 11 bankruptcy reorganization filing estimated liabilities between $50 million and $100 million. Burrow listed estimated assets of between $10 million and $50 million.
Among the major creditors listed in the bankruptcy filing was Liberty Bank of Arkansas in Jonesboro, which made a claim for $14 million. The bank’s claim referred to the Hilton Hotel located on South University Avenue with an “approximate value of $24 million.”
Arkansas, Pages 9 on 02/22/2013