Resort Investor To Sue Bahamas Government

Monday, 16 November 2009 00:00 News Editor
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A Bahamas-based investor who has injected $22 million into his resort project over the last two years is preparing to file a legal action against the Government "early this week", amid fears it will not honour his Heads of Agreement, and said: "I feel as if the rug has been pulled out from under us."

Michael Reardon, vice-president and one of the principal investors in the Eleuthera-based Sky Beach Club project, told Tribune Business he had not been refunded some $200,000 worth of Customs duties, as Prime Minister Hubert Ingraham had allegedly said would happen, with the tax payments having increased construction costs by 45 per cent and scared away potential real estate buyers.

Telling this newspaper he would "not have spent a dollar in this country" had he known the roadblocks he was likely to encounter, Mr Reardon said the Prime Minister and his administration were also holding off from signing the Sky Beach Club's proposed Hotels Encouragement Act agreement.

In the absence of this agreement and the $200,000 refund, Mr Reardon said the Sky Beach Club's development was at a "standstill", and while he did not wish to "make an enemy" of the Prime Minister or his government he had no choice but to initiate litigation to ensure the Government honoured the Heads of Agreement signed by both parties.

Mr Ingraham, through his spokesperson, declined to comment on the Sky Beach Club situation, because during the Government's "last correspondence with the developers, he was advised that this matter would be put before the courts".

Joy Jibrilu, head of the Bahamas Investment Authority and the director of investments in the Office of the Prime Minister, did not return a Tribune Business call seeking comment before the weekend.

However, describing the origins of the current dispute with the Ingraham administration, Mr Reardon recalled how Sky Beach Club and its developers - chiefly himself and his father, Tim - signed a Heads of Agreement for the development with the former Christie government in 2006.

The project had its groundbreaking in January 2007 and construction began, with the developers able to import all construction materials, plus furnishings, fixtures and such like for the resort, duty-free under the Heads of Agreement's provisions.

Sky Beach Club continued its customs duty/stamp duty free imports until mid-2009, when it was informed by Customs that it needed to sign a Hotels Encouragement Act agreement with the Government to enable it to carry on this activity.

The Hotels Encouragement Act agreement is a subsidiary, but vital, piece of paperwork under all Heads of Agreement, since it details the collective worth of all materials being imported by a developer, plus the customs duty, stamp duty, real property tax and other tax exemptions they are entitled to.

Mr Reardon told Tribune Business that prior to this point, neither the Government, Customs nor his former attorneys had informed Sky Beach Club that it needed to have a signed Hotels Encouragement Act agreement to permit it to import vital materials duty-free.

He explained that Sky Beach Club provided its draft Hotels Encouragement Act agreement to the Government in February 2009. At a subsequent meeting with the Prime Minister, attended by his father and the project's current attorney, David Johnstone of Lennox Paton, Mr Ingraham was said to have promised to refund the $200,000 worth of Customs duties the developers had paid after being stopped from using the Heads of Agreement to import materials duty-free. The Hotels Encouragement Act agreement was also supposed to have been signed.

Estimating that this meeting took place around "six months ago", Mr Reardon said no refund or signed Hotels Encouragement Act agreement had been forthcoming, despite weekly communications between Lennox Paton and the Government to see if everything had been completed.

"They haven't honoured it," Mr Reardon said of the Government and his Heads of Agreement. "I've spent $200,000 in Customs duties since then that I should not have had to pay.

"I'm the only developer in Eleuthera that, since the world fell into turmoil, has never stopped. We're the only ones. I've spent $12 million on local contractors in Eleuthera. I don't know how we can have an agreement with the Government of the Bahamas that can be changed when the political parties change.

"We thought we had an agreement with the Government of the Bahamas. We thought we had a democratic society here. This doesn't make sense to me. We completed a Hotels Encouragement Act agreement, and he's [the Prime Minister] just never signed it."

Some $5 million had been invested in Sky Beach Club in the past year alone, and Mr Reardon added: "I was entitled to the Hotels Encouragement Act [incentives] under the Heads of Agreement, and they said they were going to sign it and refund our monies.

"Lennox Paton is working on it [the lawsuit], and it's going to be filed early next [this] week. We have nothing under construction right now. We've put everything on hold for the last six months. Why do it when it costs $1.40 for a piece of material when I should be paying $1?"

Without the Hotels Encouragement Act incentives, Mr Reardon said Sky Beach Club had lost potential real estate buyers because the investment opportunity - especially in this climate - had become much less attractive - due to the increased construction costs.

The absence of the tax exemptions raised construction costs by an estimated 45 per cent, he argued, turning a $1 million project into a $1.4 million development. "I have to disclose to every single person interested in buying a lot, for my own liability, when they ask whether we are entitled to the Hotels Encouragement Act, I have to tell them it's been revoked from me," Mr Reardon said.

Sky Beach Club had been unable to pursue its development model, he explained, and investors were concerned about whether they would earn the expected return on their investment when their property was placed in the hotel rental pool for nine months per year.

Reeling off a list of Eleuthera-based projects that either had not commenced construction or ground to a screeching halt once the global credit crunch and recession hit, Mr Reardon suggested that the current impasse with the Government had resulted from the Prime Minister's resistance to extending Hotels Encouragement Act incentives to condotels and accommodations, such as bungalows, villas and houses, that were placed by their owners into a hotel rental pool.

The Prime Minister has previously expressed concern that, under the former Christie administration, investors and developers had been able to access incentives and tax exemptions under the Hotels Encouragement Act without having the necessary agreements in place.

The concern, he explained, was that through this the Government might lose out on revenues due to it - a major issue at a time when the administration is desperate to lay its hands on any revenue it can to plug the widening fiscal deficit and a debt-to-GDP ratio approaching 50 per cent.

And whether to extend these incentives to ownership-based resorts, such as the condotel model Sky Beach Club is predicated on, is another concern the Prime Minister has articulated, the suspicion being that some developers place these accommodations in a rental pool just to qualify for the tax exemptions.

Another major issue is whether an investor can pass on his tax exemptions to real estate purchasers, lowering their construction costs, when Bahamians do not receive the same.

Still, many investors and businesspersons are likely to feel that the Government is playing 'a dangerous game', given that Mr Reardon and Sky Beach Club already have a signed Heads of Agreement with the Government.

Attempts to change the details of such an agreement after the fact could potentially damage current and potential investor confidence in the Bahamas, and raise doubts about the security of any arrangements with the Government (especially when it changes hands), at a time when this nation needs all the foreign direct investment it can get.

Experiences such as the one encountered by Sky Beach Club could increase investor perceptions of 'political risk' when it comes to investing in the Bahamas, a negative development for this nation.

"Not only would I not have spent $22 million, I would not have spent a dollar in this country," Mr Reardon told Tribune Business. "Why would you come here, invest here, and then you have a political election in a democratic society and they decide your agreement with the Government is no longer going to be enforced?

"From our experience, we would never have done this deal if we had known this would take place - a change in power would affect our agreement with the Bahamas. I don't think Perry Christie would ever have done this to us.

"I know Bahamians, and know from my staff how committed they are to one political party or the other, but I don't pay attention to it. I'm just a foreign investor.

"I'm trying to develop the best resort I can and build it. Why am I being punished? I want to know of any other developer who has spent $22 million in the last two years in the worst economic depression in memory. Has anyone else in the Bahamas spent as much money, apart maybe from Kerzner International?

"We're a little site on an Out Island. We've spent a tonne of money, a huge investment, and feel as if the rug's been pulled out from under us."

Mr Reardon added: "The biggest loser is the people of Eleuthera. If I am not investing, why am I not going to pull the plug and move out?

"That's not my rationale, but everything's on hold right now. I've been through too much to pull out, but everything's on hold. The whole vision has been spoilt. I can't figure out under what scenario this is positive for the country of the Bahamas.

"I really don't want to bring suit against the Government. I don't want Hubert Ingraham as an enemy. I just want to continue on with my resort."

Mr Reardon, though, threatened that if the situation was not "corrected", details were likely to emerge in the US media, especially in south Florida or New York.

Pointing to a potential flaw with the Government's reluctance to grant investment incentives to condotels and properties with an element of vacation ownership, Mr Reardon said such a development model was ideally suited to the Family Islands, where visitors wanted low density development - as opposed to mega resorts - and a tranquil atmosphere to escape modern life's pressures. He questioned whether other similar Family Island condotels, such as the Ritz-Carlton at Winding Bay, had been subject to the treatment he had received.

Set on a 22-acre site near Governor's Harbour, Sky Beach Club currently employs 22 Bahamians, with four, four-bedroom homes, three bungalows, a restaurant, pool and bar, plus all the necessary infrastructure, having been completed.

The developers have so far been able to sell seven of the 33 available lots, which all occurred prior to the recession.

Source: The Tribune