The Westin Book Cadillac Detroit hotel downtown has been outperforming most of its national peers, but behind the scenes, the city and pension funds used for its redevelopment nearly 10 years ago may now take a huge loss.
The Westin Book Cadillac Detroit Hotel was redeveloped in 2008 at a cost of $188.9 million. It was one of the most complicated restoration projects on record.
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The $188.9-million restoration of the Westin Book Cadillac hotel in downtown Detroit nearly a decade ago is widely acclaimed as the catalyst for the renaissance of new development that almost weekly is transforming a city that, for decades, suffered from a dilapidated and moribund national image.
As renovations began on the hotel in 2006, the “deal of all deals” to finance the project was described as one of the most complicated redevelopment efforts in the nation. “It’s definitely the poster child for the most complicated historic tax credit deal ever done,” Ronald DeGrandis, managing director of RSM McGladrey Inc., a major Cleveland accounting firm that oversaw the Book Cadillac’s financial package, told DBusiness in an October 2008 cover story.
Cleveland-based developer John J. Ferchill and his team, using 22 different levels of financing — including tax credits and deductions — assembled a $117-million package in the total $188.9-million restoration tab. “The schematic of ownership and related entities is beyond comprehension,” DeGrandis said. “It’s like one of those Whac-A-Mole games where you hit one and another one pops up. And (Ferchill)’s the guy with the mallet. It’s like a secret cult, and without a flow chart, we would’ve been lost.”
Unfortunately, the City of Detroit — and especially its two major city worker pension funds — are among the moles that are currently getting wacked.
While in recent years the hotel has outperformed most of its peers nationally in terms of occupancy rates, dining receipts, and entertainment expenditures, the city and pension funds are collectively owed $42 million. Of that amount, the city guaranteed $18 million in federal HUD money for the redevelopment, while the pension funds together chipped in the remaining $24 million.
As it stands, neither the city, nor the Detroit Police and Fire Retirement System and the General Retirement System that covers retirement benefits for thousands of police, fire, and civilian employees, have received a dime of repayment since making those loans a decade ago. The General Retirement System is owed $9 million, while a $15 million loan from the First Independence Bank of Detroit, which was defaulted on, was backed by the Detroit Police and Fire Retirement System.
In 2012, Ferchill, chairman and CEO of The Ferchill Group in Cleveland, informed the police and fire board trustees that he could not meet the terms of the bank loan from First Independence. With the default that followed, the police and fire fund was on the hook for $15 million.
Ferchill, who was the catalyst for the redevelopment, says the 2008 global financial crisis, the pending bankruptcy of General Motors Corp., Chrysler Corp., and several automotive suppliers, along with a post-construction appraisal, contributed to the hotel’s early operations.
“The day all the loans were put into place, the hotel had an as-built appraisal value of $120 million, which means if you built it then it would have a value of $120 million,” Ferchill says. “That was the basis of the financing. That means it was somewhere around 60 percent loan to value. It opened in November 2008, and we then had to do a second appraisal, and honest to God, it came out at $25 million because of the market being down. So there was this enormous hit. That meant the value of the hotel went down by 80 percent. We had $9 million of deficit money to ride it out for three years, but the money was going out so fast we knew eventually there would be a default.”
A source close to the original investment package says that, early on, the hotel didn’t produce enough revenue to “pay off the junior lenders in the deal, let alone pay on the senior note.”
“The original senior note-holder, iStar Financial (Star Financial Inc.), sold off their interest because the debt wasn’t being serviced,” the source continues. “They exited the deal at a loss. I would say now the hotel is performing quite well, and if that trend continues, the city and the pension funds should stay in the game because, over time, they should be able to get all of their money back.”
In May, it appeared that the only return for the city and the pension fund investments would have come from a settlement in a lawsuit the city and the two funds filed in 2013 against the Carpenters Pension Trust Fund and its affiliate, CPTF Book Cadillac, an entity created by the carpenters to handle their involvement in the Book Cadillac project.
Neither Ferchill nor his partners were a party to the lawsuit. The plaintiffs, in their case, objected to the way they, as junior lenders in the deal, were being treated by the Carpenters Pension Trust Fund. In their filing, the city and the two pension funds argue that they should be held in the same position as the Carpenters, and are entitled to receive regular payments to eventually retire their debt.
Multiple news stories reported that the Detroit City Council voted 8-0 to accept a $22-million settlement the Carpenters Pension Trust Fund had offered to settle the debt to all parties. The reports quoted a city official saying the city would use $10 million that would go toward paying down the $18 million obligation to HUD. The remaining $12 million was to be split among the two pension funds.
A spokeswoman for the General Retirement System was quoted as saying her group was on board with the settlement, and was negotiating with their police and fire counterpart on splitting their share — the General Retirement System is owed a total of $9 million, while the police and fire fund is owed a total of $15 million.
Those reports proved to be premature. The police and fire pension trustees balked at accepting what would have been less than 30 cents on the dollar for their loan, sources say.
“While we appreciate the media interest in the Book Cadillac Hotel settlement proposal that was prematurely made public at a recent City Council meeting, this litigation matter is ongoing,” says Bruce Babiarz, a spokesman for the police and fire fund trustees. “Accordingly, we cannot discuss any specifics of the case at this time. We are confident that the Police and Fire Retirement System Board of Trustees, staff, and legal counsel are working in the best fiduciary interests of pensioners toward a resolution."
However, Ferchill says there is a lot more to the story that the city and pension funds are not making public. He says the charge of secret deals and back door dealings alleged by the city and pension fund lawyers is simply untrue. Not only was there never any secret dealing, the idea to buy out iStar Financial’s loan was one he proposed to his lenders.
“I went to the pension funds, (and) all the secondary lenders, (including) the police and fire pension funds, the general (retirement fund), the city, the carpenters, and told them I can buy the New York firm’s loan at a discount but I need help from you guys. But every single one of them except the carpenters turned me down,” he says. “I asked them to come in with me and we’ll buy out that first mortgage and everybody will be on that (new) first mortgage and I will get them paid. It was $36 to $38 million total to buy out this first mortgage. The carpenters made the decision to put the money up to save their $17 million.”
Ferchill says the Carpenters Pension Fund’s action spared the hotel. “We went back and we saved the hotel and now it is very successful. If anybody looks at this thing carefully, that hotel was the start of saving Detroit,” he says. “If we didn’t do that hotel nobody would be (investing) there today.”
Ferchill also says another false assumption about the $22 million settlement the police and fire pension fund turned down was that the money was coming from the Carpenter’s Pension Fund. “I went out and raised that money myself,” he says. “I offered to go out and get enough money to pay everybody off and let them go away. I went back and researched what second and third mortgage holders got out of city-owned deals like this one. The highest number I could find (and don’t hold me to this) was about 40 percent, so I told them I would give you guys 50 cents on the dollar meaning that if there was $42 million owed, I would come up with $21 million.”
He says he sat in on the settlement meetings with a facilitator who thought that amount would lead to a settlement. But the facilitator, Ferchill says, was having trouble getting everyone to agree, and asked Ferchill if he could find more money.