BRADENTON, Fla. - Municipal bonds helped finance the picturesque Stonewall Jackson Lake State Park Resort in Roanoke, W. Va.
For investors the experience hasn't been as pretty as the resort itself.
They have not been paid about $18 million due since $42.02 million in nonrated, uninsured tax exempt commercial development bonds were sold in 2000 by the West Virginia Economic Development Authority to build the resort, according to Rudy Henley, sole owner of MHLP LLC, the developer.
However, Henley said, bondholders have cooperated for years on planning initiatives to increase revenues at the state park resort overlooking West Virginia's second-largest lake. The resort opened in 2002.
Touted as one of the first in the nation developed as a public-private partnership, the park resort has been beset by events such as a flood in the middle of constructing the Arnold Palmer golf course, corporate outings that decreased dramatically after Sept. 11, 2001, and other factors.
Those factors include the complex structure of ownership and oversight: the U.S. Army Corps of Engineers because the federal government owns the land, the state of West Virginia as title-holder of the resort, the Economic Development Authority as the conduit that sold tax-exempt bonds to finance the resort, and bondholders who have a possessory interest in revenues generated by the estate for security, as well as various state agencies.
"It's a good project, and bondholders who got close to the deal understand and support it," said Henley. "The original structure, everyone agrees, was a little bit of a straightjacket."
It has taken six years for the parties to agree on how to allow the resort to increase revenues.
The Economic Development Authority, which did not respond to a request for comment by press time, is expected to consider an agreement later this month that will allow some land now secured by the bondholders' estate to be released so private developers can build five cottages.
The additional revenue from the new lodging will go towards bondholder payments.
The Corps of Engineers also must sign off on the deal.
The project hasn't paid some or all debt service since around 2006 but only recently has a disclosure notice been filed on the Municipal Securities Rulemaking Board's EMMA filing system, which was noted in a Jan. 2 default report by Municipal Market Advisors.
EMMA began collecting disclosure documents in July 2009.
The EDA issued $28 million of variable-rate bonds and $14.02 million of fixed rate bonds in 2009 to finance the 198-room Adirondack-style lodge and amenities that overlook the 26-mile-long Stonewall Jackson Lake, which was created as part of a federal flood control project by the Corps.
While notices about ongoing payment defaults do not appear on EMMA, filings on DPC Data's MuniFILINGS and the project's audit show that payment defaults began as early as 2006, which is also when the second principal payment was due on the variable-rate bonds.
The last notice regarding non-payment was in October 2006 while there was a notice of partial interest payment on Oct. 1, 2007.
A majority of bondholders formed a committee on Sept. 18, 2006 "to represent the interests of the bondholders in any communications or negotiations with the issuer, the indenture trustee, or any other party to the bond transaction," according to a notice on MuniFILINGS.
Through the years a number of conference calls have been held with bondholders, who agreed to a number of supplemental indentures.
Bondholders were asked in December to vote on a fifth supplement allowing the cottage project to move forward.
"We've tried to be as transparent as we can," said Henley when asked about the disclosure record, though he added that he believed all necessary notices were posted on EMMA.
Henley also said that a special bondholder's website was created where historical data, financial statements, and monthly reports are posted.
The website currently grants access only to bondholders, bondholder representatives, and the developer.
Secondary market records on EMMA show that most of the bonds are trading for cents on the dollar.
On Jan. 2, a customer bought $100,000 of fixed rate bonds due in 2030 for 7.7 cents on the dollar.
In another fixed rate tranche Dec. 31, a customer sold $10,000 due in 2027 for 10.75 cents on the dollar.
According to the state park and resort's Dec. 31, 2012 audit, the bondholders have generally not exercised their rights or enforced the remedies available following default.
Stonewall Resort was originally funded through a $10 million equity contribution by the West Virginia Division of Natural Resources from proceeds of lottery revenue bonds, and through the tax-exempt bonds issued by the Economic Development Authority that are now in default.
In addition to the debt, the resort owes the EDA $6.2 million in loans taken in 2002, 2004, and 2005. Loan payments are subordinate to debt service. The state also provided additional grants.
Because of the restrictions on the estate securing the bonds, and changes in administration over the years, it has been difficult to clear a path for the project to increase revenues and pay all of its bills, according to Henley.
Legislation was passed in 2007 authorizing the construction of up to 100 new, privately financed cottages to be built on land carved outside of the bondholders' estate so the tax exempt status of the bonds will not be jeopardized, he said. Bondholders approved the scheme in 2009.
The Corps has initially approved moving forward with releasing 35 acres from the bondholders' estate to build the first five cottages, a plan which is in the process of receiving final approvals.
"We have a contractor lined up, and a guaranteed price," Henley said.
After the cottages are built, they will be sold to investors who will be able to use them for a set amount of time but must also agree to put them into a rental program for general public use.
In addition to the rentals, people who stay at the cottages in the resort will also spend money on amenities under control of the bondholders' estate, generating more funds to repay the debt.
"We're now in process of getting the final approvals to proceed with releasing the land from bondholders' estate," Henley said. "Those cottages are going to benefit the bondholders and create additional revenue."
While trudging through the long approval process necessary to build the new cottages and increase revenues, a nonprofit foundation was formed largely by business leaders.
The foundation has obtained matching grants to fund trails, bridges, and other features adding to the resort park's appeal.
Henley said it's taken a long time to generate cooperation between all the stakeholders due to its complex structure, but now the resort is at a key point of accelerating improvements expected to generate the necessary cash flow to pay debt service.
"We have to prove a lot of things to a lot of people," he said. "The bondholders have been patient."
