Council approves sale of old armory site

Ohio-based builder plans to break ground in June for hotel-casino complex

A proposed conference hotel complex next to Kalispell City Airport is a go.

Developers and city officials signed an agreement Tuesday for Ohio-based Gateway Hospitality Group to buy the 3.4-acre old Montana National Guard armory site for $1.216 million.

Gateway hopes to start demolishing the armory - the first step in building the complex - in June.

It hopes to have the $12 million to $18 million complex - consisting of a 148-room Hilton Garden Inn, a conference center capable of handling 800 people, an upscale restaurant and a small casino - open by June 1, 2007. The complex is expected to employ from 112 to 150 people.

On Monday, the Kalispell City Council approved two Gateway requests for changes to the sales agreement and turned down a third.

That caused the project's partners to huddle late Monday evening and Tuesday before signing the agreement Tuesday afternoon.

"It was a good compromise," said Bob Voelker, Gateway's chief executive officer and lead partner for this project.

The City Council and the Kalispell business community like the proposed complex. The complex will focus on attracting upscale groups intending to stay in the Flathead area for several days - an influx that business and city leaders think will be an economic boost to the region.

"It was important that the community wanted us," Voelker said.

Council member Bob Herron said: "The city of Kalispell is getting a convention center in the community that no one else would build with this type of money."

However, several council members also worried that the city might have conceded too much in providing Gateway with what the company said it needed to develop the complex.

That led to several weeks of negotiations, compromises and bits of brinkmanship.

Gateway has an option through May 31 to buy a local liquor license. That made May 31 the deadline for deciding whether to go through with the sale or walk away. The city was under extra pressure because Gateway was the only suitor for the site.

On May 1, the City Council laid down its supposedly final terms in selling the site to Gateway.

Gateway came back Monday to ask the council for three last-minute changes to the sales agreement, which were to:

. Move its two years of payment-in-lieu-of-taxes obligations from 2007-2009 to 2008-2010. The council approved that request 6-2.

. Eliminate a requirement that the city would get 10 percent of the net profits if Gateway sells the site. The council never addressed that request, essentially denying it.

-Change Gateway's name on the sales contract to Kalispell Hotels Limited Liability Corporation. The council approved that request.

These issues colored Monday's council discussions about the sale: Gateway's limited cash flow during the construction and ramping up of the complex; practically all of the Kalispell City Airport area's tax-increment district money going to this project, and how that fund should be replenished; and some council members' feelings that Kalispell has caved in too much.

The agreement calls for the city to pay as much as $890,000 to demolish the armory and clean up the site.

This money will come from a tax-increment district - a setup in which any property-tax money above a certain amount from a specific area will be set aside for infrastructure improvements. Those improvements are supposed to help the business climate in the specified area. Demolition is an approved use for that set-aside money.

If the city pays close to the promised $890,000 maximum for demolition work, that will use up all the money set aside in the Kalispell City Airport-area's accumulated tax-increment-district fund.

Consequently, the city wanted extra payments-in-lieu-of-taxes from Gateway to help refill this soon-to-be-depleted set-aside fund.

The math works out like this:

A fully operational complex is expected to pay roughly $260,000 annually in property taxes.

But the complex - targeted for completion by May 2007 - is expected to take 18 months to three years to be running at full capacity and being able to generate a full $260,000 annually in property taxes.

The city wanted a guaranteed $260,000 a year in revenue from the complex, including during the ramp-up years when the site's tax bill likely will fall short of that mark.

Consequently on May 1, the council added this to the sales agreement: If Gateway's tax bill falls beneath $130,000 in any four six-month tax periods, it would pay extra payments-in-lieu-of-taxes to bump up the entire semi-annual payment to $130,000.

Those extra payments will go to the depleted fund that is providing the $890,000 in demolition money.

Originally, these extra payments were to be applied to Gateway's semi-annual tax bills in November 2007, May 2008, November 2008 and May 2009.

But Gateway argued that its cash flow would be low and tight as the complex ramps up, and that such payments would be a major burden during its first year of operations.

So Gateway asked that the payments-in-lieu-of-taxes obligation be moved back one year - with semi-annual payments assessed in November 2008, May 2009, November 2009 and May 2010.

City and Gateway officials acknowledged that if the complex is operating well enough to pay full $130,000 semi-annual property-tax bills in 2009 or 2010, the city will not collect any payment-in-lieu-of-taxes to make up for the extra money it agreed to pass on in 2007.

Council members were reluctant to grant Gateway's request.

They said that the city agreed to provide as much as $890,000 to demolish and clean up the armory site, OK'd an exception to the city's zoning laws to allow a small casino at the site, and allowed the proposed four-story hotel to exceed the city's height restrictions by 6 feet.

"We're approaching the point where we're giving up on all of [Gateway's requests, including declared deal breakers], and I'm not comfortable with that," council member Randy Kenyon said.

Council member Duane Larson said, "We're making the assumption that if we don't do what the developer wants, he'll back away. We shouldn't make that assumption."

Mayor Pam Kennedy echoed Larson's and Kenyon's concerns, but she said the city could live with the change in the payments-in-lieu-of-taxes arrangement. But Kennedy added that she would support that change only if the council does not grant Gateway's request to eliminate the city's share of the net profits if the company sells the site.

The council voted 6-2 on bumping back the payments-in-lieu-of-taxes obligation by one year. Larson and Kenyon opposed the decision. Council member Bob Hafferman was absent.

After that, no council member made a motion to discuss Gateway's request to eliminate the profits-share language from the agreement. That lack of action quickly and silently killed that proposal.

After the meeting, Voelker said the payments-in-lieu-of-taxes issue was more important to Gateway than the 10-percent-of-net-proceeds matter.