Subsidies a sign of the times for hotel project

Jul. 10—WILKES-BARRE — The real estate mantra of "Location, location, location," was spot on for Michael Farren when he saw the site for a new hotel downtown.

From his vantage point in Virginia, Farren could see the location chosen for a new Hyatt Place hotel was a choice one.

"This is absolutely prime real estate," said Farren who viewed the site, formerly occupied by the Hotel Sterling, on Google Maps.

Given the site's prominence as a gateway to the city and its proximity to the Susquehanna River, Public Square and the River Common, Farren questioned the need for government subsidies that at last count totaled $7 million for the project undertaken by private developer H&N Investments LLC.

The effects of subsidies is one of the areas of focus for Farren, a senior research fellow at the Mercatus Center at George Mason University.

"The point is there is absolutely no reason why the government would need to fund, help fund a brand new hotel on this spot. If the developer can't make it successful based on all of the site's natural advantages, then it is a bad economic project. It's a bad business project. The government should not be funding it," Farren said.

Farren stressed he was not against the project and offered context for his comments. "I am simply for any project that is of greater benefit, of the most benefit to the people of Wilkes-Barre and so should everyone else be," he said.

Minority investor in the project Steve Barrouk on Friday dismissed Farren's comments, questioning whether the researcher ever built anything.

"He doesn't know what he's talking about," Barrouk said.

Just look at the theater complex in Wilkes-Barre and the Mohegan Sun Arena at Casey Plaza in Wilkes-Barre Township, Barrouk said. He was involved in them when he worked with the then Greater Wilkes-Barre Chamber of Business and Industry.

All projects of that magnitude, when they're done in a small town with limited resources, require some level of subsidy, Barrouk said.

"I've done urban economic development for over 40 years. I know what I'm talking about," Barrouk said.

Yet more than four years after H&N bought the land from the city of Wilkes-Barre for $600,000 there's been little activity other than a "Coming Soon" sign placed in the dirt lot at the intersection of West Market and North River streets.

The sign reflected Barrouk's optimism the project is moving forward despite increased costs, the loss of a major investor, naysayers and not enough financing in place.

"We're hopeful we're going to get this thing done. But nothing is done 'til it's done, you know. So, we have some obstacles we have to overcome yet. We're making progress," said Barrouk, an associate broker with Lewith & Freeman Real Estate, Inc. in Kingston.

H&N has been slow to break ground, Barrouk acknowledged. But it hasn't been for lack of effort, he said.

Blame for the delay centered on the COVID-19 pandemic, even though, from the start, the project has been in flux from design to funding. The architects have changed, so has the scope of work and, most notably, the funding, with the balance shifting more to public dollars than from private investors.

"We don't have a firm commitment on financing yet," Barrouk said.

A bank loan hadn't been secured, but that's not unusual, Barrouk said, given the economic environment of supply chain issues, rising interest rates and inflation. He pegged the project at $34 million based on the latest estimate from contractor Quandel, an increase of $10 million from a few years ago.

Government grants

Initially proposed in 2018 to be built with private money, the project has relied more and more on government grants and economic development programs. And for good reason, Barrouk explained. He said the project early on lost a key investor, Asam Tahiraj, the owner of Diamanti Co., a construction company in Pristina, Kosovo, the homeland of Hysni "Sam" Syla, the H in H&N Investments LLC.

"Once he dropped out, then Mr. Syla felt, 'Let's try to get this project going on our own.' And then we decided we needed to apply for some grants to try to offset, you know, these costs," Barrouk said.

Syla, who's undertaken several smaller renovation projects in Wilkes-Barre and Kingston, referred questions about the hotel to Barrouk.

To date, the state has awarded four Redevelopment Assistance Capital Program grants totaling $7 million and Barrouk indicated they're likely not going to ask for any more. The grants are supposed to assist projects with a regional or broader impact that maintain or increase employment, tax revenues or generate other types of economic activity.

'Never say never'

"We need to make it work with the numbers that we have. I'm never going to say never," Barrouk said. "If we have to scale some things back, we'll take a look at that to try to get this within a reasonable budget."

As a cost cutting measure, H&N eliminated the luxury condominiums that were in the original plans. The conference center and restaurant remained.

"We just didn't want to build a plain hotel," Barrouk said. "The downtown needs more than that because, being an economic generator, we need to have a conference center to try to lure conferences and other activities into the city of Wilkes-Barre." He estimated it could attract 50,000 people a year.

Unapologetic about the reliance on public funds, Barrouk said, "You can only charge so much for a hotel room. You can only get so much income. So that's why we got to get the grants to make the difference up between what the income of the hotel would be and what kind of structure we want to put up."

Still, Barrouk longed for a break, especially on the 40% increase in the project's cost.

"We would like to see that number come down," Barrouk said. "A couple years ago we were looking at like $23, $24 million tops. And now we're almost $10 million higher than that."

A definitive start date also remained elusive.

"I would say probably within the next 12 months, sometime within that. That's our goal and hopefully costs will stabilize. Maybe we'll get lucky and the costs will come down a little bit ... because everything is so overpriced," Barrouk said.

Documents reviewed

Applications obtained by the Times Leader through Right-to-Know requests submitted to the state Office of the Budget showed the Greater Wilkes-Barre Industrial Fund, an affiliate of the Greater Wyoming Valley Chamber, applied for the RACP grants on behalf of H&N.

In 2019 the request was $10 million with H&N contributing a match of $22.1 million in private funding for a total project cost of $32.1 million. The state awarded a $2 million grant that year.

The request in 2020 was for $5 million. H&N's contribution dropped to $17.3 million due to the previous RACP and the entry of a new equity partner, Kriger Construction Inc. of Scranton.

Kriger was listed in a term sheet prepared by H&N on March 5, 2020, and among the documents contained in a mechanic's lien case filed by the contractor later that year after being notified it was no longer part of the proposed deal.

Kriger offered to bring $4.3 million to the table in return for 40% ownership. It would also serve as the construction manager to deliver the project at a guaranteed maximum price of $24.6 million.

The remaining equity was broken down into 40% for Syla, and 10 % each for Barrouk International and a to-be-determined entity. Barrouk International proposed $4 million in grant contributions and would serve as project developer for a $500,000 fee, payable in equal monthly payments during the first 12 months of construction.

The lien, alleging Kriger was owed $85,944 by H&N, was dismissed on March 23, 2021 by Luzerne County Judge Fred Pierantoni. Neither James Marzolino, vice president of Kriger, nor attorney Michael Mey, who filed the lien, responded to calls and an email seeking comment.

The term sheet was no longer valid and neither was Barrouk International, Barrouk said.

"At the time I was going to be doing consulting work for them under that name, but that's not an official name anymore, " Barrouk said. "I'm just doing it as an individual."

Extreme Hospitality LLC was listed in the term sheet under the hotel management role. Eric Rubino confirmed his company has signed a management agreement with H&N.

"We want it to be professionally managed," Barrouk said. "It's a local group. They're out of Scranton. They represent, I think they have maybe a hundred, two hundred hotels around the country that they assist."

The Albanian architectural firm H&N had planned to use has been replaced with Hemmler + Camayd Architects in Scranton.

In 2020 H&N received a $2.5 million RACP and factored that amount into its 2021 request for another $4 million from the state. In its application for the grant the developer listed $10.6 in private funding, plus a $5 million Small Business Administration loan, $5 million in New Market Tax Credits and $225,000 in Hyatt key money to secure a franchise agreement.

In a June 14 email a Hyatt spokesman said, "Hyatt Place Wilkes-Barre is owned by H&N Investments LLC. and is currently expected to open in 2024; however, an exact opening date is subject to change."

Barrouk said the SBA Loan might not be pursued. "We're probably just going to do, try to do the New Market Tax Credit. That might take six months by itself to get that done," he said.

The New Market Tax Credit and the SBA Loan would be delivered through the NEPA-Alliance, said Kurt Bauman, vice president of the organization's Community & Economic Development Services division. The NMTC program provides gap financing for private investment in distressed communities.

The state awarded a combined $2.5 million RACP grants for 2021 in two installments. The latest was on June 21 when Gov. Tom Wolf announced a $500,000 grant.

Aside from the RACP grants, H&N has received additional assistance. The site is located in a Keystone Opportunity Zone that provides state and local tax breaks through 2024. The developer purchased a shovel-ready site after the city tore down the former Hotel Sterling in 2013. The city also complied and removed the repurchase agreement in the deed last year after Barrouk requested it in order to help secure financing.

'Government-granted privilege'

All in all, the developer has received what Farren labeled "government-granted privilege," or exclusive economic benefits that can be translated into a dollar amount. When taken as a whole, the dollar amount of those benefits nationwide is enormous, he said.

"This constant trickle of small level subsidies at the smaller city and county level is the reason why the estimate of subsidy spending is about $100 billion a year. For context, that's enough to fund 13 states' budgets total. That is not a small amount of money by any measure, " Farren said.

The entry of a new, 110-room Hyatt Place could result in an oversupply downtown, especially when another developer has begun work on a project a few blocks away on South Main Street. Sphere International LLC of Flemington, N.J. has a 102-room Avid Hotel planned for the site. They would be competing with the Best Western Plus Genetti Hotel & Conference Center on East Market Street, across from City Hall.

"And that results in an inefficient use of resources," Farren said. "So that the land it's built on, the materials that were used to build it could have gone to building something else, perhaps more residential housing, more office space that would be better for the local community and economy than hotel rooms, especially if those hotel rooms are going to sit empty."

Responding to naysayers

The project has more pluses than minuses for Barrouk, who said he's heard from the naysayers.

"You know the problem we're encountering is a lot of people think a hotel will not succeed in downtown Wilkes-Barre. And I absolutely disagree with that," Barrouk said. Scranton has three hotels compared to only one in Wilkes-Barre, he pointed out.

"People always kind of react negatively, I don't know why. But we have two colleges. We have the (Luzerne County) courthouse, the county seat, all good reasons, the riverfront location, you know, for this to be successful," Barrouk said.

Barrouk's points reinforced Farren's position that enough was enough.

"I would say that the owner's of this property have already received all the subsidies that they arguably economically ought to receive in the fact the the community and government funds prepared the site for redevelopment. And anything else at this point is just burning money, is padding the pocket of the developer," Farren said.

Reach Jerry Lynott at 570-991-6120 or on Twitter @TLJerryLynott.