EMCID may lose millions unless dino-project built
Tuesday, January 24, 2012
Cynthia Calvert
Marlin-Atlantis ousted as developer of EarthQuest
Marlin-Atlantis, the Dallas-based real estate developer of Whitestone and the related EarthQuest theme park, is no longer associated with the project.
Frank McCrady, president and CEO of the East Montgomery County Improvement District, (“EMCID”), said Marlin-Atlantis is not associated with the dinosaur theme park any longer and, in fact, said that Marlin-Atlantis has no legal liability to repay the millions of dollars EMCID has given them until and unless the park project is opened.
The Marlin-Atlantis company which purchased the land several years ago, Whitestone Houston Land Ltd., filed for bankruptcy last summer.
McCrady said that a new developer, Contour Entertainment of Los Angeles, has assumed the financial responsibilities for the bankrupt project.
“Marlin-Atlantis is no longer capable of delivering the theme park project. They have an obligation for repayment once the project occurs. That obligation has been assumed by our existing developer, Contour Entertainment. Our approach has been for the bond repayment to be project specific and not developer specific. Developers come and go, however the project remains viable and is moving forward as we speak.”
Chris Brown, president of Contour Entertainment offered a somewhat different answer as to his firm’s involvement.
"That is not how I would characterize it,” Brown said. “Actually, we have an agreement in place with an option on the intellectual property licensing agreements with EMCID. We are working to raise the money, $500 million. That is a lot of money. However, we have not raised it yet. That is something we are working on.”
Brown said Contour was not looking to EMCID for money. “We have not received any funds from EMCID. They have already written a lot of checks [to the previous developers].” Brown said Contour expected to get financial assistance from EMCID once the park is built.
“EMCID has a partnership role with us and through their backing and support, we have achieved legislative changes that will support the project once it is built, once it is operating. But not in the current development phase. Raising this kind of money in this economy is entirely different for us and a big challenge.”
Brown said the impending bankruptcy and possible foreclosure on the original property was not a concern to Contour as they had built land costs into their business plan. If the original site becomes unavailable, Contour has chosen several other nearby alternative sites.
“We are interested in that property, but we have also looked at other sites. Our preference is that particular piece of land but it doesn't have to be. The project is not dependent exclusively on that,” Brown said.
McCrady remains emphatic that the project will be built and that EMCID will recoup the $9-$13 million already invested with the previous developer. The project must be built for EMCID to recapture the money, unless another form of retail development occurs.
“Our incentives are what makes the project viable. Any developer wanting access to these incentives would have to come to EMCID and negotiate to receive these and in that negotiation, we would require them to repay the outstanding bonds in order to receive our incentives,” McCrady said.
Notwithstanding McCrady’s confidence, the threat of the park not getting built was voiced almost two-and-one-half years ago by John Howell, bond counsel to EMCID. In a board meeting on August 24, 2009, Howell expressed his concern to the EMCID board about the possibility of the theme park not being constructed. Howell advised the board that they should make efforts “to protect the [Improvement] District in the event no park is developed.”
He advised the EMCID board that the [Improvement] District “should request an interest in the land with a preferred return on land sales.” McCrady answered that the developer (Marlin-Atlantis) would not agree to that option. The board then directed McCrady to discuss other possible options with the developer to protect the interests of the Improvement Zone in the event no park is ever built. What, if any, actions were taken by McCrady to protect the interests of the Improvement Zone are not mentioned in the board minutes.
As if the possibility of the park not getting built isn’t serious enough by itself, the bank holding the lien on the property has filed a motion with the bankruptcy court to allow it to foreclose its lien.
On January 16, 2012, according to
Research Bankruptcy Records Online | TrollerBk.com, Bank Midwest, N.A., successor in interest to Hillcrest Bank, N.A. (Whitestone’s lender), filed a motion of objection with the bankruptcy court in response to Whitestone’s plan of reorganization. The objection motion is quite lengthy and can be read in its entirety at the end of this article.
The purpose of the motion is for Whitestone’s lender to be granted permission by the bankruptcy court to proceed with a foreclosure on all of the properties that Whitestone owns, including the Dino-Park land.
This motion paints a far different picture of the status of the EarthQuest project than what has been commonly portrayed by various interested parties and some publications. Excerpts from the lender’s motion include the following quotations which are in response to Whitestone’s plan of reorganization (the “Plan”):
“On or about July 31, 2007, Hillcrest Bank, N.A., loaned Whitestone up to $19.6 million for the acquisition of real property in New Caney, Texas. The initial maturity date of the note was January 1, 2009 . . . but was extended to November 1, 2010 . . . at which time Whitestone defaulted in its obligations . . . and was subsequently declared in default on November 19, 2010. . . The indebtedness remains unpaid . . . in the [current] amount of $21,377,520.24.”
“The Plan ‘envisions a new third-party debt facility’ and [that] the Plan will be implemented through ‘the revenue from Whitestone’s future business operations and an equity investment put in by the ‘New Capital Partner.’ The alleged New Capital Partner is not identified, disclosed or supported. Whitestone’s future business operations and ‘development’ are not explained or supported. In addition, there is no support for the Plan’s feasibility because . . . the Plan is not feasible.
“Whitestone has no equity in the property . . . Whitestone has no history . . . [and] is a start-up venture . . . Considering Whitestone’s prior inadequate performance in regards to developing the property . . . the current state of the new home market . . . and the speculative nature of an amusement park . . . the Plan is not feasible.”
The objection motion goes on to state that, although Whitestone contends that the property is worth $27.4 million, the lender has certified appraisals stating that the property’s current value is only $9.88 million.
The bankruptcy court has not yet ruled on the lender’s motion of objection. If the court does rule in Hillcrest’s favor, then it is expected the lender will foreclose its lien on the property, take ownership of the land and subsequently place the land on the market for re-sale. The act of foreclosure will terminate the interests of all prior owner(s) and any other interested parties.
If the property is foreclosed, the feasibility of the EarthQuest project going forward is, at best, questionable. More importantly, once the foreclosure occurs, it is doubtful Whitestone’s lender will have an interest in reinvesting in another speculative venture. The most likely scenario is that the lender’s focus will be to sell the property in order to recover its loan proceeds.
Although many have been surprised at the seemingly current problems of the EarthQuest project, it appears the EMCID board has been in damage control mode for almost a year. Based on comments recorded in the EMCID board minutes, warning signs about the project apparently surfaced as early as mid-2009.
Examples of these concerns, listed by board meeting dates, are as follows:
August 24, 2009
The first of two major restructures of the contractual arrangement between the developer (Marlin-Atlantis) and EMCID is proposed. The developer requested: (i) forgiveness of its obligation to repay several million dollars of bond proceeds previously given to the developer by EMCID; (ii) forgiveness of its obligation to repay $1.5 million in bond proceeds utilized for the benefit of ESD # 7; (iii) a request for EMCID, rather than the developer, to pay a ‘site locater’ fee of @ $3 million; along with other concessions.
According to the minutes, the EMCID counter-proposed that a $1 parking tax would be levied on all future park visitors to: (i) repay the millions of dollars of bond indebtedness owed by the developer (as requested); (ii) utilize the same parking levy to payoff the $1.5 million bond indebtedness related to ESD #7 (as requested) (iii) ask the developer to donate to EMCID the planned site of the future EarthQuest Institute; and other considerations.
The Tribune does not have a copy of the final restructured agreement therefore, the final terms are unknown. Furthermore, what, if any, additional assurances McCrady was able to achieve with the developer is unknown.
November 9, 2010
The EMCID board learns that the project is not going to happen as planned. A second major restructure of the project is proposed. John Marlin, president of Marlin-Atlantis, informed the EMCID board that a $500 million “greenfield” project like EarthQuest was not feasible in the current market. Consequently, the project would have to be “phased” to reduce development and construction costs. The phasing of the project proposed that the theme park would be constructed first, followed by subsequent phases for related amenities.
February 1, 2011
In the meeting, McCrady states that the [Improvement] District is “a little behind on revenue projects . . .” The board then discussed areas where the budget could be reduced if the revenues did not match the budget. Director Linda Floyd “recommended that the travel by the EarthQuest consultants “be restricted or eliminated.”
There is no mention of why Floyd was so concerned about the traveling expenses of the EarthQuest consultants. But from financial records obtained by The Tribune it is obvious that EMCID has paid for extensive travel and other accommodations for the EarthQuest consultants.
March 10, 2011
EMCID director Floyd again appears concerned about money. She questioned a wire transfer of funds to EarthQuest Institute. Floyd is on the record as saying, “It was her understanding that such funding had ended.” She further asked the board “to recall the EarthQuest Institute wire.” The amount of this wire transfer was not referenced in the minutes and is unknown. What is clear is that Floyd’s concern about the wire transfer to EarthQuest reflected a growing concern on the part of some of the EMCID board members.
June 16, 2011
Chris Brown, president of Contour Entertainment, informed the EMCID board that his company was “assuming” the position of Marlin-Atlantis as developer for the EarthQuest project. In light of the complex contractual agreements that exist between EMCID and various Marlin-Atlantis entities, it is unknown if this is a formal assumption of the developer’s role or a temporary measure until a more permanent solution is determined.
November 10, 2011
The EMCID board approved an assignment and release with “Dino” Don Lessem. Reportedly renowned worldwide for his expertise in paleontology, Lessem was the brainchild, founder and director of the EarthQuest Institute. Lessem received thousands of dollars consulting on the project for several years and his extensive travel and entertainment expenses were paid by EMCID. The circumstances of Lessem’s departure were not disclosed in the minutes. What effect his leaving will have on the project is unknown. The EarthQuest Institute was a tax-exempt entity which held several fund raisers to raise money for the museum facilities. The status of those funds is unknown.
December 8, 2011
The EMCID board approved the expenditure of $25,000 to renew the Whitestone [sanitary sewer] waste discharge permit to Caney Creek. Reportedly, the permit will be assigned to EMCID. It appears that EMCID is trying to preserve the early (and limited) development work that Marlin- Atlantis performed on the Whitestone property when it was originally planned as only a residential community. This specific permit most likely was the Caney Creek Plant Permit No. WQ0014559001, which was originally issued in April of 2005. There is a companion waste permit that will also soon need to be renewed, if that has not already been done. That will be for the Peach Creek Plant Permit No. WQ0014559001, which was also first issued in April of 2005.
With Marlin-Atlantis having left the project, these type of real estate expenses will be regular occurrences as EMCID tries to preserve whatever interests it can in the EarthQuest property.
Chris Brown of Contour emphasized this. “EMCID is trying to do what it can to protect the investment it has made in the project,” he said.
Questions Remain
This complex and convoluted situation, the seriousness of which has been further magnified by the potential foreclosure of the EarthQuest property, has prompted valid inquiries by this newspaper and the public to the EMCID board.
How much money has EMCID funded to the various entities involved in the proposed EarthQuest / Dino-Park venture?
The Tribune previously asked both EMCID attorney David Marks and McCrady this specific question. Marks said he did not know but “Frank should.” McCrady responded that EMCID has funded “about” $9 million “for expenses to date.” (Note: The original Tribune article reported an amount of $7.8 million). However, in a Houston Chronicle-This Week article dated August 26, 2009, Connie Bloodworth, a board member of EMCID, then stated that EMCID had a potential exposure to the project of $13 million. “Director Connie Bloodworth said the requested changes will add up to a net initial incentive cost to the district of some $13 million. 'Right now we're putting ourselves and the community on the line,” said Bloodworth. “He's (Marlin) got his neck on the line, but we do too.'”
Why did the EMCID board not inform the public that the entity owning the land for the proposed EarthQuest property filed for bankruptcy protection more than five months ago on August 1, 2011?
Why did the EMCID board not inform the public about Marlin-Atlantis leaving the project?
Why did the EMCID board ignore the advice of its own bond counsel to seek additional security in order to protect its multi-million dollar investment in Marlin-Atlantis and the EarthQuest project.
How much money has EMCID expended for travel, accommodations, food, gifts, etc. for the various EarthQuest personnel and consultants?
Based on financial records in the possession of The Tribune it appears to be extensive. A review of those expenses is underway and will be reported on in a future article.
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