The Town of Carolina Beach rushed to purchase two hotels in a bankruptcy sale, hoping to convert the property to a state-funded pier and park. That never happened. Instead, the town ran the hotels for over five years, then sold them at a loss of over $1 million.
CAROLINA BEACH — It seems like an improbability: the government accidentally getting itself into the hotel industry competing against local business owners. But in 2009 the Town of Carolina Beach managed to do just that.
Despite the eventual sale of the two hotels, the town’s hasty decision, which was championed as a “benefit to taxpayers” has continued to cost residents a decade later — in fact, the town still has an outstanding debt of about $1.4 million and pays around $200,000 annually on the note.
The town spent millions acquiring several parcels of land with the hopes of being the new home to one of three proposed N.C. Aquarium fishing piers. At the time, the state was considering funding projects in Nags Head, Emerald Isle, and Carolina Beach.
Despite no actual promises of funding or grants being made to the town, it moved forward with the purchase of properties with the hopes of being awarded money to offset its expenses — but an unusual caveat would not allow the town to get funding for properties it already owned.
“It is a peculiarity of a number of grants that are available to the town which could apply that, while funds can be made available to the town to actually front the purchase price for properties, the grants are not available to reimburse the town for properties which it has already acquired,” according to meeting minutes from 2009.
The town then created a non-profit entity known as CBP3, LLC, an organization that still exists to this day, and transferred its purchase into the hands of the LLC while the town searched for grant funding.
In December of 2009 during a Town Council meeting, the Town Manager, Tim Owens (who currently serves as Town Manager for Wrightsville Beach) announced the town was closing on a parcel of property consisting of about 2 acres for the project. (Editor’s note: No current sitting town council members were serving in 2009 or involved with the creation of CBP3 or the purchase of the hotels.)
“The town manager said they will be closing on about $4.3 million dollars worth of property, a little over 2 acres. The intent of the property is going to be a wonderful park setting and the future home of the NC Aquarium Pier. They are looking at several things, mainly grants to help offset some of the costs of the project,” according to Town Council minutes.
The goal was to ultimately transfer the property out of the hands of the LLC and to the Town of Carolina Beach under the same financing terms.
“Traditionally when towns purchase property, they do so by performing careful due diligence, lining up grants there’s time to process some things. Sometimes, though, you don’t have that luxury,” Steve Coggins, Former town attorney
The property in question was previously owned by Arcadius Development, LLC, a company that went bankrupt. The property contained two hotels, the Surfside Hotel, and the Guy Johnson Hotel — but because of the fast-paced nature of the purchase, the town did not have time to create a well-crafted strategy.
“Council took advantage of a rather extraordinary opportunity that was presented by virtue of the fact that the property became available through a bankruptcy auction. Traditionally when towns purchase property, they do so by performing careful due diligence, lining up grants there’s time to process some things. Sometimes, though, you don’t have that luxury,” Steve Coggins, who was town attorney at the time, stated according to meeting minutes.
That inability to conduct due diligence would end up costing taxpayers for years to come.
Entering the hotel business
While the town’s main stated purpose with the purchase of the property was to make way for the state-sponsored pier, councilmembers were well aware they had just purchased two hotels.
According to meeting minutes, the council decided, “Should the hotels be so continued, CBP3 would then be able to enter into a management contract with an entity that would continue to operate the hotels.”
The possibility of having a property management company run the hotels was discussed prior to the December council meeting.
“The town manager said that at the last meeting they discussed the possibility of having a separate entity manage the hotels with a flat rate management contract with the town in order to keep non – profit status on both of their loans and stay in good favor with the IRS,” according to the minutes.
Ultimately, the state did not move forward with funding for the pier and the town was still on the hook for more than $4 million.
As to how much money was lost in the hospitality endeavor, President of CBP3 and Town Councilman Steve Shuttleworth tried to clarify just what the project was costing the town.
“It gets confusing because we collected revenue, out of that revenue we operated the hotels. The net revenue was sent to the town and the town paid all the expenses. They paid the mortgage, the taxes and the insurance. The first couple of years we had a flat fee. We received like $39,000 – $45,000 and the management company kept all the revenue. So the town would have paid the expenses and only received a little bit of revenue. So we truly did lose $251,000. That happened for a couple of years. Then we changed that management and went to where we were paying a manager, so they collected $700,000+ on behalf of CBP3,” Shuttleworth said in a 2015 CBP3 meeting.
From hotels to parking
After a few years operating the hotels, mostly at a loss, CBP3 decided it was best to sell the properties and divest the town from the hotel business — but the real estate market would not bear the full cost of the loan CBP3 owed.
The town managed to sell the properties for $2.1 million in 2014.
Because there was still money owed, BB&T required some collateral for the outstanding balance of the loan so the town transferred two parking lots to CBP3.
According to Town Attorney Noel Fox, “The town transferred parking lots into CBP3 so CBP3 now owns those parking lots and they were used to substitute collateral for the remaining deficiency after the purchase by Mr. Troutman. CBP3 is still in debt to BB&T and the security for that is the parking lots. A condition of that substitution of collateral was the town manage those parking lots. CBP3 did enter into a management agreement with the town to collect the revenues.”
The town would then collect revenue from the parking lots and use it to pay down the mortgage owed for the initial property purchase — but the lots are not massive moneymakers.
To this day, taxpayers are still funding debt payments on CBP3 properties.
According to meeting minutes, “Total expenses for the 2018 calendar year were $223,018.51. Total revenue for the Harbor Master Parking Lot and the Week’s Parking Lot were $64,279.09. The current balance in the BB&T checking account it $17,736.83.”
That means there was still an outstanding balance of more than $150,000 on the properties that taxpayers had to cover. In 2017 the town lost $152,442.45 and the loan balance was still at $1.6 million.
Several years ago, in an effort to possibly help make the town some more money, Shuttleworth presented the idea of possibly entering into a public/private partnership.
“The bad news is we went from a revenue positive by selling the hotels to a revenue negative but we get some revenue off the parking lots and we get the loan paid down rapidly. The town is no longer in the hotel business. The loan is about $2.1 million and is scheduled for 10 years ($219,000 per year). We could be innovative and let someone build a public/private parking lot with a hotel on top of it,” he suggested in a 2015 meeting.
But that never happened.
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