Hamister Deal: Reverter Clause A Stinker
Much has been made of the "reverter" clause, Niagara Falls Mayor Paul Dyster says, which was inserted in the Hamister hotel proposal to protect the city.
Like many things said by government officials, the truth is far different from what the public is told.
A "reverter" clause is not unique in real estate deals.
It is a real estate term and is used when a seller wants to retain the right to get the property back if certain conditions are not met.
In this case, the city owns 310 Rainbow Blvd. and is proposing to sell it to the Hamister Group to build a hotel.
The reverter clause is intended to insure that Hamister builds a hotel or the city gets the property back.
If that was all it said, it would be a good clause.
But it is not what Dyster's proposal really says.
The reverter has another clause, called a subordination clause.
It reads that the reverter will "be subordinated to the lien of any construction mortgage which the developer places on the property in connection with its development financing."
This makes the reverter clause worthless in the real world of business.
In short, should Hamister fail to complete or even start his hotel, but borrows against the land (mortgages), the city will have to pay off Hamister's mortgage if it wants the land back.
This is because the city is "subordinated" to the mortgage.
The subordination clause in Dyster's proposal makes any new Hamister mortgage "superior" to the reverter clause.
Let's say, for example, the Hamister Group borrows $5 million against the property, from a bank or a loan from an affiliate company, from a brother-in-law, or even from the CEO, Mark Hamister himself.
All of this is perfectly legal.
Then, if the Hamister Group fails to build the hotel as promised, the city could still take the property back, but it would have to pay off the $5 million mortgage. Since the land is not worth $5 million, the city might decide to let Hamister keep the land even though he did not build the hotel.
It might make economic sense to do it that way too.
The parking lot presently in use there is earning about $500,000 per year for its operators, John and Debbie Guido. Hamister could operate the land as a parking lot and enjoy pure profits for years to come.
Or Hamister could downgrade the project to one far different than the one he proposed that got him the deal. But the mortgage on the property would stop the city from taking the land back.
Hamister could then effectively build anything he wants and the city would be powerless.
We are not suggesting Hamister plans to do this. We are saying that he can do this and it would be perfectly legal.
The right way to make the reverter clause a true safeguard for the city would be to require Hamister to get the city council and the mayor to approve any mortgage before agreeing to subordinate the reverter to it.
This would protect the city from bogus mortgages and over financing.
And if Hamister honestly intends to build what he has promised, he should not have an objection. Most legitimate construction loans will never give the developer all the money at once but rather in installment draws, based on the progress of the construction.
Hamister would then be held to the same standard any businessman dealing with an intelligent seller would require.
Since the reverter clause as written gives carte blanche to Hamister and could leave the city with nothing, it shows me that the mayor and his people negotiating for the city know nothing about development.
They are rubes ripe for swindling.
|Niagara Falls Reporter - Publisher Frank Parlato Jr.||www.niagarafallsreporter.com||
AUG 06, 2013