In order to appease a financial partner and keep plans for an upscale waterfront hotel project on track, the Duluth Economic Development Authority modified a development agreement for the former Lafarge Cement terminal site on Wednesday night.

By a unanimous vote, commissioners agreed to assuage the concerns of Daugherty Funding LLC that a potential default by the local development group behind the hotel could disrupt the flow of financial subsidies for the project. By altering an original development agreement, DEDA commissioners ensured that public dollars will continue to pay off project debt even if a default occurs, so long as construction has been completed and the building continues to operate as “a quality, full-service hotel facility.”

Much of the money for the project will come from a small group of well-heeled local investors, including developers Alessandro Giuliani and Sandy Hoff, who joined forces in 2009 to form Pier B Holding LLC. But the local investment group is relying on Daugherty for the majority of the financing.

Both the authority and the Duluth City Council have approved a substantial tax-increment financing package for the project. Over the 26-year life of that package, about $8 million in property taxes collected from the  development will be redirected to pay off certain debts associated with the project.

Tax-increment financing is a form of subsidy that uses new property tax revenue generated by a project to cover certain qualifying development costs. The $8 million package assembled to support the hotel is expected to have a present-day value of about $3.4 million.

The total estimated price tag of the project is $29.1 million. The development will include a 140-room hotel, a 220-seat banquet hall, a 150-seat restaurant, a pool, a rooftop patio, a marina for guests visiting by boat and a bridge providing direct access to Bayfront Park, located just up the shoreline of the bay.

Giuliani said that if not for the wording change approved by DEDA on Wednesday, the entire project could have been put at risk. He said that when Daugherty put the project out to other lenders, their prospective support was predicated on making the tax-increment funding more secure.

“It was required by the lenders,” Giuliani said. “Until something like this goes out to market, you don’t know what they will ask for.”

DEDA’s legal counsel, Bob Asleson, told commissioners: “The financial sources wanted to make sure the full tax increment would not be interrupted unless they tried to make huge changes to the nature and character of the project. And so we agreed to clarifying language, which is the language you have before you.”

DEDA president Don Monaco asked if a more defined term other than “full-service hotel” might be warranted.

“We did attempt a number of various ways of more definitively stating what that standard was. And there were concerns raised with all of them,” Asleson said. “Apparently … there is some suspicion in the private sector as to the way politicians might approach something like this, and apparently based on those suspicions, they were very hesitant to get more definitive in the statement.”

Asleson expressed cautious confidence DEDA wasn’t taking too great a risk.

“I think the primary protection that we have in this situation is the fact that this is a $30 million facility, and a Motel 6 is not going to support it. And so, for that reason, as long as we keep the general character of the development as a hotel property, given what it is, even if there is a change of ownership, I think it is unlikely that any owner would be able to make any changes that would really jeopardize what DEDA has been trying to accomplish with this project,” he said.

Giuliani described obtaining proper permits for the project from all the government entities involved as a time-consuming challenge.

“It’s not an easy project. You have water on three sides, and everyone is watching. And it has to be done correctly. But we are working very hard,” he said.

Despite the challenges, Giuliani said he still believes the hotel will be completed by late spring of 2016.  

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