On Sunday, April 20, 1997, around 3 a.m., a pair of Saint Vincent College students, in town for the College Republican State Convention, were in a room at the Ramada in downtown Harrisburg when they heard a knock on the door.
According to a taped statement given later by one of the students, whom I’ll call Jill, her friend went to open the door when three men suddenly pushed their way into the room. Two of the intruders pinned her friend to the wall. A third put on a mask and started demanding money. Then he approached another student, whom I’ll call Tom, who had been sleeping in one of the beds. Tom “looked up and the guy just came down and just smashed him right across the face,” Jill recalled. “And blood just started coming out everywhere.”
Jill’s statement, which she didn’t give until two years later, wound up as an exhibit in a long-running personal injury lawsuit Tom filed, alleging the hotel bore responsibility for his injuries—a broken nose, a deviated septum and “shock and injuries to his nerves and nervous system.” The suit hinged on Tom’s claim that the hotel had lax security and that the automatic lock on the room’s door had failed.
In its response, filed with the court in May 1998, the hotel’s owners denied the charges. That wasn’t surprising. But the person who signed the document was—Robert Kroboth, the city’s deputy business administrator and chairman of the Capital City Economic Development Corporation.
The city formed Capital City Economic Development Corporation in late 1993 to facilitate an ambitious takeover of what was then the Harrisburg Hotel. The hotel, a 10-story concrete and masonry structure with an underground garage and a swimming pool, sat at the corner of 2nd and Chestnut streets, a block away from city hall. Prior to the opening of the Hilton, in 1990, it had spent several years as the only major hotel downtown. But, in October of that year, about a week before the Hilton’s grand opening, the hotel’s owner, a Florida-based management company, filed for bankruptcy. A year and a half later, the property was seized in foreclosure.
When the city got involved, in 1993, the hotel was on the brink of being shuttered. Rick Staub, who’d been brought in to manage the facility during a period of receivership, recalled it being a “real throwback kind of a place.” The service carts were equipped with shag rakes, which housekeeping staff would drag over the carpet on their way out of the rooms. The restaurant bar had porthole windows through which patrons could see into the swimming pool. The Aetna Life Insurance Company, which had taken control of the hotel in the foreclosure action, planned to close it and put a fence around it. They had gotten as far as an estimate of its carrying cost when then-Mayor Stephen Reed intervened. “Steve Reed caught wind of it,” Staub recalled, “and said, ‘We just can’t have a commercial building like that close downtown.’”
This past January, Harrisburg signed off on a plan to manage a $42 million debt it must pay in increments each year through 2033. The debt stems from a complex transaction from 1998 involving the city’s sale of three downtown office towers to one of its many municipal authorities. In a memo that year, Mayor Reed outlined a plan for spending proceeds from the sale—around $24 million—on all manner of city needs: repaving streets, demolishing blighted structures, buying fire trucks and police cars, planting trees. At the top of the list, at $10 million, was a single expense: “Retirement of Ramada Hotel Bonds.”
At the time the hotel takeover occurred, people understood it was unusual. The Patriot-News linked it to Reed’s other public-finance experiments, like the purchase of the Senators baseball team and the backing of $16.3 million of the Hilton’s mortgage. At the same time, downtown Harrisburg was experiencing a revival that no one wished to see disrupted. Kroboth, in an email, explained that the mayor and council “agreed that it made more economic sense to purchase and renovate the hotel to get it to the point that it could later be sold than the alternative of blighting a half-city block in the midst of the downtown renaissance.” They also wanted to save people’s jobs, as the “vast majority of the hotel’s employees were city residents.”
Reed, for his part, sold the move as essential to the Hilton, whose convention bookings he said would suffer without overflow lodging nearby. (According to Kroboth, Reed also saw a need for a “middle-market hotel” to attract visitors who wouldn’t spring for the Hilton.) Years later, when the risks started to show, he stood by the decision. “I can still say candidly that I do not regret our having intervened to save the hotel and keep it in existence,” he told the Patriot in 1999. “I believe it was the right decision then, and the interests of the city and its central business district demanded that such occur.”
Indeed, after the period of city ownership, the hotel was upgraded and joined the Crowne Plaza chain, under whose flag it operates today. “He succeeded in keeping it open, and you have to give him credit for that,” Staub said. Or, as a more recent advisor to the city put it, “There is a Crowne Plaza and not a hole in the ground.” As far as the health of downtown Harrisburg is concerned, that seems an obvious benefit. What was the cost?
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At the time of the 1998 lawsuit, Capital City Economic Development Corporation had a five-member board, most of them, like Kroboth, closely connected to city government. One of them was Richard House, the City Council president. Another was Milt Lopus, a financial advisor to the city. A third was Wilmer Faust, executive director of the Harrisburg Redevelopment Authority.
The board met each month, typically at the hotel itself, and heard reports from Staub, who stayed on as manager. Meetings were “serious, structured and professional,” Kroboth recalled, conducted according to Robert’s Rules of Order, with written minutes and formal agendas. Bruce Foreman, the corporation’s solicitor throughout the ownership period, said members would also review the progress of renovations. “It was a very old hotel and needed upgrades,” he recalled.
The renovations were a key part of the takeover’s financing plan. The hotel was reportedly in terrible shape—in the course of the former owner’s bankruptcy workout, half the rooms had been stripped of valuables. Reed’s plan, which he brought to City Council in July 1993, was to spend several million dollars renovating it, then sell it off when it turned a profit. Patriot articles at the time referred to a “market analysis” supposedly showing the hotel would break even sometime in 1995. But, according to the paper, the city treated the analysis as confidential.
The proposal was controversial. Council delayed an initial vote, after residents and local hotel owners opposed the plan at public hearings. The owner of the Quality Inn on Front Street worried about having to compete with a city-backed enterprise. In August, the CEO of another hotel company told the Patriot the Harrisburg Hotel should be shuttered immediately because of safety problems, including inadequate fire protection. But the city dismissed the concerns. “You’re going to find there are some envious hotel operators that are afraid when this is all done, the Harrisburg Hotel could possibly dip into their clientele and that’s why they’re screaming foul,” Councilman House said.
The city ultimately financed the takeover and renovation with a $10 million borrowing, in the form of bonds issued in early 1994 by the Harrisburg Redevelopment Authority. Out of the proceeds, around $3.5 million were slated for renovations, including $300,000 for a new sprinkler system, $425,000 for asbestos abatement and $597,000 for revamping rooms. Around $2.2 million went towards repaying the city, which had advanced money to HRA to buy the hotel from Aetna and to cover operating expenses while the borrowing was negotiated.
A little more than $4 million went towards costs that were only indirectly related to acquiring and fixing up the hotel. Such costs, which are present in every municipal borrowing, are important—the true price of a public project can’t be measured without them. In the case of the hotel project, the city spent $605,052 on what are called “costs of issuance,” which include things like fees to ratings agencies, financial advisors and lawyers. One of the larger payments was to Eckert Seamans, a local law firm, which received $95,000—$45,000 as bond counsel, $20,000 for organizing Capital City Economic Development Corporation, and $20,000 for the city’s agreement guaranteeing payments on the debt, plus expenses.
These indirect costs can also give a sense of a borrower’s actual assessment of a project’s risks. The confidential market analysis, according to the city, projected the hotel would become profitable in 1995. But the city also borrowed large sums as a kind of insurance in case things turned out differently. For instance, $1.5 million of the 1994 borrowing was what’s known as capitalized interest—money borrowed upfront to cover early debt payments, in this case through May 1996. Another $1.1 million was for “working capital,” to cover operating expenses while the renovations were completed. The city also borrowed $1 million for a reserve fund, to cover some of the debt in case of a shortfall.
Such borrowings are normal in construction projects, which often require a “ramp up” period before they become profitable. But, as a 2012 investigative report on the Harrisburg incinerator debt discussed, they can also result in unnecessary expense. Steven Goldfield, who worked on the audit and later served as an advisor on the city’s financial recovery team, explained why this was so. “If the construction is supposed to be done in one year, why borrow for two years of debt service?” he said. “It’s just more debt.”
As it turned out, when it came to generating enough revenues to make interest payments, the hotel needed all the time it could get. The $3.5 million renovations budget depended on an exemption from a state law requiring public projects to pay contractors the prevailing union wage. When the state deemed the hotel a public project, construction costs on the hotel ballooned. The renovations, which Staub said were originally expected to bring the hotel into the Doubletree chain, were scaled down; the city had to seek a new franchise.
In July 1995, the Patriot reported the hotel would become a Ramada. The article quoted Reed as claiming the hotel had been profitable since the previous April. But, the article also noted, the mayor and hotel officials “refused to disclose financial records for the hotel or discuss occupancy rates.” A year and a half later, in November 1996, the paper reported the hotel was running a deficit of half-a-million dollars. The city blamed the shortfall on the prevailing wage problem, which had prevented two whole floors from being renovated. In Kroboth’s recollection, though occupancy was “good” on the finished floors, the inability to charge Ramada rates on the others made it difficult to meet original projections. (The hotel, according to Staub, rented rooms on those floors at steep discounts to rail and airline employees—$30 per night, compared with the $100 the Hilton was charging.)
To solve the problem, Reed said he would seek another $3 million from City Council to finish the renovations. He brought the proposal to council in December, prompting a reproachful editorial. “That the city would put together a borrowing plan based on a hunch it could get around the law is not evidence of good management,” the Patriot’s editorial board wrote. In a subsequent critique, they urged the controller and council members to pay closer attention to the mayor’s spending. A year later, Reed backed off the plan for the additional borrowing. The extra debt, he told the paper, would have stayed on the books until 2020. Instead, he started looking for a buyer.
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When the plans to sell the Ramada were initially reported, in the summer of 1998, Reed pledged the city would recoup its entire investment. The private investor, a company called Monarch, was going to pay $1 million upfront, and then another $500,000 after several millions in renovations were completed. The city would later get a share of net profits, or a share of any proceeds in the event of a sale, sufficient to repay at least the full $10 million.
As part of the 1994 borrowing, however, the city had entered a series of agreements tying up the hotel’s revenues. In June 1998, those agreements were relinquished to clear the way for the sale. This was made easier by the fact that all of the bonds had been sold to a single lender—what was then Phoenix Home Life Mutual Insurance Company. Phoenix signed off on the city’s revised guarantee agreement, releasing the hotel from its ties to the debt. Under the new agreement, the bonds were secured solely by city tax dollars.
The exposure was only temporary. That fall, Reed brought a new real estate proposal to council. The city would sell its downtown office towers in Strawberry Square to the Redevelopment Authority, thereby generating a one-time infusion of $24 million. The money would go to a variety of projects, including paying off the stranded debt from the Ramada hotel. In a memo to City Council, Reed was careful to characterize the new bonds as “self-liquidating,” meaning city taxes would never be used to repay them. In fact, he said, profits left over after operating expenses and debt service would “come to the City’s General Fund in the Year 2016 and beyond.”
In recent years, as 2016 approaches, the 1998 debt has returned to headlines. The problem is the security on one portion of the bonds—rents from Verizon, a tenant in one of the Strawberry Square towers. The company’s lease expires in early 2016, shortly before the first scheduled debt payment. In lieu of rent, the city will be on the hook for the full obligation. In September, the Commonwealth agreed to rent additional office space after Verizon leaves, relieving the city of a portion of the burden. But the city will nonetheless have to budget tax dollars to cover a majority of the debt payments, due each year through 2033.
These bonds, often referred to as the “Verizon tower bonds,” are technically separate from the ones that were used to pay off the hotel debt. Those were secured by rent payments from the Commonwealth, which had a separate lease for Strawberry Square offices through 2025. Still, it’s hard not to see them both as threads in the same elaborate quilt. Throughout 1999, City Council drew on the proceeds from both sets of bonds without distinction, paying for all kinds of “capital projects”: police sedans, fire bureau equipment, a Civil Rights History project, Verbeke St. landscaping. And Reed’s November 1998 memo, outlining a list of proposed uses for the $24 million, didn’t discriminate, either.
Capital City Economic Development Corporation still exists, though it doesn’t appear to have conducted any business for several years. Kroboth, who left the city at the end of 2013, said that to his recollection it never embarked on any other projects. In 2003, it briefly changed its name to HarrisCom, Inc., as part of an abortive enterprise involving the sale of phone lines to city entities. Wilmer Faust, the Redevelopment Authority executive director who was on the corporation board, died in 2005. Milt Lopus, the board member whose firm served as financial advisor to the city on numerous deals, including the original $10 million borrowing in 1994, the 1998 bond issue and the sale of the hotel, died in February of 2014. (Lopus’s former associate, Bruce Barnes, declined to be interviewed.)
Several months after the hotel sale was reported, Monarch and Capital City Economic Development Corporation quietly amended the agreement to reduce the city’s share of proceeds. Officials, confronted by the Patriot in 1999, said the original version was preventing Monarch from receiving financing. But, Reed said, there was still “no question” the city would recover its investment. That September, officials told the paper they’d received the last of a down payment, totaling a little more than $1 million, at least some of which had gone towards hotel expenses.
In 2000, the hotel reopened as a Crowne Plaza after $10 million in renovations. In 2003, however, Monarch defaulted on its loan. A Connecticut hedge fund specializing in distressed assets, after taking over the mortgage, bought the property at sheriff sale for $856. The city lost its investment. The hotel stayed open.
