The Ritz-Carlton, Grand Cayman owner/developer tried for more than two-and-a-half years to negotiate a new arrangement for repaying nearly $6.2 million of deferred import duties accrued on building materials used to build the resort.
Simultaneously, developer Mike Ryan and his companies tried to negotiate other concessions to make the Dragon Bay project viable, including obtaining freehold ownership for the leasehold property and a licence for the resort produce its own water.
Although dozens of communications occurred – sometimes with gaps of many months waiting for a response – the government did not offer any concessions to the resort’s owner, which was put into receivership on 12 March.
A chain of letters and e-mails dating back to 15 June, 2010, obtained by the Caymanian Compass indicate the Cayman Islands government had agreed to a payment schedule for the deferred import duty that called for Cesar Hotelco (Cayman) Ltd. to make quarterly payments of CI$347,818 from June 2005 through March 2012. Because Hurricane Ivan delayed the opening of The Ritz-Carlton until December 2005, the payment schedule was subsequently amended to allow for commencement in September 2006, with completion in December 2012.
The payments were made consistently through March 2009, after which Cesar Hotelco no longer made any payments. In September 2009, three months after missing the payment due in June 2009, Mr. Ryan proposed to make interest-only payments until March of this year and for government and The Ritz-Carlton ownership to commence discussions in March 2011 to agree on a restructuring plan for the remaining principal balance.
The documentation suggests the proposal was handed to Financial Secretary Ken Jefferson in September 2009, but received no response for more than nine months.
Cesar Hotelco Asset Manager Tony Haddad followed up with a letter to Mr. Jefferson on 15 June, 2010, and attached an updated payment schedule for the proposal. Mr. Jefferson responded two days later querying two points, including how the interest rate of 4.25 per cent had been arrived at. In a letter dated 25 August, 2010, Mr. Haddad answered Mr. Jefferson’s queries, including that the interest rate was arrived at by adding a 1 per cent premium to the prime rate of 3.25 per cent. The letter also requested a further duty deferral to March 2015.
The following month, in response to a Parliamentary Question in Legislative Assembly, Cayman Islands Premier McKeeva Bush gave details of The Ritz-Carlton duty deferral and acknowledged the request to extend the payment plan and make interest-only payments, noting that the main reason cited for the request was “very difficult economic conditions”.
“A decision has not yet been made on this request,” Mr. Bush said in his answer, later explaining the decision had not been made because it had “not gone to Cabinet as yet”. He further said that it had not gone to Cabinet because “there is a discussion going on between [Mr. Jefferson] and [Cesar Hotelco] in regards for such things as the rate of interest that will be charged now.”
Mr. Bush later gave an indication that Cabinet would discuss the matter and possibly even reduce the amount owed.
“[T]he fact is that government’s position is that the people have to pay, whether that is in a reworked position or whether when we finally get to Cabinet, the Cabinet says ‘No, they must pay the full thing’ I don’t know. But one thing is that they have to pay.”
Mr. Jefferson wrote again on 9 January, 2011, recapping the Ritz developer’s proposal to make interest-only payments and acknowledging that in the Legislative Assembly discussion in September 2010, “Government stated that it would seek to establish a revised payment plan with [Cesar Hotelco].
However, Mr. Jefferson did not address the request to extend the duty deferral until March 2015 and relayed certain conditions for establishing the new payment plan.
“I have received indications that, at a minimum, the government would entertain the establishment of a revised payment play if [Cesar Hotelco] paid half of the unpaid quarterly amounts due at 30 September, i.e. half of US$2,545,008 = US$1,272,504 would have to be paid as a prerequisite to the establishment of a revised payment plan.”
Mr. Ryan and Mr. Haddad responded to Mr. Jefferson on behalf of Cesar Hotelco on 14 January, 2011, copying the response by e-mail to Premier Bush.
The letter stated that the “last few years have been extremely challenging to all businesses and the hospitality and construction sectors have been particularly severely affected by the global economic downturn and the recent drastic increase in costs of construction and development in Cayman”.
The letter further stated that The Ritz-Carlton was “now operating in an extremely difficult economic environment, in fact, much more so than existed at the time the original deferral was granted”.
In addition, the letter made reference to the agreement that was reached with the People’s Progressive Movement concerning the creation of Dragon Bay, a larger project that involved both the original Ritz-Carlton properties plus an additional 220 acres of land that was formerly known as SafeHaven, which one of Mr. Ryan’s companies had purchased.
Mr. Ryan noted that the duty deferral issue was not incorporated in the Dragon Bay Main Agreement, but said “it was always understood that the government would, by virtue of its general obligations under the Main Agreement, do everything in its power and control to promote the viability of the project”.
The letter made reference to a letter dated 17 November, 2010, that was sent to the government outlining “many outstanding issues that need to be resolved with regards to the Main Agreement … crucial to the viability of the project.”
Mr. Ryan said that it was “absolutely imperative that we have some very frank and forthright discussions with regards to the project globally”.
“I am therefore very concerned that I have not yet received any response to the letter [of 17 November] and I am even more concerned that your note, whereby government is now making a demand for payment of duty without addressing any of the substantial challenges that this project is faced with is instead … threatening its viability.”
Mr. Ryan noted that Mr. Jefferson’s e-mail of 9 January was the first communication “we have had of any sort from government in the last six months and, without a doubt, if this situation continues, this project simply will not survive …”
Mr. Jefferson responded to the letter by e-mail on Sunday, 16 January, 2011, saying that neither the original proposal of September 2009 nor the letter of 17 November, 2010, linked the viability of the Dragon Bay project to a suspension of payments to repay the deferred duty.
On 18 January, Mr. Jefferson sent an e-mail saying he had a chance to discuss the matter with Cabinet and other members of the Legislative Assembly and that he was instructed to “invite you to present, in writing, a revised payment plan” preferably by 21 January, 2011.
Mr. Haddad responded on 21 January, proposing a payment plan that would start that month to “pay the outstanding duty deferral balance at the end of 2010 in the amount of $2,969,178 at a 1 per cent amortisation rate per month. The remaining balance will be due in one balloon payment at the end of the amortization period”.
Mr. Jefferson acknowledged the e-mail that very day and said that because of the 24 January public holiday “the earliest possible time I am able to reply in a substantive way is Tuesday, 25 January”.
More than three months later, there had been no response to the proposal, so Mr. Haddad sent Mr. Jefferson an e-mail on 12 May 2011 saying he was back on the island and wanted follow up on the proposal. On 18 May, having not received a response to his e-mail, Mr. Haddad sent another e-mail to Mr. Jefferson inquiring if he had received the e-mail of 12 May.
On 19 May, Mr. Jefferson acknowledged receipt of both e-mails, but explained he had “been consumed by budget preparations for government” and would endeavour to be in contact very soon. Four months later, on 16 September, 2011, Mr. Haddad sent an e-mail to Mr. Jefferson yet again. “I wanted to follow up with you on our last payment proposal regarding the duty deferral,” he wrote. “We have not had any correspondence on the matter since our last exchange of e-mails in May.”
By this time, an extensive interview with developer Michael Ryan had appeared in The Cayman Islands Journal in which he expressed his frustrations in not getting cooperation with the government, including with his negotiations to have the title to the Dragon Bay properties converted to freehold and for a licence to produce water for the resort. He stated in that interview the Dragon Bay project could not go forward and The Ritz-Carlton would not be sustainable under the current paradigm. The article was read aloud during the Legislative Assembly leading to public discussion.
When Mr. Jefferson responded on 16 September, he commented on Mr. Ryan’s offer to acquire the freehold title to “Crown lands”.
“Does this indicate the possibility of a more accelerated payment programme being on offer now?” he asked.
Mr. Haddad responded on 19 September, noting that the issue of freehold title as discussed in the newspaper was “not directly related to the financial affairs of Cesar Hotelco”.
At that point, Mr. Jefferson handed the matter over to a subordinate, Anne Owens, the senior assistant financial secretary. In an e-mail dated 26 September – more than eight months after Mr. Haddad had proposed another structure for repayment of the deferred duty – Ms Owens responded to the proposal by asking for clarification on two points – what the preferred amortisation period was and whether Cesar Hotelco was willing to pay an up-front lump sum of the amount that would have been payable between January 2011 and September 2011 “if the government had agreed to the 21 January proposed payment plan”.
Ms Owens followed up several times between late September and October in effort to get an answer to the questions before Mr. Jefferson followed up himself on 21 October. There were several more e-mails back and forth between Mr. Jefferson and Mr. Haddad between that time and 22 November, 2011, when Mr. Haddad replied and said Mr. Ryan had been in discussions with Mr. Bush and that the premier had requested a meeting be arranged to discuss the duty deferral and “other outstanding items”. The following day, Mr. Haddad wrote to Mr. Jefferson saying they had contacted the premier’s office “to establish a meeting and will be continuing to reach out to set the meeting”.
On 15 December, Mr. Ryan wrote to Mr. Bush “another formal request for a meeting with yourself and the necessary persons from your Ministry to discuss crucial items in the hope of finding a resolution, including but not limited to, water production, freehold and duty deferral”.
That meeting never happened, but on 21 December, 2011, Mr. Jefferson wrote to Mr. Ryan stating that Cesar Hotelco would be required to comply with the original payment plan, meaning that the entire outstanding balance of CI$6,186,806 had to be repaid by 31 December, 2012.
Cesar Hotelco responded by once again requesting a meeting with Mr. Bush.
On 28 February, 2012, Mr. Jefferson sent another letter to Mr. Ryan, much of which was the same as the 21 December letter. However, in this letter, Mr. Jefferson stated that he had been advised by Premier Bush that “a discussion should be held with staff within the Ministry of Finance on this matter”. He then referred to the 21 January, 2011, proposal and asked the same two questions asked by Ms. Owens on 26 September, 2011, namely what the preferred amortisation period for the restructured payment plan was and whether Cesar Hotelco would pay an up-front lump sum of the payments that would have been made between January 2011 and February 2012 if the government agreed to the proposal in the 21 January 2011 letter. On 2 March, Mr. Ryan responded. By this time, a civil action had been filed in relation to The Ritz-Carlton by the senior secured lender.
“As you may be aware, there are discussions ongoing between ownership and the senior lending group of The Ritz-Carlton, Grand Cayman Resort and I wanted to begin by informing you that these discussions/negotiations will likely have an impact on the position of the project in relation to the import duty deferral and its repayment, as well as other matters arising as a result.”
Mr. Ryan then asked if, when conducting the discussions with the Ministry of Finance staff as suggested in Mr. Jefferson’s letter, the Ministry of Finance would be in a position to enter into negotiations on behalf of the government in relation to the freehold title issue or the production of water at the Ritz-Carlton, or into discussion and negotiations that might arise “as part of the current refinancing/restructuring of the senior debt facility of The Ritz-Carlton, Grand Cayman project.”
He also queried why Mr. Jefferson was still asking for him to answer question about the 21 January, 2011, restructuring proposal when his letter of 21 December 2011 demanded payment of the entire amount of deferred duty by 31 December, 2012.
On 6 March, Mr. Jefferson wrote to Mr. Ryan and said that neither he nor the other staff of the Ministry of Finance were in a position to enter into negotiations or discussion on any of the points raised by Mr. Ryan in his 2 March letter.
Mr. Jefferson also wrote that he had been advised again “that the 21 December 2011 letter still stands” with regard to full payment of deferred duties being due by 31 December, 2012, but that he had sought the answers to the questions in the 26 September, 2011, letter in order to “seek completeness of information” because the questions remained unanswered.
Mr. Ryan responded on 9 March.
“I will admit that I am still confused by your letter,” he wrote. “How is it that you are requesting our preferred amortisation period and payment terms and, at the same time, assert[ing] a deadline payment date for the full amount of 31 December 2012? I am working on the assumption that you are prepared to enter into discussions that may modify the date and terms of repayment, but that if no agreement is reached, then the payment in full is required by December 31st 2012.”
Mr. Ryan then reiterated that he was attempting to restructure the loan on The Ritz-Carlton with the senior lender and that until those efforts reached a conclusion “I am not in a position to respond with a proposal regarding … the payment, terms or timing of how the deferred duty obligations will be met”.
On 12 March, 2012, the same day joint receivers Kris Beighton and Keith Blake of KPMG took control of Cesar Hotelco and three other companies involved in the ownership of The Ritz-Carlton, Mr. Jefferson responded to Mr. Ryan’s letter of 9 March.
“Please respond specifically to the Ministry of Finance’s previously stated position that CI$6,186,806 (US$7,544,886) is to be repaid by 31 December, 2012.
It is unknown if the secured lender, which now controls the companies that own The Ritz-Carlton through the joint receivers, recognises Cesar Hotelco’s debt to government with regard to the deferred duties or, even if it does, if it intends to repay the debt. Asked those questions on Friday, a spokesperson for KPMG said: “The Joint Receivers are unable to comment on this matter.”