Developer: Tax conviction ‘water under bridge’
Guardian Business Editor
Published: Oct 07, 2013
A developer in the final stages of receiving government approval to invest in a key Exuma property yesterday stated that a previous sentencing for tax evasion in the United States has been disclosed to the government and need not stand in the way of him moving ahead with his investment in The Bahamas.
Guardian Business understands that concerns had been raised with the prime minister that John McGarvey, who has been touted as having “amazing” plans for Exuma via the redevelopment of February Point, has a prior conviction for tax evasion in the U.S. and that what his company has spelled out as its intention for the properties to investors in the project appears to differ in scope from that described in public statements to date.
Details have emerged of McGarvey’s plans for the February Point property, which indicate that the Florida-based developer has committed to investors that once he acquires February Point and nearby 815 acre Flamingo Bay using funding which includes $700,000 of his own cash, he wishes to make a “front end” capital investment of only $2 million in “vertical construction funding”.
Supplemented by cash from anticipated sales of land, this would be used to construct five condominiums, in addition to a sales office, a pool and restaurant, and conduct some road, entrance and marina improvements.
While not insignificant, the description of the intended investment falls short of the plans highlighted in media statements by McGarvey’s attorney, Thomas Dean, of law firm Dupuch and Turnquest, who had suggested that McGarvey’s plans would amount to a $40 million investment that could “revolutionize” Exuma, and would include the development of a hotel and commercial village.
Back in March, the prime minister described McGarvey’s intentions for the February Point project as “amazing” and likely to lead to an “expansion of development” that would have economic spillovers for Exuma.
According to an “executive summary” of the proposed investment prepared by McGarvey Development Company, a significant portion of McGarvey’s plans revolve around the “aggressive marketing” for sale land and “hotel sites” within the target properties to “qualified developers”.
McGarvey identifies himself as someone who has been successful at buying “distressed” properties, “holding” them for a period of time and re-selling them for a significant profit.
On Friday, McGarvey Development Company’s executive vice president of Asset Management Bill Price said funds from land sales in February Point and Flamingo Bay would be “continually reinvested” into the development.
With respect to tax fraud, a 1991 article in the Lehigh Valley Morning Call newspaper highlights the conviction of John McGarvey of Moorestown, New Jersey, who was sentenced to a year in federal prison and a $100,000 fine for failing to pay taxes on more than $1 million.
According to the article, McGarvey pleaded guilty on June 17, 1991, to one count of tax evasion and one of filing a false corporate return for 1985, having been charged at the age of 42 with three counts of income tax evasion and two counts of filing false corporate tax returns.
Federal prosecutors had been seeking a two year term for McGarvey, arguing that he was “dishonest in defrauding the Internal Revenue Service and he took steps to cover up his cheating by getting innocent people to lie for him.”
“Unfortunately, the government must conclude that McGarvey did this out of pure greed,” they stated in a memorandum.
Yesterday, Price said that while McGarvey “is not proud” of the conviction, it is something of which the government is fully aware.
“There’s been a lot of water under the bridge. It occurred 30 years ago and since that time there’s been nothing similar and we’ve been able to convince alot of people we are good people to do business with.
“John made a mistake, and John paid for his mistake, and we never hide behind that or never said he didn’t make a mistake, but it was overblown relative to the context. The bottom line is disclosure and the passage of time,” said Price, adding that McGarvey Development Company had been involved with “probably half a billion dollars” worth of business since that time.
With respect to access to financing for February Point, McGarvey, who has been said since the mid part of this year to be in the final stages of receiving approval from the government to acquire the property from the Hart Family, told Guardian Business on Friday that he cannot access funding from investors for the purchase of the property until he receives approvals from the government.
Stating that “money isn’t an issue” for his company as it relates to the deal, and he has “nothing to hide”, he revealed that government approvals are critical to the release of funds from a “stable of investors” he is said to have secured.
McGarvey told Guardian Business: “We have in place our investors, but we’re waiting for the government to provide approval. The investors are willing to invest providing the representations made in the proforma are accurate. Will the government approve the marina, etc. Everyone’s in a holding pattern until we have the government say ‘Yes, what you've applied for we can give you’. Then we can finalize the investment from investors.”
His comments came in light of information being passed on to Guardian Business with respect to a proforma issued to potential investors in relation to February Point earlier this year.
In that document, the McGarvey Development Company highlights a goal of raising $12 million, of which would include $7.2 million towards the purchase price and acquisition costs of February Point and nearby 815 acre Flamingo Bay, and $2 million and $2.8 million respectively in construction funding and working capital.
The proforma – described as an “executive summary” of the McGarvey Development Company’s plans for February Point – is also said to suggest that the developer will “explore opportunities for the development or sale” of nearby Flamingo Bay, and adds that a portion of the property “will likely be donated for a community sports complex in return for governmental cooperation in the overall development plans.”
McGarvey is understood to have described his business model since 2008 in the document as one which involves purchasing distressed real estate – initially in the Florida market – and later re-selling it at a significantly higher price once the market has recovered.
“Successful turnarounds include the purchase of the bankrupt Quail West Golf & Country Club in March of 2009 for $13.5 million. After a three year hold, the project was recently sold in a transaction valued at over $32 million,” the summary is understood to read.
In a financial breakdown, the proforma anticipates just over $36 million in gross revenue from land sales within the targeted Great Exuma properties alone over seven years for McGarvey and his investor group, as property values gradually increase over the period by an expected 50 percent.
This revenue would be joined by a $7.3 million investment in community upgrades, and $13.3 million in eventual construction costs, over a four year period, funded in part by reinvestment of funds from property sales.
McGarvey would eventually collect a 30 percent “developer fee” of $7.8 million, while investors would take 70 percent – an $18.3 million take, with an internal rate of return (IRR) for investors of 24.9 percent.
“McGarvey has identified The Bahamas, and particularly The Exumas, as the next market likely to recover. The acquisition of assets such as February Point, at below replacement costs, put them in an excellent position to take advantage of the recovery,” the proforma is said to read.
Guardian Business understands that the proforma recently began circulating in the Exuma community and has raised some concerns among residents regarding McGarvey’s financial means and development plans for February Point.
Yesterday, a concerned Exumian speaking on condition of anonymity, suggested that the plans described in the document fall short of the type of development that has been proposed in public statements by the prime minister or McGarvey’s representatives to date which suggested McGarvey intended, among other things, to develop a hotel and commercial village in the area.
He added that the proforma suggests that selling February Point and adjacent land to McGarvey could be unwise when there are a significant number of “potential quality investors” who could possibly add greater value to the area.
“I am not sure why we are entertaining him when there are wealthy people out there. A group of Bahamians could put together what he is proposing.”
Responding to the fact that the document makes no mention of any plans to construct a hotel or commercial village, as had been suggested was part of McGarvey’s plans by his attorney, Price said that this discrepancy arises because it is “very difficult to project” whether the construction of the commercial village would take place as it would be demand based.
In relation to the mention of hotel development, Price clarified that McGarvey’s plans are for the sale of the hotel site “to a competent developer”.
“We are not hotel developers. We’ve learned early on that if you are not a developer, you are better off selling the site to someone who knows how to do it,” he told Guardian Business.
His comments may surprise some, given that McGarvey is also said to have received final approval for a development proposal on Stocking Island, in which it was at least initially suggested that he would construct a boutique hotel.
Price said that the February Point proforma document with its plans for condos and other upgrades describes a “base” of development on top of which “future development” is contemplated. McGarvey added that the proposal submitted to the Bahamas Investment Authority for February Point is “two to three inches thick”.
“Once we acquire February Point with the main group there’s also downstream developments, such as the hotel and golf courses,” added Price.
With respect to the commitment in the proforma to “start vertical construction on five condominium buildings”, Price said that McGarvey Development envisages building 25 condominiums ultimately, but “prudence dictates” that coming out of the economic downturn the group should at first focus on building just five.
“The expectation is we’ll roll from one group of five into the next group of five,” he added.
‘There’s a rolling amount of money that is being created by the sales that are continually being reinvested until we get the vertical going. Twelve million dollars is just the front end number.”
In McGarvey Development Company’s proforma document, there are said to be six potential investors listed who have to date promised or committee funding towards the project including “Harrington”, “Marino”, “McGarvey”, “Whitehead”, “Toker” and “Dean”.
McGarvey is personally listed as having an “expected” personal investment of $700,000, and to be bringing $2 million in “expected” investment from outside investors. An adjacent column listing “actual” investment shows personal investment again listed at $700,000, and $0 investor-based financing attained.
As to whether he himself ultimately intends to keep his equity in the project to $700,000, McGarvey told this newspaper on Friday that it “depends on a lot of variables” including “where we get to with the proforma,” again indicating that the question of financing has yet to be resolved.
Pressed to respond to concerns about whether he has the financial wherewithal to add value to the Exuma property, McGarvey told Guardian Business that he has a history of completing projects.
“Every project I’ve started, I’ve finished, except for one where the market crashed.”
On Friday, Guardian Business was informed by a source close to the matter that McGarvey has obtained approval in principle for his February Point plans and has recently received final approval for the purchase of Stocking Island.
McGarvey began being highlighted as a potential purchaser of February Point this year after major Canadian resort company Talisker Corporation pulled out of its initial plans to acquire the property in February.
Minister of State for Investments Khaalis Rolle did not return messages seeking comment on McGarvey’s conviction or development plans up to press time.
|Last Updated on Monday, 07 October 2013 20:04|