Versailles finances property deal

State government's largest landlord is selling nine Frankfort office buildings valued at $20 million for more than twice that sum to a Georgia company, in a complex deal being financed by the city of Versailles.

Last month, the Versailles City Council rushed through approval for $56.5 million in 30-year bonds from the city's Public Properties Corp. The tax-free, low-interest bonds will pay for the property. This benefits major Frankfort landowner Rodney Ratliff, who along with partners is selling the properties now leased by the state, and H&W Development LLC, which is buying them.

But critics ask why a city would finance a deal between private businessmen that creates no jobs and takes place in another county. Versailles is in Woodford County. Frankfort is in Franklin County.

Such use of public bonds, and concerns about liability if the deal goes sour, explain why the Frankfort City Commission passed when H&W approached it first with the same deal last year. Only after Frankfort said "no" did the businessmen take the proposal down U.S. 60 to Versailles, which embraced it.

"It's their prerogative. I personally think they're making a mistake," said Frankfort City Commissioner Rodney Williams, a vice president at Republic Bank and Trust. "How could you be an enabler in a house of cards that could basically fall down at any time?"

However, Versailles Mayor Fred Siegelman said lawyers in the deal assure him "it's a win-win" for the city. Those lawyers include influential Frankfort lobbyist Terry McBrayer, representing H&W.

To give Versailles an incentive to participate, H&W has agreed to hand it $1.5 million from the bond issue, which the city hopes to use toward the cost of a new police station, Siegelman said.

Even if the state government pulls some agencies out of the leased buildings and stops paying rent -- which, in fact, the state plans to do in coming years -- the revenue losses could not hurt the city, because H&W will manage the properties and European bank Dexia will provide a letter of credit assuming liability for the bonds, he said. And, at the end of 30 years, if the buildings remain and no major players have changed, Versailles should own the buildings outright, he said.

"It was brought to us and explained that we could do this," Siegelman said.

The only other time Versailles' Public Properties Commission has issued bonds was to renovate the abandoned Texas Instruments factory in the city for new use as the headquarters of the Kentucky Community and Technical College System. That project, four years ago, brought hundreds of jobs to Versailles and cost $6.3 million.

To justify using public bonds on a private deal this time, the city drafted ordinance language that wrongly suggested state jobs were at stake if Versailles didn't help Ratliff sell his properties.

"The city (of Versailles) has determined that a substantial number of city residents are employed by the Commonwealth of Kentucky," according to the ordinance passed by the council. "In order to increase or preserve employment opportunities for the residents of the city, the (Public Properties) Corporation, acting for the benefit of the city, should proceed to acquire nine office buildings to be leased to third parties."

But state officials say they do not plan to cut or add employees based on who owns the leased buildings.

Only Versailles City Councilwoman Ann Cox voted against the deal. The other four council members present voted for it.

Cox asked her colleagues why the council called special meetings to hurry approval for the bonds in 48 hours. Before the council acted, she wanted the city to appraise the office buildings and audit their finances. More than anything, Cox said, she wanted independent experts to examine Dexia's proposed letter of credit, to be sure Versailles won't be on the hook if revenue from the buildings doesn't cover the bond payments.

Cox discussed the deal this week with the state attorney general's office. A spokeswoman said the attorney general has not opened an investigation of the matter.

"We know nothing about these buildings," Cox said in an interview. "How old are they? When was the last time they had a new roof put on them? Who is in them? These are the sorts of questions you would ask before you spent $100,000 on a house, much less $56.5 million."

Williams, the Frankfort banker and city commissioner, said he had the same questions when the deal was presented to Frankfort. But H&W and its lawyer were impatient and didn't want to answer, he said.

"They gave us an arbitrary deadline and said we had to act by Dec. 17 or else the world would stop spinning," Williams said. "It was basically, 'Just shut up and do it, don't worry about it, nothing's on you.'"

Calls to Ratliff and the H&W partners were not returned.

Founded in August, H&W includes Atlanta lobbyist Robert Willis; Lee Hunter, whose suburban Atlanta vending machine company is H&W's mailing address; and Paul Fagan of Chattanooga, acquisitions manager for another real-estate company, State And Federal Equities of Amarillo, Texas. SAFE purchased two Frankfort office buildings in 2006 that are leased to Kentucky state government.

McBrayer, working as H&W's lawyer, said nobody should worry about his clients' plans.

"It's a straight-up, permissible, allowable thing," said McBrayer, a Democratic Party leader and longtime counselor to governors.

About $42 million from the bonds will buy the properties from Ratliff and his partners, McBrayer said. The rest will cover debt service, property maintenance, management fees, professional fees related to the bond sales and $1.5 million for Versailles.

Also, $1 million will go to compensate the Franklin County School District for lost property tax revenue. The properties' new owner technically will be Versailles, and governments don't pay taxes. However, no money is included to compensate the city of Frankfort, the Frankfort Independent Schools or Franklin County. Versailles officials said that part of the deal is a mystery to them, even though they approved it.

"I don't know any of those details," said Siegelman, the mayor.

The value of the properties is about $20 million, less than half the purchase price, according to Franklin County tax records. They are office buildings scattered throughout Frankfort, most of them large and plain-looking, offering about 500,000 square feet in all. Hundreds of state employees work in them. The deal's supporters said they assume the properties have been grossly undervalued for tax purposes.

The next step is for H&W to buy the properties from Ratliff, McBrayer said.

Ratliff, 74, last year closed his Frankfort scrap-metal business and told friends he planned to sell most of his land in the capital city.

Long involved in state politics, Ratliff has given more than $90,000 in political donations in just the last decade. His companies' leases with the state have been worth more than $2 million a year.

He also has made money selling land to the state for new construction. For example, he owned a lot in downtown Frankfort that was assessed for tax purposes at $92,000. The state wanted it seven years ago to build a new Transportation Cabinet headquarters. Ratliff asked for $1 million. After negotiations, the state paid $1.15 million, or $150,000 more than he asked.

State employees should not notice a difference when their landlords switch, McBrayer said, because the same maintenance company will stay in place.

However, those employees might not occupy all of the buildings for much longer.

State government is engaged in a long-term plan to renovate its larger office buildings in Frankfort and bring employees in from leased space, said Jill Midkiff, spokeswoman for the Finance and Administration Cabinet. Ultimately, the percentage of state offices that are leased should drop from 35 percent to 15 percent.

So far, the state has built a new Transportation Cabinet headquarters and renovated the 12-story State Office Building where transit officials used to work, making room for 400 more employees than the building previously held, Midkiff said. Renovations are planned for other state buildings.

"We will reduce our dependence on leased property," Midkiff said.

Dexia Credit Local -- an arm of the bank Dexia -- is assuming liability for the bonds from Versailles through its letter of credit, said Stan Kramer Jr., chairman of First Kentucky Securities Corp., who is helping broker the deal.

If state agencies move out of the buildings and H&W can't find new tenants, Dexia will decide whether to foreclose or put the buildings up for sale, Kramer said. Versailles won't control the buildings' fate, but it also won't be responsible, he said.

"The letter-of-credit bank is guaranteeing the payments," Kramer said. "And then they (Dexia) are overseeing the collection of the rents and the management of the property."