There's no "blue sky" ahead in Virginia for Marriott Corp.'s new hotel construction limited partnership. The securities division of the Corporation Commission has refused to allow the food and lodging company's tax shelter to be sold in that state.
Last January Marriott announced a venture called Potomac Limited Partnership to raise $18 million from well-heeled investors. It is believed to be the first time that hotel construction has been financed in this way.
For an investment of $10,000 those in the highest tax bracket would get deductions over 15 years of $87,000, or an 8.7-to-1 tax write-off, and total benefits in the ratio of 5 to 1. The money would be used as seed capital for 11 new hotels the Bethesda giant plans to build. Marriott also has arranged for a commercial bank loan of $456 million.
So far the venture, which became effective April 23, is doing well, according to a company spokesman. But not in Virginia.
Marriott originally applied to sell the shelter in 41 jurisdictions, including Maryland and the District, under what are called "blue sky" laws. Thirty-six jurisdictions "blue skied" the offering--broker jargon for approval.
Five states asked for different modifications in the prospectus. In the four the company declined to identify the offering was withdrawn.
Marriott Vice President John Dasburg, according to a spokesman, said Mariott's lawyers and advisers deemed the conditions in the prospectus "important to Marriott." The company was "not inclined to alter them or waver," he said.
Virginia's objection centers on an amendment concerning removal of the general partner, Marriott. It states, "The partnership agreement provides that if the general partner has committed and not remedied any act of fraud, bad faith, gross negligence or breach of fiduciary duties in carrying out any of his duties as general partner, the general partner may be removed and the limited partners the investors may vote to replace him."
Director of Securities Lewis Brothers said the offending phrase and not remedied "just was not proper." He explained that it would make it very difficult for the limited partners to eliminate the general partner. Richard Ellwood of Warburg Paribas Becker Inc., which is offering the shelter, dismissed the phrase as "an arcane point."
David S. Dondero of Dondero & Associates, an Arlington financial planning firm, called use of the phrase very unusual in such partnerships.
"What it says is that there is no way for cause you can remove Marriott ." In reality it is a difficult task anyway, as a majority of the partners, who tend to be more numerous in public than private ventures, has to vote out the general partner.
In Dondero's opinion Potomac Limited Partnership represents a "heavy investment risk" because it is highly leveraged. "If things go sour, the banks may decide to withdraw, and it would be easy for investors to lose," he said. On the other hand, he added, the risk is somewhat lessened by Marriott's reputation for good management.
Dondero called the partnership good for tax benefits, but not for profit-making.
There would be no return of capital for investors because Marriott would not be inclined to sell the hotel soon and liquidate the partnership. It can extend ownership to 75 years. He said he would recommend the shelter for elderly persons in a high tax bracket and in certain cases where a very heavy write-off is needed for a couple years.