Pared back FRPD payment ‘Reservation of Rights Agreement’ revealed by County

In an unexpected and somewhat stunning development in an added agenda item to conclude Tuesday’s Warren County Board of Supervisors Work Session, it was revealed that a revised “Reservation of Rights Agreement” has been negotiated between members of the county board and the Front Royal Town Council. Following the discussion about the new agreement on making the July FRPD construction debt service payment, a board consensus was reached to place a vote on approval of the revised agreement on the board’s July 21st meeting agenda.

The new agreement is a radically pared-back version of the one the town council unanimously approved at a June 30 Special Meeting to cover half the July FRPD headquarters debt service payment, as will be explored in detail below.

FRPD building at Ground Zero of a legal, financial, and ethical dispute between two municipalities and their joint Economic Development Authority. What’s confusing is this is one project that was not implicated in the alleged misdirection of EDA, Town, or County assets – better not be, the occupants are packing heat. Royal Examiner Photos/Roger Bianchini, Video by Mark Williams.

Board Vice-Chairman Cheryl Cullers made the motion to add the item to Tuesday’s work session. Delores Oates then noted she and Cullers “met, I think you guys know, with Ms. Cockrell and Chris (Holloway)” on the matter, observing that the supervisors had not appropriated funding to continue covering the EDA FRPD debt service payments into the new fiscal year.

It seems the County and Town are on the verge of taking a high-stakes gamble on whose credit rating will suffer the worst if the EDA’s FRPD debt service payments are not covered this fiscal year.

The pared-back Reservation of Rights Agreement appears to be a compromise to avoid that gamble being played into the commercial banking community as of July 16.

It was revealed during the subsequent discussion that today, Wednesday, July 15, is the last day before the $21,102 interest-only payment to United Bank goes overdue. If the agreement to keep the loan current is realized before either elected body votes to sign off on the method by which it will be done, at least for July, the Town will still only pay half of the monthly amount due, or $10,529.

That half interest-only payment is based on council’s contention that verbal assurances by former EDA Executive Director Jennifer McDonald of a New Market Tax Credit-based 30-year, 1.5% interest rate on the FRPD construction project that it did not even qualify for, is somehow legally binding. The EDA is paying United Bank 3% interest on the debt service.

The new EDA Board of Directors and staff left to clean up the financial mess inherited from predecessors finds itself under fire from one of its supporting municipalities, well previously ‘supporting’.

And while it is the EDA’s loan, supported by the County’s operational funding, both municipalities have traditionally and continue to be responsible for covering the debt service on their capital improvement projects funded through the EDA. It seems clear outside of Town Hall that precedent indicates the intent was for the town government to assume the Town Police Station construction debt service upon completion of the project, dating to October 2018.

But that was before the previous EDA administration financial scandal began unraveling in 2018. That unraveling led to the EDA’s initial March 2019 $21.3 million civil litigation against former EDA Executive Director Jennifer McDonald and 14 co-defendants alleged to have conspired with her to misdirect or embezzle EDA assets to their own benefit. It was followed by the Town’s filing of escalating litigation against the EDA, now seeking recovery of “at least $20 million” of allegedly misdirected or promised Town assets.

Delores Oates explains her perception of the evolution of negotiations to head off a potential financial disaster for both the county and town governments’ financial ratings and ability to acquire preferred financing terms on future capital improvement projects.

But on Tuesday, Oates asserted that the new agreement, which removes the conditional legal language that would have had the County and EDA signing a document that stated the Town had “no moral or legal obligation” to pay for its police station, indicates ongoing “good faith” negotiations between the two municipalities to resolve the FRPD debt service impasse; and perhaps other issues related to the Town’s $20-million-plus civil litigation against the half-century-old joint County-Town EDA. That litigation relates to the previous EDA administration’s financial scandal, details of which were revealed by a 2018 forensic audit commissioned by the EDA and County.

That audit was commissioned in the wake of Town Finance Director B. J. Wilson and Town auditors discovery of financial irregularities in some of the Town’s debt service arrangements with the EDA, though the police station project was not one of those.

It is against this legal backdrop our community financial drama is unfolding.

Pared-back legal verbiage

As opposed to the convoluted legalese we described in our story “Legal questions surround Town offer of one-time, recoverable FRPD payment”, the new, one-paragraph draft “Reservation of Rights Agreement” is brief and to the point, at least comparatively.

It reads: “The Town of Front Royal (‘Town’) tenders $10,528.95 to the Industrial Development Authority of the Town of Front Royal and County of Warren, Virginia a/k/a Economic Development Authority of the County of Warren (‘EDA’) for the July 2020 payment on the loan by United Bank for the Town Police Department with no admission of obligation and reserving all rights to continue to contest this and other matters in pending litigation between the Town and EDA. The EDA accepts this payment acknowledging this reservation of rights.”

A view of FRPD headquarters from the EDA Kendrick Lane office complex at left – so close and yet so far away, at least to a resolution of a nebulous legal dispute on financing its construction.

Gone are the “Conditions” that led EDA attorney Sharon Pandak to tell Royal Examiner upon our reading them to her over the phone, that she would be reluctant to advise the EDA to sign off on the initial agreement. Those deleted passages include:

“The Town denies that it owes any moral or legal obligation to repay the Loan”;

“The County and the EDA acknowledge that this payment shall not be construed as, considered to be, or argued to be, in any forum, an admission for any purpose, including but not limited to of liability of the Town for the Loan or the Costs”; and,

“All parties agree that payment hereunder shall be inadmissible for any purpose except by the Town to recover this payment as damages in the Litigation,” among other legally qualifying passages.

So, good-faith negotiations perhaps – just in small steps, VERY small steps with a very large credit rating gamble looming in the balance that could impact this community’s financial future on both sides of the Town-County boundary.

Thus far the EDA, with County support has been making what have been interest-only payments on the $9-million FRPD project. That will change on November 1, when the United Bank loan moves to principal and interest payments. EDA Executive Director Doug Parsons estimated that would take the monthly payments to about $50,000 from the $21,000 interest-only range.
According to Parsons the balance on the United Bank FRPD headquarters loan as of June 1, when the EDA submitted an invoice to the Town for slightly over $441,300 paid thus far by the EDA, is $8.44 million.

How not only this month’s payment but also coming ones will be handled by both municipalities appears to be hinted at by the new one-paragraph Reservation of Rights Agreement spitting the FRPD debt service down the middle with minimal additional legal verbiage. Letting the EDA’s FRPD debt service go delinquent may not be a gamble in either involved municipality’s best interest.

Delinquent debt service payment – what do we have to lose, it’s not our responsibility, or is it? The county board, above, and town council, below, appear to be trying to fold on that gamble – for now.

At issue now appears to be will July’s $21,102 payment be made by somebody, somehow before the end of the July 15th banking day; and will majorities of both the Town and County’s elected bodies to agree to this arrangement on an ongoing basis to prevent that rather large credit-rating gamble being played on the municipal-banking poker table??

Stay tuned for the next thrilling episode of “As the FRPD Debt Service – and EDA, Town and County Credit Ratings – Turn”. But while you wait for that next episode, see Tuesday night’s episode unfold over the last 10 minutes or so of Tuesday’s meeting in this Royal Examiner video: