Kostelnik Votes with Carrell Faction, Endangers $330 Million Port Deal

Ordered Staff to Stop Negotiating until A&M Deal Done, McKinney Suggests Symphony for Economic Development

At a special Port of Corpus Christi Commissioners meeting on Friday afternoon, Mike Carrell refused to discuss items put on the agenda by Commissioners Ken Berry and Bobby Gonzalez authorizing the staff to pursue all proposals related to Naval Station Ingleside (NSI) and re-examine A&M’s memorandum of understanding. Carrell, Hawley and Bourchard had ordered the staff to stop negotiating with a private equity company Apex Group that wants to buy the NSI property for a reported $330 million and bring Swiftships, a ship building defense contractor as the anchor tenant. The Caller-Times for whatever reason, wrongly reported the negotiations as stalled.

Swiftships, has $270 million in government contracts to build riverine port security boats. The boats are in high demand at ports around the world. The company also builds crew, supply, dive and other types of small fast ships. They are looking at NSI along with bases in Virginia and Puerto Rico that are being closed as options to immediately expand their current Louisiana facilities. The Port takes possession of NSI on May 1, 2010.

Carrell said they would be “just rehashing old issues”. When Berry asked to go into executive session to discuss them, Carrell said there was nothing new to discuss, to which Commissioner Frances Gandy said he had additional information. At that point, Judy Hawley made a motion to adjourn seconded by Richard Bourchard. The meeting was adjourned 4-3 with Kostelnik at his first meeting joining Carrell, Hawley and Bourchard. Gonzalez, Berry and Gandy voted no.

McKinney fumbles big address.
This followed what was described as a disappointing address by attendees at A&M Chancellor Mike McKinney’s Chamber of Commerce address. On Thursday, at the much anticipated announcement of plans for Naval Station Ingleside, McKinney only pledged to be “an honest broker” and told citizens that just having the base alone wouldn’t attract business. McKinney suggested that Corpus Christi needed to provide more cultural amenities to attract creative people and risk takers. He recommended improving teacher salaries and schools, art museums, symphony and civic clubs. A broad spectrum of community leaders who heard the address rated it from disappointing to “the worst political address I have ever heard.”

A&M has had a Memorandum of Understanding (MOU) with the Port of Corpus Christi since April of 2009. In the 10 months of the MOU so far it has failed to bring any prospective tenants or buyers to the port. A&M is negotiating to expand its contract to be master developer of the base which would give it total control over development, but wants no financial liability if nothing is sold or leased. The Port has budgeted $500,000 a month for maintenance and operation of the facility when it takes over May 1 plus it pays A&M $29,333 a month for being master developer under its current MOU. So far the port has paid for three quarters or $268,997 for A&M's unsuccessful attempts to try and lease or sell the land.

McKinney said they were doing a study for economic development and focused on discussions of research that would eventually yield better paying higher skilled jobs at some point in the future. A&M is part of the Wind Alliance, a consortium of universities and businesses that are seeking a small part of the base for research facilities.

Questions to McKinney received even more disappointing responses. McKinney was asked about how soon development of the base would start, he stated he didn’t know but there were lots of negotiations. When asked if a previous suggestion by A&M officials that A&M’s marine research division might move there, McKinney talked about what a great marine firefighting program they had at College Station including a boat. He stated any movement of the marine research program would be a future decision. When asked if A&M would operate the hospital on base, McKinney said no but they would be glad to staff it if someone else would operate it. In the end McKinney offered no financial support or obligation to cover any of the costs on the part of the university system.

Berry and Gandy Make Plea to Continue Negotiations
This issue became paramount when Commissioners Ken Berry and Frances Gandy asked Port CEO John LaRue and Port Counsel Jimmy Welder to stay and answer questions after Carrell had adjourned the meeting. He also invited the audience to stay; Commissioner Judy Hawley sat in the room during Berry’s presentation.

Berry then asked LaRue a series of questions:

Did LaRue send an email on February 16, indicating Carrell, Hawley and Bourchard told staff to quit negotiating with Apex the owner of Swiftships while an agreement with A&M was continued to be negotiated? The answer was yes. Berry expressed that the act was probably illegal as the committee had not been given any authority by the full commission to start or stop negotiations.

Were negotiations with A&M proceeding and scheduled to be concluded March 16, 2010 with the last communication being a list of problems with the proposal that was sent back to A&M last Friday? The answer was yes.

Had A&M brought any buyers or tenants during the ten months they have received $270,000 for their services? The answer was no. Berry pointed out that A&M could “make an offer” for the NSI property and was asked if they were given a copy of the Apex proposal? The answer was yes. Berry stated he felt uncomfortable with A&M acting as seller, broker, and buyer; while also looking at and evaluating the bids of other companies.

Berry asked if there had been any contact with Apex since their original offer. The answer was no, and no additional contact was planned with them since the staff was ordered to stop. LaRue had met and discussed the original offer, then had staff prepare a term sheet for a counter offer. That was never sent because of the Carrell order to cease contact and negotiations.

Berry took the position that A&M needs to make a decision whether it will be the broker or a bidder, that it is impossible to do both without a conflict of interest. At that point Gandy discussed what Berry had described as the potential to lose what could be the Port’s best possible offer and a chance to create hundreds of high paying jobs.

A&M Deal Could Kill Port Sale
Apex a private equity firm that wants to buy the port for Swiftships is a specialist in turning around and expanding poor performing government contractors. After acquiring Swiftships they restructured it, changed the management team, injected capital and secured big contracts to put the company on a profitable path.

If they can reach an agreement on NSI, they plan to use Swiftships as an anchor tenant and lease or sell off the rest of the property. They approached the Port without any contact with A&M another reason for the Berry’s concern. The A&M contract has high commissions and a clause where they would collect five percent even on deals that they had nothing to do with. In this case that would add at least $16.5 million to the cost and still leave A&M in control of the property, limiting the private equity firm’s ability to manage the rest of the property without interference, a major concern for the company who wants to complete deals with other compatible businesses and expand their own operations.

Berry compared Carrell’s action to saying to someone who made an offer on your house, "just a minute I have to go out and hire a realtor so I can give him 6%." Following is a comparison of the two deals based on the information currently available.

Apex- Swiftships
Proposal - Offering a reported $330 million, would bring Swift Ships as anchor tenant would develop the rest of the property.
Maintenance & Operations - APEX would assume all M&O costs.
Economic Impact - Would start immediate production of ships as soon as facilities ready.
Costs - None

A&M
Proposal - Offering no money at this time only to be master developer - control development, broker for base leases & sales, ability to bid against other potential buyers.
Maintenance & Operations - Port would be responsible for M&O of retained property - $6 million a year
Economic Impact - No current or prospective tenants or buyers. Chancelor McKinney talkd about long term development as a research facility.
Costs - $350,000 a year to be paid for development services plus; 10% of any pier/wharf leases for ten years,
25% of any lease of other property, 10% of any sale after expenses, 5% of any lease for ten years if they have nothing to do with bringing the tenant.

A source representing Swiftships, who asked not to be indentified, said they need additional capacity quickly in order to meet their contracts. He said while they like the NSI location they have other options. He discussed the importance of an open and transparent process to investors and most importantly he repeated a basic law of all business, “we’ll go where we are welcome.”