The owners of the Hotel Jerome are officially off the hook from paying $375,000 in real estate transfer taxes after the ownership and the city of Aspen reached a resolution last month.
After a two-year legal battle, the city recently walked away from its pursuit to assess the 1.5 percent real estate transfer tax (RETT) on Jerome Property LLC when it acquired the historic hotel on Main Street in 2009.
The city had appealed a local judge’s ruling that the Hotel Jerome’s owners were exempt from paying the tax because it was acquired under a “deed in lieu of foreclosure.” The city recently withdrew its filing with the Colorado Court of Appeals and the case was dismissed Oct. 16.
“We all just decided that we did not want to pursue this,” said City Attorney Jim True, adding that he consulted with City Finance Director Don Taylor and received approval from City Council in executive session before pulling the case out of the appellate court.
“It had to be mutual and be done unilaterally,” True said. “Don Taylor and I felt it was in the best interest of the city do this.”
The agreement was that the city would drop its appeal and Jerome Property LLC would cease its pursuit of attorney’s fees of $85,000 that it wanted the local government to pay. The city also won’t have to pay the hotel ownership’s $6,000 in legal costs, which Pitkin County District Court Judge Gail Nichols had ruled previously that the municipal government was responsible for.
Nichols ruled in June 2011 to dismiss the case, in favor of the hotel ownership, and she declined the city’s subsequent request to reconsider. That’s when the city kicked the case up on appeal.
After the city in July 2010 informed the hotel’s owners that they must pay the assessed tax, the LLC filed a complaint a month later in Pitkin County District Court arguing that it should not have to pay the bill because it acquired the hotel through a “deed in lieu of foreclosure” proceeding and not a standard sale.
Nichols found that the city was using a too-narrow interpretation of its code by not granting the transfer a RETT exemption, which the hotel ownership had applied for in 2009.
Such exemptions are common when a lender repossesses a property. In this case, Jerome Property acquired a loan that a Chicago-based investment group, LCP-Elysian, had taken out to purchase the property, and then foreclosed on LCP, which agreed to grant a subsidiary of Jerome Property title to the hotel in exchange for forgiving the debt. The exact value of the transfer was never established by the city, but it’s estimated that the RETT bill would have been around $375,000. That money would have benefited the local affordable housing program and the Wheeler Opera House endowment fund, both of which are supported by RETT revenues.
The Jerome was purchased by LCP-Elysian in 2007 for $52.2 million, according to Pitkin County Assessor’s records. The group bought the Jerome from the Oklahoma Publishing Co., which purchased it in 2005 for $33.7 million and unsuccessfully sought City Council approval to build a fourth floor on a wing of the hotel.
LCP took out a $48 million loan to finance its purchase. The note was swept up in the Lehman Brothers’ bankruptcy and acquired in 2009 by Jerome Property. At that point, the note had an outstanding balance of $36 million, according to court documents. Jerome Property paid between $25 and $30 million for the note, according to numerous media reports.
Shortly after acquiring the note, Jerome Property initiated foreclosure proceedings on LCP-Elysian, citing default on the loan. The two entities clashed, but by early December 2009, LCP agreed to grant title to Jerome Ventures — an entity created by Jerome Property — in exchange for Jerome Property forgiving the $36 million debt. That was done via a deed in lieu of foreclosure.
True said the city’s law has been changed to address RETT collections and deed in lieu of foreclosure transactions. Now, if the holder takes title to the property in order to satisfy amounts owed under the note they must resell the property within two years to be considered exempt from the RETT.
The city dropped the issue with Jerome Property, recognizing that the Court of Appeals might have agreed with Nichols on the city code as previously written.
“It was determined to be in the best interests of the city given that we had not prevailed in district court. As to the tax being due in this specific case, there were affirmations of exemption language that were to our benefit that we did not want to reopen,” said Taylor in an email.