local hotel operation and has threatened to pull out of Bermuda.

The company has said it will terminate its lease with Bermuda Properties Ltd.

for the Marriott's Castle Harbour Resort unless its rent was reduced and other arrangements were made to improve cash flow.

"In November (1996) the Company (Bermuda Properties) was advised by Host that because of the continuing Hotel losses and the weakening of Bermuda's tourism industry, Host was unwilling to continue leasing the Hotel under the existing terms,'' the 1996 Bermuda Properties annual report stated.

The company had previously threatened to pull out of Bermuda in 1994 due to continuing operating losses and a negative cash flow. Host Marriott wants to at least achieve a "neutral'' cash flow position, one in which revenues are able to cover expenses.

Bermuda Properties general manager Peter Parker said negotiations are in the "crucial'' stage with Host Marriott over the lease arrangements. Key to the negotiations are the proposed $65 million Ship's Hill development in Tucker's Town.

Bermuda Properties is negotiating with Host Marriott in which the company would take a stake in the proposed 26-house resort development. The revenue gained from the development would help offset Marriott's negative cash flow.

"It's the only thing we have to negotiate with,'' Mr. Parker said. "Our only asset is land. We are trying to convince Host that this land is a valuable asset and the assets are crucial as a part of the solution to the hotel.'' Until the negotiations are completed Bermuda Properties has reduced Marriott's rent until the end of this year. Bermuda Properties owns 229 acres in Tucker's Town, including the Castle Harbour property and the Castle Harbour Golf Course.

Marriott entered into an agreement to lease the hotel from Bermuda Properties in 1984 and has invested about $60 million into renovating the property. Since Marriott took over the hotel the company has accumulated operating losses of $40 million, including a cash flow deficit of $2.7 million, the largest since the company has been in Bermuda. The deficit meant the international company had to pump money into the Bermuda operation to keep it running.

The Bermuda property and Marriott's Barbados hotel were the only two on its books which had cash flow deficits, Mr. Parker said. Marriott has since gotten out of its Barbados property.

The Bermuda Properties annual report shows in 1996 the Castle Harbour Resort lost $7.23 million compared with $6.53 million in losses registered during the previous year.

Under the original lease agreement with Bermuda Properties, Marriott pays a base rent equal to four percent of total revenues and a supplemental rent of 40 percent on net profit after deductions for expenditures on renovations.

After a similar threat to pull out of Bermuda in 1994, Bermuda Properties agreed to cut Marriott's rent in half, to two percent deferment of total revenues until 1997. Bermuda Properties also agreed to extend preferential rates to the hotel under a management agreement over the golf course.

Government also provided a development oreder granting "in principle'' approval of a master development plan for the resort. Under the agreement Marriott invested $4.6 million in refurbishing the hotel last year.

Bermuda Properties had gross revenues of $5.06 million in 1996, a decline of 2.3 percent from $5.17 million in 1995. Net earnings were $1.68 million, a decline of 3.5 percent from $1.74 million in 1995.

The decline was due to the reduction in the rent Marriott had to pay the company. Marriott paid Bermuda Properties $550,000 in 1996, compared with $830,000 in 1995.

Meanwhile revenues from the golf course continued to boost Bermuda Properties bottom line. The company had revenues of $3.99 million from its golf operation, and increase of 2.3 percent over 1995. Profits increased by 5.4 percent to $1.52 million.

Other revenue came from rental of six cottages, and water provision to the hotel and the Mid Ocean Club from its 38-acre property at Catchement Hill.

Bermuda Properties is 94 percent foreign-owned. It paid its first dividend to shareholders in 1991 and suspended them in the first quarter of 1997 so as to build up cash for financing the proposed Ship's Hill development.

Bermuda Properties was incorporated in 1958 to develop the Tucker's Town land and develop the Castle Harbour Resort. Up until Marriott's took over in 1984, Bermuda Properties had acumulated losses of about $8.3 million.

Ship's Hill has been opposed by a number of groups due to concerns over envrionmental damage to an underlying cave system.

"I'm confident that a solution is possible,'' Mr. Parker said.

Peter Parker