Peel Hotels and Bespoke Hotels have launched legal action against Bournemouth Council over what they see as a "highly speculative" and "irresponsible" taxpayer-backed hotel scheme.
The two firms joined forces to fire off a 17-page pre-action legal letter from solicitors Dentons expressing their concerns over the plans, which would see the £70m development of a 322-bedroom hotel and spa, and health club next to the Bournemouth International Centre (BIC).
The council is proposing to back the scheme with public money after plans for a privately funded venture failed to get off the ground.
The letter on behalf of Peel Hotels and Bespoke Hotels details why they don't consider the scheme to be financially viable.
The council originally entered into a development agreement for the site in 2011 and planning permission was subsequently granted for a 208-bedroom, four-star hotel with 30 apart-hotel rooms next to the BIC.
However, it did not progress beyond planning as the developer could not raise funding and the development agreement was terminated by the council on 27 September 2015.
In their letter, Peel Hotels' and Bespoke Hotels' solicitors said: "This is strong evidence that the scheme is not commercially viable or fundable for a market operator."
They claim the site is a difficult one, surrounded by busy roads on three sides, making construction costs for any hotel high.
Nonetheless, the council continued with its ambitions to build a hotel on the site and in February 2016 initiated a public procurement procedure to select a partner to fund, construct and manage a training hotel.
A condition of the plan was that the partner procured an internationally recognised hotel brand to operate the hotel for at least ten years.
The council whittled the bidders down to a shortlist of three but by March 2017 the process had failed.
At that stage, the council changed the tender process so that a provision was made for all development funding to be made available by the council, effectively making the council the hotel owner, the letter claimed.
The letter added that these were "clearly not commercial terms".
But Peel Hotels and Bespoke Hotels have also raised concerns about that bidder.
Its solicitors said in the letter: "We are informed that persons by the name of Glen Mills and Brandon Riley, who appear to be directors of Mill Lane Estates Limited, were also directors of GB Development Solutions Limited, which is in administration.
"We understand that GB Development Solutions Limited and its parent played a significant role in a £32m Hilton hotel project at Leeds Arena which failed, after a receiving a loan from the public sector of £4.8m. The loan 'will not be recovered' according to reports in the local press.
"The developers of the Leeds hotel scheme apparently went into administration after works on the foundations had been completed in 2016."
Taking issue with the council's financial projections for the hotel, Peel Hotels' and Bespoke Hotels' solicitors claimed that even if the maximum valuation of the hotel of £75m was reasonable, and assuming that the hotel could achieve the £5m projected stabilised net operating income (NOI), the value of the hotel would be shared with the council (70%) and the developer (30%), making the council's interest £50m, which is £20m less than the hotel's total development cost.
The letter added that the hotel firms considered the NOI estimate to be too high. They estimated it to be 50% higher than a direct competitor in the town, with "no grounds" to assume the new scheme would outperform existing rivals.
It said the £5m projected NOI was inflated by "unproven and highly speculative increases in health club/spa and car parking projections".
And it added: "[The]assumptions that underpin the decisions are unduly optimistic, to say the least."
Meanwhile, the council has commissioned an independent review into the scheme, but the claimants have concerns it is "not robust".
The letter called upon the council not to conclude a development agreement until a "proper legislative basis" had been identified for the project and independent review was conducted using "verifiable comparable hotel schemes", among other demands.
Speaking to The Caterer about the case, Peel Hotels executive chairman Robert Peel said: "No-one minds competition as long as it's on a level playing field."
"Looking at the estimated costs - and I have been in the business a long time - there is no way this proposed scheme is financially viable.
"How on earth do they intend to pay the money back? I am rather fed up on behalf of taxpayers how councils can take risks with their members' taxes.
"If people build more and more hotel rooms on an unfair basis, it is going to jeopardise and hurt the private individual that risks everything to build up their businesses."
"I hope common sense prevails because I think this is a case where people haven't been informed about the true facts. That is why I got involved - to try and make sure that everyone does know the true facts and can therefore make their true judgements accordingly."
Bill Cotton, executive director for environment & economy at Bournemouth Council, said: "It's disappointing that two of the town's major hotel operators do not support this investment which aims to attract new visitors to Bournemouth.
"We have referred the matter to our external legal advisers and await their advice. It would be inappropriate to comment further at this stage."
Mills and Bespoke Hotels declined to comment.