Bob Schneider: A bad combination

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My purpose in writing is to summarize two publicly known situations with the city of Steamboat Springs and Routt County concerning their failed efforts into the realm of real estate and to offer a method to prevent similar problems in the future.

Here is the pertinent information on a 10-acre parcel owned by the Yampa Valley Housing Authority near the intersection of U.S. Highway 40 and Elk River Road. The numbers are approximate but realistic.

Purchased in 2006 for $2.4 million

■ Carrying costs, interest, fees of $700,000

■ Total cost to date of $3.1 million

■ Estimate of property’s current value is $1 million

■ Loss to date of $2.1 million

The Housing Authority has an outstanding debt on this land of $2 million. Its expectation was that the “bust” of 2008 would be short, and so it decided to hold onto the land rather than explore the possibility of returning it to the lender. The renegotiations taking place with the lien holder now, if successful, will cost the Housing Authority an additional amount yet to be determined but surely will be at least $50,000 per year. So this property has cost $3.1 million to date, with the cost increasing each year by the amount paid to the lender, most of which would go to interest, not principal. The property now has been taken off the market because the land is worth about $1.4 million less than it was bought for.

How did the Housing Authority get to this position in light of initially having been funded by the city and county at the rate of approximately $160,000 per year? No doubt the success of West End Village raised the expectations for success, but it appears to me the organization did not have the real estate experience to allow it to recognize that the market seriously was overheated, similar to the “savings and loan” real estate bust of the 1980s, nor did it have the experience to say that this downturn is going to be long and ugly.

Or perhaps the Housing Authority knew but did not want to acknowledge it. I know that at least some members wanted to keep the land because it would ruin the Housing Authority’s chances to borrow again if they gave it up, a point that is moot now. Either way, the Housing Authority has a multimillion dollar loss on its hands. The salvation of increasing property values will be a long time coming and would have to be at the rate of $50,000 per year just to keep the loss at its current level.

The entrance of the city into the real estate market with the purchase of the Iron Horse Inn in October 2007 is a similar circumstance. The income derived has been far below expectations since the outset. There are serious problems with the parking lot, and the buildings that were supposed to provide income and affordable housing are so decrepit that the city wants to tear them down. Where was the due diligence that led to this in five short years?

So now the city has a $5 million piece of land that is “underwater” and financing on it that won’t go away. In addition, the city wants to take a premium piece of land in perpetuity off the tax rolls. What does that cost?

I disagree with those in the city who do not want to sell the land because of the financial loss it would entail. The city already has incurred the loss and is paying interest on that loss. Selling just brings that reality into focus.

With the current discussions about the relocation of the police department and fire station and the troubles of the Housing Authority, it is time to ask, “What are the limits of what our local government can do, and how can we more easily and safely approach similar problems, such as affordable housing?”

I suggest that the real estate business is an industry, not something to be ventured into without realizing its complexity and risks. What would the reaction of taxpayers be if the city or county wanted to venture into the oil and gas industry in an effort to better serve their residents? I suspect the outcry would be huge and negative.

How then do we accomplish the goal of affordable housing and similar ones in the future?

Using affordable housing as an example, I think the city and the county should spend the time and effort to come up with a tax program that specifically would encourage the construction of such housing by tax credits or abatement of property taxes, waiving of connection fees or similar incentives. That way, we would know exactly what it would cost the taxpayer, the projects would be exactly as approved by the planning authorities and the risk would be where it belongs — with the developer. This idea could function on similar priorities of our local governments.

Comments

Fred Duckels 2 years, 3 months ago

The Iron Horse and Elk River parcels are now officially orphans and the excuses have been justified by pointing to mistakes made in the private sector. The sad part is that many of the visionaries have not broken stride and are again leading us into the future all the while pushing their agenda.

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Scott Wedel 2 years, 2 months ago

In a city that does not have a property tax, it is impossible for the city to offer property tax credits. Regardless, even if all property taxes could be exempted then that on residential housing is peanuts compared to the needed subsidy.

Government cannot strictly rely up service providers for real estate because it is typically more cost effective for government to own it's office buildings than renting. Think how much County would have paid in rent all these years if they didn't own it their Lincoln Ave complex.

I think the good v bad purchases can more quickly be distinguished. Good is when property either has positive cash flow or government is immediately to build. Bad is when it is a speculation to buy or build now before costs go up.

Government has two advantages in the real estate market. First, it has access to lower cost loans so it can buy cash flow properties such as mobile home parks or apts and do well. Second, government has easier access to grants so it can improve the cash flow of a property in poor condition for less than the private sector.

YVHA was simply lucky like every other developer during the boom with West End Village and unlucky with Elk River. The lesson YVHA should have learned is that a development success is nice and creates money to roll into the next development while a development failure cripples them for years. Thus, they cannot afford to take risks.

City of SB purchase of Iron Horse was a pure speculation that prices would increase and hubris that city could profitably operate the motel while creating some higher rent housing rents. It was arrogance on steroids to think SB City could run Iron Horse so much smarter and better managed than private sector.

No one can predict market trends and it would be foolish to try to come up with rules claimed to prevent buying in booms. The solution is to stick to where they have a competitive advantage and focus on cash flow.

As for development, they should stay out of that because the risks are simply too great. If YVHA makes it clear that they will buy projects with a certain cash flow then a developer can always make that product and sell it to YVHA.

If YVHA wants to sell housing units to people then they should contract with a developer for a bulk purchase at a favorable price, terms of which are known and available to all developers, and then resell those units to clients with the expectation of taking losses due to the reduced sales price.

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