Our View: Prospects for Iron Horse sale improving

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Editorial Board, May and June 2013

  • Scott Stanford, general manager
  • Tom Ross, reporter

Contact the editorial board at 970-871-4221 or editor@SteamboatToday.com. Would you like to be a member of the board? Fill out a letter of interest now.

Thursday’s news that the Steamboat Springs City Council declined an unsolicited offer from businessman KC Wilson to purchase the Iron Horse Inn provides more hope than we’ve sensed in a great while that our city government could mitigate its losses associated with the purchase of the property on U.S. Highway 40 almost six years ago.

The hotel was purchased for $5.285 million in late 2007 at the peak of the real estate boom here as a way to ensure a supply of workforce housing. The annual payments are $475,000, and the debt won’t be retired until 2032.

The Iron Horse burden limits the city’s ability to tackle issues like deferred maintenance on existing facilities. Wilson’s offer to pay $915,000, while not unfair based on a recent appraisal that established a value range of $600,000 to $1.2 million, probably isn’t the right number for the city.

Remember, the city received an offer of $400,000 for the Iron Horse in March from a Chicago developer intending to demolish the buildings and redevelop the site. At the time, we published an editorial urging the city to take it’s time and assign a task force to calculate the net present value of the property in light of the revenues it could be expected to generate in the future.

Wilson’s offer is more than double the offer that came in March, and though we continue to think the city should be patient about getting the price it needs for the Iron Horse, we attach more urgency than we did in March to refining the right price for the property.

We think there is a purchase price, and it might not be too much greater than Wilson’s offer, that would make it economically sensible for the city to walk away from the hotel and move forward with pressing business. We also think it’s likely that City Manager Deb Hinsvark and Finance Director Kim Weber have an idea of what that number is. The calculation is complex, but it’s certainly doable.

Hinsvark told the Steamboat Today last week that the city had bought itself some time on the issue of the Iron Horse because it was operating the older of two Iron Horse buildings marginally in the black after closing the money-losing newer hotel building. That’s great, but we think Hinsvark’s public statements to that effect are a negotiating position. There’s still the loss associated with the annual cost of carrying the debt that puts the Iron Horse solidly in the red.

Within the next five years, those payments, consisting primarily of interest, will have added seven figures to the ultimate cost of the Iron Horse.

The calculation necessary to determine at what price the city can afford to sell the property boils down to balancing market appreciation against interest on the remaining debt and the prepayment penalty written into the certificates of participation. The certificates are the form of borrowing the city used to purchase the hotel (essentially, a former City Council promised to pay out the full-term interest amount).

We have to accept the reality that the local real estate market might never rise to the point that the city could be made whole on its original purchase price. And even if it did, no buyer could hope to justify the deal to a bank.

Still, there will come a day when the market rises to a tipping point where the city could receive an offer that would justify liquidating the asset. That’s because the associated loss would be offset by the annual principle payments on the loan (remember, the city can’t get out from under the interest).

Selling the Iron Horse isn’t as simple as waiting for the market to rise and hoping for the right offer to come in over the transom; the public process requires that the city put the property on the market and evaluate the range of offers that might come in. And the price the city can afford to accept will be a moving target as market conditions evolve.

For those reasons, we would urge that City Council direct the city manager and finance staff, if they haven’t already, to create a model that allows them to plug in the variables and monitor the salability of the Iron Horse as our commercial real estate market continues to heal.

Comments

Scott Wedel 1 year, 5 months ago

Before the city can sell the Iron Horse, it must must work out a deal with the bondholders that the city transfers the secured asset to another city property.

The purchase of the Iron Horse was so screwed up that not only did that City Council severely overpay for that property, they "saved money" by getting a slightly lower interest rate by agreeing to not pay off the debt early. So it will be hard to ever avoid the interest expense.

I think the best way for the City to cut their costs would be for the City to go out and simply buy these bonds on the open market. In the past they have been for sale. Since the City would now be the owner of the debt they issued, they can just mark that portion of the debt paid.

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Fred Duckels 1 year, 5 months ago

We have a social engineering debacle and any way you cut it will take years to stomach. We seem to have a pent up need to spend and this ugly reminder of past and present thinking is unpleasant at best. Today we are just itching to move on to Iron Horse II and this dead "Horse" in the road is beginning to smell. This was all part of our visionaries taking the bull by the horns and jumping whole hog into this and the affordable housing empire trying control the future assuming to be business tycoons. For those itching to prove business acumen I think that the private sector is the more appropriate venue. The Affordable Housing mess should be liquidated, think how much simpler life might be if the markets were allowed to function, and I might add with a thousand times more wisdom.

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Pat West 1 year, 5 months ago

Interesting that we debate this and the lodging tax in different meetings. The responsible thing to do with the lodging tax would be to retire the Iron Horse debt, and shelve the other projects till this mistake is paid off.

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Fred Duckels 1 year, 5 months ago

It is not necessary to give the Iron Horse away. It will be better to have faith and hold on than to have a fire sale. Opportunity will come but it seems that some would like the smell to go away and we will still be stuck with the bill. It seems to be hampering new wild ventures but this may be best overall.

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jerry carlton 1 year, 5 months ago

Pat Best suggestion I have heard. Unfortunately it makes too much sense for the empire building government of this town to heed.

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mark hartless 1 year, 5 months ago

I think Fred is exactly right.

Once the Iron Horse is frittered away for pennies on the dollar those eager to "invest" in the next big fiasco will do so and lose the remaining portion of the taxpayers' original sum.

There is an old saying that goes like this: "The first generation EARNS the wealth. The second generation ENJOYS the wealth. And the third generation SQUANDERS the wealth."

If that doesn't describe what is going on in this nation, state, county/city, then I don't know what would.

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Bill Whittemore 1 year, 3 months ago

Ever since the city decided that a new Police Dept. is needed, mainly because of the amount of feet needed, they should not sell the Iron Horse. This building can be redeveloped, very easily from an Inn, to a Police Department. The city already has begun buying the land and the building. It would make a lot of sense to keep it. I feel that placing the new Police Department at the Iron Horse would be very good logic. The Iron Horse would have to greatly be remodeled, but wouldn't that be millions of dollars less, than if we bought 2-3 acres of land and fully built a new building, from the ground.

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Scott Wedel 1 year, 3 months ago

Bill,

Iron Horse cannot reasonably be remodeled to be a police station. Building codes are too different.

It could be sold to someone with a plan on how to gain value from the existing buildings. I'd expect that it could be profitably remodeled into desirable apartments, for instance.

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John Fielding 1 year, 3 months ago

Scott is right, there is solid value in those buildings, demolition would be very wasteful. An astute entrepreneur could do very well there. But no amount of efficient management can make enough to cover that debt and still have a reasonable profit for the effort.

However, the City does not need a reasonable profit, just enough to cover the payments and the management. We are not quite making that, but it could be in reach. I propose we try hiring a manager whose compensation is partly tied to the performance of the Inn, get those vacant rooms occupied even as micro/fridge single room occupancy efficiencies. There is a price point at which they would rent, and the reduced costs from less housekeeping cold balance the books.

There are several possibilities for improving financial performance while we wait for the market to improve. The location is great, eventually someone will be willing to pay a reasonable price to keep the existing facilities active. It is not likely to ever be worth more as a scrape off than intact and functioning.

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Pat West 1 year, 3 months ago

Scott, have you been into the Iron Horse, I doubt it have redevelopment potential besides scrape, and rebuild, and its too expensive to do that due to the bond's wording.
Bill, in an ironic twist, this council modernized the building code one week before attempting to move the police station to this location. The new code prevented the existing structure from being used for a public building as it is not up to the new code's standards.

Classic government blundering, that cost our town millions.

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