Our View: Prospects for Iron Horse sale improving
June 23, 2013
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.
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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.