19a ‎(3)‎

• Board Meeting Date: 5/21/2008
• Description: CF Section - Changes to Existing Loans - Tom Hill - McElroy Dam Rehabilitation Project
• Board Meetings - Doc Type: Memo

Historically, the Hills have financed their ranching operations through debt which they
eventually pay off by the sale of parcels of land. At this time (May 2008) , they have incurred a
large amount of debt from their ranch operations , including the CWCB loan and the purchase of
a 40-acre property where they reside near Ol athe. The Hills owe Grand Mountain Bank (the
Bank) approximately $2,170,000 in principal and inte rest, and they have been unable to make
their 2008 annual payment to the Bank. The sale of the conservation easement is critical for their
current financial situation. Taking into account th e sale of the conservation easement and paying
down a considerable amount of debt, the Hills’ pr ojected income-to-expense deficit is estimated
at -$118,370, as illustrated in Table 1.
Table 1. Income to Expense Deficit
Projected 2008 Income $233,930
Projected 2008 Expenses (with
original CWCB annual payment, $352,300
and assuming Bank is paid off)
Total -$118,370
The Hills’ net income from the $3,750,000 sale of the conservation easement will be
approximately $263,000 after deducting the 12.5 % donation to DOW, broker’s commission,
attorneys fees, closing costs, capital gains taxes, the payoff of the Bank, and other accounts due
from ranch operations.
The Hills have had the Ranch for sale at more or less its appraised value of $6.4 million. The
sale of the conservation easement will eliminate the development rights to the Ranch. The Hills
understand that based on their income-to-expens e deficit, they will st ill need to sell the
remainder of the Ranch to remain solvent fo r the long term. With the development rights
removed from the value of the Ranch, the Hills ca n continue to list the Ranch at a price of $2.5-3
million, which is a much more attractive price to prospective buyers who would want to continue
to operate it as a ranch.
Originally Staff requested that the Hills use th e conservation easement proceeds to pay off the
CWCB loan, but, as outlined above, the net proceeds are not sufficient. The Hills will also need
to retain some of the proceeds for operating ex penses on the Ranch. As a result, if the CWCB
consents to subordinating to the conservation eas ement, the Hills have agreed to amend the
CWCB loan by increasing the collateral for the loan with a first-position lien on the Gore Pass
Ranch, including its water rights, a first-position li en on the Hills’ 40-acre Olathe property, and a
lien on any future property that the Hills purchase to defer taxes from the sale of the conservation
easement. Furthermore, the Hills have agreed to amend the terms of the loan from 30 years at
2.5% per annum to 10 years at 2.0% per annum. The annual payment amount will change from
$41,210.13 to $96,023.58.
Although the value of the collateral exceeds the valu e of the loan, the Hills will need to liquidate
some of their property in the near future to co ntinue ranch operations. By encumbering all of the
Hills’ property, the CWCB can ensure that it gets paid from any such sale and that the proceeds
are applied to repayment of the CWCB loan. Furt hermore, Staff is recommending a reduction of
the loan term because a long-term loan is a risk for the CWCB given the Hills’ inability to
operate the Gore Pass Ranch profitably.
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