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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 Olathe. The Hills owe Grand Mountain Bank (the Bank) approximately $2,170,000 in principal and interest, 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 the sale of the conservation easernent and paying down a considerable amount of debt, the Hills' projected income-to-expense deficit is estimated at -$118,370, as illustrated in Table 1. Table 1. Income to Expense Deficit iected 2008 Income $233,930 Projected 2008 Expenses (with original CWCB annual payment, $352,300 and assumin� Bank is paid offl 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-expense deficit, they will still need to sell the remainder of the Ranch to remain solvent for the long term. With the development rights removed from the value of the Ranch, the Hills can 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 the 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 expenses on the Ranch. As a result, if the CWCB consents to subordinating to the conservation easement, 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 lien 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 value of the loan, the Hills will need to liquidate some of their property in the near future to continue 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. Furthermore, 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.