City may buy debt-ridden lots

The city of Kalispell soon may be selling real estate as part of a plan to save the Old School Station development.

Old School Station was designed to be a center of technology and industry when it was annexed into the city. However, many parcels of land at Old School Station are undeveloped and have fallen into debt. While the lots are privately owned, the city ultimately has to make payments on the bonds it issued to create the district.

“Our debt service is running low,” City Manager Doug Russell told a City Council work session on Monday.

It’s so low that city officials don’t think they can make the next payment of $285,000 that is due at the end of June.

To right the ship, city officials have drawn up a plan to eliminate the debt and make the parcels more marketable. 

Broadly, the city would purchase the indebted lots with money from its general fund, sell the lots and use that money to replenish the general fund.

The full plan involves a few more moving parts.

Old School Station is a collection of 17 lots on 55 acres south of the main city limits on U.S. 93. The city annexed the area in 2006 and issued $4.5 million in bonds that covered the cost of extending services such as sewer and water to Old School Station.

The city set up a special improvement district for technological and industrial use. The idea was that the special assessments paid by the property owners would cover the annual debt service on the bonds. 

The recession hit soon after the district was created and development slowed to a crawl. Today, 11 of the 17 lots are held by private owners who are delinquent in their assessment payments.

That’s a problem for the city because it’s ultimately responsible for the bond payments.

“We are required to protect our bond holders at this point,” City Attorney Charlie Harball said.

Furthermore, the lots are a tough sell with delinquent payments that reach six figures in some cases. 

Enter the city with a plan to buy out the most delinquent lots to pay back its own debt service fund. Then it would sell the properties to square up the original borrowing amount.

Six of the 11 delinquent properties owe more than three years’ worth of payments. The total debt is nearly $1.2 million in special assessments. Over the years, the city has exhausted several contingency funds to cover the debt service on those lots.

The city’s plan involves several transfers that follow a path allowed by law. It also involves the city owning, marketing and selling property, which is something that didn’t sit well with some City Council members.

But their backs are against the wall with the $285,000 payment due June 30.

“I like the solution. I just don’t like the situation of having to utilize that,” council member Rod Kuntz said.

The plan goes something like this: The city would move $1.2 million from general fund reserves to the community development fund. Then money could be transferred to the debt service fund to reconcile the delinquent assessments.

From there, the city would repay its contingency funds — the tax increment financing account for the district and a revolving fund. Some money also would be set aside for future assessment payments on the parcels that the city acquires.

The city would then have to sell those lots. The idea is that they would be more marketable without a debt load attached. The lots are estimated at a cumulative value of $3 million.

The money from those potential sales would be put into the revolving fund. Once that fund reaches 15 percent of the outstanding bond principal, the city can legally return the original amount to the general fund.

At Monday’s work session, the council didn’t take any action on the plan. Council members discussed potential issues arising from the plan. Should the city enter the real estate market? Can the city sell the lots at a marketable rate?

It was also noted that some parcels at Old School are owned by functioning businesses that are in good standing with payments.

Russell said that this is a last-resort effort. The best solution would be for a private entity to purchase the lots, but that doesn’t seem likely with the debt load.

“If there’s another option, we’re certainly up to investigating and seeing what that is,” he said. “But delinquencies do make it difficult for private development.”

The City Council is expected to officially take up the initiative at its April 6 meeting. In the meantime, Russell said the city welcomes ideas about the future of Old School Station.

Reporter Matt Hudson may be reached at 758-4459 or by email at mhudson@dailyinterlake.com.