Tamarack's $670 million cure – Real estate trouble lingers at ski resort

A $670 million bond issue proposed as a way to help re-start major construction at the financially and legally challenged Tamarack Resort in central Idaho would not cure all ills but would provide some breathing room.

The Idaho Housing and Finance Association would put together the bond issue under an economic development statute that the Idaho Legislature passed in 2007.
Tamarack CEO Jean-Pierre Boespflug said in an interview that Tamarack owners are pursuing other options including conventional financing. But the bond issue, if it comes together, would have its advantages, he said.
“With a government conduit, terms tend to be more favorable, and, more importantly, the repayment period would be longer,” he said.
Maturity ranges and interest rates are yet to be determined for the would-be issue of bonds, said Idaho Housing and Finance President and Executive Director Gerald Hunter. It would be a privately placed bond sale wherein an investor is identified and Tamarack negotiates terms and conditions with the investor.
As a facilitator or conduit issuer, Idaho Housing and Finance would help Tamarack find “a large, institutional investor that will help them restructure their debt,” he said. The state-created, nonprofit association would help the potential investor set up the investment in the bonds - with a private financial institution, not Idaho Housing, serving as the trustee to provide oversight.
“We would have no financial position in the transaction,” Hunter said. “We are helping them arrange for investment capital they otherwise might not be able to get.”
Idaho Housing would take a fee up front for preparing the bonds and helping to structure the transaction, and a fee for any ongoing administrative paperwork. Neither Idaho Housing nor the state would take financial risk; the fully taxable bonds would be secured by property at Tamarack and any additional security that Tamarack offers, he said.
The Idaho Housing and Finance board is yet to issue the final go-ahead but did approve an initial resolution. Hunter said much needs to be done, such as determining if a bond issue for Tamarack serves a public purpose. Public meetings are scheduled at 5 p.m. Aug. 20 and Aug. 21, in Cascade and Boise, respectively, to help make that determination.
Tamarack construction impacted the local economy substantially and “since they have had these financial difficulties with the construction work that has stopped, there is a significant downturn in economic impact,” he said.
The association’s authority to put together the bond issue comes from House Bill 198 (2007), which allows Idaho Housing and Finance to issue revenue bonds – repaid by the revenue that the funded project produces – for economic development.
But someone, such as an institutional investor or pension plan, must buy the bonds, Hunter said.
How attractive the Tamarack bonds are to investors remain to be seen, given the widespread decrease of bond values and ongoing credit crunch, said Jack Harty of Boise commercial mortgage brokerage Harty Capital. For example, principal values for commercial mortgage-backed securities that fund commercial real estate have fallen even though these bonds have had a minimal default rate, he said.
A lack of demand for solidly performing commercial mortgage-backed securities indicates challenges for bonds of all types, “which is why they are talking about private investors buying” a Tamarack bond issue, he said.
“Tamarack is proposing to find an investor or investors for bonds backed by lot sales,” Harty said. “What if lots fall in value and you can’t sell them, or you can sell them for 50 cents on the dollar? The bondholder comes up short.” Prospective bondholders would estimate lot sale price and frequency, and other risks, and adjust bond principal and interest expectations accordingly, he said.
“They are doing this because it’s very hard to get financing of that size on that product from a bank, which has its own problems,” he said.
Another option would be to sell Tamarack Resort to an investor, assuming it has value above what is owed, he said.
“The advantage here is that you don’t have to dilute equity further,” said Boise State University Finance Prof. Keith Harvey. Equity would be diluted if financing came from bonds or high-dividend preferred stock that buyers could covert to common stock, he said.
But a bond-only package poses challenges now, he said. “It’s not a good environment to sell debt into.”
Demand will depend on the credit rating, and as demand falls, the interest rate must increase, Harvey said. Interest rates have dropped a bit recently, but demand is weak for low-grade debt because of the slow economy, he said. The interest rate spread between U.S. Treasury debt and high-risk debt is widening.
The Tamarack bond issue’s offering circular to investors would disclose where the proceeds are to be spent, and investors would want to know that the issuer has sufficient assets to repay the bonds and is not merely projecting an appearance of solvency, Boise attorney Forrest Goodrum said.
“This is a very big project that requires a huge capital investment, and as long as the real estate market was hot it looked great – and attracted a very large number of speculators who were getting creative financing,” he said. “Any time you get into a real estate market where a high percentage of buyers are not buying the real estate to use it, you have potential for disaster.”
Tamarack majority owners Boespflug and Alfredo Miguel Afif early this year filed for Chapter 11 (reorganization) bankruptcy protection, after French bank Societe Generale withdrew financing arranged to pay on a Credit Suisse loan, The Wall Street Journal reported July 7. Credit Suisse followed with a foreclosure suit.
Tamarack lobbyist Scott Turlington told the Idaho Statesman July 28 that bond proceeds would be used to complete unfinished buildings, resolve more than three dozen liens filed by unpaid contractors, and resolve the dispute with Credit Suisse.