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Railroad land.

Downtown merchants wary of the Alaska Railroad development plans

The history of American railroading is inseparable from that great American commodity: land, and lots of it. The U.S. government granted huge acreages to the pioneering lines to encourage cross-country rail development. Now, in the continent-conquering tradition of the old Great Northern and Southern Pacific, the Alaska Railroad is looking to develop its inherited real estate portfolio to bolster its bottom line against the perennial uncertainties of hauling freight and passengers.

Leasing and developing land is nothing new for the railroad, but since transfer of the line from federal to state ownership in 1985, its new managers have gradually repositioned the land base for the hard realities -- and opportunities -- of Alaska's post-oil-boom economy. Altogether, the railroad owns about 36,000, acres which have consistently generated $4 million to $5.5 million annually since state ownership.

Increasingly, railroad managers look to a long-term relationship with Alaska's growing travel industry, searching for ways to wed passenger services with trackside real estate. In particular, the Alaska Railroad is focusing on tourism development for property along Ship Creek in Anchorage, capitalizing on the city's strategic location as a tourist and commercial gateway.

While this may sound like progress, not everyone is happy with the railroad's recent land development initiatives. Some longtime industrial customers in the Ship Creek area are wondering how they fit into a tourism future. And downtown Anchorage hotels are at best skeptical about the railroad facilitating construction of new hotel space as part of its ambitious plans to lure visitors and add visitor days.

Enter John Burns

John Burns, the railroad's director of facilities and land development, is the new point man for the Ship Creek project and the statewide real estate portfolio. An architect who was involved several years ago in efforts to locate a micro-brewery on the banks of Ship Creek, Burns lists public relations and marketing skills among the strengths he brings to his new job.

While the railroad has always leased industrial property up and down the line, Burns says land development was historically a low priority. Until very recently, there was no land inventory system, no strategic development concept. In 1985, just before the railroad was transferred to state ownership, efforts by the Municipality of Anchorage to develop property for the coastal trail in the railroad's corridor were met with indifference and outright hostility.

"That was a hell no, a double hell no for the railroad," says Burns. "They had to be strong-armed. The muni butted heads for years with the railroad."

The new owners of the railroad were confronted with a backlog of leasing paperwork and a growing number of inquiries about potential projects involving Alaska Railroad land.

"It took the better part of three years after state control to get the backlog addressed and be responsive to people walking in the door. As early as 1986, they were getting signals that there was a potential for more activity out there. The railroad basically holds prime property that was held out of the flow," Burns says.

The railroad can't dispose of its land without legislative approval. Development options include straight leases or lease arrangements in which the railroad assumes the role of a partner.

By 1990, the railroad had been contacted by several parties interested in hotel development. One proposal resulted in a partnership between the railroad (40 percent share) and a group of Spokane investors (60 percent share) to build the new mid-priced Comfort Inn Heritage Suites on the banks of Ship Creek. Under this arrangement, the railroad put up the land as its share of the equity and will take 40 percent of any profit.

At this juncture, managers realized there were two ways to approach a serious land-development program: Staff up or hire a master developer to oversee marketing of other Ship Creek lands.

Must-See Attractions

A lengthy and sometimes controversial process undertaken with the Anchorage Economic Development Corp. yielded two finalists for the master-developer contract. One featured a general business emphasis for Ship Creek, the other highlighted the prospects of luring tourists to a must-see attraction.

LoPatin & Co. of Southfield, Mich., the company with the tourism focus, was hired early in 1992.

Burns readily acknowledges that the big change for the railroad lately has been to see railroad property in a commercial rather than an industrial light.

"This is not $3 ground to park cars on, this is $12 to $15 ground for commercial and tourism potential," Burns asserts, referring to the general appraisal levels for different types of land use. As the railroad is required to offer land at fair market value, leases cost up to 10 percent of the commercial appraisal rate. Thus, commercial land appraised at $12 a square foot would be leased at $1.20 a square foot, rather than 30 cents per foot for industrial land appraised at $3.

Burns is enthusiastic about LoPatin's planning and marketing progress. The firm has a master lease on 60 acres, of which about 30 is buildable. The lease term is five years, with a 35-year renewal option. LoPatin currently pays $37,000 a year with provisions to increase rents as development proceeds. The railroad reserves the right to participate in discrete elements of the overall project.

LoPatin envisions multi-phase development that actually includes three attractions on the site: an Omnimax theater similar to the one built for the Vancouver World's Fair, a so-called "lean rail" hologram theater and a museum, all featuring Alaskan themes highly sought by visitors.

According to Burns, research indicates strong demand for this type of attraction. He says feedback from tour companies indicated many Anchorage visitors leave town as quickly as possible because they perceive a lack of interesting activities.

LoPatin's plan is to create a four-hour, must-see attraction that will hold visitors in town for another day, for a ticket price not to exceed $21 per person. According to Burns, this extra visitor day could generate as much as $40 million annually for the Anchorage economy.

The master plan also calls for an additional hotel as well as a so-called World Trade Center Alaska, providing 150,000 square feet of office space to companies or agencies involved in international trade or fisheries management and research. A letter of intent has been signed with the University of Alaska to locate its World Trade Center for Alaska on the site, and hopes are high that the new administration in Washington would look favorably on relocating a substantial portion of the National Marine Fisheries Service regional offices from Seattle to Anchorage.

"I'll bet you it's $25 ground in the long term," Burns projects. He says Outside, and thus objective, experts have reviewed LoPatin's concepts and found them eminently doable. "It pencils, it's the beginning of the high margin for success. It sustains itself with conservative numbers."

Hotel Raises Questions

Still, Burns is not unaware of his critics. He is especially sensitive about the concerns of downtown hotel owners, but says they are overly sensitive because of substantial debt loads. Furthermore, he says at least four feasibility studies in recent years have cited a need for additional mid-priced hotel space, a need satisfied by the new Comfort Inn.

"There's a lot of debt, some of it unnecessary, in the Anchorage hotel industry. It scares the hell out of them. I can appreciate their concern, but there's a mid-price niche that was met by that hotel. The word 'hotel' out there is death in the financing world, (but) it's been scrutinized unbelievably closely. This hotel was built for virtually the same price as one in Oregon."

Critics say the railroad is missing the point, that the Comfort Inn entered the market with an advantage because of a favorable lease arrangement with the railroad and the railroad's position as a partner in the venture.

According to the Alaska Railroad Corp.'s latest annual report, in August 1991, the railroad entered into a general partnership agreement to develop and operate a hotel complex at Ship Creek (the Comfort Inn Heritage Suites). While the railroad has made no long-term investment in the hotel beyond the land itself and is financially liable should the project not be successful, $500,000 was advanced by the railroad to the partnership until the partnership's bank line of credit was funded. The amount, essentially a construction loan, was repaid in full by the partnership.

"We feel the railroad is competing with low-interest loans that we feel are unfair to our industry," says Ralph Nogal, president of the Alaska Hotel/Motel Association and general manager of the Anchorage Hilton. "They do things whatever way they want to. Something has to be done to hold them accountable. They pretty much have free rein right now. People are just upset about the way it's being handled. Instead of working with people, they just do what they want."

Community Critics

Others are concerned for different reasons. Odom Corp., a longtime railroad tenant and shipping customer, worries that tourism development may eventually push them out of their Ship Creek location. Executive vice president Bill Odom sympathizes with other downtown landowners who have had trouble marketing their properties.

"They (the railroad) would like to relocate us, but it's a good place for us. We just don't want to get squeezed out of it," says Odom. Although he's not certain about the viability of the tourism mega-concept, he agrees the railroad should build on its strengths and assets to fulfill its mission.

"They should try to exploit their attributes. I just hate to see them do it at the expense of people who have supported them for a long time," says Odom, noting that his company does about $350,000 worth of business with the railroad annually just in freight shipping.

Concerns such as these point to a significant challenge for the railroad and its development partner -- generating enthusiasm in the community for the project, a task requiring all of Burns' public relations skills and the professionalism of LoPatin.

So far, the results are mixed. One railroad tenant who declined to be identified says communication with the landlord can be difficult, noting: "I wouldn't say they have the best bedside manner over there. I would say they're a little high-handed at times."

But Burns says the railroad and master developer are committed to an even-handed process for securing project approvals, including close consultation with the city and community councils.

"There's been a completely public process on the transition of the land to some of these uses. The public process has been adhered to and will be adhered to. LoPatin is very cautious and very private. They're not Donald Trumps. They don't like to make a splash. They just quietly do it," Burns asserts.

Whether the public review process will silence or satisfy critics in the business community remains to be seen.

Real Estate Bonanza

Scott Hawkins, president of the Anchorage Economic Development Corp., says his organization assisted in the master developer selection process based on a railroad pledge that building up the Ship Creek property would add to rather than dilute downtown retail business. He agrees the Alaska Railroad got the best possible agreement with LoPatin and says the railroad needs a chance to keep its promise.

"It's pretty much in the railroad's court. It's definitely an issue. Now the proof is in the pudding, is in the eating," Hawkins says.

According to Burns, the strong chance for Ship Creek to succeed increases the potential for the railroad to expand its leasing and development program elsewhere. A number of parties have approached the railroad management with ideas.

While land in Anchorage and Fairbanks generates about 90 percent of the line's real estate revenues, there are parcels scattered up and down the line, many of them with tourism potential. Burns says the railroad is currently looking at several proposals for a new hotel in Seward, a project in Whittier and a development in Fairbanks similar to the one underway for Ship Creek.

Burns says the level of interest is pushing the railroad closer to developing a more comprehensive real estate development strategy based on tourism concepts.

"Hopefully, the railroad can facilitate some things. (This is the) inherent advantage of being a boundary-crossing entity," says Burns, noting that real estate development for the Alaska Railroad will never be a stand-alone activity. "Alaska Railroad real estate has already generated cash for the bottom line, helped (keep up with) track maintenance and engine rebuilds. Real estate represents a way to finance this internally."

In Burns' view, real estate development simply supports the primary mission of providing badly needed transportation infrastructure that the private sector has thus far been unwilling or unable to support. "It remains a smart activity for the state to own a railroad," he says.

Robert Hatfield, the railroad's president and CEO, says, "As far as the strategic vision is concerned, the board and management of the Alaska Railroad Corp. is charged with making the highest and best use of the assets of the corporation. That includes real estate.

"We want to develop our real estate to basic principles. One is, we want to develop our real estate in line with the goals and objectives of the community in which that real estate is being developed. The other is, we want whatever development we do to relate to our core business, which is transportation," Hatfield explained.

"We're really seeing a grassroots kind of response, a significant increase in general real estate inquiries," Burns adds. "Some of them won't make any sense, but the market is becoming aware that the railroad wants to talk business."
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Title Annotation:planning Alaska's railroad system
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Date:Jan 1, 1993
Previous Article:Business Exchange International of Alaska.
Next Article:Business looks at 18th Legislature.

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