Old School Station at a Crossroads

Faced with ongoing debt payments, Kalispell considers acquiring delinquent property in industrial park south of town

By Dillon Tabish
Empty streets at Old School Station in south Kalispell. Beacon File Photo

Ten years later, dusty knapweed overruns most of the vacant land at Old School Station.

The 55-acre business park, tucked two miles south of downtown Kalispell off U.S. Highway 93, far from resembles the vibrant industrial and technology district that developers originally envisioned. Many of the privately owned lots remain empty and racked with growing debt.

Now the city of Kalispell, which is responsible for making payments on the $4.5 million in bonds it received to build the initial infrastructure a decade ago, is stuck with the bill while the site languishes.

By June 30, the city must make its latest payment of $285,000. Except there isn’t enough money in the debt service fund or other contingency accounts, creating a troublesome scenario where the city might have to tap into its general fund for the next 10 years to cover the reoccurring payments.

“We’re sitting on a time bomb,” Kalispell City Councilor Jim Atkinson said during last week’s work session in City Hall.

Faced with a worsening situation, city officials have devised a plan to eliminate the growing debt and hopefully spur development at Old School Station by acquiring six lots that are floundering in delinquency and resell them on the open market.

The prospect of local government getting into the real estate game is already rankling one city councilor, Rod Kuntz, who expressed his fundamental disapproval of the concept while acknowledging there might not be a better solution.

“I just don’t like the idea of us being in the real estate market as a city. I don’t think it’s what the city does best,” he told fellow councilors. “But I don’t see us having another choice. That’s the frustrating part.”

The goal would be to acquire the property — eliminating the assessment fees that have piled up and reached six figures — and then attempt to quickly sell the lots, City Manager Doug Russell said.

“I think we’re somewhat in a corner here,” he said. “It’s wiser to acquire the asset to be able to manage under the scenario laid out than to sit back.”

It’s a complex proposal for a contentious issue.

In the early 2000s, growth was defining the Flathead Valley, especially Kalispell. In 2004, there were a record 480 new housing units constructed in town. Commercial development skyrocketed, including a new section of retail business sprouting up north.

A group of developers, Montana Venture Partners, approached the city with an ambitious plan to create a hub for technology and light manufacturing businesses on an empty section of land on the south end, near the intersection of Demersville and Rocky Cliff roads. The project was called Old School Station, named after the old Demersville School that sat near the site.

To get this project off the ground required a lot.

First, the 55-acre property was annexed into city limits in the summer of 2005 and the growth policy boundaries were extended to include this former rural area into the urban sector. It was platted as 17 lots. The city created a special improvement district, which is a mechanism used by municipalities to build infrastructure, including sewer, curbs, gutters and streetlights. The city received $4.5 million in bonds to initiate the SID, and then the plan was for businesses and other development at Old School Station to pay back the city in assessment fees over 20 years.

To attract high-end businesses, the developers wanted cutting-edge technology infrastructure. So the city approved a pair of tax increment finance districts, one for industrial and another for technology. The two TIFs would use surplus property tax revenues above a determined amount and use the funds for infrastructure and other development needs.

Old School Station was a grand endeavor, in many ways embodying the rapid — and some would say reckless — growth of the time. There were critics, including former City Councilor Bob Hafferman, who voted against each measure throughout the multi-year process, saying public funds should not be used to support private development.

But the project moved forward, propelled by optimism and encouraged by rumors of interested tenants, including large production companies, a performing arts center and various manufacturers. Two large tenants moved in almost immediately, including Fun Beverage, which developed its new facility there.

And then the Great Recession hit.

Growth screeched to a halt in late 2008 and early 2009. Meanwhile, attention turned to the burgeoning commercial district on the north end of town, where new retail development thrived in spite of the economic downturn.

Old School Station became an island on the south, ready and waiting for development. But it never arrived, except for the three businesses that sit there today.

“It just came on the market at the wrong time,” Paul Wachholz, who owned Fun Beverage and was a developer with Montana Venture Partners, said.

Reflecting on what went wrong at Old School Station, Wachholz said the SID payments that businesses needed to pay the city were probably a disincentive. But overall, the recession is to blame, Wachholz said.

“It’s a good project,” he said. “Everything is there. All the high-tech wiring is there. The city water. The city sewer. The streets are paved. It’s really ready to go.”

In the years since the site was developed, 11 of the 17 lots remain vacant and six lots are significantly behind in their payments to the city, some delinquent by up to six years.

Now the plan is to eliminate those delinquencies, thus removing a hurdle for prospective businesses.

Russell explained the complex scenario last week.

The city would pay roughly $1.16 million to acquire the six lots by covering the outstanding debt, including the special improvement district fees and forestry and street assessment fees. Essentially the city would be paying itself back the SID fees, and the money would be reimbursed by the county back to the city.

Now Kalispell would own these lots, encompassing nearly 25 acres of land. The other five lots are privately owned and in better standing than the other six, Russell said.

The city would offer to sell the lots at “fair market value,” Russell said, and there would no longer be the delinquencies attached to the lots.

Kalispell would take the money from selling the lots and recoup the general fund account, where the initial $1.16 million would come from.

“We’re confident we will be reimbursed over time,” Russell said. “Maybe it will take 10 years, but every development will get us one step closer to that.”

The other option is to default on the loans, which would result in the city possibly losing other claims. It would also hurt the city’s ability to borrow in the future.

“We’d be looking at an ugly situation,” Russell said.

Most councilors who reviewed the proposal expressed initial interest in the idea last week, while Kuntz remained vocally critical.

The council did not take any action at the work session and will review a possible resolution to move forward with the acquisition at an upcoming meeting. Russell said the city could acquire the lots by the end of May and begin seeking buyers. He also said he was open to other ideas and encouraged private investors to offer a better solution.

Others remained optimistic that this could be the best scenario for a bad situation.

“I think it definitely is light at the end of the tunnel,” City Councilor Wayne Saverud said, “And we’ve been looking for it for a long time.”