Back From the Brink?
by Seth Cagin
Jan 18, 2011 | 6635 views | 5 5 comments | 32 32 recommendations | email to a friend | print
NOTE: What follows is a partial rewrite (Wednesday, January 20, 2 p.m.) of a column first posted on Tuesday. This version is the one that will be printed. The Tuesday version is below.

“This is the worst thing that has happened in Telluride since the mine closed.”

That was a friend, a knowledgeable, long-time local, who called me on Monday morning.

As of Wednesday afternoon, the news appears less dire. Maybe the Capella Telluride and the Inn at Lost Creek aren’t closing at the end of January after all.

Instead of closing, late word came from “a highly placed source who asked not to be identified” that the management contract with Capella had been or would be terminated and that the receiver of the two properties, which entered the foreclosure process in October, would continue to operate them.

But beware: We at the Watch have been unable to confirm this report!

Confirmed or not, the Local Perspective column I published at watchnewspapers.com is no longer the right one to print in the paper of Thursday, Jan. 21 (though it will remain online).

As I wrote in that first column, following the October foreclosure and Monday’s announcement that two hotels would close, we couldn’t know what would happen next. Somebody could purchase the properties out of foreclosure and operate them. Or it might be that nobody will bid enough and the bank will hold onto them, and will either operate them or won’t. All of that is still true.

But if the late news is correct, we are back from the brink. Maybe. Unless things change again, which they certainly could. Maybe even by the end of today after this column has gone to press, making today’s speculations obsolete. With hundreds of millions of dollars at stake, the interested parties have every reason to jockey for position.

The current stratagem, it appears, is to replace a five star hotel operator with one that operates with maybe one or two fewer stars, thus reducing the hotel’s operating costs. It was, according to the receiver, the failure of the Capella operating as a Capella to cover even its operating costs that led to the announcement it would close in the first place. So it makes sense for the receiver to try to operate it more frugally. If that is what’s happening, it would represent a devaluation of the property, another step toward a sale whereby the investors and their lenders take a bath but the property itself becomes more viable.

Surely, at a low enough cost of overhead and operations, the hotel formerly branded as Capella (if the news is right) and the Inn at Lost Creek could be operated profitably.

So how vulnerable are we, the regional community? How scary is all of this?

There remain a host of unknowns. A lot of investors’ money will be lost, upwards of $200 million of it, but if the properties they have left behind can be sold and operated successfully, the community may benefit.

After it is reorganized and has new owners, will luxury condos in the erstwhile Capella Telluride start to sell? And at what price? If prices fall too low then everybody’s property values must be affected. As property values across the region fall, so must property tax revenues to local governments.

These are all steps toward less affluence (looked at negatively) or more sustainability (from a positive perspective). As we reach equilibrium, also known as the bottom of the real estate market, some degree of losses have to be recognized and pain must be endured. As we are witness to now.

In any case, it appears that the worst outcome has been avoided, at least for now. The hotels will continue to operate; the economy won’t free-fall. It may just continue to settle downward for awhile until it slowly starts to recover.

Was my first column, in response to the news that the hotels would close, alarmist? Don’t think so. Read it online and judge for yourself. I won’t repeat the entire thing here. Real estate brokers may argue that a buyer’s market is not a bad thing. That this is a great time to buy. But falling prices are a bad time to own or to try to sell. And locally, the bottom is clearly not yet in sight.

Published on Tuesday, January 18, 11 a.m.:

Off an Economic Cliff

“This is the worst thing that has happened in Telluride since the mine closed.”

That was a friend, a knowledgeable, long-time local, who called me this morning.

Yes, we both agreed, this is really scary.

The Capella Telluride and the Inn at Lost Creek can’t cover their operating costs at the height of the winter season. Barring a miracle last-minute infusion of cash, they are closing their doors. Without being an insider, and before the foreclosure process plays out, it is impossible to calculate the ultimate loss, but it could well be upwards of $200 million.

But that’s just investors’ money. It is equally hard to calculate the loss to Telluride and the entire region of the Western San Juans. It is, to begin, 120 jobs lost practically overnight. On top of that there’s a certain amount of business we won’t be able to accommodate. And then there’s the biggest hit of all, a hit to property values – and subsequently to property tax revenues – that is impossible to quantify. Not to mention a blow to our confidence.

The Capella started as a bid to sustain the economy and property values. The leadership of the Telluride Mountain Village Owner's Association led the organization to purchase the site of the Capella precisely to ensure it would be built-out as a project that would be economically beneficial, and not just another frequently dark condo project. This project would contain hotel rooms – bedbase! – and other community amenities, including meeting facilities and an underground parking facility. It would bring vitality to the Mountain Village core.

Finding a developer and getting the ambitious plans through the development approvals process, and then getting the project built, took years and years, not to mention millions and millions… no, make that at least two hundred millions. When the project opened two years ago, one year into the Great Recession, there was a sense, at least among some observers, that at least we had this to help see us through.

But there was a problem. The entire project was premised on the assumption that local real estate values were high and would remain high. Condo units at the Capella and Inn at Lost Creek could be sold at a premium price, as happened with similar luxury hotel-condo projects in Aspen and Vail. Revenue from real estate sales would repay the construction costs and even generate handsome profits to the developer while dues from owners would underwrite hotel operations.

Of course, those sales just didn’t happen. We in the Western San Juans are not alone in seeing the real estate bubble burst. It has happened beyond ski towns, beyond resorts, and not just in the United States. But we were unlucky in this much: the Capella was financed by none-other-than Lehman Brothers, the Wall Street firm whose failure in 2008 set off the global financial crisis.

Now what?

Nobody knows. In foreclosure, somebody may purchase the Capella and Inn at Lost Creek. Or, just possibly, nobody will bid enough and the bank will keep the properties, and may keep them closed, and hope property values recover. If the properties are acquired and the purchase price is low enough, the condos may be sold at a huge discount. Maybe. Then, maybe, HOA dues from those new condo owners will generate enough cash flow to underwrite the hotel operations. And the Capella and Inn at Lost Creek could reopen. But that is a lot of maybes and coulds, and I’m sure I’ve missed a bunch more.

What’s worse, even if it happens just that way, is that more hundreds of millions in property values in the region are now at risk. After all, if a luxury condo at Capella can be had for a song, or can't be sold at a price the owner is willing to take, what is your condo, or your home, worth? Probably far less than you imagined, maybe far less than you have put into it. The losses could quickly become stratospheric.

Is there a silver lining in this dark cloud? If so, it sure isn’t easy to identify. Telluride remains an exceptional place of beauty and adventure, so people will want to come here to live and visit. At some point the bottom will be reached, though we can’t know when, and some people will get really great deals on real estate. This will generate brokers' commissions and bring warm bodies back here. An economic argument for our revival will start to take shape.

Or maybe, somehow, the community can figure out a way to mitigate the unfolding disaster and none of this, or only some of it, will come to pass.

More likely, in the near term, Telluride and the surrounding region must necessarily be less populous and less affluent. Maybe this will reduce our carbon footprint. Maybe it’s an essential step toward “sustainability.” But it will be painful for a lot of people. And as others have often observed, notably George W. Bush when asked how he would be viewed in the long term, in the long term, we’ll all be dead.

Comments-icon Post a Comment
January 19, 2011
Good to see you back George.

Yes, it is a great buyers market but there are hundreds if not thousands of great buyer markets out there, so why are we different? The scenery? Gorgeous yes, but no more so than South Lake Tahoe or Hana, Maui.

Our amazing customer service? Yeah, I snickered too.

Our honest government that actually listens to the people and not to slick propaganda indie films? More snickering.

George, it is going to take more than a GREAT buyers market to turn this corner. It is going to take a complete examination of what Telluride wants to be and what we need to do to get there. A positive reinforcement letter to the papers by our Mayor is just not going to cut it.

We need to quit whitewashing our problems. Things are tough and they are going to get tougher as the commercial market begins to correct itself. Minimizing the situation looks good in the glossy marketing guides, but does nothing to create a sustainable future for our families. Say howdee to Becky and Happy New Year my friend.

January 19, 2011
This too shall pass. We survived the Peaks foreclosure 17 years ago just fine. We are in the best buyers market in years. For God's sake, look at the positive!
January 19, 2011
Come on Seth-This brings us closer to zero emissions,which is of course is one of the main goals of our towns mayors -what else could be on their agenda for success ?
January 18, 2011

Capella is not the only problem in MV; look at Lorian (empty), Lumiere (almost), Peaks (struggling at shoulder seasons), Elkstone 21 (empty), Cassidy Ridge (still being finished, empty), Cortina (shuttered, too.).

MV is a ghost town after March 15...

It is famous only by it wonderful movie, The Lost People of Mountain Village...

How many millions in Central Planning have we spent on the Professional Educated Planning Elite over at TMV Main HQ? All these planners, no people and empty buildings...

The ski hill was always about development. Affluenza.

Hopefully, the empty buildings will sell to people who have more at heart than real estate appreciation. We should convert Capella into a youth hostel...bring some kids in who know how to have fun and are only concerned about meeting someone before closing ...

Central planning and real estate net present value calculations and 1031's etc..that is what got us here in the first place...

Lets go skiing and let Swedbank worry about its 150 million dollar note that I will give them a dime to a dollar for...

Skiing..today, Sunny, 40..lets worry about our turns again.
January 18, 2011
Another friend, another longtime local, just told me he couldn't disagree with me more. We've known this was coming for a long time, he said. There are many ways for this to evolve. Well-conceived, properly valued property is doing just fine.

Hope he's right and I'm wrong!