Short Line Investment?

[edblysard]

Boy, I wish it was!

And additional plus...if you get in a position where you would need to divest your group of this line, once you got it up and running, the coal companies would most likely buy it just to keep their product flowing.
Aarco... (Citgo Lyondell) has a coke unit here, on the south side of the ship channel.
The Bulk Material handling plant, that loads coal and coke to ships, is one the north side, within visual range of the Arco coker...it is cheaper for Aarco to lease 2 SD40-2, and 100 old coal cars, and run a twice a day train using PTRA tracks and crews around the turning basin, as opposed to loading a barge and shoving it across the channel, although the distance separating the two is less than a mile.

They have a vested interest in keeping their product flowing, so Arco also has rebuilt a siding and loading facility to expedite this move, and we, (the PTRA) have exclusive right to move their trains.

If this hypothetical line happened, getting the coal companies involved as vested partners almost guarantees a built in buyer in the event you decide to move on to other things.

There are quite a few short lines here in Texas that are exclusively devoted to a single or small group of companies...one in West Texas was mentioned in Trains mag, it moves crushed rock and gravel only.
And there is GRR, Georgetown Railroad...built as a connection from limestone and gravel quarries to interchange with the MoPac, it now hosts its own ballast trains and leased rock trains all over the Gulf Coast, supplies men and equipment to rebuild or build ROW, all from a pair of SWs and some old composite gons....

Texas City Railroad serves three refineries, supplying interchange service for them to the UP, on a railroad that is less than ten miles long.

My own railroad started out in 1924 with two 0-6-0 switchers, hauling freight up from the city docks to a small interchange yard, not even two miles of track, with 35 total employees it generated a whopping $7000.00 it’s first year of operations...now we have almost 40 miles of mainline, 8 yards, employee 275 T&E personnel, a large car department and MOW group, along with the office staff and company officers.
We serve over 450 customers on the Houston Ship Channel.
North Yard, the original or first yard built, now holds 3000 cars on any given day, and generates several outbound to interchange trains per shift.

BNSF is building two 125 car length sidings out near the Cargill Elevator for the exclusive use of BNSF and PTRA to serve the unit grain trains...
Like any enterprise, you can grow it, if you’re willing to invest the time, money, and the sweat equity.

Ed

[MP173]

Ed

That is a fascinating railroad you work for.

When are you giving us a tour?

ed

[edblysard]

http://www.ptra.com/
http://www.trainweb.org/southwestshorts/ptra.html
http://home.austin.rr.com/aldossantos/port_terminal.htm
http://home.austin.rr.com/aldossantos/texas_shortlines.htm
http://www.trainweb.org/jssand/Houston/Houston.htm
http://www.trainweb.org/jssand/Houston/Houston.htm

The last one has a few photos of our locomotives...the MK1500D,
Purchased in 1996, and numbered by that year and then the order they came on property...9601 would be the first unit, with 9624 tha last to arrive.

Some of the information in the links is out of date...some customer no longer are there, and some of the operating officers have been replaced, but this will give you a basic view of who we are and what we do.

Ed

[Anonymous]

QUOTE: Originally posted by MP173

Things are a bit clearer....still, I would want to know more about the principals involved. That is just as important in a project like this as the assets.

BTW...is this an informal solicitation? You have my interest, which is always the first step.

ed

No ed, it is not a solicitation. As I said above it is offered as an example only. I posted it as a companion thread to the other short line thread in the hope it would be a good learning exercise for some of the folks on this board about how things really work.


LC

[tormadel]

What were you guys using before the MP1500D's?

[Anonymous]

QUOTE: Originally posted by MP173

LC:

I did read the facts, however you didnt mention other purchases, only this one. The investment turns from an investment in a shortline railroad into an investment in a portfolio of shortline and more importantly into the abilities of management to identify potential line, negotiate a fair price, operate and manage the line better than others.

At this point my attention would turn from the actual 32 mile stretch of railroad to the people involved that are asking me for money. Do you care to share more on their past successes?

ed

Check out the 11th post in the string on page 1 where I set forth most of the facts. In two places I mention that this is one of several short line possibilities in the hypothetical group.

I think the resumes for the individuals are more than adequate. If this were an actual solicitation I would add more.

I'm not looking to teach everything I know, just enough to get a general feeling of whether this type of project is able to attract outside investment.

LC

[edblysard]

ed....
If this had been the real deal, and more information posted, I would have jumped on it.

Given a little more info, and a chance to go walk the property, this is one of those once in a lifetime deals that would have me seriously considering taking a mortgage out on the house for the investment cash.

Tormadel..
What ever we could lease from our member lines...in 1996 that would be BN, Santa Fe, UP and KCS(TexMex)

We had everything from SW9s and the UP rebuild program SW10s(little brutes), GP38s, a bunch of CF7s, and a few GP9s....we even had a SP SD9 for a year or two.

Problem was the Class 1s would run short of their own power, cancel the lease and leave us short handed.
So, in 1995 the board of directors decided to purchase our own power.
We looked at rebuilt SWs, rebuild GP38s and a few others...but MK Rail offered the best all around deal, including warranty service, on site maintenance and rebuilding as needed, field mechanics, and a service contract that included UP and BNSF getting light repairs at our facility, and the MK service contract for all of the Houston area.

The MK1500D, although ugly as sin, works great for our type of switching, and even though they are Cat powered, we have not have a major engine failure in the ten years they have been here.

We did break one of the frames, and drove a piece of drill stem through another ones cab and electrical cabinet, but that’s another story!

Ed

[tormadel]

QUOTE: Originally posted by edblysard

ed....

We did break one of the frames, and drove a piece of drill stem through another ones cab and electrical cabinet, but that’s another story!

Ed

Hehe, OOPS! I'm surprised, I had heard that someone had purchased the Houston Belt and Terminal, surprised the same thing didn't happen you ya'll (although I don't wish for anything like that)

[MP173]

Ed:

my only problem with this is that $10 million is being raised with on $1.2 million invested. I would be very leary of this, until I knew more of what was going to be happening with the $8.8 million. Just think of it this way....88 cents of every dollar would not be invested in this shortline.

ed

[Anonymous]

QUOTE: Originally posted by MP173

Ed:

my only problem with this is that $10 million is being raised with on $1.2 million invested. I would be very leary of this, until I knew more of what was going to be happening with the $8.8 million. Just think of it this way....88 cents of every dollar would not be invested in this shortline.

ed

ed -

If I was going to make an offering of this type, which I am NOT, there would be a complete set of financials and pro formas looking forward five years. Part of that would explain the need for working capital, capital investment on the existing property to bring it up to a usable state and other capital investment in equipment (if any) that would be necessary to convert partially unused and deferred maintenance track into a healthy short line...

I chose the $10,000/share number to ensure my potential investors realized they would have real skin in the game and were willing to take such a risk. I have found that it is much easier to raise a LOT of capital than a little so long as the plan is sound.

The $10,000,000 raise amount is larger than I would expect and in any event there are several legal and corporate reasons I would never do a real deal this way as it would require a public offering and all the headaches inherent in such a structure. As I have said above I would leave the financial structure open for now to make additional adjustments possible. So far, no one has suggested such an adjustment.

LC

[edblysard]

Actually, HB&T was dissolved back into its parent roads....
Which were, in the end, BNSF and UP.
Originally, HB&T was a joint venture between several roads, but the merger/acquisitions reduced the owners to these two.
They split the property and the locomotives.
HB&T, along with the PTRA, purchased the first, and only 35 MK1500Ds...We got the 01 thru the 25 they got the 26 thru 35.

The HB&T yards and property were split between UP and BNSF...BN of course got the old Santa Fe property, New and Old South Yards, and the UP got Settagast and East yard, Booth and Basin yard, along with the Milby street roundhouse.

PTRA is a neutral switching association, not owned by the member lines, but in fact owned by the Harris County Navigation District, the City of Houston, and the Port Authority of Houston.
BN and UP have board members on our board of directors, and help determine our business practices, but the majority of the voting power rest with Harris County.
But then, Harris county guys don’t know much about railroading, so they pretty much go along with what BNSF and UP want.
Our operating budget comes from the Harris County Navigation District, the Port Authority, and BNSF and UP.

Our billing to the UP and BNSF is, in fact, the majority of our next year operating budget…the more cars we move this year, the bigger our budget will be next year…not a bad incentive to work hard and be productive.


Ed

QUOTE: Originally posted by tormadel

QUOTE: Originally posted by edblysard

ed....

We did break one of the frames, and drove a piece of drill stem through another ones cab and electrical cabinet, but that’s another story!

Ed

Hehe, OOPS! I'm surprised, I had heard that someone had purchased the Houston Belt and Terminal, surprised the same thing didn't happen you ya'll (although I don't wish for anything like that)

[tormadel]

QUOTE: Originally posted by Limitedclear

QUOTE: Originally posted by MP173

Ed:

my only problem with this is that $10 million is being raised with on $1.2 million invested. I would be very leary of this, until I knew more of what was going to be happening with the $8.8 million. Just think of it this way....88 cents of every dollar would not be invested in this shortline.

ed

ed -

If I was going to make an offering of this type, which I am NOT, there would be a complete set of financials and pro formas looking forward five years. Part of that would explain the need for working capital, capital investment on the existing property to bring it up to a usable state and other capital investment in equipment (if any) that would be necessary to convert partially unused and deferred maintenance track into a healthy short line...

I chose the $10,000/share number to ensure my potential investors realized they would have real skin in the game and were willing to take such a risk. I have found that it is much easier to raise a LOT of capital than a little so long as the plan is sound.

The $10,000,000 raise amount is larger than I would expect and in any event there are several legal and corporate reasons I would never do a real deal this way as it would require a public offering and all the headaches inherent in such a structure. As I have said above I would leave the financial structure open for now to make additional adjustments possible. So far, no one has suggested such an adjustment.

LC

Well I had not gone there yet but I would suggest a Limited Liability Corp orgainization rather then a standard corp. Would be much easier to deal with, but could restrict the number of investors you might have. But then again it's likely that anyone willing to invest that much may want to invest alot to have more say.

[TomDiehl]

QUOTE: Originally posted by edblysard

The MK1500D, although ugly as sin, works great for our type of switching, and even though they are Cat powered, we have not have a major engine failure in the ten years they have been here.

Ed

Oh come on Ed, utility and reliability are their own forms fo beauty. [:D]

[Anonymous]

QUOTE: Originally posted by tormadel

QUOTE: Originally posted by Limitedclear

QUOTE: Originally posted by MP173

Ed:

my only problem with this is that $10 million is being raised with on $1.2 million invested. I would be very leary of this, until I knew more of what was going to be happening with the $8.8 million. Just think of it this way....88 cents of every dollar would not be invested in this shortline.

ed

ed -

If I was going to make an offering of this type, which I am NOT, there would be a complete set of financials and pro formas looking forward five years. Part of that would explain the need for working capital, capital investment on the existing property to bring it up to a usable state and other capital investment in equipment (if any) that would be necessary to convert partially unused and deferred maintenance track into a healthy short line...

I chose the $10,000/share number to ensure my potential investors realized they would have real skin in the game and were willing to take such a risk. I have found that it is much easier to raise a LOT of capital than a little so long as the plan is sound.

The $10,000,000 raise amount is larger than I would expect and in any event there are several legal and corporate reasons I would never do a real deal this way as it would require a public offering and all the headaches inherent in such a structure. As I have said above I would leave the financial structure open for now to make additional adjustments possible. So far, no one has suggested such an adjustment.

LC

Well I had not gone there yet but I would suggest a Limited Liability Corp orgainization rather then a standard corp. Would be much easier to deal with, but could restrict the number of investors you might have. But then again it's likely that anyone willing to invest that much may want to invest alot to have more say.

True, I could and probably would use an LLC to avoid some of the limitations. Unfortunately, that won't solve all of the possible issues. What particular corporate form I would use depends upon how I would finance the deal. There are other possible financial and corporate structures for this sort of thing which make sense too, but I can't give away ALL my secrets...

LC

[edblysard]

You know, after a while, they kinda grow on you.
And note the new Green Goat has a very familiar shape to it!
In reality, the big cab windows, short rear hood, and sloped, short "nose" allow the engineer to see all around, and most importantly, he can see me in the front or rear steps giving hand signals!
They are very utilitarian, on purpose...it is easier to replace flat steel sheet than curved shaped steel, and the basics, frame, trucks and controls are all off the shelf EMD parts.
Makes for an easy to repair, and easy to run little beastie!

QUOTE: Originally posted by TomDiehl

QUOTE: Originally posted by edblysard

The MK1500D, although ugly as sin, works great for our type of switching, and even though they are Cat powered, we have not have a major engine failure in the ten years they have been here.

Ed

Oh come on Ed, utility and reliability are their own forms fo beauty. [:D]

[mudchicken]

LC:

Pet Peeve Time

Still waiting to see another issue come up regarding startups & that is the total blundering management of and mishandling of the real property assets. Compound that with the asset managing scam that happens on most of the ex-Rock and ex-Milwaukee properties and you have a big liability and cashflow mess. Very common to see seller still reaping income from lease & contract rental(s) years after sale of the line and the new shortline oblivious to the lost income. Most shortline management is clueless of what is going on and future income is squandered by the shortline management on the ground being oblivious to what goes on around them. [a big part of this I blame on the buyer & seller's clueless lawyers/ advisors, but that income and/or liability risk protection could keep many a shortline afloat in times of poor cashflow] Hope those operating managers and ex ChE are not much more than glorified trainmasters and trackmen....... (things I start looking at HARD while I'm out there "kicking the tires" and which I continually get really sorry answers for from shortline management)

Really fed-up with most of these transactions coming with zero paperwork, ICC maps & records, contracts on the line sale and so on.[:(!][:(!][:(!]

[Anonymous]

MC -

I know what you mean. These days the Class 1s and most of the big short line groups are putting these kind of hold backs in all their sales agreements. Check out this article at one short line oriented law firm website.

http://www.wbsk.com/

Go to "Newsletters" link at top of page and then down the side menu to December 2004 Transportation Newsletter.

LC

[mudchicken]

LC- That's mostly just the sales transaction contract for the line. It gets worse for the contractural agreements/licenses/contracts that come with the property during sale. I've also seen swoosh and yellow's corporate legal folks get rid of more than they thought they were with quit claim deeds which should be a signal to get a new set of legal beagles. And yes, those bargain & sale agreement with the conditional/restrictive clauses are a headache. Know of at least two shortlines suing yellow over those conditions tied to questionable AAR embargoes.

[Anonymous]

QUOTE: Originally posted by mudchicken

LC- That's mostly just the sales transaction contract for the line. It gets worse for the contractural agreements/licenses/contracts that come with the property during sale. I've also seen swoosh and yellow's corporate legal folks get rid of more than they thought they were with quit claim deeds which should be a signal to get a new set of legal beagles. And yes, those bargain & sale agreement with the conditional/restrictive clauses are a headache. Know of at least two shortlines suing yellow over those conditions tied to questionable AAR embargoes.

Sadly, too true. Many of the easements, licenses and other real estate agreements are beyond the skill sets of many short line operators. Quitclaim Deeds are very common in the industry, but generally not a big problem as when the property transfered is an operating railroad it is nearly impossible for outsiders to affect the property transfer. It is impossible to get a loan from a bank based upon a quitclaim, unfortunately.

LC

[tormadel]

These things are good to hear from Mudchicken and LC. Not good that they happen, but it is good to see someone aware of the issues. I know if I were to start a venture in this area I would want people like them in my corner.

[MichaelSol]

QUOTE: Originally posted by Limitedclear
It is impossible to get a loan from a bank based upon a quitclaim, unfortunately.

????
It's what the Title Insurance Policy looks like, not the form of the property deed [warranty deed v quitclaim deed], that is important. That is, due diligence goes to the examination of title, not the name of the deed used for conveyance.

Best regards, Michael Sol

[mudchicken]

MSol:

You just touched a raw nerve around most surveyors/mudchickens.

You apparently don't know how big, dumb and incredibly stupid most title insurance outfits can be around railroad operating property. It would be a joke if it wasn't so sad a story. They just except everything in their Schedule B's and walk away dazed in their own little warped world. Title people operate with a set "formula" and the drones carry it out without any understanding of what's in play. Too many have no clue about railroad color of title or where to begin looking. [and they don't pay out when they screw up, which they do with frightening regularity - scary[:(!][:(!][:(!] ...the ones getting burned are the adjoiners, not just the rr's[:O]]

[banghead][banghead][banghead]

[MichaelSol]

QUOTE: Originally posted by mudchicken

MSol:

You just touched a raw nerve around most surveyors/mudchickens.

You apparently don't know how big, dumb and incredibly stupid most title insurance people can be around railroad operating property. It would be a joke if it wasn't so sad a story. They just except everything in their Schedule B's and walk away dazed in their own little warped world. Too many have no clue about railroad color of title or where to begin looking. [and they don't pay out when they screw up, which they do with frightening regularity - scary[:(!][:(!][:(!]

Ha! I agree.

I have handled probably about a thousand "Trustee's Deeds" from Richard Ogilvie [Milwaukee Road Receivership Trustee] to various entities over the past 25 years, plus a few BNSF deeds.

Now, you want to see something interesting, where government easements mixed with private easement grants mixed with outright purchases of ROW, combined with the occaisional "exclusive use" for railroading language written into some -- including in original Warranty Deeds (!!) -- then add on subsequent easement grants by the railway company (to power companies, pipelines, irrigation ditches, roads) -- and subsequent outright sales -- and you have the finest litigation stew concocted at the hands of mortal man.

The Title Company's are usually poorly equipped to analyze those.

I learned long ago to do my own title searches, and compare that to the Title Company's.

Warranty Deeds, Quitclaim Deeds, Trustee's Deeds, Instruments of Distribution, Personal Representative Deeeds, all have their legal quirks, but from the Title Company standpoint its that Title Insurance Policy that I have always been mostly interested in.

Best regards, Michael Sol

[Anonymous]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by Limitedclear
It is impossible to get a loan from a bank based upon a quitclaim, unfortunately.

????
It's what the Title Insurance Policy looks like, not the form of the property deed [warranty deed v quitclaim deed], that is important. That is, due diligence goes to the examination of title, not the name of the deed used for conveyance.

Best regards, Michael Sol

A quitclaim deed only grants that interest which the transferor held in the property. Accordingly, if there is a defect in the transferor's title it passes to the transferee without any of the warranties (including the warranty of title) contained in a warranty deed. Accordingly, the type of deed does indeed matter where the property is being evaluated by a lender.

Further, I have yet to see a railroad deal with title insurance, nor have I met a major title insurer that will write railroad title coverage. Most railroad have never been surveyed except to the extent there are internal valmaps kept by the railroad itself which hardly carry the weight of an independent surveyor's license stamp. Localities maintain tax maps, but those can be notoriously unreliable in determining the exact dimensions of the property. Also, many railroads have some portions that are owned in fee and other portions that are easements "for railroad purposes" which indicates an old negotiated easement or an easement that resulted from an eminent domain taking or perhaps cetain state or federal land grants, depending upon the language of the grant (most are over a century old too, so finding the grant can mean extensive legal research all by itself) Taken together this makes banks extremely nervous about lending for RR deals based upon the real property. Some banks will lend for specific projects but most RR loans come from government sources.

LC

[MichaelSol]

QUOTE: Originally posted by Limitedclear

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by Limitedclear
It is impossible to get a loan from a bank based upon a quitclaim, unfortunately.

????
It's what the Title Insurance Policy looks like, not the form of the property deed [warranty deed v quitclaim deed], that is important. That is, due diligence goes to the examination of title, not the name of the deed used for conveyance.

A quitclaim deed only grants that interest which the transferor held in the property. Accordingly, if there is a defect in the transferor's title it passes to the transferee without any of the warranties (including the warranty of title) contained in a warranty deed. Accordingly, the type of deed does indeed matter where the property is being evaluated by a lender.

That's the classic definition of a warranty deed. However, under the doctrine of merger, that "warranty" goes hand in hand with any other documents, including language frequently used "subject to exceptions contained in the title insurance policy" in Buy-Sell agreements and the like.

It is true that railroads are often "self insurers" on many matters. The standard ALTA policy excludes just about anything to do with railroads for a variety of reasons, including the fact that the standard 50 year search almost never discloses the true title information when it comes to railroads. Further, the policies are written for the amount of purchase of the land, not for the future value of the use of the land.

However, look at what you have written: the seller "warrants" title. Good luck in finding the seller five years down the road unless it happens to be another railroad company. I suppose after that old farmer has spent the money from the sale on gambling and drinking and the Bahamas, and then died, that "warranty" is worth the cost of the sheet of paper it was written on.

As I have trained associates over the years, rule number one if the seller won't sign a warranty deed is "why not?" but rule number two is, the "warranty" in "warranty deed" is not worth gambling anything on. And that's the "due diligence" part of anyone who handles a transaction and relies on a single word at the top of the page to have significance when push comes to shove in litigation.

As I mentioned above, a great deal of property is conveyed outside of the standard warranty deed. The Trustee Deeds referred to above have routinely been pledged in mortgages and trust indentures by First Bank System, Wells Fargo, Norwest, US Bank, National Bank of Commerce and others that I have worked with on those transactions notwithstanding the risk particularly inherent in those deeds (and some mighty sloppy work done back in Chicago).

Best regards, Michael Sol

[tormadel]

Yeah it becaue obvious to me reading about the hurricanes on the east coast that the railroads don't have the kind of insurance alot of companies have. For example if my Domino's pizza burned down it would probably help my franchies owner. The insurance would pay for the loss and fund rebuilding (or moving to a better location). He might have to eat the loss of revenue during the reconstruction, but wouldn't have utility bills either. The hurricanes caused millions (probably more) of $ worth of damages and the railroads seem to have had to eat the whole loss to fix it. Hurricane damage was basically portrayed as the last nail in Erie Lackawanna's coffin.

But, I could see how property damage and acts of god insurance on every mile of track would be a nightmare. [:D]

[mudchicken]

You can quitclaim just about anything. The question is whether you had legitimate title to anything in the first place.

(And then there is the abuse by most of the term easement)...and going back to the original point of the thread, you ought to be getting the bulk of the records from the seller, especially if it's a Class 1 [who would be in violation of 49CFR1201 if they cannot produce the data - Quite another issues for Cls. 2 & Cls. 3's since Staggers, especially when the rules changed in the Federal Register in 1983.] The due dilligence is not a walk in the park (as LC knows well) and I wonder how much income the shortline loses and how much etra liability are the shortlines taking on?

[MichaelSol]

QUOTE: Originally posted by mudchicken

You can quitclaim just about anything. The question is whether you had legitimate title to anything in the first place.

Same with a warranty deed; how good's the warranty?

Best regards, Michael Sol

[MP173]

Boy, this thread just took off over my head. I understand about every third word now.

ed

[tormadel]

I understand the gist of what they're saying if not every term. Suffice it to say real estate is a big pain in the ***. It's just not as easy as going to Walmart and picking up a 6 pack of property to put you're business on heh.