Irrational exuberance?

By Randall Poulton | Sep 05, 2019

Prolog: While this story is not set in the Midcoast, Rangeley shares many of the demographics, strengths and weaknesses of Maine’s coastal communities. However, the saga of the Saddleback ski area exposes a rather startling difference in attitude: The proposal by Arctaris to reopen a business that uses millions of gallons of water and despoils mountain flora and fauna enjoys near 100% local support, while in Belfast, there is staunch opposition to Nordic.

Last March, Arctaris, a private equity company headquartered in Boston, announced it was considering buying the long-closed Saddleback ski area. Around Rangeley, there was the requisite cheer from local stakeholders. After all, the reopening of “the mountain” would be a huge shot in the arm for the western Maine economy and great news for the hundreds of people who own vacation homes along the dormant ski slopes. But, due to the sting of past broken promises made by sketchy developers (the last potential buyer/developer of Saddleback is now in jail), the grassroots response to Arctaris was, appropriately, more one of “wait and see.”

In June, Gov. Mills revealed the list of 32 new "opportunity zones" in Maine. Part of Trump’s tax reform package, these opportunity zones provide tax breaks to developers doing business in hard-to-develop places like Rangeley. Except, no town in Franklin county made the cut. Not surprisingly, Jonathan Tower, the managing partner of Arctaris, announced that, without the boost of an opportunity zone designation, he would “put the brakes on” the acquisition of Saddleback. Another setback for the mountain. But, apparently, the deal was not dead.

On Aug. 22, Arctaris held a well-attended community meeting in Rangeley. In front of over 100 people, Arctaris officials reported they would be signing a purchase and sale agreement “in four days” and the mountain would be open for skiing on a limited basis this winter. They also reported they were $6 million short of what they needed to seal the deal. But this “minor” fact seemed lost in the sudden surge of optimism. Social media lit up with comments like: “Now that the mountain will be open again, I can finally rest easy.” Talk about irrational exuberance! Wow!

My belief is Saddleback will never again be a major ski area. Why am I being such a wet blanket? Because, quite simply, I don’t see how Arctaris can turn a loser business, like Saddleback, into a winner that delivers big profits to its investors, particularly without the benefit of the opportunity zone designation. I hope I am wrong, but here is my thinking.

Based on the information listed on its website, Jonathan Tower started Arctaris in 2009, and currently employs a team of fewer than a dozen people. The staff’s job is to locate (rich) people willing to invest in Arctaris (thereby providing capital) and then search out and underwrite (unbankable) deals, wherein lending out that capital will provide a high rate of return for those investors (and, no doubt, a nice fee for the Arctaris team as well).

To summarize: The mission of Arctaris is to make money, for itself and its investors. Nothing new or exotic here. Calling Arctaris a sophisticated “loan shark” might be a bit over the top, but, essentially, that is its business model, sans broken legs. So, keeping the above in mind, let’s look at the Saddleback deal.

Arctaris will not buy the mountain directly. They are acting as a broker on behalf of investors in their Impact Fund. The Impact Fund is a separate LLC and one of five funds Arctaris offers. According to their website, the Impact Fund is designed to “provide capital to growth-oriented businesses in underserved regions with an emphasis on inner cities and targeted rural communities. The fund’s structure is designed to provide above-market returns (for investors), liquidity, principal protection and CRA credit (for banks), while also revitalizing underserved communities.”

The financing to purchase Saddleback will be complicated (it usually is). Arctaris proposes to utilize capital from their Impact Fund, private/bank loans and equity from “state/foundation partners” to buy Saddleback. As part of my research for this story, I exchanged emails with Benjamin Bornstein, managing director of the Impact Fund. Bornstein said he couldn’t reveal much at this time, due to the sensitive nature of the negotiations (which is understandable). That said, I assume Arctaris will be looking for FAME to guarantee some of the loans.

As pitched, the Saddleback deal would create 200 jobs, thereby helping to revitalize the region’s economy. That do-gooder aspect of the deal may be why banks, looking for CRA credits, are willing to sign on. As far as I can tell, the money to buy Saddleback would be a mix of Arctaris capital and loans from banks. The banks most likely will lend their money at market rate (probably 5% or 6%). But clearly Arctaris expects to get “above-market returns” on its capital, likely over 10%. That will mean a whole lot of debt service (Arctaris calls these payments “royalties”) for the new Saddleback. Yikes!

But here is the biggest reason I am skeptical Arctaris will reopen Saddleback: They have no experience running a ski mountain. Both Sugarloaf and Sunday River are owned by CNL (via a real estate investment trust, I believe) and managed by Boyne Resorts. Boyne has over 7,000 employees and it operates 10 ski resorts and 11 golf courses. As far as I know, neither CNL nor Boyne has expressed interest in buying Saddleback. That should tell you something.

Finally, acquiring a defunct business is a lot different than providing an infusion of capital to an operational company that cannot get a traditional bank loan. During a time of historically low unemployment, where will the new Saddleback, or any business, find the dozens of skilled employees they need to reopen, let alone folks willing to work only on weekends and holidays? (Part-time operation is the current plan for this winter.) Can Saddleback “steal” some snow-makers, groomers and lift operators from Sugarloaf? Maybe. But harder to find will be the mechanics to repair the lifts and snow-making system. And that assumes that it is even feasible to repair equipment that has not been run in five years (and possibly not well maintained before that). And don’t forget, starting Jan. 1, Maine’s minimum wage jumps to $12/hour.

Of course, it is possible I am all wrong and Arctaris will be successful in bringing back “the mountain.” Let’s hope that is the case. But my bet is there will salmon farming in Belfast before there is skiing at Saddleback!

Republican Journal columnist Randall Poulton lives in Winterport.

Comments (0)
If you wish to comment, please login.