Stan & Heather's Excellent Adventure

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Obstacles included dealing with four rail entities (Capitol Corridor, Sacramento Regional Transit, Amtrak and UP freight); the site’s lack of sewers, roads and electrical service; and restoring large, rundown buildings that reflect a storied part of Sacramento’s history. All three caused headaches during negotiations. “The railroads didn’t help,” points out Bruce Williams, COO and Thomas’ right-hand man at Thomas Enterprises. “They all have tracks. But they don’t want to share tracks. The old empire thinking was still there.”

Yet the rail lines played second bill to the environmental concerns. To paraphrase an earlier line, there are few projects in the country that could create more hassles than the Railyards.

“This was not viewed as a real-estate deal,” says Casey. “This was a risk-transfer transaction. We had to figure out how, as owner and polluter, we had to have our obligations fulfilled under current law. That’s what put the deal on such a slow schedule.”

Though SP has started remediation of the land, it will be up to Thomas Enterprises to finish the process and bring it to the level that will be approved for public use. To secure loans, Thomas had to negotiate an insurance policy that protected his investment if, for example, a toxic cleanup required more time and money. Making those matters more difficult, he says, was that while he negotiated with the AIG insurance firm, UP kept looking over his shoulder, approving this, rejecting that.

“It wasn’t a policy for Thomas Enterprises, and it wasn’t for Union Pacific,” Casey explains. “It was our policy; both parties are insurants, and both had to protect themselves, and sometimes those interests don’t always align.”

Meanwhile, the costs kept piling up. Then, just as the deal headed for the homestretch in August 2005, Hurricane Katrina hit, and AIG decided to call off negotiations for a year so it could assess its losses.

It came as sort of a surprise to Thomas late last year that Union Pacific reached a level of comfort with the AIG insurance policy. The railroad told Thomas he had a matter of months to close. One problem: He didn’t have all the loans lined up.

Beyond the Numbers

“Could they handle the deal? Yes. We qualified their financial background, and we liked Thomas’ expertise in development,” Casey says. “The one area they lacked was the experience to do deals with public-private components.”

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