City hopes purchase and resale of hotel will keep business open

Minnesota State Roundup

Published October 1, 1994  | October 1994 issue

In a bid to preserve its only downtown hotel, the city of Virginia plans to purchase the Coates Hotel from the Iron Range Resources and Rehabilitation Board (IRRRB) for $799,000, then quickly resell it to a private owner.

The city's action was inspired by the IRRRB's plans to sell the hotel to a developer who planned to turn about half of its 79 rooms into assisted living apartments for seniors. Business and city leaders were concerned such a change would negatively impact the economic prospects of downtown merchants.

"That frightened us," says Bob Leiviska, director of the Virginia Area Development Association. "We feel very strongly that it has to remain a hotel." If half of the Coates were converted to senior housing, it would not only reduce the hotel size in the short term, but it raises the possibility that the entire hotel might eventually convert to senior housing, Leiviska says.

City officials shared business leaders' concerns, according to City Administrator Nick Dragisich, and in September the city council approved the city's involvement. "The city wants to insure that it stays operating as a hotel," Dragisich says. But he also says that the city has no intention of operating the hotel. "Thirty seconds," is the time Dragisich expects the city to own the Coates—just long enough to sign the purchase agreement with the IRRRB and then turn to the new private owner to complete the deal.

There are no economic impact studies that purport to measure the effect of the Coates Hotel on Virginia businesses, according to Leiviska, but he cites the meetings and receptions that are held at the hotel, in addition to its overnight guests, as important to the downtown's viability, concluding: "It has to be good for the economy."

Before offering to purchase the hotel from the IRRRB, the city had two interested parties in the hotel, according to Dragisich, and both parties are experienced in hotel/motel management. City officials believe that with proper management and marketing, the Coates can be a profitable venture, and Dragisich says that the two interested parties—who will bid on the property—are also convinced of its potential. (The city's purchase of the hotel and its resale to a private owner was expected to occur in late October, while this issue of the FEDGAZETTE was at press.)

The hotel has been operating at about 43 percent capacity this year, and needs to maintain 65 percent levels to achieve profitability, according to Leiviska. Under the IRRRB's management, the Coates sustained about $85,000 in operating losses through the first seven months of this year, according to Rick Anderson, IRRRB loan officer.

The IRRRB, for its part, did not intend to own the hotel for very long when it took over the property in March 1993, Anderson says. Plans to sell the property in 1993 were thwarted by concerns about the site's property taxes, he says, and those taxes were eventually reduced by the city in December 1993. When the IRRRB began marketing the property again this spring and summer, one of the proposals included the senior housing plan that inspired the city's involvement.

Anderson said the proposal to split the Coates into hotel and assisted living space was a good one, and he has concerns about the Coates' viability as a hotel. The Coates' two competitors are located on major roads on the edge of town where they are easily accessible and highly visible, while the Coates is "off the beaten track"—a few blocks from the main downtown street.

The IRRRB, a state agency funded in part from a portion of taconite production taxes to support Iron Range economic and vocational programs, is not designed to manage such private enterprises as hotels, Anderson says. "We don't like to artificially prop up a failing business," he says. That's the business of the marketplace, according to Anderson. "We can't salvage every situation."

David Fettig