For those of you who don't receive "Northern Lines" the newsletter of the 261 group, I thought I'd provide both an update on what is happening, and an amplification on what has been reported about the interactions between the Green Bay museum and the Friends.

The "Friends of the 261" name is going to be phased out, to be replaced by the groups non-profit corporate name "Railroading Heritage of Midwest America" or "RHMA". Their plans for the immediate future are:

Operate mainline steam excursions. Negotiations are presently being finalized to bring a main line locomotive to Minneapolis for trips next summer.

Lease out the fleet of cars as a continuing source of revenue

Search for another steam locomotive.

The most interesting (to me) items in the newsletter were a more complete history of the lease negotiations between NRM and the Friends. Here are a few highlights:

July 2007:
The NRM offered to sell the 261 to the Friends for $800,000 or to lease it to them for $70,000 per year (700% increase over the existing lease). The Friends rejected the offer.

February 2008:
NRM offered a lease at $30,000 per year for the first five years and $35,000 per year for the second five. The offer is rejected by the Friends because of the price and the shorter ten-year lease term.

September 2008:
The Friends receive a certified letter from NRM saying that the terms of the lease have been violated when 261 participated in the filming of "Public Enemies" in May and demanding that $150,000 be paid to the museum immediately. The Friends respond that there has been no violation of the lease.

September 14, 2008:
Milwaukee Road 261 makes its last run.

November 2008:
NRM proposes a "pre-paid" lease with the Friends paying over $16,000 per year but half of the entire lease is due at signing with the remainder due within one year. This would have required an advance payment of over $214,000. The Friends reject the offer.

Early 2009:
NRM offers an annual lease starting at $25,000 but the term remains at 10 years; the Friends require a 15 year lease.

November 2009:
NRM offers a ten-year lease at $20,000 per year with a four percent increase compounded annually. The Friends reject the offer and decide to return the 261 to the museum.

I offer no opinions, though I have a number of them.

Regards,
Doug

In my lifes experience folks who do these kind of things to you are in the longer term doing you a favor.

I sincerely hope that will prove true here for Steve and his fine organization. I for one am confident that they'll emerge from this stronger and better than ever!!

Ross Rowland

Opinions no doubt will vary and be wide spread over various points, but the thing that jumped out at me immediately was the WIDE range of pricing.

7/2007 $70K year
2/2008 (7months later) Price is cut in half, $30K year for 5 years, and $35K year for the following 5 years
9/2008 (Another 7 mos) Public Enemies dispute
11/2008 (9 mos since last offer) $16K year
Early 2009 (3-4 mos since last offer) $25K year
11/2009 (7-8 mos since last offer) $20K year

In the space of roughly 2 1/2 years the asking price was as high as $70K and ends up less than a third of that ? They start with a high bid (understood), the first counter offer is half ? and within 9 months drops to almost a quarter ?

Is this just horribly bad negotiating with an apparently complete lack of what the market will bear, or flagrant bad faith ? Regardless of what the realities of a "good/fair" pricing might have been, this truly makes no sense at all.

Friends was a superb operation while it lasted, and from this outside view, in my opinion, Steve and company are better off closing out this chapter of their existence and starting the next one.

On the one hand, this does mollify the image of the NRM slightly by exhibiting at least a willingness to actually negotiate and flex. On the other hand..... what Cloos said.

If I were negotiating with a party who on the one hand kept lowering the price to gain my favor while at the same time (allegedly) demanding $150K for supposedly violating the terms of a lease, I'd certainly be wary of continuing any business relationship with said party.

On the other hand, as I've said before, the Museum does retain a fiduciary responsibility to manage its assets to the best of its ability and benefit. If the Friends of 261 made anywhere around $150K with the loco for a movie filming, and there was nothing in the lease covering such a "profit" enterprise, and the Friends made no effort to share such "revenue" with the loco's actual owners, well......... it smells all around.

If the Friends of 261 made anywhere around $150K with the loco for a movie filming, and there was nothing in the lease covering such a "profit" enterprise, and the Friends made no effort to share such "revenue" with the loco's actual owners

As they say in any divorce, there's his side, her side and the truth...However:

If there was nothing in the lease regarding the use of the locomotive for ANY specific purpose (by nothing in the lease, I mean its not proscribed, either) then the lessor is required to make the required payments and return the asset in the minimum allowable condition,that's all that's required and the owner shouldn't be expecting a bonus because the lessee found a way to earn something of a windfall.

Once again, there's no such thing as "profit" enterprises, there are "exempt purpose" activities (meaning there's no income tax due on the profit) and unrelated (to the exempt purpose) business income, on which tax is due.

Any undertaking should be done with the expectation of profit. Nonprofit isn't a business model; it's a recipe for oblivion.

Actually, this is quite a lot of locomotive for the selling price, considering I know where there is an 0-6-0 under restoration that will likely top out at $1.8 million. $1.2 million has been spent, and the boiler doesn't have a firebox in it, nor is the boiler on the frame yet......

Not really Mr. Jordan. A machine is "worth" what it will fetch on the open market from a qualified buyer, ( meaning the buyer has the cash to equal his offer and puts it on the table at closing),assuming the seller has a reasonable chance to broadcast its availability to the open market.

As has been previously discussed on this forum at length, with the realities that exist in todays American mainline railroad world, these mainline engines, if forced to be sold to the highest bidder on the open market,would almost certainly only bring their approximate scrap value, where-is, as-is.

In the case of the 261 at todays scrap prices I'd guess she'd fetch somewhere in the area of $ 65,000- $ 75,000. That's a looooooooooooooooooong ways from $ 800,000!!

Sad but true!!

Ross Rowland

Assuming just for sake of the argument that the Public Enemies "payday" was $150K,, just how much of that is so-called "profit" anyways ? It's not like the engine and train suddenly miraculously appeared, costs of operations, insurance, crew, etc,,

Not sure how much "profit", there might have really been at the end of those days.

++Just for the sake of argument, of course !++

In Steve Glischinski's "News and Photos" update on the 261 in the latest Trains magazine, I think the comments from the NRM's Executive Director are very telling. "Our Board of Directors worked very hard...while providing our institution with a reasonable level of compensation...." "Since the beginning of the relationship in 1991, the friends have enjoyed a very low, unchanging lease rate. The bottom line is after 18 years, the lease rate was due for an increase to account for a number of economic realities including an increase in the rate of inflation."

Another interesting comment from Tezlow: "We felt that the final offer was within the capability of that group,..." I guess when NRM gets the 261 back, restores it and runs it a few years maybe they'll get an idea on the realities of running mainline steam.

Well, from my foxhole, since 1991 NRM hasn't spent a dime (as far as I know) on maintaining the 261. And the economic reality has been that the increase in inflation has adversely affected the operation of the 261 not NRM in relation to 261. So, I guess I don't see the logic in NRM's claim that they needed more money from the Friends/Sandberg. Perhaps they are justified in asking for more than $10,000 per year, I don't know. But their rationale for fumbling around with their "good faith" negotiations for over 2 years isn't supported by the facts as I see them.

And what's behind their stance not to give the Friends the 15-year lease? Sounds strange to me.

Thanks!

Sounds allot like the Colorado Historical Society and the Georgetown Loop fiasco....

A couple of people in high places start seeing $$$$$ and they are willing to blindly wreck and destroy the whole works to get at "what they consider" their fair cut.

Much like congress.

Huh? NRM thinks it can teach Steve's group how to run mainline steam? What incredible arrogance for someone who pushes a little dead steam engine around with a toy diesel. Oh yeah...they're well qualified.

I hope they reconsider giving the Museum those tender roller bearings.

Steve

- From TRAINS Magazine -

Telzrow (the Museum's executive director) says the museum does't regret its decisions. "Our board of directors wisely pursued a modest increase while offering the Friends group a number of different options that would have kept the locomotive running well into the future".

I find this argument astonishing.

Modest increase = 700% increase in lease costs?
$10,000.00 to $20,000 per year with a 4% increase annually??

A number of different options = $70,000 /year to $30,000 /year to $25,000 /year?

Options that would have kept the locomotive running well into the future = 10 years?

I understand fully why Steve can't be "Friends" any longer.

/Mitch

Way cool that a lot of this information is being made available as a lesson for many of us who will never be in a position of negotiating a long term lease of a locomotive. Also good reinforcement of our individual levels of ignorance, both of the specifics of this situation, other referenced situations, or the nature of business in general.

I don't see any list of counteroffers made back to NRM by the Freinds, Doug - was there such a list published? Might be interesting to know what their responses were other than "no".

dave

Dave, the museum was aware, all along, that a fifteen year lease was an absolute requirement before the Friends would agree to a lease. And the Friends, all along had offered to double the existing lease, to $20K/year. Beyond that I simply do not know.

The museum had had the right to, and in fact did examine the Friends books, so they absolutely HAD to know that operating the 261 was a break even operation at best, with the fleet of Amtrak capable cars cross subsidizing the operation of the 261. Telzrow's comment that he felt "the offer was well within the Friends capabilities" confirms what I'd heard at Harrison Street, that the museum's attitude was "well just raise your prices and pay us what we want".

I fail to see the "wisdom" in how the NRM managed this process. They had a source of income from the 261 for which they took NO risk, invested NO money, nor did they have to lift a finger to keep that income flow going.

The "wisdom" of their board of directors got them a steam locomotive that needs between $400K and $600K of work to go back out on the mainline. They have neither the rolling stock, the expertise, nor the relationships necessary to operate the locomotive successfully.

Perhaps the NRM thinks that they can find another operator for the locomotive? I don't know, but after watching this debacle play out, were I a prospective operator of the 261, I'd be frightened senseless of conducting any kind of business with the NRM. That's just me, though. Perhaps there's an optimist out there who'll take over. If so, I wish him/her/it well.

Doug

Its the difference of steam smart operator vs the businessman sitting on their duff in an office. Returning the engine is the right choice, if the NRM wants a successful running engine they will have to put their own skills into it, or find/attract the talent. Before the engine was leased out, it was a static display, hey the NRM was doing fine then, why now?

NRM needs to work on their own "funding" than just sit and harvest off other efforts. There's the little Chicken Little scenario in there somewhere.