Riverfront Hotel in Richland

For more than six decades, Richland has collected relatively little income from the land lease where the Riverfront Inn sits today.

In 1961, the Richland City Council tied up riverfront land for a hotel for $7500 a year for 55 years. In 2012, when it was time to renegotiate the lease option for 44 more years until 2059, the council increased the rent to only a small fraction of the value of the land, while adding the potential for the lease to run until 2100.

Then, in 2018, Shilo Inn owner Mark Hemstreet had financial problems and sold the hotel to Traum Ventures, Inc. of Portland for $3,600,000. Again, the city blessed the sale without raising the price of the lease.

Traum, like many hotel businesses, has suffered from the lack of travelers caused by the COVID-19 pandemic. City records show that as of October 2021, $20,941 remained unpaid on the Riverfront Hotel lease.

Portland developer sees a bargain

Portland developer Sean Keys, owner of Fortify Holdings, who is also pursuing the Clover Island Inn in Kennewick, is ready to swoop down and grab the hotel. Fortify President Ziad Elsahili has said that the company has until March 31 to buy the hotel, which it wants to remodel into micro-apartments. 

Elsahili had told Richland and the Port of Kennewick that Fortify would buy the buildings only if they agreed to sell them the land leases too. When the port voted no on the land sale, Elsahili indicated a change of mind. Now the company might be interested in a lease agreement at Clover Island.

Fortify has tried to entice the city by promising to restore the Economy Inn at Jadwin Avenue and George Washington Way to its mid-century glory. The inn is a constant eyesore of the neighborhood. 

Keys has had problems in the past, and has no track record converting hotels to micro-apartments. Of the 16 Fortify Hotels, the two in Spokane seemed to be the closest to completion, but they ran into trouble. 

Spokane Permit Coordinator Sean Shields, said that the hotel projects had been shut down when the office discovered that they were being renovated without proper permits. The company recently announced that the apartments would be available in April.  The company’s 250-square-foot units in downtown Spokane are listed at $1,145 a month. Utilities are about $150 a month.

Fortify’s 14 other hotels have just begun the remodeling process. 

It’s unclear if the region’s tight housing market will support that kind of pricing. The average rent in the Tri-cities is about $1,110 for any size, with studios being less expensive and 4-bedroom units being the most. Each unit is far bigger than the 250-square-foot studios Fortify talks about.

Fortify has purchased two other hotels in north Richland with 300 rooms that it plans to make into 250 sq. ft. apartments. If it bought the Riverfront Hotel, the company would have 400 micro-apartments in a relatively small area. 

2012 Council concentrated on meager lease payment

When the council approved the 2012 lease amendment neither staff nor councilmembers mentioned that the new lease not only included the 44-year extension that started in 2015 and was part of the original 1961 lease but also included the possibility of an additional 40 more years.

In 2012, the council seemed focused on the meager $7500 a year lease payment they were receiving from the approximately 20-acre Shilo Inn riverfront property.

Mayor John Fox said, “I think probably a little naivete in the early days of the city. That lease was written only a couple of years after the city was incorporated and they didn’t seem as farsighted in its provisions.”

With that the city council voted 6-0 (Councilmember Bob Thompson was absent) to approve the 44-year extension with the possibility of 40 more tying up a valuable piece of city-owned waterfront property for 87 more years.

Shilo Owner in financial difficulty

While the city was trying to negotiate for a higher payment from Shilo Inn for the lease, the owner Mark Hemstreet, faced financial difficulties.  In 2011 and 2012 Hemstreet was in default on his corporate airplane . In 2012 California Bank & Trust filed suit against Hemstreet for being in default on loans to three of his hotels. 

A longer lease would make the Richland hotel more attractive to buyers. In 2016, the California Superior Court handed down a $20 million judgment against Hemstreet on the hotel defaults with 9% interest until the judgment was paid. In January 2018, he sold the hotel to Traum Ventures, Inc.

The 2012 lease bumps up the lease payments, but they remain low

The council focused on the lease payment because the original 1961 lease only required 1% of the gross income from all the businesses on the property with a $3000 a year minimum and a $7500 maximum plus a leasehold tax to pay for government services.

The 2012 lease started bumping up the minimum payment. This year, the $75,000 rent is a bit above the inflation equivalent of $7500 according to the Consumer Price Index (CPI) calculator. At the same time, the 2012 lease eliminated the 1% gross on all income from the property and put a scale for net income on only the room rent:

*1% on amounts in excess of $2,250,000

*3% on amounts in excess of $2,500,000

*4% on excess of $3,000,000

By January 1, 2035, the lease payment will be $150,000 a year. Every five years after that, it will increase according to the CPI.

The  Benton County Auditor currently appraises the property at over $5,000,000. The base rent for 2022 is only 1.5% of the appraised value.

The council has not scheduled another meeting to discuss Fortify’s purchase of the hotel and the land under it that the city owns.