SECOND READING OF THE OMNITRAX 30-YEAR RAILROAD FRANCHISE ON THURSDAY

By Juan Montoya
In just two more meetings, the fate of the port's railroad will be decided by a vote of the Brownsville Navigation District's board of commissioners.
Last week, commissioners voted to approve a franchise agreement with OmniTrax. Tomorrow, they will hold a second reading and a week later (on May 8) they will hold the last reading and vote.
Their decision will place control of the profitable Brownsville Rio Grande Railroad in the hands of Colorado-Based OmniTrax, a company that is part of The Broe Group, a mega-corporation with real-estate and railroad holdings all across the United States and other foreign countries.
Former Port board chairman Mario Villarreal went as far as buying space in the local daily arguing against giving OmniTrax the 30-year franchise claiming the terms were disadvantageous to the port taxpayer.
The 2013 audit by Long and Chilton lists the BRG's capital assets at $11.1 million, minus $5.3 million accumulated depreciation, for a total capital assets net of $5.85 million.
In fact, the BRG has funneled millions into capital improvements of the rail system.
"The railroad's investment in capital assets as of December 31, 2013 totaled $5,855,055 (net of accumulated depreciation)," the audit states. "The investment in capital assets includes buildings, machinery and equipment, railroad system and leasehold improvements."
It is, in fact, a profitable rail operation that – according to the 2013 audit, compared to FY 2012, – its "railroad operating revenues increased by $1,009,138 or 12.48 percent ( from $7,861 .2 million to $8,807.4 million) and operating expenses increased by $679,390 (from $7.628.1 million to $8.307.5 million) or 8.91 percent over the previous year.
"The railroad's major source of revenue is derived from switching (yards) revenues which increased $773,883 or 10.80 percent from the previous year," the audit states. "The increase in incidental revenue and switching is primarily due to scrap customers moving their traffic by rail again. Revenues have increased $404,151 or 4.47 percent since 2011."
"Scrap commodities were up in 2013 since the railroad was able to regain scrap customers by rail again. As the railroad completed the year, its net position reported a balance of $8.4 million, an increase of 9.40 percent compared to the precious year. Of this, $4.1 million represents unrestricted net position which are available to meet the railroad's current and future needs."
Under the franchise agreement,  OmniTrax will take over the profitable working railroad before it is required to plunk down any money on a promised Industrial Park and "small-business incubator." The company wants to lease 1,200 acres from the port and use 227 acres for the incubator.
But none of this will happen until the company finalizes its Master Plan a year after the agreement is signed.
Additionally, OmniTrax promises in the proposed agreement to "contribute and attract franchise consideration of not less than $8.5 million (Franchise Consideration) of direct capital investment in the common elements in the Industrial Park area. (OmniTrax) will provide Franchise Consideration during the period of five years following acceptance of the Master plan."

Until then, the only thing the port can expect from the Colorado-based railroad is:
– $3,693 a month for the (1,200 acres) of real estate
– $10,714 per month rent on the railroad's buildings and locomotive pit for seven years. Upon payment of 7 years rent ($900,000), OmniTrax will own free and clear, all rights and title to real estate listed, not including the land itself. Those are valued on the 2013 Long  and Chilton audit at $987,600.
It also wants to buy the railroad's capital assets (machinery and equipment, tools, etc.) for $2.5 million with $500,000 30 days after the agreement is signed and the rest ($2 million) to be paid over seven years.
Given a timeline, then, within seven years, the port will have sold all of the railroad machinery, locomotives, buildings, to OmniTrax and own nothing but the railroad without trains.
And a year after the adoption of  a master plan, OmniTrax promises to "attract or invest" $8.5 million for the construction of an industrial park. If the totals don;t reach that figure, the agreement stipulates that it will use a formula to determine how much land the port can take back form the 1,200 it will lease.
For example, if OmniTrax only brought in half, or $4.25 million in investment, the port can terminate its exclusive rights to 600 acres of its undeveloped land.
The same applies to the 227 acres of the incubator. The language n the franchise agreement states that if in the five years following the adoption of the master plan there is till undeveloped properties in the incubator area, it will simply be added to the 1,200 acres.
But, hold on. Didn't the port own the land to begin with? So what does it gain by taking back its undeveloped properties?
Included in the agreement is a promise by the district that it agrees to cooperate with OmniTrax to minimize or eliminate property. ad valorem value added taxes, and similar taxes potentially or actually assessable to OmniTrax. Any taxes that bare assessed, however, shall be the company's responsibility.
OmniTrax also included language in the agreement that will give the allow the BRG railroad the authority to issue bond for rail-related or developmental purposes as long as they don;t interfere with their right to operate under the agreement.
As far as the Master Plan, OmniTrax requires sole discretion in planning and implementing it but agrees to submit the proposals to the board of commissioners for approval. It will charge a Common Area Maintenance charge to all its tenants. However, if there are insufficient funds for the cost of maintenance, the excess costs shall be divided between OmniTrax and the district.
The district is also required to pay OmniTrax for reimbursement of costs associated with the Industrial Park and the agreement states that "upon the sale or lease of any real estate parcel within the Development Area, OmniTrax shall be entitled to reimbursement from the proceeds of the transaction for reasonable transaction- related out-of-pocket expenditures for tenant or user-specific marketing, engineering or other services, and capital improvements..."
And while OminTrax said it will place a cap on existing rail rates, the franchise agreement leaves that door open.
It states:
"OmniTrax is solely responsible for promulgating and ensuring that all public rates and tariffs, and franchisee issued rules, and timetables, be fair, reasonable, uniform and in compliance with all applicable AAR circulars and manuals...OminTrax shall not increase the rates in public tariffs issued by the franchisee which are charged to existing BRG customers, or their successors or assigns to an existing facility at the port...without the consent of the Board of Commissioners. Nothing in this section shall restrict the ability of OmniTrax to charge a special rate for additional services provided to a BRG customer, or to enter into future Transportation Service Agreements with existing or new customers."
Also in the agreement is a commitment from the port to contribute $1 million in marketing efforts on behalf of the industrial park, incubator and railroad.
The timeline is this, then:
In seven years, OmniTrax will own all the machinery and have another 23 to run it for the port. Until then, if it wants to raise the rates on port customers, all they will have to do is lobby a majority of the port commissioners and it will have its way.
If, as Villarreal suspects, not all the company and port's plans fail to pan out, will we have given up a profitable railroad for unsupportable predictions?