City closes on purchase of 80 acres of former McLaughlin sawmill in Spearfish

The city of Spearfish closed on approximately 80 acres of the former McLaughlin sawmill off of Colorado Boulevard on Wednesday. Pioneer file photo by Kaija Swisher

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SPEARFISH — Though the Spearfish City Council provided an extension into 2018 on the closing deadline, the city of Spearfish officially closed on the purchase of the former McLaughlin sawmill Wednesday.

A real estate purchase agreement was drawn up in March for the property for $2,775,000, and after extending the due diligence period to conduct inspections, including an environmental assessment, the city in August finalized the purchase of the approximately 80 acres off of Colorado Boulevard. 

Initially, Northwestern Engineering (NWE) Company, the seller, offered two parcels, the first consisting of about 76 acres with several outbuildings and two residential structures and listed for the price of $2.2 million “as-is,” and parcel 2, listed at $575,000 and subject to a five-year leaseback, consisting of approximately three acres fronting Colorado Boulevard that includes a single-story, 2,880+-square-foot office building. The leaseback would provide a $24,000 annual gross rent payment to the city for the former McLaughlin sawmill sales office. There are also two residential leases in place on the property.

The closing deadline in the agreement was Dec. 29, 2017, and the seller requested to extend that deadline until June 29, 2018, “to better facilitate the seller’s 1031 Exchange,” the agenda item summary states. A 1031 Exchange refers to Section 1031 of the U.S. Internal Revenue Code, which allows a taxpayer to defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property, including non-simultaneous sale and purchase of real estate. 

The city council in November authorized Mayor Dana Boke to sign an amendment extending the closing deadline, and in exchange, NWE offered to let the city utilize the property for certain public works activities, including storing snow in the winter. The amendment also allowed the city to begin the demolition, deconstruction, or removal of buildings and structures on site prior to the closing, as well as removing, relocating, burying, or incinerating the sawdust and rubble piles on the property. The city could also use the property for storing equipment, vehicles, and materials as long as they did not interfere with the owner’s current use of the property.

The Spearfish City Council heard of the closing during the special year-end session Wednesday, since the closing impacted the end-of-year bill list.

Councilman Doug Schmit asked what the plan of action was for the property in the near term.

Public Works Administrator Cheryl Johnson explained that she was waiting on a structural report on the buildings to determine whether there is any possibility of future, temporary use of some of them. Others were slated for demolition already. She added that insurance coverage is in effect for the buildings. 

Johnson explained that she is working with the Department of Environment and Natural Resources (DENR) to acquire an on-site disposal permit, after Jan. 1, to dispose of materials from the property onsite. There is also sawdust to remove, per DENR regulations, so the city would need to look into prices for that, and Johnson said that staff crews and equipment would be utilized this winter to demolish some of the concrete foundations and also excavate five areas with limited petroleum contamination. Snow is also being stored onsite, she said. 

Councilman Marty Clark questioned the status of the rentals on the property.

City Attorney Eric Davis said that under the purchase agreement, the city assumed the leases and that the two residential leases on the property are operating month-to-month. The city sent out a letter advising the tenants of their new landlord, and Davis said that staff would discuss the arrangements and bring a proposal back to the council to see how they wish to proceed.

“At this point, staff feels like it’s in our best interest to generate as much revenue as we can off that property. In addition to those, we have the commercial lease of the office building back to NWE,” Davis said, adding that there is also a lease for frontage on the property for a greenhouse. 

Davis said that currently, everything is “business as usual,” with utilities being transferred over and all of the things taking place that one must do when purchasing property. He added that staff doesn’t have any plans to recommend any immediate changes until the city council has a plan to do something with the property. 

Boke explained in March that the city was acquiring the land for municipal purposes, looking ahead for future growth needs. She described that the property is currently zoned Heavy Industrial, and with the purchase, the city has the opportunity to rezone the land to fit with how the area is developing and take into account the impact to local neighborhoods. Department heads and advisory committees would formulate and present ideas and plans to the council for the council’s and the public’s input about the property’s future use.

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