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Moving Ahead on Workforce Rental Housing02-07-2017
The Cook County Board this morning voted to move toward issuing up to $1.6 million in tax abatement bonds for construction of workforce rental housing in Lutsen. A public hearing on the proposal will be held at 5 p.m. on Tuesday, Feb. 28, in the commissioner’s room at the courthouse.
Developer and owner of the 16-unit Lutsen project will be One Roof Community Housing of Duluth, a housing non-profit with a long and impressive history of building and operating similar projects in northeast Minnesota.
The tax abatement bonds are essential to making the housing project work financially, because the secure nature of the bonds means a lower interest rate on borrowing to build the project.
Questions were raised during the public comments portion of the County Board meeting today about the risk to taxpayers. The risk is negligible. Here in a nutshell is what is involved:
1. The County Board sells bonds of up to $1.6 million to help finance the Lutsen workforce rental project. The proceeds of the bonds are loaned to One Roof for construction of the housing.
2. One Roof uses rent income from the housing to repay the bonds. Annual payments on interest and principal are estimated not to exceed $110,000. County fiscal counsel Bruce Kimmel of Ehlers & Associates estimated that in year one of the project, net rent collections after expenses would equal 110 percent of the amount required for bond repayment. Because rents will rise while bond payments won’t, Kimmel estimates that by the last year of the bond payments, year 20, rents would increase to 170 percent of the amount needed for the annual bond payment.
3. If rents fail for some reason to cover the annual bond payment, the shortfall must be made up by One Roof, which will pledge its “full faith and credit” toward retirement of the bonds. One Roof is worth approximately $6 million, so its “full faith and credit” is several times more than enough to cover $1.6 million in bonds.
4. If One Roof were to default for some reason on bond payments, the Lutsen rental housing would revert to county ownership. The project would have an estimated value of $2.6 million when new, more than enough to cover repayment of the $1.6 million in bonds. The county could either sell the property or hire a manager and again use the rents to cover bond payments.
5. Only after the project had burned through rents, then the “full faith and credit” value of One Roof and then the value of the project, would Cook County taxpayers ever be responsible for making up any portion of the annual bond repayments. That is highly unlikely to happen, but if even if the entire amount were to be charged to county taxpayers, it would still equal a very small increase in annual property tax levies.
That small risk is worth moving this fine project forward. It was put together through a great deal of hard work by the Cook County-Grand Marais Economic Development Authority and One Roof Community Housing. It begins finally to cut into the large unmet need for workforce housing throughout Cook County.
Private investors have not responded to that need because they cannot make the financing work. Rents that people can afford do not yield sufficient revenue to support financing a project. It is a classic example of what economists call a “market failure.” Only a non-profit developer, able to tap grant funds and lower interest rates through such mechanisms as tax abatement bonds, could make it work. We are fortunate the EDA and One Roof Community Housing were willing to take it on.