Stealing from the…
by John H. Fischer on December 20th, 2010
On Tuesday, December 14th, 2010 the Wausau City Council as a whole officially took up the issue of accepting the proposal for the Federal Building submitted by Metro Plains. (Metro Plans is the same Minnesota developer that has been approved to construct the Trolley Flats WHEDA tax credit apartment complex on the old Zastrow property a few years ago, a project that has still not been “officially” started.)
Basically, the plan is to use WHEDA tax credits to convert the Federal Building into 20 apartments. Although this is still in the conceptual stage, the preliminary plan calls for a project cost of $4.7 million, the bulk of which would be funded by WHEDA tax credits. To supplement this financing, Metro Plains also wants a $75,000 loan from the city, no interest, with a 30-year payback. Metro Plains cannot own the Federal Building, so they would be renting it. The preliminary rent payment is in the $14,000 per year range. When adding this to some revenue to the city for renting parking stalls, and figuring in a cost savings to the city of $20,000 to $25,000 per year (which is what they currently pay in holding costs such as insurance and utilities), this proposal would mean about $40,000 per year to the City of Wausau.
I did share some thoughts with the Wausau City Council during the public comment part of the meeting. However, I did greatly abridge my remarks to try to stay in the time frames they allow (about 3 min per person, but I am pretty sure I took 5 min or so), and of course I was not able to be a part of the discussion when this hit the floor, which is a shame because there were some comments made that require rebuttal. Luckily, with the magic of blogging, I can address those issues now.
I apologize in advance if this blog entry gets long. First I will go over what statements I made to the City Council. Then, I will end with my rebuttal to two issues brought up during the discussion of this item before it was approved by the Council on an 8-3 vote.
I did share with the Council that I understood that there is a significant cash flow upside to this proposal for the city. The net cash flows to the City would be about $40,000 per year, and this doesn’t include the cost savings to the City that would result in not having to do some major improvements to the property if it stays vacant for much longer.
I then mentioned Newton’s 3rd Law of Motion: For Every Action, There is an Equal and Opposite Reaction. I pointed out that this law goes beyond physics and applies to much that happens in life. It also very often (if not always) applies to decisions made in government, especially at the local level.
I didn’t spend much time on the WHEDA tax credit issue because that is a state program, but I did voice my concern that this development abuses an obvious loophole in what this financing tool was designed to do. The concept behind the tax credit financing program is worthy. This type of financing allows for the development of housing that is “affordable” to “low and moderate income households” when the market is either unwilling to provide this housing, or is unable. However, this market IS willing and able to provide “moderate” income housing, so much so that the market is simply saturated. (Though I will admit that there is a severe shortage of housing for those of “low” income.) I see this use of WHEDA tax credit financing as taking from the poor and giving to the middle class. This perception was confirmed with the comments of Heather Wessling, the Assistant Community Development Director (that is one of the two comments requiring rebuttal that I will hit at the end of this post).
I did state that I understand that the WHEDA issue is outside of the purview of the City Council, but I wanted them to understand the problem that I have with this, and also let them know that I fully intent to fight the WHEDA approvals as well.
One item that the City of Wausau does have control over is the $75,000 no interest loan with 30 year payback. This one item is one of my biggest single objections. The City is proposing that this $75,000 come from TIF funds.
My first question that I feel the City needs to ask itself is whether or not this $75,000 loan is a “deal breaker”. After all, it is less than 2% of the total projected project cost. One would think a developer the size of Metro Plains could either cut that amount from the project, roll it into the other financing they are trying to get, or use their own capital to fund that last very small piece of the pie. If an additional $75,000 from the City makes this $4.7 million dollar project no longer feasible, the City needs to ask why.
And, even if this $75,000 from the City is needed to make this project happen (which I don’t believe, but let’s say it is) – why does this loan need to be at zero interest? Is the interest rate a deal breaker? And… why the 30-year payback? I am not aware of commercially available loans that have a payback of longer than 15-20 years. The interest thing really bothers me. The City has loan programs both for rental housing rehab, as well as funds to help with improvements to owner-occupied homes for low income families. However, even these loan programs aimed at low income people have interest attached to them. So… we charge market rate interest to normal developers, we charge a reduced rate of interest for low income households… but we charge NO INTEREST for a housing development designed to attracted young professionals. Like I said before, robbing from the poor to give to the middle class.
In fairness to the City, they are looking at this in terms of payback. Currently the holding costs for this building are $20,000 to $25,000 per year. Even though this $75,000 is a loan that is supposed to be paid back, based on the holding costs alone, there is a 3-4 year payback on this money. Although that is a pretty good deal, my point is that if this $75,000 is not a deal breaker, then the payback is instant. If you can get the same savings with no loan, or at the very least a loan with a market rate of interest, why would you not pursue that option? This is already perceived as a win-win for the city and the developer without this loan… why make it that much more attractive?
My comments then changed course a little bit from the specifics of the Federal Building project to comments on Wausau’s well-documented inner city blight. This is a problem I knew existed, but I have learned more about the extent of the problem since being asked to serve on Wausau’s Housing Task Force.
I pointed out that the City of Wausau has done a very good job of finding ways to come to win-win situations using private-public partnerships to encourage some fairly large projects downtown. However, if Wausau really wants to do something about inner city blight, they need to get creative and come up with some private-public partnerships on a much smaller scale. Currently, the primary thing that Wausau has been doing to address blight is to wait until properties are beyond repair, then purchase them, raze them, and rebuild them to either be resold, or held in the City’s inventory of rental housing. Having the City buy these properties one by one is not the long-term answer. Finding ways to work with the private sector, new ways… creative ways.. that is what is needed. It worked downtown… I have been asking and will continue to ask the City of Wausau to spend the same amount of time, resources and effort in saving Wausau’s inner city housing stock that it did in saving Wausau’s downtown.
One of the biggest contributing factors to Wausau’s blighted area is a vicious cycle that many rental property owners are stuck in. Many would love to make the repairs and improvements to their properties that would attract a better quality of tenant, a tenant willing and able to pay a little bit higher rent for better quality housing. However, before these improvements and repairs can be done, the revenue from these stable tenants are needed. The vicious cycle is that these more stable tenants are not going to come until after the improvements are made. So, you need the higher rents to make the repairs… but you need the repairs to get the higher rents.
Don’t get me wrong… there are property owners who do have the resources to improve the quality of their housing that they offer and simply choose not to… they choose to pocket the money instead of making needed repairs. These owners are a problem. However, these owners are also the minority. Much has been said about addressing the blight issue with new codes or better enforcement of existing codes. This method of addressing the problem is a good route to take for this type of property owner.
However, coming up with new codes or more intense enforcement does very little to address the problem when the property owner simply doesn’t have the resources.
If the City really wants to do something to address inner city blight, they need to find a way to stop this vicious cycle. The City needs to get creative and come up with programs that make it possible for property owners who do care about their properties and just don’t have the resources they need to be able to make the improvements and repairs needed to attract a better class of tenant.
In tying the discussion of blight back to the Federal Building proposal, I stated that I just don’t see how adding 20 more essentially “market rate” apartments downtown does anything to help the blight situation. If anything, adding 20 more units to a market that has seen over 1,000 added in the last few years (saturating the market), only makes the current vicious cycle spin faster. It has the potential of taking 20 rental units that are in good repair, and losing those 20 tenants causing hardship in properties where hardship hadn’t been before. (I understand the concept of competition, and this was brought up by Alderman Jim Brezinski, but that is another rebuttal that will be added to the end of this post).
When looking that this from the point of view of a potential renter, the Federal Building proposal is $4.7 million for 20 units, that means a unit cost of $235,000. However, in this market, apartment buildings renting for similar rents that are proposed for the Federal Building have an average per unit value of $40,000 to $80,000. So, I ask you… if you were going to pay the same amount of rent, would you rather live in an $80,000 home or a $235,000 home? Again.. same amount of rent.
I brought my comments to a conclusion by saying that I empathize with those on the Council because I understand there is a risk in doing nothing. I can empathize because I do understand, actual first hand knowledge, what it is like to pick up a distressed property for practically nothing, but six years later (and six figures worth of cash outflows later), there that property still sits, vacant and a drain on my resources. Been there… done that. However, when I speculate on real estate and lose, I am the one who suffers the loss. When the City speculates on real estate and gets it wrong, it is all of us (the taxpayers) who end up losing and footing the bill. However, hind-sight is 20-20. The purchase of the Federal Building for $1 is done and cannot be undone, the costs that have been incurred to date are done and cannot be undone. Now is not the time to second guess that decision, now is the time to do something to minimize the damage being done to taxpayers.
I understand that there is an opportunity to do something now, that there is an offer on the table. There is a chance to put something where nothing is now. I also pointed out that I understand the importance this $40,000 per year change in cash flows can have to the city budget… and I pointed out in no uncertain terms that if this $40,000 savings were to somehow be earmarked to address inner city blight issues, you would definitely have my attention.
My basic purpose in addressing the Council was to educate them and inform them. To let them know that if they believe that this project has no potential downside risk, that they were mistaken.
There is a potential downside risk. There is an equal and opposite reaction. This potential benefit to the City could have the potential downside of further contributing to the blight that is attacking the City just outside of our very impressive downtown area.
The question is… is the downside risk of expanding inner city blight worth the upside benefits that the Federal Building project proposes? THAT is the decision that the City Council is making. My job is simply to point out the unintended consequences, point out the potential ramifications of the decision. My job is to point out that there are risks as well as benefits.
Those were my comments last Tuesday evening. During the discussion before the 8-3 affirmative vote, there were two comment made that actually proved my points.
The first was made by Heather Wessling, Assistant Community Development Director. On the issue of the WHEDA tax credits, she pointed out that Wausau is getting considered for many of these WHEDA funded projects (Wausau East High School, Trolley Flats, etc). The reason why is that Wausau has a large number of their population that pay more than 35% of their total income in rent. That demonstrates a need for more “affordable” housing. I agree 100% with Ms. Wessling’s statement. However, a few sentences later, she indicated how this Federal Building project is designed to bring more young professionals into downtown, as they would be the ones who would like this type of housing.
I am very familiar with the local housing market… and there are a sadly large number of households whose income is $900 per month or less… and these are the people who need more affordable housing, and these are the people who the WHEDA tax credits should be aimed at helping, these are the people why Wausau gets this type of funding. However, this project, using funds that should be used to help low income people, are used to create housing to attract young professionals… people who have no problem finding quality housing that costs less than 35% of their income. No wonder the problem doesn’t get better.
The best way I can compare this would be a program that helps with flu shots to areas where there is a high rate of the flu. However, the funds are actually used to help lower insurance deductibles for people with insurance. Although that may result in some lowering of the incidents of the flu… the problem of a high rate of flu doesn’t change.
This project is being proposed within the WHEDA guidelines, but there is a problem with those guidelines when the funding is granted because of a need of one kind of housing, but the housing being developed goes after a different class of people. Again, robbing from the poor to give to the middle class.
The final comment made that I think needs to be addressed came from Alderman Brezinski who brought up competition, that is what America is about.
I don’t disagree. When the city was proposing allowing a large multi-family development out on 25th Street, I did not address the City Council. Even though the market was saturated and the zoning was wrong and it didn’t match the City’s long range plans for that area, it was a private development funded with private money. It was competition, and as much as I may not want the competition, it is their right to compete.
However, there is a difference between competition and FAIR competition. Even leaving the WHEDA funding completely out of it… If I need a $75,000 loan, I need to pay interest and it will probably be a 15-20 amortization schedule with a 3-5 year balloon. That debt service cost is significantly more than if I were to get the same loan with a 30-year payback and no interest.
Also, other than debt service, my biggest expense is property taxes. The amount that this property will be paying (in rent or PILOT, since it is not subject to property taxes) will be less than half of what they would be paying if this was a standard 20-unit apartment building with a value based off of the rental revenue.
I don’t mind having to compete… but how does Mr. Brezenski expect me to compete when the City is giving my competition huge breaks on the two biggest expenses there are in real estate – debt service and property taxes? Give me a no interest loan and cut my property taxes in half and then yes… MAYBE I will be able to compete…
But … I am putting my $60,000 units up against $235,000 units… renting for the same amount… with my competition paying no interest and half the taxes I do.
Mr. Brezinski, how fair would the competition for your aldermanic seat be if you were not allowed to spend any money at all, but your competitor had the city give them a large sum of money to campaign against you?
Competition only works when it is fair, and the parties are playing on a level playing field.
I apologize that this blog post was twice the length of my normal ones… but I thought it important to fully articulate my thoughts, versus what I could abridge into a few minutes.