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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.
Where are the 20 apartments going?
First paragraph, in the old Federal Building downtown, across from the library.
And then another block of flats are going in at the old Zastrow building?
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Just wanted to throw a line of thought in here (I don’t necessarily support it, but it was something I was thinking).
Maybe giving the developer’s (the Zastrow Flats, and the Federal Building Apartments) is a low risk way for the city deal with blight.
I work downtown, and I have a lot of people telling me they want to move downtown to live, but the apartments around the square are full, and many have waiting lists. Once you get East of downtown there are a lot of the “blighted” homes we read about all the time, and people don’t want to live in them.
The landlords of these properties have had years (some have had decades) to get them into to shape and market them. If they are within blocks of places that have waiting lists and they can’t find tenants, those properties are under-marketed, over priced, or simply undesirable.
By allowing and enticing contractors to build new places (or retro-fit some) maybe some of these blighted landlords will lose tenants or finally get some other incentive to fix up their properties to a state where people do want to live there, because our current system is obviously to0 over-burdened to solve this problem.
I think the argument about the WHEDA credit is valid, but the practice of our (or any) city providing unfair advantages to big developers happens all the time. We give big retail stores, chain restaurants, big apartment developers, large grocery stores, etc breaks all the time. Many times cities go out to look for a “mega” store to entice, this always seems unfair to the small business owner, or property owner. Many time the people in cities lobby their own government to bring in these mega-stores that crush local places (Olive Garden, Red Lobster, Home Depot, Wal-Mart, this list sadly goes on forever..)
If you look from this point of view, it would seem like the City of Wausau is finding a way to clean up a ugly and polluted warehouse long the river, get a Federal Building from costing us every month-to earning the city money, and providing some competition to blighted landlords to get the properties into shape. All for some concessions on taxes and a $75,000 dollar loan which will be paid back in a few years, but taken as a whole this could be viewed from one point of view, as a HUGE win for the city of Wausau.
If these property owners would have kept up their rentals over the years there would be no waiting lists, and no attractive market for these large developers to want to come into.
Again I am not trying to make enemies with this post, but it is a line of thinking I haven’t really heard anyone else address.
Two obvious problems I see with this are, blighted home owners (not tenants, but people who actually live in and own a blighted home) will not have any incentive to shape up, and the WHEDA credit allowing a $225,000 apartment rent for the same thing as a $60,000 apartment isn’t fair…but I think that problem needs to be addressed at a state level, because from the city’s point of view turing away these developers could only be seen as a loss, or a way to ensure the continued abuse by some landlords.
Tyler, except that the people living in those currently blighted houses in the city, aren’t the demographic that will be applying for (and having their credit run, references, etc) and being accepted into the new apartments downtown. Oh, they pretend it will be, but it won’t. Even the city says it’s for “young professionals”
Also, 30 years at zero interest isn’t ” paying back in a few years”. It’s nearly a third of a century. A luxury others do not get, even others borrowing money from the city for blighted housing projects. Low income people can borrow, after waiting three plus years of course, and interest is tacked on their loan from day one. If they move, rent or sell or use the house for business, they must immediately pay it back in full at that time, no exceptions, no grace periods, no breaks, no favors, no special meetings.
Your solution to blight in the city is to throw tax money at millionaire developers to build new higher priced apartments and assume the poor will just somehow find a way to move there, while just assuming that if a landlord can’t rent a house, he’ll be eager to throw $25,000 at each house after acquiring market rate loans from banks with closing costs to remodel them to compete?
In the past you said government should’t be helping people fix up their private property. You said that in another thread, yet then say today it’s ok to give money to millionaires to fix up something they want to build.
Seems you think gov’t shouldn’t be helping low income citizens fix things up but you have no issue helping the rich, who then pay next to zero taxes back to the gov’t.
According to this post if they toss millions from the state and city at a millionaire to fix land their profit mongering friends ruined through pollution and to remodel a building to rent to moderate to higher income people, then that’s ok?
I can see why you’re behind the Fed Building remodel. 20 apartments geared for young professionals will be probably 20+ new clients for your bar. Thus you will likely directly profit from the city and state tossing millions into the Federal Building. Where as helping rehab blight on Jackson, Washington, 6th Street and 2nd Ave does nothing for you, since very few people living in that kind of housing are the types to go to jazz bars downtown.
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I think you should reread the first line of my post. Just because I can view a situation from multiple points of view does not mean I support all of them.
Also the fact I own a business in downtown has nothing to do with the point of view I was trying to show.
If the city provides $75,000 but is getting back around $40,000 a year not to mention save on cost of maintaining it. This deal should provide the city with over 1million dollars within 30 years.
And finally if your arguement that tenants that currently live in these blighted areas will be unable to live in the new apartments current landlords should have nothing to worry about.
Tyler,
I think your first post was interesting. I support the creation of apartments in the Fed Building. I would live there.
I disagree with DBC reading of what you said.
As stated in my original post, some of the landlords who own some of the inner city rental housing have had the ability to keep there properties in a good state of repair, but have choosen not to and pocketed the money instead.
However, that is the minority, not the majority.. and better enforcement of existing codes could solve that problem.
However, quality tenants for these inner city properties are hard to find because many of them are dumps.. and put enough dumps in a block.. you have an issue.
I took over the management of 5 properties (8 rental units) in the 700 Block of Jackson Street about 2 years ago… just so I could get some first hand experience with one of the worst areas in town…
Of the 8 original tenants when I got the properties, 7 have since been replaced. With each move out, about $2,500 to $3,500 was put into each property… they were all structurally sound.. so this primarily cleaning, new carpet, new paint, a window here and there, update some appliances.. etc. Then, I put prospective tenants through the same underwriting as I do for my units.
The result, 5 units in a row on the 700 Block of Jackson Street that are kept up on the outside, and have generated practically no police calls. It can be done.
The problem is… most of these property owners don’t have the $5,000 or so it would take to put their foot down with the current tenant, do some “lipstick and rouge” improvements, and look for new tenants at a higher rent. Case in point, I have been putting my money into these properties and the property owner owes me north of $12,000 for doing so.. and this is money I doubt I will ever see (alas, that is a story for another day).
I can be sold on the concept of housing in the Federal Building, what I cannot be sold on is that WHEDA tax credits combined with a no-interest loan from the city should be the source of the financing. I am also not sold on them not having to pay property taxes at the same rate.
This is not the kind of thing that will “motivate” inner city landlords to improve their properties to compete…. it will motivate them to lower their standards even more, just to having a paying tenant (who cares if they have long criminal records or drug histories, as long as they can pay).. just so the property owner has the funds needed to pay taxes and debt service…
What will happen is what will continue to happen, the properties fall into further states of disrepair, are eventually condemmed… and then purchased by the city, razed, and a new property built adding to the inventory of Wausau’s largest landlord (who happens to be the City of Wausau by the way)
John I agree with your take on this issue, but what will motivate the slumlord to get their properties into shape? Basically it seems like it’s been years of virtual self-regulation and the bad apples are once again ruining everything…
As a side note, I do own a small business, I never asked the government for anything, and it does bother me that these large businesses can come in and catch a lot of breaks I can’t. Go to Sams sometime and look what they can sell a bottle for versus what I have to pay….but there are a lot of advantages to being small too…
This is an interesting discussion, but I think that some issues are being mixed together in a way that is not conducive to productive problem solving. In the case of both the Federal Building and the Zastrow property, we have specific sites with specific challenges and the opportunity to effect a positive outcome in the near term. We have attracted the interest of specialized developer with resources that attacks projects like this. This is a good thing and more than a lot of other cities can say. Because they know what they’re doing and they have other choices they can make, they drive what some may think of as a hard bargain.
It’s easy to look at individual aspects of these kinds of deals and say that removing a given element would make it an even better deal, but often, that isn’t the question before the players. It may well be a case of “take it or leave it.” Getting into onion peeling carries some real risks and they can be difficult to evaluate for people who aren’t directly involved in the negotiations. What we’re looking at now is where things ended up in the discussion and not necessarily where they began. (Contrary to popular myth, there are many development proposals that the city walks away from.)
Are we better off with these projects or worse off? I would say that in both cases, we are clearly better off. Few deals are going to be perfect for either side, but the implication that these two projects significantly diminish the opportunity to make other improvements to neighborhoods and homes tends to create a false choice. That’s really a separate issue. Having comprehensive neighborhood improvement as a priority — and I agree that it should be, particularly in some troubled areas — doesn’t mean that other priorities have to be shelved.
In the case of the Zastrow property and the Federal Building, we have a chance to get some things done. Based on the conditions that exist and what they could become, (upside and downside considered), we’re better off doing the projects than not doing them, in my opinion. Others may feel differently and John Fischer presents a well-reasoned case for seeing it his way.
I thought the Children’s Museum idea for that building would have been pretty cool, something unique.
One other thing. When an historic building gets refurbed into condos or apartments, it’s no longer experienced by the general public, unless you’re a tenant or friend of one. How cool is it when an historic space is lovingly renovated and used for a business, org or service that’s open to the public, thereby allowing everyone to experience a piece of history? Unless the federal bldg. was a bland dump in its heyday.