Tax-Exempt Review Committee

Boards, Commissions & Committees

Tax-Exempt Review Committee - December 5, 2017 Minutes

Regular Meeting Tuesday, December 5, 2017

The rescheduled November meeting of the Tax Exempt Review Committee of the City of Fargo, North Dakota, was held in the City Commission Room at City Hall at 1:00 p.m., Tuesday, December 5, 2017.

The committee members present or absent are:
Present: Dave Piepkorn, Jim Buus, Jessica Ebeling, Mayor Tim Mahoney, Erik Johnson, Bruce Grubb, Robert Wilson, Jim Gilmour & Ben Hushka.
Absent: Kent Costin, Mark Lemer, Chuck Hoge, Broc Leitz
Guests present included: Fargo City Commissioners Tony Grindberg and Tony Gehrig as well as Cass County Commissioners Rick Steen and Chad Peterson.

Commissioner Piepkorn called the meeting to order at 1:00 p.m.

Discussion on Economic Development Incentive Policy For Downtown Housing Units
Commissioner Piepkorn stated that this is not just a City of Fargo issue and that we want to encourage the development of the downtown. He said that we want to make sure that we have multiple (rent) levels as well as workforce and low income levels of housing in the downtown. He also stated that we should be cooperating with the Fargo Housing Authority to assure that we don’t have redundancy in what we are trying to do. Piepkorn stated that we also have competition so we have to consider that in our policy making decisions.

Jim Gilmour presented information on affordable rents. Mr. Gilmour stated that HUD has some definitions of affordable rent based on if rent represents 30% of household income. He said that in Fargo, at the median income of $52,699, affordable rent would be considered $1,317 per month. Gilmour stated that low income would be considered 50% of the median income and that rent would be considered affordable at $738 for a 1-bedroom unit and $885 for a 2-bedroom unit. Mr. Gilmour said that HUD considers a fair market rent in Fargo that is eligible for a housing voucher, at $643 for I bedroom and $810 for 2-bedroom. Gilmour suggested that we may want to arrive at our own definition of affordable for these purposes. However, if we intend to create a policy for very low income people, additional subsidies would be necessary to get rents low enough. Mr. Gilmour distributed a map of the downtown housing units and the various rents broken down by subsidized and non-subsidized units. He stated that in years past, downtown housing consisted mostly of low income and the current policy was developed to encourage market rent units as well.

In answer to a question from Bruce Grubb about vacancies, Mr. Gilmour said that a year ago the downtown had one of the lowest vacancy rates in the metro but three new projects have been built since.

Jesse Craig addressed the committee and began by describing some of the projects he has done downtown. He stated that they had people that wanted downtown apartments so bad that they were willing to walk two blocks to their parking space to get a downtown unit. Mr. Craig said that the 1-bedroom units fill up fast. In the context of the incentives, according to Mr. Craig, two things can happen. He said if the incentives are scaled back or deleted, the downtown could go back to where it was 10 years ago. He said the other thing would be that things could stay the same but, without incentives for new projects, the rents would increase because of no competition. Mr. Craig said that the struggles in developing downtown are the high cost of land, trying to assemble enough parcels for a viable project, running in to fuel tanks and other underground obstacles, and convincing the neighborhood that there will ultimately be a benefit to the entire neighborhood. He said that the Cathedral Lofts project that was at the last meeting is an example of, not what is being lost but, what will be gained in tax revenue and improvement of property over the next many years. He said there is risk being taken in some of the neighborhoods where there is blight around where the projects are being developed. Mr. Craig said that most of the developers in the room are doing these developments for the downtown; for Fargo, not just the return on investment. He said these projects bring culture change and art change to the downtown and it is very satisfying.

Mayor Mahoney stated that Mr. Craig kind of got caught in a buzz saw with the Commission on the Cathedral Lofts project because of the question of what is considered affordable. But, he said after studying some of the information obtained since the last Commission Meeting, that project does meet the definition of affordable. This committee did unanimously recommend approval but the Commission questioned it and put it on hold. Mayor Mahoney questioned if we are not going to do these projects anymore, are we going to change the direction of this committee? Commissioner Piepkorn said that he doesn’t want to see us burdening the developers with more hoops to go through to develop affordable or low income housing.

Mayor Mahoney stated that we do send financial information to an outside party for analysis. Jim Gilmour stated that with the larger projects that run longer than 10 years, normally using tax increment financing (TIF), is where the outside financial analysis is being done. Gilmour said that creating low income housing has become more difficult because a lot of the federal programs have been cut back. He also stated that downtown doesn’t really work for low income units because there are a lot of units already downtown and the price of land is too high to make them work. Jesse Craig said that another large component, besides development costs on low income projects, is the management. He said that you have to know how to manage the initial, and continued, compliance verification and reporting and that adds a lot of management cost to a project. Mr. Gilmour stated that regardless if there are rent restrictions or not, the Assessor must value the units for assessment the same as market rate units and that is the reason for a need for the subsidy. He said there is a state law that does use a method of taxation tied to the actual rents if a non-profit entity is partnered with the project.

Mike Almendinger, from the Kilbourne group, addressed the committee. He said that there are projects in the city that have had no updates for many years that are unsafe for people and need major renovations and updated infrastructure. Almendinger stated that we do have to consider as a community what kind of housing we want to provide for all of these housing types we are discussing.

Mr. Almendinger said that he has heard of projects mixed with market and affordable units but has not seen one. He said that he would be interested in learning about the concept. He said he feels that the management would be the most complex component of something like that.

Mr. Almendinger stated that the incentive programs that have been used to date have lowered property taxes for all taxpayers in the City of Fargo. He said the growth of the downtown value since the Renaissance Zone, PILOT and other incentives has lowered the property tax rate 4%. He addressed the issue of whether these projects would have been done without the incentives. He said that they believe an incentive should not be granted unless a project is in need of it. He said there needs to be good communication and transparency in the process. Almendinger said that it’s important to communicate that there is no cash given out to developers with these incentives. He said these are hypothetical dollars that would not be in place unless the project happens. Mr. Almendinger said that their projects would not have moved forward without the incentives. He stated that, of 24 projects they have done in downtown Fargo, they have asked for a PILOT in addition to the Renaissance Zone incentive on only three. Almendinger also stated that there is a need for greenfield and infill projects. He said that they feel that the policy should be that economic incentives should only be used if the project would not otherwise happen. Almendinger said that we need more housing units downtown to make it thrive and maybe we need a policy that addresses a goal of how many units we need and try to achieve that goal.

Commissioner Piepkorn asked for any ideas about senior housing, especially in the downtown where tenants would have access to medical care and other services. Jim Gilmour said that they have been working with Beyond Shelter and the Fargo Housing Authority. He said that in some cases you need to find less expensive land. Commissioner Piepkorn said that, as we are looking at this, we should consider all types of housing.

Austin Morris, with Enclave Development, addressed the committee. Mr. Morris stated that he has been part of the downtown “In-Focus” group that has been studying the needs of the downtown. He said one of the things they have found is that retailers are cost burdened and at the top of the market that they can afford. They are smaller businesses and boutiques and don’t really attract the traffic that they need to have rent growth. He also said they looked at how many housing units there were downtown 30-40 years ago and how many there are now. Mr. Morris said that their study found, that downtown needs to be more than an event area to attract the better parts of Fargo, West Fargo, and Moorhead. The study found that, for retailers to be successful, the downtown needs 4,500-5,000 more housing units. So, he said, the question is how to get more units, which requires density and already has existing product on it. Mr. Morris also said that with façade requirements in the DMU, land acquisition, asbestos abatement, demolition, etc., the cost is 7 to 8 times that of developing in the outer perimeter. He said that the Lime project is 100 units/acre and an Urban Plains development is 25 units/acre. Austin said that, he looks at the Lime project as not getting a handout. They took land valued at $780,000 and will turn it into a roughly $12,000,000 project. He said that they did the analysis of that project and with the PILOT, their projected return is 6.3%-6.5%. Without the PILOT, paying full taxes and at the same rents, they would have a .9% cash-on-cash return. The PILOT allows them to accelerate the build-out of additional housing units that are needed downtown.

Mr. Morris addressed the affordable housing definition by referring to a Harvard study that is done every year. Over the past five years, the percentage of cost-burdened individuals has gone down due to lower unemployment and growing economy. He said there is still a need for low income housing. But, he asked, what is affordable housing as opposed to low income housing? He said the discussion needs to be had to determine those levels when considering incentive policies. He said they would be interested in developing affordable housing downtown at some point but haven’t yet figured out how to do it.

John Casper, ND State Senator and real estate investor, addressed the committee. Mr. Casper stated that the City has had a policy and we have seen great change because of that policy. He said that policy can, and is, being debated. But, he said, we have to ask why Fargo is leading the state and appearing in Forbes magazine, New York Times, and Wall Street Journal? He said it is because we don’t change the rules in the middle of the game. He said investors are not interested in investing where rules change dramatically and quickly. Mr. Casper stated that there has to be a larger discussion of all of the components separately rather than wrap all of these issues into a current policy. He said that policy change should take place only with ample notice and discussion with all parties who take the risk. Mr. Casper said what we also have to look at here is what the alternative is. He asked if the City is going to purchase these buildings and develop & manage them. He said if there is no incentive for people to take the risk, he wonders what the alternative is.

Mayor Mahoney said they recently visited Boulder and they asked what is working and the answer was reputation. He said if we have a policy and it is working, in part due to this committee’s work, we shouldn’t do a moratorium which stalls progress. Mahoney said in Boulder, they said that if you change your reputation, you can go the other direction. He said we don’t want to go back to where we were 20 years ago.

Jim Buus spoke about a recent article in the Minneapolis Tribune relating to the current federal tax bill being debated in Congress. The concern is that there is risk that some low income housing and historic preservation tax credits may be in jeopardy of being eliminated. Both of these types of credits have been used in downtown Fargo to develop housing projects. Mr. Buus said from a policy perspective, as a committee, we spent much of last year revisiting and, modifying where needed, all of these policies. He said that he doesn’t feel that there is any real problem that we are trying to solve here today. He said we felt the policy we came up with last year was where we wanted to be and we should continue with it as we further this discussion. Mr. Buus said that we are creating policies for programs and should from time to time look back at what our goals are and have we reached them?

Jim Gilmour said that in our current policy manual, an older version of the downtown area boundaries was used and they are working getting one together that is more up to date for the manual.

The meeting adjourned at 1:59 p.m., Tuesday, December 5, 2017.