City agrees to 75% tax abatement; to kick condo 100% tax abatement question to St. Louis County

TUESDAY, NOVEMBER 13, 2018 — The Tower City Council agreed to increase its tax abatement offer to Tower Harbor Shores (THS), a Limited Liability Company registered in Tower, to seventy-five percent over 15 years.

The city is making the offer to THS in hopes of seeing progress on a 20-condominium unit on the East Two River.At the onset of the project, over three years ago, the city agreed to build the necessary infrastructure for the development, but after arranging for city, public and private money totaling over 6 million the city became reluctant to commit more of its funds to infrastructure following THS’s refusal to provide the city with a letter of credit demonstrating that the LLC has the ability to handle the project for the company. Delays on the city preparing the plat, and other land issues, as well as delays by the LLC Tower has seen little progress on the project. Even a $125,000 loan to developer Orlyn Kringstad has failed to generate any significant progress towards the development.

Looking for a solution the city agreed to offer the developers the option of building their own infrastructure and offered a 65 percent tax abatement from the city and offered ask St. Louis County to forego collecting 100% of the county portion of property taxes over 10 years, at its October 29 meeting. At that meeting, in a telephone conference call, Fryberger Law Firm attorneys specifically told the city and Kringstad that it was unlikely that St. Louis County would agree to that level of tax abatement. The city attorney was quite clear that the project “might” realize some tax abatement but not to expect anything greater than 20 to 50%. There is real little interest in tax abatement for residential projects, the attorney emphasized.

Once the developers learned that the city offered 65% they returned to the city seeking the increased tax abatement and Jeremy Schoenfelder flew in from Arizona, Hans Hanstad flew in from Lillehammer Norway, and Mike Wood, a third investor, traveled from Biwabik to lobby the city council for the higher tax abatement program.

Deputy Mayor Kevin Fitton explained that “There is a point where the city needs to recoup some costs as it will have expenses.” Fitton also said that there would be routine snowplowing and other ongoing city maintenance as well as potential unforeseen larger maintenance expenses for which the city will become responsible.

“Orlyn, your going to be the next mayor of this town what do you think of this deal?” Alderman Lance Dougherty asked.

Kringstad explained how the developers viewed the history of the project and said that he was no longer involved and has sold his interest to Hans Hanstad and paperwork is currently being completed to make Jeremy Schoenfelder the Master Developer. Answering Dougherty’s question, “I really think we should go back to the original agreement,” Kringstad said.

Schoenfelder argued that it would be cheaper for the city to finance the infrastructure development, because of a difference in interest rates between what the city can obtain in bonding, under 5%, over what the developers can realize, currently 12%, from commercial lenders. The difference in interest expense is considerable while amortizing the projected debt, Schoenfelder documented.

Joan Broten, who sits on the Tower Area Economic Development Association, asked the city to consider that they have developers ready to do something and not allow an opportunity to slip away, encouraging the city to bond or seek grants for the project.

”Somebody is going to have to pay for it,” Mayor Carlson said as he expressed his lack of interest in sending the bill to other Tower taxpayers.

Both Carlson and Planning and Zoning Chairman Steve Altenburg explained that when the original agreement expired when its time-line ran out, the city sought financial advice and learned the risk was too high. Both explained that the city was not in a position to spend $750,00o on infrastructure. There is an opportunity for the developers to make millions, Altenbeurger said as he explained that the city could just not accept risk which might cost other taxpayers money.

“There was no guarantee (in the original development agreement) of even one town home built, that why our financial advisers said it would not be wise to spend $750,000 on infrastructure¯ Altenburg said and explained that the planned infrastructure benefits only the harbor development, not the rest of the city.

Both Schoenfelder and Wood, the Biwabik, investor, stated that there was a lot of doubt there would be extensive profit. “There is a false sense that there is a lot of profit in this project” Schoenfelder said, claiming that it was a difficult development to accomplish, citing the need for yet another agreement with the county and all of the hurdles which have, and still need to be crossed.

At the conclusion of this considerable conversation the city council unanimously voted to raise its level of tax abatement and continue with its plans to ask the county for 100% over 10 years. It was hoped it would finalized the development agreement, however the developers returned home without signing a formalized agreement.

According to City Clerk-Treasurer Linda Keith the city will again visit the development agreement at its Monday, November 26 meeting.

Considering the opinion of its attorney, the city is likely setting up the county to be the entity that finally derails the improbable harbor project. Answering the question of profitability, Kringstad has previously projected that the 20 condominium project would cost around 6 million to build. With 20 condos currently being advertised at a starting price point of $395,000 upwards to over a half-million dollars, can we assume that an average sales income, could come close to 9 million dollars if the project comes to fruition. Two years ago, for grant paperwork submitted to the IRRRB, the developers provided information to the city that their expected construction expenses were budgeted at 4 million. Obviously inflation has raised building costs, but it remains to be seen if they have risen by 50%. At the end of the day the city is still willing to sell that real estate to the developers for one dollar and limit its property tax income to 25% of the current property taxes, over 15 years.

In other action, the Tower City Council:

• Certified the city’s election results, as reported in the November, 9 issue of The News

• Approved offering to pay one half of the fees required by the Iron Range Resources and Rehabilitation Board (IRRRB) to tear down two separate dilapidated residential properties in the city. Currently the IRRRB pays seventy-five percent of the cost of demolition and disposal and the current practice of the city is to offer to split the balance owed with the property owner and offer payment terms

• Accepted, with regret, the resignation of Nick Levens from the Tower Fire Department

• Authorized Ambulance Director Steve Altenburg to begin ordering a new ambulance expected to cost around $250,000

• Authorized the purchase of ambulance equipment ****

• Appointed Jolene M. Herberg to the city’s Planning and Zoning Committee

• Declined to waive the statutory tort limits on its League of Minnesota Cities liability insurance

• Approved paying pay requests from Lenci Enterprizes, Inc. for work completed on the new Lamppa Manufacturing building and Neo Electrical Solutions for work completed at the airport

• Completed negotiations with the Teamsters on the 2019 contract of City Clerk-Treasurer Linda Keith and started negotiations with AFSCME for other city employees.