Photo: Cook County HRA

By Tom Morse - Submitted article - February 12, 2024

Jason Hale is the Director of the Cook County HRA and recently shared information with the Grand Marais City Council in preparation for a request to support tax abatement for “The Heights” development located on Hwy 61 next to Up Yonder. In a prior City Council meeting Jason had shared some of the ways the city could help to support the project. The project's unique modular construction would allow this housing to come online more quickly than some of the other initiatives being supported by the HRA. I wanted to connect with Jason ahead of the next City Council and County Commissioner meeting to learn more about this project, tax abatement financing, and how our community could potentially benefit from this historic moment in funding for housing efforts.

In the conversation below, Jason highlights the high cost of affordable housing and the need for County and City action if we hope to address the need for nearly 500 additional units of housing for the community in the near future.

Tom: One of the first projects being considered by the City Council for tax abatement financing is “The Heights,” can you share a little about this project and what makes this development unique in Grand Marais?

Jason: The Heights is a proposed 36-unit multifamily residential project on Highway 61. The HRA is submitting an application for $750,000 to the Dept. of Iron Range Resources and Rehabilitation (IRRR) as well as other resources to support the project. The Heights will be unique for several reasons:

1. It will be the first modular larger apartment building in the county allowing for quick construction on site and could open in late 2024 or early 2025.

2. Half of the units will be designated for workforce housing (80% of the area median income), and short-term rentals will not be allowed (a shared vision between the HRA and The Cook County Real Estate Fund).

3. Depending on the outcome of the team’s variance request, it will be the first apartment building with underground parking and solar panels.

4. Pending the IRRR grant award, it will be the largest long-term rental property built to-date in Cook County.

T: What is Tax Abatement? How is it utilized in communities to spark investment in affordable housing and is there a history of using tax abatement in Cook County?

J: Tax abatement financing (TAF) is a tool enabled by State statute that leverages future property tax payments to assist with funding projects. There are various rules around how TAF can and cannot be used, but there are also exemptions for affordable housing built into statute. There are two ways TAF can be used:

1. The future revenue stream that is the property tax payment is pledged toward a loan or bond.

2. The property taxes an owner pays are partially refunded over time to help reduce expenses.
   
   

A very recent example of TAF being used occurred last week when the City Council approved TAF bonding on 1/31/24 for the construction of the new City Hall & liquor store downtown. In that instance, the City is capturing tax revenues from specific properties downtown and pledging those taxes toward bond payments. In other words, the City will issue bonds (think of bonds as taking out a loan) and they commit the future property tax payments they receive to pay the bonds (loan) back over time. 

Since I started as the HRA director in 2022, I have been very clear that Grand Marais and Cook County will have to consider using tools like TAF to assist housing projects. The reality is that building in Cook County is exceptionally expensive compared to the median incomes in the community, and there will always be a funding gap for those trying to construct housing that is available to those earning the median household income (about $60,000). 

The only way that more attainable housing gets built is through some form of subsidy. For example, Hamilton Habitat relies on donations for labor and/or materials, and Birchwood Apartments is receiving financial assistance for its rehabilitation. Every project the HRA is working on requires assistance to be financially viable. 

Municipalities like Grand Marais have a limited number of tools to support projects like The Heights. The three biggest are TAF,  tax increment financing (TIF), and providing land at little or no cost. There are currently no TIF districts in Cook County, and aside from local government projects, I do not know of TAF being used either.

Something I admire about the people of Cook County is their desire and ability to figure out how to get things done. People here have grit, are doers, and help each other. We are, however, living in a different paradigm now. According to the National Association of Realtors, the median home price in Cook County is $302,280, and because of the quality of life here and the popularity of the area, the existing inventory is extremely limited. The only way right now to get more attainable housing for long-term residents is to build it. TAF is one tool that can bring housing projects to the finish line.

T: What are some of the drawbacks to an approach like tax abatement?

J: There are generally three complaints levied against TAF:

1. Why are we (taxpayers) subsidizing private development?

2. The public is missing out on taxes by committing them to a project.

3. TAF is too risky for the public.

First, and as I mentioned earlier, most housing projects simply don’t get done without assistance. Since 2018, the cost of housing has dramatically increased. In short: there is a reason more housing that is attainable for the average Cook County resident is not being built: without help, such projects are not possible. The exception might be building tiny homes in Grand Marais, but these understandably have a limited appeal and are incredibly expensive on a $/ square foot basis.

Second, TAF can be structured in a variety of ways. The path I propose with projects is to establish the original tax capacity (i.e. the amount of taxes that are being paid now) and ensure those taxes continue to be paid to the taxing jurisdictions. Additionally, not all of the increased tax base that is created by the new projects has to be committed to the project. For example,  the property on which The Heights will be built had a tax liability of $1,594 in 2023. That amount would be locked in so the County, City, ISD 166, and other entities currently receiving money from taxes will continue to receive their respective portions of that. 

When the project is complete, it is estimated to have a tax liability of over $70,000 per year; the TAF agreements can commit, for example, 90% of that increase to help fill the funding gap, and the remaining 10% could be paid to the County as it normally would. In short, if The Heights property stayed the way that it is, as it has been for years, the community would continue to receive around $1,600 per year. If TAF is used to support the project, the community will still benefit from that $1,600 each year, and when the TAF term expires in 15 years that will likely increase by over 4300%. I call this a win-win.

Finally, TAF bears almost no risk to the public unless bonds are used. I have never advocated for bonding for TAF or TIF in the 16 or so projects I have worked on with those tools. Instead, the risk is on the developer: if they do not pay their taxes, their taxes are not abated. Remember, TAF is used to either pay back a loan/bond over time via property taxes or pay their taxes, and those taxes are all or in part refunded. If they don’t pay, they don’t get their payment returned. Also, if they don’t pay taxes, there are generally bigger issues present.

T: The HRA is supporting a request for tax abatement for The Heights project to the City for $375,000 and a request to the County for $450,000 over 15 years. These seem like big numbers, how would this impact the City or the County’s budgets? Is there a typical benchmark for the cost of developing a unit of housing for a unit of government?

J: The HRA is supporting a request of up to those amounts for up to 15 years. These numbers were devised in collaboration and at the recommendation of Ehlers Public Finance (a municipal advisory firm). These commitments would have zero impact on County or City budgets: the value ($) is being created by the project, and the owner will be paying themselves the TAF over time. The amount of TAF a municipality can approve and dedicate is limited by statute, however, so approving TAF for one project may mean other projects will not be eligible until the TAF term expires. 

Regarding a benchmark, there is no good metric. I believe the current costs we are seeing for heavily subsidized projects are outrageous and not sustainable. For example, while the future rehabilitation of Birchwood Apartments will be a victory for the community and is long overdue, the total cost per unit is over $430,000; two new multifamily construction projects I worked on in Duluth were also funded this year and will cost roughly $450,000 per unit. These are not good benchmarks. 

While not a low-income housing project, The Heights will cost approximately $230,000 per unit, unless it runs into unforeseen issues and costs increase. The reason the HRA is working with and supporting private developers is to leverage their efficiencies to get housing in our community in exchange for providing only the level of assistance that is needed to make the projects work.

T: The City Council asked, “Where does opening the door to tax abatement lead?” Could you give some examples of what policies could help create clear boundaries for City and County leaders? How many parcels in the City could support a development of this size?

J: As I mentioned previously, there is a statutory limit on the percentage of the municipality’s tax base that can be committed toward abatement. Many municipalities have tax abatement policies; in fact, it is required by statute to use TAF for non-housing (i.e. economic development) purposes. I have drafted an Economic Development Tax Abatement Policy for the City to review, edit, and use or not use as it sees fit. Housing does not require a policy, but I believe it is important and helpful to establish priorities and criteria when considering providing TAF for a housing project. I believe this will be part of our conversation at the February 14th Council meeting.

There are not many parcels in city limits that are available, especially at a reasonable price, that can support this size of a project. This is a significant reason I have asked the City to partner with the HRA by providing land for housing projects. We will be discussing a proposed 16-unit project at the next Council meeting as well where Council will decide whether to provide land for the project. The HRA is requesting the property for $1 so that we do not have to ask for TAF or TIF. Parcel size is not the only consideration: zoning, access, access to utilities and developability also play key roles. The Heights is located in a zone district that the City recently amended to allow large apartments without a special permit; this is a clear indication that it wants to encourage multifamily housing in this corridor. 

T: It seems like this is a unique moment in the amount of funding available to address housing needs in Minnesota. Can you share some of the other ways the HRA is working to secure funds beyond the City and Council to develop housing?

J: The HRA is in the process of preparing and applying for four grants to support new housing projects. These grants would bring up to $2.3M of state funds to the community and support the construction of up to 92 new rental and for-sale homes. The Legislature approved $1 billion for housing last year, and these four grants are trying to capture more than our fair share of the programs we have access to. The $10.5M Birchwood Apartments rehabilitation is also a result of the state funding; the HRA played a critical role in that coming together.

Additionally, the HRA has secured $50,000 for single-family rehab, and is waiting to receive another $50,000 award for predevelopment costs. In short, we are trying to get whatever we can to assist with our housing needs. I say “we”, but as the only staff person, the Executive Director is responsible for everything. There are probably some other funding sources available that we could try to avail ourselves of, but honestly doing so is a capacity issue: I simply do not have the bandwidth to apply for, much less manage, additional funding sources at present. If and when some of the current projects get in the ground, that may change! 

T: Why is the HRA working on so many projects at the same time?

J: According to the 2022 Comprehensive Housing Needs Analysis, Cook County could absorb over 500 units by 2026. I have been very clear when I talk about this that 500 is a projection and we won’t really know the need until we build more and watch the market respond. There are two primary reasons I am working on six projects concurrently: 

1) The only way to address our housing crisis in a meaningful way is to build more housing. Even if all six projects were to go forward, which is unlikely, it would result in approximately 150 new housing units. That is not insignificant, and I will be humbled and delighted if that happens, but against the backdrop of a need for 500 units, it is not enough.

2) We have a small window of opportunity to get one-time funding from the state, and while we have multiple projects in various stages of progress, nothing is done until a ribbon is cut and tenants move in. Grand Marais and Cook County have a unique opportunity to make real progress on our housing challenge, but that opportunity is on the clock.

T: How can people support the HRA in the effort to bring more housing to Cook County and Grand Marais?

J: What a great question! Here are the ways people can support the HRA’s effort:

1. Attend meetings like the County Board meeting on the 13th and the City Council meeting on the 14th to voice your support for the HRA’s requests. If you cannot attend in person, consider writing an email or sending a letter to the County Board (email)  and City Council (email).

2. Build a house/s or an accessory dwelling unit on your property.

3. Contribute financially to existing HRA or other local development efforts.

4. If you have a short-term rental property, consider renting it long-term.

5. Consider providing land to the HRA at little or no cost for new long-term housing.

6. Help educate neighbors and friends about the reality of our housing situation and advocate for the local government to responsibly use the tools we have available.

Tom Morse is a Cook County resident and advocate for housing initiatives in the County. He is not associated with the HRA or the Cook County Real Estate Fund and has no personal investment in these projects.

This piece has been edited by Boreal Community Media for clarity and length. The views and opinions shared in the article do not necessarily reflect those held by Boreal Community Media. If you are interested in submitting an article for consideration, please read our submission guidelines here.