TOWER— In a long and contentious meeting on Monday, the city council here may well have ended its involvement in the long-planned town home project at the city’s harbor by approving yet another tax abatement schedule that developers are highly likely to reject. The action could well lead to litigation.

The council took its action just two weeks after a majority of the council rebuffed an effort by the mayor and city clerk to kill the deal outright and seek a new project. Instead, the council had asked attorneys for the city and the developer to discuss the tax abatement proposal to address a claim by City Clerk-Treasurer Linda Keith that state statute limited the interest rate on the abatement plan to two percent over the prime interest rate, rather than the 12 percent interest rate that an investor in the project is seeking in order to take on the financial risk of installing public infrastructure— risk that the city is seeking to avoid. On Nov. 26, Keith informed the council that city attorney Chris Virta had told her the abatement plan could not legally proceed given the purported statutory limit on interest rates.

The city had originally agreed to fund 100 percent of infrastructure costs but later reneged on its commitment, demanding, instead, that the developers front the money. The developers and the city later agreed to develop a tax abatement plan under which the developers would finance the infrastructure and be reimbursed through a portion of the property taxes collected on the property wealth generated by the project. The city had proposed a plan to include abatement of 100 percent of county taxes and 65 percent of city taxes for ten years, but town home project general manager Jeremy Schoenfelder told the city that the arrangement would not cover all the costs of repayment. The council subsequently agreed to boost the city’s abatement to 75 percent, which Schoenfelder agreed would make the plan viable, assuming St. Louis County went along. At the Nov. 26 council meeting, however, Keith claimed the plan violated state law for providing an excessive interest rate and Mayor Josh Carlson cited Keith’s claim in his bid to end the project and issue a new Request for Proposals.

Schoenfelder was present via speakerphone at the Nov. 26 meeting to present the developers’ side of the case and he ultimately convinced three councilors not to kill the project. On Monday night, however, city officials did not allow Schoenfelder, who was expecting to speak again on the issue, the opportunity to do so.

Keith told the council that she had tried to put the attorneys for the city and the developer in touch, but never heard back from the developers until late on Wednesday, Dec. 5.

Tower mayor-elect Orlyn Kringstad, who is in the process of divesting himself from the town home project, urged the council to hear from both sides.

“I think this discussion is going to be a sham unless you bring Mr. Schoenfelder onto the phone. I think there’s more to this story,” said Kringstad. “This becomes a one-sided discussion if Jeremy is not included.”

“What’s to discuss?” asked Councilor Lance Dougherty.

“Why don’t you want Jeremy in this discussion?” responded Kringstad.

Carlson responded angrily. “Relax! We’re going to let the council decide what’s going to happen here,” he said.

Carlson said the council erred when it agreed to renegotiate the abatement plan. “At the end of the day, our responsibility is to do what’s best for the city. Their bottom line doesn’t or shouldn’t mean anything to us. If it works, it works. If it doesn’t, it doesn’t.”

Carlson said he was willing to contact Schoenfelder if the council wanted to hear from him, but no one responded.

Dougherty asked if Keith had any more information about her claims regarding debt and allowable interest.

Carlson jumped in. “Going back to the last meeting, Jeremy was right. Okay. You can, in fact, do that.”

Keith offered an explanation. “By statutory definition, it’s not a debt, it’s an arrangement. The statute applies to debt, specifically. Arrangements are outside of that… if this were a debt, it would be prime plus two [percent].”

In fact, Keith misstated the facts yet again. Minnesota Statute 475.55, Subd 1(a) specifically states: “Interest on obligations issued after April 1, 1986, is not subject to any limitation on rate or amount.” That is reiterated in guidance from the League of Minnesota Cities, which states in Chapter 23 (Debt and Borrowing) of its current Handbook for Minnesota Cities: “The interest rates on bonds are not subject to any statutory limitation.” Instead, the handbook notes that rates are determined by what the market will bear.

That’s a point that Schoenfelder said he was prepared to make to the council had he been allowed to speak. Schoenfelder, who spoke to the Timberjay on Tuesday, said his attorney, Kelly Klun, of Ely, had reached out to the city’s attorney immediately after the Nov. 26 meeting and that the two had already conversed and concluded there was no statutory limit on interest rates, as Keith had purported.

“My concern with the whole thing is we had a deal two meetings ago, and then an issue was brought up about maximum interest rates. I found out that it was not a concern, and that Chris Virta was not a part of bringing up that concern. That is what I was expecting to have talked about at the council meeting.”

The council, apparently unaware or unconcerned that Keith appears to have invented her claim regarding interest rates in a bid to derail the town home project last month, agreed to adopt a new tax abatement plan produced by Keith. Keith’s plan—effectively a poison pill— provided for 75 percent tax abatement from the county and 62.5 percent abatement by the city, which is less than the city’s original proposal. The council gave the developers until Friday, Dec. 14 to sign off on the new tax abatement plan and the rest of the development agreement.

Schoenfelder, who said he’s yet to see the agreement, acknowledged that he’s unlikely to sign it based on the changes to the abatement plan that the council approved. “My guess is I’m not going to accept it. Then, I’ll have to decide whether to bring something up in a legal action. There’s only so much I can do when it appears the municipal partner doesn’t want to continue.”

Keith offered a new explanation for the interest rate confusion, arguing that the tax abatement agreement was not supposed to indicate an interest rate, not that there was a limit on the rate in question.

TEDA loan

In related business, the council agreed to transfer responsibility for the loan from the Tower Economic Development Authority that had been issued to Tower Vision 2025 and Tower Harbor Shores LLC in 2017 solely to Tower Harbor Shores. But that decision came after nearly 20 minutes of recriminations, accusations and theatrics, mostly by Ambulance Director Steve Altenburg, now representing himself as an “independent investigative journalist,” that the loan was a giveaway to Kringstad (who handily defeated Altenburg in the Nov. 6 mayor’s race), engineered by Timberjay Publisher Marshall Helmberger, who was president of TEDA at the time. Altenburg, in a written “report”, called the terms of the loan, which were approved by TEDA, “ridiculous,” suggesting that it violated the authority’s loan guidelines because it contained no collateral and that loan funds were paid out on at 100 percent based on paid invoices, rather than 50 percent. “If that is not corruption, I’m not sure what is,” he wrote.

Keith said the loan was technically in default because the developers had missed an interest payment of $196.95 in May. Kringstad said Keith had informed him of the missed payment just last month and had been assured by the new owners of Tower Harbor Shores that the missed payment would be made up by the end of December. Keith said the loan was also irregular because she had mistakenly paid out $126,000, rather than the $125,000 that was the agreed-upon amount. She said the loan would have to be reissued because of that but claimed she didn’t know who would be signing for the new grant.

Kringstad said Schoenfelder would have been able to address that had he been allowed to take part in the discussion.

Keith also claimed that the developers had failed to provide her with sufficient invoices to cover the disbursals. “I still don’t have the total invoices in dollar amount to close out the IRRRB grant,” she said. “The IRRRB is expecting me to give them $250,000 in receipts [to close it out].”

Yet IRRRB officials confirmed on Tuesday that the grant was closed out and paid in full as of Aug. 24, 2017. Grant administrator Chris Ismil noted that the agency had been willing to pay out 100 percent on invoices in order to “infuse cash” into the start-up project. He said all of the receipts and needed paperwork had been submitted on the project more than a year ago and that he has long had all the necessary documentation. “We wouldn’t have paid it out if we hadn’t,” he said.

When offered an opportunity to respond, Keith cited the IRRRB website, which still lists the TEDA grant in active status, despite its being closed out last year.

The loan to the developers was a pass-through of a $125,000 IRRRB grant to TEDA to help finance early-stage costs, like architectural work, engineering, and marketing, for the town home development. Kringstad, Helmberger, and investor Lars Hanstad had met with IRRRB officials in early 2017 to seek an IRRRB loan to the developers to cover an identified funding gap. The IRRRB opted to funnel the loan through TEDA, with repayment going into a revolving loan fund for the city’s economic development authority for help with future projects.

IRRRB officials were well aware that the loan would be unsecured, since the project would have no assets until sales had begun. Keith acknowledged that the IRRRB officials had indicated in a phone call with the agency that the loan would not require the usual collateral and that the IRRRB would reimburse 100 percent of the paid invoices presented by the developers as they expended funds on the project. After two full initial payments, the city council agreed to allow interest only payments on the loan until the project actually got underway, at which time proceeds should allow repayment of the principal.

Carlson said the city had no choice but to go ahead and transfer the loan to Tower Harbor Shores. “There’s really nothing we can do,” he said.

The Timberjay will have more on the Dec. 10 city council meeting in its Dec. 21 edition.