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Committee Minutes

Minutes of the Grand Forks City Council/Finance-Development
Standby Committee Wednesday, January 14, 2009 - 4:00 p.m.

The Finance/Development Standby Committee met on Wednesday, January 14, 2009 at 4:00 p.m. in Room A-101 in City Hall with Chairman Christensen presiding. Present at roll call: Christensen, McNamara

Also present were Greg Hoover, Saroj Jerath, Terry Hansen, Mel Carsen, John Warcup, John Herz, Candi Stjern, Council Members Bjerke and Gershman, and representatives of various housing units.

1. Matter of pre-audit communication between the auditors and the finance
committee._____________________________________________________
Information only.

2. Applications for abatement of taxes:
a) Grand Forks Homes, Inc., Oak Manor Apts, 710 4th Ave.S. - 2006-2007
b) Grand Forks Homes, Cherry Heights Apts., 110 Cherry Street - 2006-2007
c) Grand Forks Homes, LaGrave Place Apts., 810-830 4th Ave.S. - 2006-2007
d) Grand Forks Homes, LaGrave Learning Ctr, 832 4th Ave.S. - 2006-2007
e) Continental Homes, Inc. Apts, 1800-1804 and 1808 Continental Dr. - 2006-2007
f) Homestead Place Apts., 1639 24th Ave.S. - 2006-2007
g) MDI Limited Partnership #35, Riverside Manor Apts., 813 Lewis Blvd. 2006-
2007
h) Faith & Hope, LP, Westwood Apts., 2500 14th Ave.S. - 2006-2007
i) Housing Authority of City of GF, Ruth Meier Ctr, 770 S. 14th St. - 2006-2007
j) Housing Authority of City of GF, lot next to 770 S. 14th St. - 2006-2007
k) Terzetto Village, LLC, 12 lots, Promenade 2nd - 2006-2007
l) Westgate Village, LP, Westgate Village Apts., 1100 N. 55th St. - 2006-2007-2008
Mel Carsen, city assessor, reported this meeting is work session, will be recorded and is in preparation for the hearing that will be held next Tuesday before the city council, that the council will make a decision as to the recommendation to the Board of County Commissioners on all of these properties. The County Commissioners may overrule our decision.

Terry Hansen Housing Authority, made opening remarks, stating that applications were submitted to the city assessor for consideration in their request for property tax relief "…to relieve financial strains these properties are experiencing due to increased costs."; that their position is that all of the properties are exempt from taxation under NDCC Section 57-02-08, the North Dakota Constitution, Article X, Section 5, and/or NDCC Section 23-11-29, that these sections address the use of properties for the provision, in whole or in part, of public charity, and the legislation creating housing authorities. He stated that these properties house elderly families, families with disabilities and low-income families; that the rental properties have rents restricted by HUD or the IRS; and that residents are required to pay only 30% of their monthly income toward rent and are also eligible to receive additional services at minimal or no cost, including access to computer labs and training, after school programming, access to Resident Service Coordinators, meal sites, and more. He stated that the information provided with their applications clearly show that a public benefit is provided by these properties in our community and that it is their position that all properties under discussion do provide charitable service to their residents resulting in a benefit for the entire Grand Forks community; and asked for assistance as they move forward with this process.

Mr. Carsen stated they shouldn't confuse the Housing Authority with Grand Forks Homes, all of the Housing Authority property has been exempted starting in 2008 based on 23-11-29 and only one that is an issue is Ruth Meiers which has applied for an abatement for 2006 and 2007 and that property is owned by the Housing Authority. The rest of the property is owned by either Grand Forks Homes or Homestead Place, MDI LP, Continental Homes, etc. who are non-profit corporations under the direction of Terry Hansen but not Housing Authority property. He stated his suggestion is this, that law 23-11-29 allows for property tax exemption but also allows for payment in lieu of taxes that is agreed upon by the Housing Authority and being the 2006 and 2007 taxes are already paid, thinks that constitutes their agreement to pay those taxes, and has exempted 2008 and that is his recommendation on Ruth Meiers property.

Mr. Melland stated they would have to dispute that position. Mr. Hansen stated hard times started over the last few years with various properties, that not experiencing hard times with the Ruth Meiers property but because it is exempt from taxes and that they are seeking the abatement, and to assist the Housing Authority with its other operating costs overall. Christensen asked for expense statement for the Ruth Meiers property for the past 3 years. Mr. Carsen stated that in the future they should talk about the possibility of assessing the Housing Authority for some sort of payment in lieu of taxes and is question for future date. Christensen asked Mr. Warcup to prepare a paper on waiver for them for council, but probably not make ultimate decision on Monday but will have to make a recommendation and have factual basis based upon the idea of waiver for that particular property.

Christensen asked relating to the other properties if they are owned by a 501-C3 organization, and Mr. Hansen stated that either the properties are owned by a 501-C3 or the entity that owns the property or controls the property is owned by 501-C3 with the exception of Continental Homes.
Mr. Melland stated the only one not a 501-C3 is Continental Homes (is a C4) and the Housing Auth. does manage that and that he agrees that management doesn't have any bearing on exemption or not. He also noted that interpretation of the 501-C3 designation whether it is required to be a 501-C3 under the provision of charitable housing, and thinks that is religious organization is tied to the 501-C3 status or to that - charitable is a term in ND Body of Laws that has not been defined.

Christensen asked if they were seeking the exemption because times are harder; and Mr. Hansen stated that with some of these properties it has become more difficult to meet the operating expenses; and that there has been an increase in the rental properties in Grand Forks but not so much a vacancy issue that they have but that costs are increasing to a point where they are exceeding the revenue, occupancy is 5% or less but are restricted on what they can charge in rents and when have to pay large portion of those rents towards property taxes, utility costs and other operating costs. HUD has to approve all increases in rent, and have tax credit programs which are restricted by the IRS Codes. He stated that on a 5-year basis they have to supply to HUD a market needs assessment and that shows HUD what the local market is and HUD will not allow us to exceed those rents in our structures; and if increase to the market rent have to justify why; that every year they can go back for an adjustment but they always bring us back to every 5 years we have to explain the market and they insure themselves that we are not exceeding the market. That they can go for an annual increase and have done that. The increases for all the properties this past year they allowed us an $8 to a $10 per market rent increase.

Mr. Carsen stated that the rents on the 5-year rotation are established based on a survey that is done every 5-years based on new rentals for the last 15 months and based on that survey they can charge rent based on the 40 percentile of that rent from the survey, that there is 40% of the rentals that are below this number and 60% above and in the ensuing years they are adjusted depending on the project but quite often for inflation - adjusted for increased costs in that project and at the end of the 5-year period there is another survey taken and may have to move the rents back a little because they have now exceeded what the market says is fair market rent. Mr. Hansen stated to some extent that maybe correct, that if they can show that the costs have gone up, they will allow us to increase our rents to cover those costs provided we do not exceed the market rent. He stated one of the projects, LaGrave Place, that they are addressing today and they look at the market rate for that unit, and say that you cannot exceed these rents and will allow you to get to these rents if you can justify that your costs are there - that the services that they provided at LaGrave Place, a neighborhood network center, a resident service coordinator, after school programs and a lot of other services that charges cost to the operation and if those costs go up, they don't necessarily cover those costs if the rents of the units would exceed the market rate units. He stated the issue they are trying to address today is not whether or not they are charging the market rate units, is whether or not they are providing the charity to the residents of the units of the families that live there, and that is what exempts these properties from taxation is that they do provide the tenants a charity. The charity is that they only pay 30% of their income towards the rent, anything above and beyond that 30% of their income up to the operating costs of the project is the charitable contribution to that family - they are receiving a charitable benefit by residing in those properties - that if they have zero income there rent is zero and do have properties where we actually issue a check to the residents every month to help them pay the utility bills but that is different program.

Mr. Carsen stated he maintains that the rent received from the tenant and the contract payment makes the owner of this project whole, the two equal market rent and that is in every single case; if the rent is $25.00 to the tenant and the market rent on that rent is $500, the contract pays $475.00, so there is no charity in his opinion provided by the owner of the project. It is no different than if there is a federal voucher housing program and if you live any place else in town, you might qualify for a voucher where you only have to pay $200/month rent and the voucher pays the other $300 - that if he owned a 4-plex and had 4 vouchered tenants, is he providing charity to those tenants - no he isn't, that he is collecting $200 from each tenant and $300 by way of a voucher - this is the same analysis.

Gershman reported present.

Mr. Melland stated one of the fundamental differences between our understanding of the law in this area, and the law in this area and what is different between the example of the owner who operates an apartment building and has 4 vouchered tenants is that in most cases is a "for-profit entity", and the cases that discuss this issue talk about whether or not the project or the purpose of the entity is operating with a view towards profit - that even making a profit in the Evangelical case that was discussed by the court and was stated by the Supreme Court they are happy that this organization is able to make the profit so they continue in their operations - that their revenues would exceed their expenses and therefore continue to allow them to provide this benefit to this group of people that have been deemed worthy and in need of aid, and that the issue that they look at were private inurnment which is whether or not those revenues or whether there is a surplus goes to any individual, and in all these cases with the exception of the possibility of Westgate or MDI that is the case. All the entities have restrictions in their by-laws that their assets and/or purposes are dedicated to providing low income housing, upon dissolution if the entity were dissolved and go away, the assets of that entity are dedicated to that similar purpose, that is the understanding of the Supreme Court as expressed and as he understands it from the cases that have addressed this topic; they don't look unfavorably at the fact of making a profit in the provision of these services but rather that there is no private inurnment and there is a benefit to the community, provision of housing for the needy or those who but for their subsidy or aid would not be able to provide or have this housing. Carsen stated that is no different than a 4-plex he might own that he would rent to 4 vouchered tenants, providing housing. Melland stated the difference is private inurnment.

Christensen stated that anybody who owns rental property is to own it in a 501-C3 organization, pay taxes on the profit and would be income he would have to pay taxes on, but when dissolve the 501-C3 whatever he had left would go to charity; in the meantime he would own it and operate it and have pleasure of it as a owner - and that in the cases he has read, 501-C3 - there are two tests, 501-C3 or the nature of the organization is a throw-away, and get down to what is the charitable purpose - hasn't had a chance to study everything they have presented but doesn't see where much different than Riverview Place case. Hansen stated that the differentiation between the two is - that Riverview Place charged a full rent to cover their operating costs to the tenant and then the tenant was required to supply them with their financial statements to show that they had the resources themselves to pay the rents in the future without subsidy, but what they do with these properties is provide housing to families regardless of income and the families only have to pay 30%, that any part of the cost of the operation is over that 30% is a charitable benefit for the resident - they are getting their housing at a reduced cost due to their income.

Melland stated there was a big difference in the Riverview case, was no requirement of demonstration for need and that was the turning point in the Riverview case for the court, in that they were a charitable entity and provided services to the elderly, one of the things they have discussed and is consistent in the law as respects the elderly without an issue of need - there has to be something more than providing them the space, have to provide them some other services and in the elderly context, one of the issues were Riverview failed was although they provided this "catering services and a lot of other amenities", they were all done at a fee basis based on an ability to pay as opposed to the Evangelical case is a good contrast out of Devils Lake as they allowed the case and discussed the issue of need and provision of subsidy to fix only 64% of the tenants were subsidized in the Riverview case; the issue we have with these properties which they are presenting today is that every tenant has to qualify, not on the ability to pay, but qualify because they cannot pay the full market rent. There is no interest to do harm to anyone, least of all the tenants, the purpose of these entities and their charters which are dedicated to these purposes, they use regulatory agreements which control the property and dedicate those properties to these purposes; there is no interest to do any harm to the city, can't speak on behalf of the Boards, but purpose of being here today is to acknowledge that these properties under the law in the State of North Dakota are exempt, either under the constitution or the statute based on the current case laws interpreting those provisions; the second step is the statutory procedure doesn't provide how do we move forward from here He provided some additional supplemental information today, that there was a report published by the ND Housing Finance Agency dated January 5 of this year that talks about the state of affordable housing in ND, and it highlights in one instance the situation where we have low income wage earners who don't have the ability to pay their rent and highlights the need that we have need in our community, and also provided a recent copy of an article in the Grand Forks Herald on food stamp issue and increase in cost, and gave information and supplemental material about the increase in waiting list of "eligible families" for which there are no units available.
The vacancy rate for these units is equivalent to the market - Mr. Carsen stated the vacancy rate on these units are typically quite a bit less than the typical market apartments, market apartments fluctuate more, and these are full most of the time and in fact a waiting list for every unit, and when vacant, it is filled. Mr. Melland stated there is a great need in our community.

The question was asked what average wage would be for person who qualifies for the $500/mo.; Mr. Hansen stated to pay $500/month, that would be 30% of their income, have income of $20,000/year or $9.62/hour. and that includes utilities, and to be able to afford a unit that charges $500/month in today's standards, assuming 30% of income, and have $9.62/hour job to pay that. That if have to pay utilities over the $500 then exceed that dollar amount - those wages do not support housing in the state of ND

Mr. Hansen stated that in 2005 they completed construction of $1.2 million facility between two of these projects, Cherry Heights and Oak Manor, both elderly disabled properties with total of 138 units; that they were assessed an additional million dollars plus or minus to the facility for that property, the rents did not go up to cover the additional taxes on that property, and have been struggling on that property for the last 3 years and that property has shown a negative every year in its operating because to cover all the additional costs, haven't been able to do that with the rents provided. Another facility is Riverside Manor, that property is experiencing a negative cash flow - that property received a 12 year tax exemption from the City when rehabbed and developed into
a rental property, that exemption went off in 2007 and taxes were increased $20,000 + or - dollars that were paid in 2008, and seeking relief for that property so not obligated to pay those taxes All of the properties are feeling squeeze between operating costs, and federal government is restricting more the allowable rent increases they are providing these properties, and looking at all they can do to reduce operating costs, and this is one of the primary costs these properties have and with their belief that these properties are exempt from taxation as supported by the Constitution and Century Code and to give relief to these properties.

Mr. Hansen stated they have a ceiling on their rents and that the operating costs have exceeded the rate they are allowed to increase their rents; they did that with Oak Manor facility, and has rent increase that takes effect January 1, and when they submitted a proposed rent increase for that facility, asked for a rent increase showing operating costs that include the current taxes and utility costs for that property and they denied the increase to cover those costs because not in their regulation, they could only go so far, and that has to do with their market studies, that they cannot exceed the market rate and if can justify one year that their rents exceeded the annual adjustment factor that was provided , they will allow us to provide a budget abatement up to what the 5-year study shows provided to date - they hold us to their market studies. This is all project based assisted housing, not public housing - HUD has had that issue with public housing and voucher program for many years, there is a greater need for both public housing and vouchers than funds available through federal government and that argument has been made to the federal govt. through Congress for years to put more funding into assisted housing of any type and they have refused to do so, but have actually reduced the amount on an annual basis they have put towards housing of any kind

Council Member Christensen asked what cities in ND have afforded property tax relief - that the A.G's opinion didn't afford them - they said if the applicant establishes charitable purpose, would like to know what are the facts that you would be presenting to the City and County as to what the public charity, not needs for these organizations but what is the public charity. Mr. Melland stated providing housing to those people who cannot afford to pay. The charity they are providing our residents is the difference between what the tenant pays and the subsidy, tenant getting the benefit.

Christensen stated what is charitable purpose providing housing to those people. Mr. Hanson stated that the charitable purpose of these properties is to provide decent, safe sanitary affordable housing for the less fortunate of the community.

Mr. Gershman asked what is the gross amount if the council granted all of the city portion. Mr. Hansen stated to include Westgate Village which is also requesting the exemption, it is approx. $310,000 in total annual taxes paid by all of these properties, the City portion of that would roughly be $77,000.

Christensen asked if there were any additional facts. Mr. Melland stated they have provided materials contained in the record. John Warcup, asst. city attorney, stated he didn't have any questions at this point, and not sure if the committee wants to make a recommendation, could or that this matter will go before the full council. Christensen stated they should take it to the council and not sure if make decision at that time, as important decision; and if they have any further information to supplement it before going to the council. He also stated they would have to address and determine what the charitable purpose is.

Mr. Hansen stated they would like to add at the end as they are basing a lot of this on the Constitution and the Century Code, that the constitution originally was subject to interpretation by the Legislature, self implementing, and that in 1918 the people of ND changed the constitution because they did not believe at that time that it was being interpreted the way it was meant to be interpreted by the ND Legislation, they wanted it to be self executing and that we want this project to be tax exempt if it has a charitable purpose and is providing a benefit to the citizens of this state, and that he believes that this property that they are representing today does provide charitable purposes, not just the residents that live there, but for the community of Grand Forks, but for these properties where would these people be living - living not in Grand Forks and would not be available for our community to enjoy and have people working in the service sectors earning the wages they are earning or would be living in poverty in this community - more people living under the bridge and living in conditions that would be intolerable for anyone to live. That is the charity these properties provide these families.

Mr. Warcup stated that at this point the council would give a recommendation to the County Commission who would then make the final decision, council gives merely recommendation, and that Mr. Carsen had some matters set up for public hearing on Tuesday. Christensen stated important that council persons have an outline from the attorney as to what we can consider as to the facts in arriving at our decision, wants it to be in form and reason, and also have other people in the community that are in this business for a profit.

Mr. Carsen stated that before we leave should address Westgate Village. Mr. Melland stated they are talking two different parts, one is 2006 and 2007, where they have asked for a reduction in taxes because of number of construction issues - property is on edge of city limits on N. 55th Street - 64 units - that they lost significant amount of money in 2006 and 2007 and as a result of that, owner sold the property to a non-profit in 2008, Community Venture, as they do affordable housing, sold it for $1.00; and property is in a position where they are doing the same thing - providing lower income people with a place to live; and what they are asking in 2008 is an exemption for them. Because of the arrangement with the people that buy the credits, have to help them continue for the next 6 years or so; Housing Authority manages this.

Mr. Hansen stated good majority of people have vouchers that rent that properties, they all have to be 60% or less than the area median income, depending on family size, in order to be eligible to live there, low income families - there are a few units that families cannot exceed 30% of the area median income. Section 42 of the Internal Revenue Code upon which these properties were built requires that any tax credits can only go to units that families earn 60% or less. Regulations also dictate what the maximum rents can be and that includes utilities.

Mr. Carsen stated the rent is restricted to 60% of the median income which is higher than the rent they are collecting, rent they are collecting isn't even up to what the limitations are and on back side of this project is a federal income tax credit that actually built this project, new program for subsidized housing, have many other projects in town that are very similar to this. Tax credits in Attorney General's opinion doesn't think he included the benefit of the tax credits when he made the determination or his opinion, doesn't talk about the tax credits - tax credits in his opinion very, very lucrative and over a 10-year period probably pay for this project, $5.2 million over a 10-year period.

Mr. Melland stated the proceeds from the tax credits certainly helped build the property, that they were involved with the A.G.'s opinion in Minot, they had similar project and had tax credits but in order to make it work they needed the tax exemption, that is why the A.G. basically gave that opinion and that is why the City gave the charitable purpose.

Mr. Hansen stated that the tenant cannot exceed 60% of the area median income and the maximum rent is based on 30% of that 60% and is the maximum rent. He stated the rents are restricted to 30% of the income of a 60% income person and can't go beyond that and credits come in to help buy down that property to a point where those rents will not exceed that and looking at the tenant and saying, you will not have to exceed 30% of your income to afford a very nice units, but only tenants eligible there are low income people.

Mr. Melland stated that tax credits as a concept with relative to the exemption abatement issue, has not been discussed in other cases - it is a financing mechanism to the issues that are addressed by the constitution. Mr. Carsen stated there are two things that would apply in the face of that, Section 57-02.03 says in part, "all properties state is subject to taxation unless expressly exempt by law"; the other section 57.02.04 and part of that says, "all rights and privileges thereto belonging for anywise appertaining is taxable; the right to receive the federal tax credit is one of the rights of that property and he maintains it needs to be included, that is one of the rights of ownership and can't be set aside and can't tax that, some states have said that the tax credits are assessed and add that to the rent and assess them, other states have said that the tax credits are exempt and not taxable, only assess the property; in ND the legislature has not made a determination whether to assess them or not. The law says we have to value all property and have to value all the rights and privileges and when do tax credit property they value the same as a market based property, don't add for the tax credits and don't deduct for the reduced rents. That for a 10-year period the value would be high if going to use the income from the tax credits, but the income from the tax credits is equal to the rent received from the tenant, and equivalent to $730.00 per month per unit and that is the amount of the tax credit - this is real money and to disallow that or not include that in the valuation would be ludicrous; that is one of the rights and privileges of ownership of that property, have not added for it, just valued the property the same as any other property of like construction. They addressed that in 2003 legislature and considered assessing subsidized properties differently than other properties, didn't get out of committee.

Mr. Melland stated they did provide a copy of current legislative bill before the House and Senate Bill 1200 in their supplemental material, which is intended to address cost of fire, police and services of the community for exempt properties in the State of ND, that was in committee today in the Legislature, they are looking at it and is an attempt by reps. in Burleigh Co. to address this issue again as a backside of the exemptions, and addresses only exemptions under the statutory provisions. Mr. Carsen stated under four different provisions, charity would be one of those where the City could charge for or tax charitable institutions for fire protection, police protection and safety.

Christensen stated first of all have to determine if it is a charity, and what constitutes a charity - and that would be what looking for from Mr. Warcup is what do we consider when considering a charitable purpose.

Mr. Melland stated it gets down to private inurnment under the statute and there is no private inurrenment because to the extent that you are for profit owner operating a facility and you generate the gross rent for a profit or loss, your purpose is operated with a view towards profit and that is how the distinguish it in ND. Mr. Hansen stated that is what the A.G. said in the Minot opinion, he agreed that constitution wise if there is a charitable purpose for the property, it is exempt and left it to the City if there is a charitable purpose with that property. Mr. Melland stated that the constitution doesn't care about ownership, its charitable use; statute ownership and use.

Christensen stated that if they don't have an opinion from Mr. Warcup will have to postpone the hearing. Gershman stated that is why he recommended that they talk about that at a work session.
Mr. Warcup stated that there may be members of the public that would appear at that hearing on Tuesday, and would want to hear any members of the public that are available and want to speak on that, that they could continue the public hearing on Tuesday.

The meeting adjourned at 5:30 p.m.

Alice Fontaine
City Clerk