Letter to City Council President Paul Ostrow

April 6, 2004

Paul Ostrow, President
Minneapolis City Council
307 City Hall
350 S. Fifth Street
Minneapolis, MN 55415

Dear Paul:

I am responding to the recent articles in the Star Tribune about subsidized development along the Hiawatha light-rail line. They suggest that Minneapolis taxpayers will be on the hook for large sums of money resulting in high real-estate taxes for many years to come.

The taxpayer appropriately pays for public infrastructure improvements that sometimes bring a windfall to nearby landowners. In this case, however, private developers want the taxpayer to pay for their own development costs. Further, if the developers do not own the land, they want the city to take it for them through eminent domain.

The case of the development project at Cedar and Lake merits particular attention because the principals are former City Council members. (I must admit that, after my experience with Jackie Cherryhomes, I regard any business deal with her name attached to it as being potentially suspect.) In this case, we have:

(1) a city-approved project on which only one firm bid. Potential bidders were given only 25 days to present proposals - an extraordinarily short time - with the knowledge that preparations for the Minn-Cherryhomes project were well underway.

(2) The project prospectively requires almost 60% public funding.

(3) The development group does not own much of the required land, so it will have to be taken by eminent domain if strong-armed real-estate agents cannot intimidate the present landowners into selling.

(4) Steve Minn stands to collect $ 1 million in developer fees.

All this suggests insider dealing reminiscent of the previous city administration.

I have two problems with this type of arrangement. First, there is the extra cost to the taxpayer in providing public subsidies for projects which, because of the proximity to light rail, ought to be viable on their own. Second, there is construction of “affordable-housing” units at taxpayer expense at a time when vacancy rates for rental housing are high. This means that I, as a rental-property owner, am being taxed to pay for a further surplus in housing units working to my disadvantage. These units will be owned by my competitors.

When apartment vacancies were low, I and other members of Minneapolis Property Rights Action Committee protested the city-ordered demolition of housing units that aggravated the housing shortage. We wanted a balance in supply and demand. Now that there is a housing surplus, the city is helping to finance a further surplus of housing which will push vacancies even higher. Shouldn’t the city let market forces decide what is the proper balance in housing supply and demand?

It’s true that much of the existing housing stock is not affordable for many people. Presumably, more supply means that rents will fall. Why haven’t they fallen that much? One reason is that real-estate taxes are so high.
I have owned two buildings for many years. On one property, real estate taxes have increased by 8% this past year and by 145% in the past four years. On the other, real estate taxes have increased by 41% in the past year and by 214% over the past four years. I poured huge sums of borrowed money into a third property, which was condemned, only to see its real estate tax increase by 305% during the past year.

City tax assessors are taking their cut right off the top of increased revenues which we might get from increasing rents - whether or not we actually do raise rents. But we can’t raise rents, at least not by much, because of the high vacancy rate. When I recently put an ad in Saturday’s and Sunday’s Star Tribune to rent the upstairs unit of a duplex at a reduced rent, no one called. I used to get a large number of calls whenever I advertised an apartment for even one day. Meanwhile, there is this continuing orgy of public money funneled to city-favored private developers....

Let me say that I think you, other City Council members, and the mayor are doing a reasonably good job in picking up the financial mess inherited from the previous city administration which is aggravated by policies at the state capitol. I would vote to reelect you. Also, I no longer have any cause to criticize city inspectors. I am disturbed, however, by the news reports about the continuing subsidies to politically favored developers which will generate big profits for them but whose expense I and other taxpayers will have to bear over the long term.

Above all, I’m worried that the numbers for staying in this business in this city no longer add up. I can’t stay financially afloat in an environment of exploding real-estate taxes and insurance combined with an oversupply of rental housing which will keep vacancy rates high and prevent rent increases to recover increased costs. This continuing business of huge public subsidies for the favored few adds insult to injury.


William McGaughey


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