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Columbia Heights plans America's first city hall in a luxury apartment building

Columbia Heights is using a Trump-backed tax break to help a real estate developer build its new city hall at 3989 Central Avenue Northeast.

Columbia Heights is using a Trump-backed tax break to help a real estate developer build its new city hall at 3989 Central Avenue Northeast. Zoe Prinds-Flash

At the end of September, in a meagerly attended City Council meeting, the blue-collar suburb of Columbia Heights decided to build a new city hall in the doorway of a luxury apartment building.

Such a marriage had never been attempted before, as far as city staff could tell, anywhere else in America.

Mixed-use properties—shiny flats with rooftop pools balanced atop breweries and boutiques—are the Twin Cities’ current development obsession. Members of Minnesota’s congressional delegation rent local constituent offices in private office buildings. But for a city to buy a 20,000-square-foot condo, almost the entire ground floor of a high-end apartment building, and call it the official seat of government? Columbia Heights would be the first.

Luxury housing developer Alatus, which recently canceled long-suffering plans to build a 40-story condo in the St. Anthony Falls Historic District, would be responsible for the new six-story building at 40th and Central, where an obsolete business center, the former home of Northeast Bank, now stands.

If Columbia Heights ever wanted to create a destination downtown, with places to dine, shop, and enjoy nightlife, this prime parcel would be its nexus.

Its high potential for commercial development was what qualified it for lucrative federal tax breaks handed out by the Republican Congress of 2017.

In addition, Alatus requested financial aid from Columbia Heights—up to $43 million worth of subsidies that would otherwise go to schools and roads. The city taking it upon itself to purchase space would further insure Alatus’ success.

Council members spoke of the proposition as if it were too good to refuse.

They reasoned that purchasing a piece of someone else’s development would be a cheaper way to get a new city hall than constructing fresh. The city and the building could share maintenance costs and parking. When the roof needed replacing, they’d split that burden too.

Unanimously, they voted to both subsidize Alatus and buy into its building.

Their decision came just three business days after the city hosted its first and only public engagement meeting introducing the concept.

The most heated critique of the vote and its undebated, long-term costs came from resident Sean Broom.

A progressive who ran unsuccessfully for the council in 2016, Broom was visibly red in the face as he delivered a fuming denunciation of the choice of a city hall that was cheaper “only in the most facile and short-sighted sense of the term,” made with “barely a sneeze of community involvement.”

“You guys are shoveling money into Alatus’ pockets,” Broom said. “At the end of the year, when a bunch of developers get together and have drinks for whoever got the best deal, Bob Lux is getting drinks bought for him because he just got a great deal from the city of Columbia Heights.”

II. Holding out for a hero

North of northeast Minneapolis, the hustle of Central Avenue slows to a provincial pace as it wends through a smattering of auto shops, small restaurants, and neighborhoods composed of aging houses built after World War II.

At 40th and Central Avenue Northeast is the library, which was recently rebuilt after 15 years of decay, and only following a divisive referendum in which some residents felt its upkeep was less important than a tax increase of $40 a year.

Zoe Prinds-Flash

Zoe Prinds-Flash

A few blocks down, there’s a conspicuous cavity where Rainbow Foods used to be. Its closure five years ago left the city without a full-service grocery store. Hy-Vee once flirted with taking its place, but allowed its application to lapse while focusing on openings elsewhere in the metro.

Nearly one-fourth of Columbia Heights residents live in poverty—the highest rate in Anoka County. Young professionals, those most likely to pay a premium to live in apartments with hot tubs and spin rooms, aren’t flooding to the Heights. Where the population has grown, it’s done so among immigrant families seeking affordable housing.

Columbia Heights’ 2040 comprehensive plan urged the city to understand the needs of its lower-income residents, and prescribed building 133 affordable housing units over the next decade.

But shifting demographics have brought occasional cultural collisions.

In 2015, school board member Grant Nichols resigned after comments accusing Muslims of unsanitary bathroom habits surfaced on his Facebook.

And when the affordable housing developer Dominium attempted to build apartments on an old Kmart site, the prospect of new renters earning 60 percent of area median income caused an incendiary row at city hall in which some members of a local condo association, demanding the city spurn rentals, conflated density with transients sowing “disarray and neglect,” “noise and traffic,” and “gun wars.”

Columbia Heights has been trying to forge a path into the future for a long time. Replacing its city hall—a 60-year-old patchwork of quick fixes with water seeping in through the walls—is part of a long-range plan to redeem its reputation of neglect and blight.

Then came President Donald Trump to the rescue.

III. Cutting-edge tax breaks

In 2017, Congress passed Trump’s tax bill, a transformative package of sweeping cuts, which, in the nonpartisan Congressional Budget Office’s conservative estimation, would add $2.3 trillion to the national debt over 10 years.

One provision of that bill established “opportunity zones” in the poorest census tracts across America. The governors of each state got to choose them, so in Minnesota, counties nominated places that were supposed to be both low-income and ripe for development. Real estate investors who built there could avoid paying capital gains taxes as long as they held on to their buildings for 10 years.

These domestic tax shelters were designed to funnel private capital held by the richest Americans into the nation’s most impoverished communities. A win-win, in theory.

In practice, economists soon found, opportunity zones had only minimal incentive to accomplish a public service.

They were created in an industrial center in Nevada that housed a Tesla factory, a prison in Florida, and at the Philadelphia Zoo, according to a 2018 study by Brookings Institution economist Adam Looney. These locations only loosely fit the definition of “low-income” because they weren’t places where people actually lived.

Unlike other placemaking programs intended to uplift the least fortunate, like the Low-Income Housing Tax Credit for affordable housing, developers could build almost anything in an opportunity zone. As a result, lavish condos and high-end hotels are cropping up in neighborhoods whose longtime residents are now at risk of displacement despite their plight being the basis for the program’s existence.

“There was an impression that the process was opaque, was influenced by local developers rather than being based on the needs of low-income residents,” says Looney. “The whole thing is an amazing piece of work, to get the law passed. It’s a boondoggle.”

Columbia Heights’ downtown commercial corridor was designated an opportunity zone in the spring of 2018. Aaron Chirpich, the city’s community development director, says Columbia Heights promptly held a developer roundtable to advertise the former business center at 40th and Central, which had been vacant for three years, crumbling and occasionally burglarized.

A few developers were interested. Alatus rose to the top of the heap with a flashy vision of first-class, amenity-rich apartments to lure downsizing seniors and young professionals priced out of northeast Minneapolis. It proposed a product nearly identical to the Ironwood Apartments, a “luxury community” Alatus built in New Hope when Chirpich was community developer there.

Later, when Alatus learned of Columbia Heights’ desire for a new city hall, it drew up plans incorporating council chambers and staff offices, suggesting the city buy space onsite.

Staff came to believe that city hall made sense as an anchor tenant.

“We bring activity to that corner, and we have a stable presence,” Chirpich says. “So if there’s going to be some commercial or retail on the first floor, in their estimation, why not have a very solid partner in somebody that can stay there for 50 years, instead of a revolving door of marginalized retail enterprises?”

But Alatus drove a harder bargain still. Simply building luxury apartments in an opportunity zone wasn’t profitable enough. Alatus could demand higher rents in downtown Minneapolis, says Chirpich, so it would have to have financial aid in the form of tax increment financing (TIF) to build in Columbia Heights.

TIF, simply put, would freeze property taxes on the business center site. Additional taxes generated as a result of development would be set aside and reinvested in the apartment building and immediate surroundings. Normally, those taxes would feed the city’s general needs, county roads, and the local school district, but by forgoing its future income, Columbia Heights could subsidize Alatus even though it didn’t have the ability to do so upfront.

According to a TIF plan representing the maximum potential of the project, Columbia Heights would give up to $43 million over the course of 26 years to reimburse Alatus for the cost of land, site improvements, utilities, and a raft of other development expenses. The loss to Anoka County and local schools would be $1.6 million each.

Residential developments are the least sensible use of TIF schemes, according to University of Illinois-Chicago Prof. David Merriman, whose research has called for more careful use of this common public financing tool.

More housing means more families, and educating those children increases the burden on local schools—which would, by design, lose property tax revenue as a result of TIF.

Bankrolling luxury housing, which creates almost no jobs, is particularly hard to justify, Merriman says.

“Big cities will have a better chance of negotiating with a developer to get a better deal because they do it all the time, whereas they have more time and more sophistication,” he says. “Small cities, it’s very easy for the developer to have their way.”

Columbia Heights staff believe giving Alatus tens of millions in financial aid is justified. In their opinion, the business center building couldn’t develop without it, the market value of the property would never increase, and none of the foregone tax revenues would exist but for Alatus.

Moviegoers made their way to the historic Heights Theater Thursday for a screening of "Won't You Be My Nieghbor." ] AARON LAVINSKY • aaron.lavinsky@startribune.com Central Avenue is the iconic entry point to Columbia Heights, but city leaders know the busy thoroughfare could use some major TLC. They envision the area as a Twin Cities destination, with restaurants, bars, boutiques and fun stops at places like the historic Heights theater. Now they want to help existing businesses spruce up storefronts and breathe new life into tired exteriors. With a nod to the Great Streets program in Minneapolis, a new grant project will give up to 15 business owners along Central Avenue a financial boost for renovation work. We photograph some of the potential businesses Thursday, July 5, 2018 in Columbia Heights, Minn.

Moviegoers made their way to the historic Heights Theater Thursday for a screening of "Won't You Be My Nieghbor." ] AARON LAVINSKY • [email protected] Central Avenue is the iconic entry point to Columbia Heights, but city leaders know the busy thoroughfare could use some major TLC. They envision the area as a Twin Cities destination, with restaurants, bars, boutiques and fun stops at places like the historic Heights theater. Now they want to help existing businesses spruce up storefronts and breathe new life into tired exteriors. With a nod to the Great Streets program in Minneapolis, a new grant project will give up to 15 business owners along Central Avenue a financial boost for renovation work. We photograph some of the potential businesses Thursday, July 5, 2018 in Columbia Heights, Minn. STAR TRIBUNE

The TIF probably won’t be $43 million when in its final form. Costs could go down depending on the ultimate number of apartments and size of a small coffee shop planned for the ground floor. But in any case, the city plans to use TIF to reimburse Alatus for all eligible expenses under state law, says city manager Kelli Bourgeois.

Which includes land. This means that although Columbia Heights bought the business center building in July for $2.9 million with the intention of selling it to Alatus, the developer will ultimately reimburse itself with taxes that would otherwise go to the city.

“This is exactly how TIF works,” insists Chirpich.

Cities are not obligated to reimburse developers for all related costs, and are free to negotiate the breakdown of financial aid versus how much the developer must contribute, according to Jason Nord, an assistant state auditor who specializes in TIF.

The finding that development wouldn’t occur without TIF is also highly subjective, he says.

“Maybe a development that big wouldn’t have happened, but a smaller development would have. Or maybe the development wouldn’t have happened in the very near term, but one might have come down eventually.”

IV. Pitching the people

On September 18, the city held its only public engagementmeeting about Alatus’ city hall proposal. About 15 people attended.

Chirpich, the economic development director, put a small chart on a large easel comparing the costs associated with buying a condo versus building a standalone city hall. Sure enough, it looked as though taxpayers would save $5.5 million by going with Alatus.

Part of the savings required the city to give Alatus the municipal parking ramp next door to the business center building, which served area businesses, a local church with an aging population, and other residents in the winter months when overnight street parking was not allowed. In return, Alatus would credit Columbia Heights $2 million, which would be spent building a portion of the city’s condo.

The cost of the TIF didn’t come up for discussion. Neither did yearly condo dues.

Emails obtained from a data practices request show Alatus wants Columbia Heights to pay $20,000 for common area maintenance and $15,000 for 30 parking stalls annually. The total would be four times the city’s revenues from adding its parking ramp back to the tax rolls, and doesn’t include utilities, cleaning services, or a reserve fund for major repairs.

At the end of the night, Chirpich announced he would ask the City Council to make a “significant decision” at its full meeting on September 23.

That decision turned out to be the creation of the TIF district and a commitment to buy into Alatus’ project.

Connie Buesgens, an affordable housing proponent, was the only council member to express concern. Placing city hall—a fundamentally dull bureaucracy shop closed nights and weekends—on Columbia Heights’ main drag might be a lost opportunity to pump life into an otherwise fully built city, she pointed out.

And what happens when a contentious issue appears on the council’s agenda and irate residents crowd the chambers and the hallway, making noise, per their constitutional right? How would the city contain a protest with 500 roommates living on the floors above?

Buesgens’ colleagues were far more enthusiastic.

John Murzyn Jr., son of a longtime park superintendent after whom the community center Murzyn Hall was named, said he would support any option that could avoid raising taxes on Columbia Heights residents.

Bobby Williams, co-owner of Bobby and Steve’s Auto World, added, “As a matter of fact, the developer told me personally—we haven’t seen the numbers yet—but it looks like city hall may not cost us anything. That’s what he told me.”

City staff stepped in to inform Williams that, regardless of what Alatus might have said, building out the new condo would still cost Columbia Heights an estimated $2.7 million.

Nevertheless, Columbia Heights Mayor Donna Schmitt, who once announced on Twitter that “gentrification is a myth,” urged fellow council members to be brave and lead other cities by example.

“Everyone will be looking to us,” she reasoned. “It’s also creating a unique and marketable identity for our city. It has been mentioned, this has not happened before.”

Ultimately the council voted unanimously to approve financial aid for the Alatus project and become its first resident.

Some residents were taken aback, unaware that this city hall concept had been under consideration.

Amada Simula, president of the community building nonprofit HeightsNEXT, wishes the city had tried as hard to involve the public in the creation of city hall as it had for Columbia Heights’ 100th anniversary bash, coming up in 2021, and for which the staff have been gathering feedback for months.

Mary Tholkes, a Columbia Heights resident of 40 years, says that while the council has been discussing various ideas for a new city hall for a long time, the public had almost no time to understand the cohabitation situation, which seemed both nontraditional and impromptu.

For instance, condos are governed by a ream of contracts, but no one’s seen a hint of a draft discussing conditions on the city’s authority over its unit. Who decides when major repairs occur? How much would the city be on the hook for?

“The condo thing, it’s all rather nebulous at this point in time. What does that really mean?”

V. Winners and losers

Searching far and wide, Columbia Heights staff recently located another city developing an uncannily similar city hall concept: Oakland Park, Florida, a suburb of Ft. Lauderdale.

Its city manager, David Hebert, happens to be a sunbird who graduated from Farmington High and knows the Twin Cities well.

Oakland Park he compared candidly to West St. Paul: “older, settled, warehouse-y, not-the-belle-of-the-ball, the has-been, also-ran.” There are no fancy homes or shopping centers aside from strip malls. People only know it because they pass it on the way to the beach.

But as Ft. Lauderdale boomed, Hebert started to amass a list of goals for his forgotten city, including more housing, parking, retail, and entertainment. Hurricanes kept battering city hall, so he needed a new one of those too.

Incentives and subsidies are big down in Florida, Hebert says. But Oakland Park was too poor to titillate a developer with monetary offers. What the city did have were two acres of land, vacant for more than 15 years and polluted by an extinct autobody shop, where no one wanted to build.

So Oakland Park applied for and received opportunity zone designation. Then it named its parcel a brownfield so that cleaning it would yield tax credits that could be sold on the open market to recoup costs. Grants from various state agencies upgraded tangential roadways.

Oakland Park eventually found a developer to build two buildings in an area that hasn’t seen new construction in 40 years. They will be workforce housing for a working-class city, plus a combination of shops and restaurants. Across the street stands the landmark brewery Funky Buddha. To the north, one of the city’s premier parks.

“It’s going to be like St. Anthony Main,” Hebert says. “Small, quaint, bucolic.”

Finally, in order to sweeten the deal, the city decided to rent a penthouse unit for its new city hall. They’d pay for it with proceeds from selling the developer its land. The entire property would be taxed. The school district would get its cut. The county agreed to give Oakland Park its share for the first five years in return for facilitating a deal that would fatten everyone’s wallet.

“They’re not getting a check written from the city, no financial incentives, no subsidies,” Hebert says.

His redevelopment agency has been consulting residents and area businesses for a year and a half.

In Columbia Heights, a public engagement period of less than a week resulted in a very different deal. Alatus hasn’t yet purchased the business center parcel from Columbia Heights. The city hasn’t produced architectural plans for its city hall condo. The cost of the TIF will change as the rest of the project unfolds. Though many details remain unknown, Columbia Heights has officially committed to the global decision of moving in with Alatus.

When Chirpich talks about Columbia Heights seizing the opportunity to work with Alatus, the city official invokes faith. “The mantra of this development team has always been: We’ll take it as far as we can with the best information available to make each incremental decision. And at some point, you do have to step off and believe that you’ve got enough information to make a good decision,” he says.

Chirpich calls city hall’s placement “bold” and “cutting edge.” A futuristic model for other financially strapped towns in the years to come.

“We feel we’ve done the best that we can given the constraints that we’re under,” he says. “Because the broader development project is being driven by a bigger picture.”

A prior version of this story wrongly stated that Aaron Chirpich personally held a developer roundtable in the spring of 2018 to advertise the business center for redevelopment. Chirpich was not employed with Columbia Heights then. We regret the error.