Affordable housing deals get harder to make in Byron, surrounding towns
A deal for a second 47-unit apartment complex in Byron faces tough fiscal challenges.
BYRON — When the Bear Path Apartments opened in Byron in June 2021, the 47 units were filled within a few weeks.
With that kind of demand, building a second apartment building would seem like an obvious option, but getting it done is harder than expected.
"The numbers are getting harder and harder because construction costs are going up," said Ryan Nolander, a developer with Hamilton Real Estate Group.
The company built the original Bear Path Apartments and is trying to work with the city to develop a second building.
"Compared to our first project in Byron, costs have gone up $800,000 for the same project," Nolander said. "And now interest rates are creeping up, too. They were in the mid-3 (percent range), but are over 4% now."
The change is cost and interest rates, Nolander said, have made the margins on the deal tighter, and getting a deal done can be more difficult even if everyone — Hamilton Real Estate, the city of Byron and the rental marketplace — all want to make it happen.
In December, Hamilton sent the city a proposal asking for a 10-year tax abatement on the project in exchange for making 40% of the units — 19 out of 47 — available for individuals or families at 60% of the average median income for the region, which would qualify the development as affordable housing.
Janna Monosmith, the community development planner for the city of Byron, said the city is still optimistic that the deal for the second apartment complex will be completed, but the city and Hamilton Real Estate are still negotiating on the financial incentives that can help bridge the gap on the deal.
"They had proposed some new numbers a couple of weeks ago, and were bringing that to the EDA (Tuesday)," Monosmith said. "But they asked us to pull it back because they need to run the numbers again."
Without the assistance of a government entity, Nolander said, the numbers just won't make the deal work.
"Even with that help, it’s hard do do," he said. "It’s getting that skinny now."
Nolander said there are three levers that can be used to make the deal work: tax abatement or tax-increment financing from the city, increasing the rents for the apartments, or reducing the cost of the land for the project.
And you can only manipulate those levers so far, he said. For example, the rent amounts will be capped by what the market will pay.
The big problem, Nolander said, is that the price of lumber rose during the beginning of the COVID-19 pandemic, mainly because production facilities scaled back, and those prices have not come back down.
"The prices went down in the fall, but they jumped back up again," Nolander said. "It's significantly hindering construction of new product.”
And that's not just in Byron. Nolander said his company is looking at Owatonna, Kasson and others cities in the region, and the construction costs are making those deals more difficult as well.
Still, the need for more affordable housing in communities like Byron remains high. Every community is talking about affordable housing, Nolander said.
"But if we can’t find people to live there who meet the income requirements, then we're left with empty units," Nolander said. "And if we have empty units, we can’t make debt service payments."
Monosmith said the quick occupancy of the Bear Path Apartments shows how a development like that is needed as Byron continues to grow.
"We know people want to live in Byron, and they want to live in Byron at all different price points," she said. "We don’t anticipate that housing demand to decrease over the next 10 years, and rental housing is a segment of that population."
When it comes to growth, Monosmith said, the city used to think the first step was to develop new commercial growth. After all, commercial properties add to the tax base at a higher rate.
But businesses won't come without more residents, so housing developments are key. And a 47-unit apartment building — meaning about 70 new residents — is a big step in the development plan.
Nolander said low-income housing programs funded in part through the state can help, but the funds for those developments are limited, and in the past year only a couple of projects in Southeast Minnesota received funding.
"There's not enough dollars to go around," Nolander said. "Right now, we don’t have a solution."