Iowa housing developer broke contracts with Duluth

DULUTH - Construction of 125 sorely needed apartments in the western half of Duluth is in doubt after an Iowa-based developer breached its housing contracts with the city.

Merge Urban Development Group is set to build 80 units of affordable housing in West Duluth and has begun work on a separate 45-unit building in Lincoln Park called Urbane 218. The larger of the projects was to receive millions in pandemic-relief aid, and the smaller project has already benefited from nearly $1.8 million from the city.

The Duluth Economic Development Authority recently notified the company it had breached several clauses of each project agreement. It has not provided records for a contractor and risk insurance for Urbane, and has left the building — in the middle of the Lincoln Park Craft District — open to the elements for months. Project costs and contractor contracts have yet to be submitted for the Residence, the other building planned near a city athletic complex. The developer has also failed to give the city other financial information and plans for that project by a set deadline. The company has 30 days to become compliant for each development.

If it doesn’t, the city will likely take legal action, said Chad Ronchetti, director of planning and economic development for the city.

Interest rates and costs during and after the pandemic have made development challenging, he said, “but we have to protect our community.”

A message left with Merge wasn’t returned.

Work on the $12 million Urbane project stopped months ago, and its general contractor has since severed ties. The city stands to lose nearly $1.8 million on that project through a $1 million Housing Trust Fund loan and nearly $800,000 in federal pandemic aid funneled through the city. The Duluth Housing and Redevelopment Authority gave Merge the land.

The building shell sits on the site of the former Seaway Hotel, destroyed by fire several years ago.

Construction on the Residence hasn’t begun, and no public money has been spent. A tax increment financing agreement with the HRA is in place, but the developer hasn’t yet benefited from it. It also hasn’t received $4 million in pandemic-relief aid the city had allocated for it. HRA executive director Jill Keppers said that project, with “workforce” housing rates in mind, would be an especially painful loss.

The apartments are planned for people whose income falls slightly under the average median number for the area, a type of housing the city has so little of, she said, but desperately needs. Many people in that category make too much for rent subsidy but can’t afford market rates.

And to see the Lincoln Park project continue to stall is “beyond frustrating,” Keppers said.

If Merge doesn’t meet its agreement stipulations, that building could be assumed by another developer.

A 2019 Duluth housing study said the city would need more than 3,500 lower-income homes, including workforce, and about 1,000 at market rate, by this year.

Several hundred low-income units are under construction through the HRA and other nonprofit housing organizations in town, including the 70-unit Skyridge Flats and the 52-unit Brewery Creek Apartments. But about 3,000 affordable homes are still needed, HRA data shows. The need for new market-rate homes has largely been met, the nonprofit said, and the type of housing that’s seen the slowest growth in construction falls under “workforce” rentals.

The city is planning an updated study.