Sioux Falls' partner on affordable housing warns subcontractors about slowing economy

SIOUX FALLS — The company that is partnering with the city of Sioux Falls on an affordable housing project recently warned suppliers that payments will be delayed because of the slowing economy.

But officials with Nielson Construction say that a sluggish housing market doesn’t affect the viability of the project in northeast Sioux Falls, which was awarded $2.1 million in tax increment financing by the city council.

“We are a financially sound company,” owner Kelly Nielson said in an interview with Forum News Service. “The TIF project has nothing to do with what’s going on in the market right now.”

The council approved the package in October to offset the cost of the infrastructure for 65 single family homes. The financing allows the prices of the homes to be lower than they would be otherwise.

The homes will range from $232,000 to $323,000, which is below the cap of $340,000 set by the state’s first-time homebuyer program.

The council’s approval of the TIF comes as overall housing sales have fallen sharply amid rising interest rates. The Federal Reserve has hiked the prime rate for lending six times in 2022. Those increases were intended to temper economic activity and reduce inflation.

As a result, the once red-hot housing market in Sioux Falls has cooled considerably.

Nielson Construction was building 18 new homes a month in 2021. That is down to four homes a month, the company said in a release.

In an email to subcontractors and suppliers, Josh Nielson, construction operations manager for the company, said the slow sales are affecting their ability to pay the bills.

“We are in a weird place right now with sales continuing to be slow. (We have) taken multiple steps to try to help this, but at the moment sales are just not moving,” he wrote. “... (C)ash flow is short and there is going to be some delays on getting paid for invoicing.”

Copies of the email circulated among city officials this week and was first reported by The Dakota Scout.

TIFs were initially established as a tool to help spur economic development in targeted areas where developers are seeking to build new businesses and income-generating properties. However, TIFs have now evolved to facilitate other projects, including housing developments. The increase in property tax revenue in the area being developed is what funds public infrastructure improvements and pays back the government entity that approved the project.

The Nielson project is the first time the city has used a TIF related to single-family housing.

It also comes at a sensitive point for city councilors stung by the Village on the River project, which fell through in 2019 when the partner in that deal wasn’t able to meet financial obligations. A hulking concrete parking ramp on east 10th Street in the heart of downtown is the only piece of the Village on the River project that was finished.

The city is in the process of finding new developers for the ramp space, so it is moving forward. But the ramp is a regular reminder of the risk of public/private business deals.

Village on the River was put together under the Mayor Mike Huether’s administration. Current Mayor Paul TenHaken negotiated a settlement that freed up the space to move forward.

While they are different administrations, and suburban housing isn’t a downtown hotel, the email from Nielson is a cause for concern, said Councilor Pat Starr.

“Of course it concerns me and it gives me more questions than answers,” Starr said in an interview. “We were assured that everything was fine with the parking ramp project multiple times until it imploded.”

That doesn’t mean the affordable housing project with Nielson is in danger. But Starr would like more evidence of financial due diligence from the TenHaken administration.

“‘Trust me’ doesn’t work anymore,” he said.

Jeff Eckhoff, director of planning and development services for the city, said an internal committee examines the financial plan and business history of any potential project partner.

“We have great confidence in Kelly (Nielson),” Eckhoff said. “He has a tremendous track record and heart for this kind of work.”

A big difference between this housing project and Village on the River is that there’s no risk for the city, Eckhoff said.

If the housing market were to completely collapse or the deal were to go bad for other reasons, the city won’t lose money. Any debt is still the responsibility of the developer, he said.

“I applaud the city council and I applaud Kelly for working with the city to try and bring a market-based solution to the problem,” he said.

Kelly Nielson said the email was intended to let their contractors know the reality of the market. Slow sales forced the company to finance projects that once it could cash-flow, which just takes more time.

And there are just going to be fewer houses built, he said. Nielson Construction currently works with about 200 subcontractors. They won’t need that many in 2023 and the email was intended to communicate that, he said.

“I can’t keep all 200 trade-partner families,” he said. “I can’t keep all of them alive.”

That doesn’t mean the affordable housing project with the city won’t go forward.

Work is underway putting in utilities at the site, which is near Madison Street and Veterans Parkway. Building will start in the spring. The plan is to break construction into thirds. Demand will determine when the next phase will start, he said.

Nielsen said it was frustrating that the email was getting circulated, or suggested a broader problem with the company.

“I’m as financially sound as any contractor in town,” he said.

Starr said he appreciates that sensitivity but that’s what comes with doing business with the public.

“They are builders, not politicians or public relations experts,” he said. “There is a higher level of scrutiny when you’re dealing with taxpayer money.”