Tennyson: CCH mess not entirely Gorsuch’s fault
Published: Thursday, August 29th, 2013
Local developer Mike Tennyson, a man instrumental in developing several of the facilities managed by Custer County Housing (CCH), isn’t among those who believe CCH, as constituted, can be rescued. In fact, he believes the exact opposite.
“I would say anything other than it can be rescued,” he said. “The best thing Custer County Housing can do is either fold or go through reorganization to rid it of outstanding debt and claims.”
Tennyson doesn’t say that lightly, having spent hundreds of hours helping CCH develop Trail View I, Trail View II and parts of Landover Estates. With the current state of CCH, however, he doesn’t see an alternative. He believes it would be better for CCH if it went into bankruptcy and had a judge restructure it to rid it of its current claims and debt.
“Currently, there’s nothing left. When you look at the way these projects are structured, there is no equity in them,” he said. “The board has great ambition, and I hope they succeed, but I think they are riding a dead horse. I think (CCH) is going to have to go through this maturation process at this point or die a very ugly death before it can begin with a clean slate. I just don’t know another way out of it. Simply put, a nonprofit housing agency does not have access to the huge amount of money it would take to resolve its financial situation.”
Over the years, Tennyson has acted as a co-developer and general contractor for CCH while working with former CCH director Connie Gorsuch. Sunrise Construction, of which Tennyson is part owner, built both Trail View I and Trail View II, and he served in an advisory role in the development of Landover III and IV.
Tennyson said all the projects he assisted CCH with in Custer had multiple sources of debt and equity in their financing. Low income housing tax credits, U.S. Department of Agriculture Rural Development loans and United States Department of Housing and Urban Development HOME Investment Partnerships Program money along with private bank financing were all used.
The situation can sometimes create a catch 22, because the tax credits aren’t any good unless the Rural Development loan is secured, as it carries zero percent interest. The tax credits are no good to a housing agency, because it has no tax liability. Therefore, the tax credits are sold through a syndication process to a limited partner that gives the project cash today for credits it is going to receive from the project over 10 years. Tax credit investors won’t give any money until the project is done and occupied, and Rural Development is the same way. Because of that, money is needed from a lending institution to get a project built and stabilized.
Because of all the subsidies, it doesn’t make economic sense for a bank to foreclose on the project if something goes awry, so someone with net worth must borrow the money for the project. That is the hat Tennyson wore for Trail View I and II and Landover III and IV, although he did not receive a developer fee or general contractor fee for the Landover projects.
“We had finished Trail View, and done so successfully. Contrary to comments from some current (CCH) board members, CCH was a very successful developer,” Tennyson said. “I will be the first to admit, although it was successful in development, its management and operations had room for improvement. (Former CCH director) Connie’s (Gorsuch) passion was creating affordable housing and senior housing. Her heart was in the right place.”
Tennyson, who has developed other low income projects similar to Trail View over the years in the state and region, said when dealing with that demographic, there are “special needs” that must be dealt with, whether it is financial needs or life choice needs.
“There is some coaching needed and sometimes you have to swing a pretty big stick,” he said. “I always picture Connie swinging a feather instead of a two by four.”
In Rapid City, Tennyson said his low-income projects always had a waiting list and there was hardly ever a police officer on the property. Tenants had a crime-free amendment in their lease agreements and if a tenant was arrested for a felony, they were immediately evicted.
“They were gone. End of story,” Tennyson said. “If you want to sit here and live for free, you’re going to have to be responsible for a few things, and your behavior is one of them.”
Tennyson said he never put a down payment on the land Gorsuch was eyeing for the failed Carriage Hills project in Hermosa, but, rather, loaned $50,000 (current CCH board members say it was $40,000) to CCH, which was used for a down payment on the Nadine Courtney land that was to be used. Tennyson said he gave CCH a one-year note and later gave an extension, but made it clear he was to be paid back at the end of the extension, which he was.
Tennyson said Gorsuch initially needed assistance in land planning for the project, and Pat Tlustos, a civil engineer he has partnered with on many projects, volunteered to help. Tennyson worked with Gorsuch on the numbers for the project, going through costs, possible profit and financing possibilities.
It became evident a Tax Increment Financing (TIF) District would be needed because the cost of the needed infrastructure would not be recouped by selling the lots. The TIF District was formed Sept. 20, 2005, and technically still exists today.
Tennyson had skin in the game because he planned to design and build the senior living facility serving as the anchor of the Carriage Hills project. CCH made application to the state for a low income housing tax credit and HOME funds to develop a senior housing project in Hermosa, which failed. Tennyson said there was a lot of competition at the time from other housing agencies and applications can only be submitted once a year.
Tennyson said the first red flag he saw in dealing with the project was when Marvin Bishop, who was a county commissioner at the time, surveyed and platted the land, which was subsequently run through the Town of Hermosa’s planning and zoning committee and later the Hermosa Town Board and was approved —meaning lots on the project could be sold, despite the fact there was zero infrastructure in place.
“It was the strangest deal,” Tennyson said. “I had never see that done and I didn’t believe it could be done.”
Tennyson said the normal way of doing business is that the infrastructure would be installed, or a bond would be put it place to guarantee the infrastructure is going to be put in place to protect future buyers.
Tennyson also disputes that the local bank never had any interest in the project. Quite the contrary, he said.
If the application for the senior housing facility went through, First Western Bank (now First Interstate Bank) was ready to commit to the project, and the purchaser of the tax credits—Citi Bank in Sioux Falls—was committed as well. Tennyson said former bank president Pat Walker, along with former loan officer Greg Mayes, worked hard on the project, meeting long hours, even on Saturdays, to get the project off the ground. When contacted, Mayes said he could not comment because of confidentiality.
The following year, the application for the senior housing facility was resubmitted and again failed. Tennyson said the reason was because the updated market study didn’t support the project.
“Connie was going out, taking census, getting commitments, yet when the professionals came to town to verify there was that need, they couldn’t get any verification,” he said. “The state housing authority kept nixing the deal because there was not enough documented demand.”
The second denial put the project in further peril, since a down payment had already been put on the land, but the economic engine that was to get the project started — the senior housing facility — was looking more and more unlikely.
The senior housing application was eventually denied a third time, so Tennyson and Mayes worked with the CCH board to look for creative ways to keep the rest of the project alive. Five property owners with land west of Hwy. 79 within the TIF boundaries (who would have benefitted from utility expansion, some of whom were CCH board members and Hermosa Town Board members) were asked to lay out projections for future use of their land. Those projections would help forecast tax revenue that could then be available to support the TIF loan. It was hoped that whatever the TIF couldn’t support, the sale of the lots would make up for. The TIF loan proceeds were to be used as gap financing.
The property owners laid out grandiose designs for the future, including motels, supermarkets, retail strips, apartment projects and even a bank. That meant, on paper, the TIF could easily work. To the bank and Tennyson, the projections seemed overly optimistic. Because of that, the bank structured two separate loans—a development loan and a TIF loan. The development loan was to be secured with the CCH land. Every time a lot was sold, the bank would give CCH a release and it would have to pay the bank a pre-determined amount. The bank was to receive 100 percent of the TIF tax revenue to retire that loan. In addition, the first $700,000 of profit from the sale of the land was to be put in an escrow account. The landowners involved were asked to personally guarantee their prorated share of the TIF loan.
The last stipulation, Tennyson said, was the “kiss of death.”
“It was basically calling their bluff,” he said. “None of them would do it. That decision sent a very clear message to me that they didn’t believe their own projections for future development plans.
“There was a conditional letter of commitment from (the bank). They shouldn’t be painted as the black hat in this. They were willing to do the deal. It was a fair deal, and it was reasonable, assuming the landowner projections proved to be realistic.”
While that negotiating was going on, Gorsuch hired an engineer, Ron Bengs of Advanced Engineering, who also served as the city engineer, to engineer Carriage Hills. The project was put out to bid, with Rapid Construction coming in as the low bidder. It was awarded the contract, despite the fact that there was no financing to move ahead with the project. This was in 2005.
Much of the urgency in awarding the contract was because Hurricane Katrina had just hit and the price of PVC pipe skyrocketed, as the plants that produced around 70 percent of the world’s PVC pipe was in the affected area.
Rapid Construction purchased the pipe, but Bengs would not issue the notice to proceed to Rapid Construction. Rapid Construction has since sued CCH and Gorsuch.
“Connie is probably the world’s biggest optimist,” Tennyson said. “That’s not all bad. That’s how you get things done sometimes. You have to believe in what you do. She really believed she could bring the project to fruition.”
Tennyson said the third failed senior housing application, along with the countless hours of work combined with the loss of his oldest daughter, Jill, in 2006 caused him to walk away from the project. That’s when Gorsuch hired Rapid City attorney Joe Lux to help with the project.
“I didn’t really understand what he was going to do. The TIF was done,” Tennyson said. “What she needed was a bank, and she knew that wasn’t going to happen unless those property owners stepped up and did what every other property owner does in a TIF, which is to provide the financing. They weren’t willing to do it, so it wasn’t going anywhere.
“What caused me to walk out of this deal was the day all those people providing us with all of those projections wouldn’t stand behind those projections. I felt if they didn’t have enough confidence in the deal, to the point they were willing to take the same risk any other developer takes when they borrow that kind of money and roll the dice, then we’re wasting our time, because that’s what made the deal work. It wasn’t developing 29 house lots (that made the deal work). It was ultimately developing the motels, apartments and retail centers. That was not in CCH’s control.”
Tennyson also contends that the TIF district is no longer valid, having already gone well past the five years allotted from the time the district is formed to the time construction must be done. After that, another allotted amount of years (generally 15) is given to pay off the debt.
“If you could spend the money over 20 years, what would be the incentive to develop anything today? You could go out and form TIFs, lock them up and start collecting tax receipts, then when you get enough tax receipts, go build the project,” he said.
Custer County auditor Linda Nelson said the Hermosa TIF is still in effect. For 2012 taxes payable in 2013, the amount of taxes to be raised is $31,661.59. The taxes are payable to the Town of Hermosa on a monthly basis if taxes have been paid in that month. That figure will change each year depending on the value of the TIF. Nelson said the county does not hear from Hermosa as to how the money is being spent, although CCH can present costs to the town, if it has any, to recoup some money.
Tennyson said the TIF is no longer an asset to CCH and is cheating the other taxing entities of much needed revenue.
“It’s not a bona fide TIF. Show me anything in the TIF plan that they have executed. There is no infrastructure. You have to build the project. You can’t just collect the money. They have no TIF loan. They have no debt to retire. That money is to service a debt that does not exist.”
Tennyson said he hasn’t been involved with CCH in over seven years, so he can’t comment on current operations, but said Gorsuch and CCH were very successful at developing much-needed affordable and senior housing projects in Custer.
“I can attest that Connie was operating with passion, commitment and optimism to achieve her goals,” he said.
He said he believes the failure of CCH should not be placed solely on Gorsuch’s shoulders, but rather, it is the past board members who should bear the responsibility.
“I feel the past board members have to bear responsibility for not fulfilling their fiduciary responsibilities to the agency they served,” he said. “They were the ones who should have demanded current and timely financial reports and improved management of their properties. Apparently, they had not been doing so for several years.”
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