The Babbitt city council accepted a $4 million bid for the West Babbitt housing development project. Rachel Contracting had the low bid at $4,049,068.63.
Additional costs include $393,400 for engineering. The city has a $2 million state bond grant and $1,450,000 from IRRRB.
George Eilertson participated by phone and gave an overview of the financing for the project. He said after the bonding grant and IRRRB funding, there is a $992,000 financing gap for the project.
However, that does not include any contingency monies for the project. The council later added $200,000 for contingency.
Eilertson said the city can issue general obligation bonds for up to 30 years. He said the city has an A+ bond rating currently and can get a AAA backing with state backing. This would drive down the interest rate for the bond.
Proceeds from the sale of lots could be used to pay off the bonds. Eilertson said he would work with the city on determining the exact length of the bonds.
Mayor Andrea Zupancich asked what the yearly payment would be.
Eilertson said that based on a 15-year financing, for a $1 million bond, the yearly payment would be around $93,000 per year. Going to 20 years would change the amount to $78,000. The principal could be paid off early if lot sales go well.
Lot sales would generate up to $1,190,000 if all lots are sold at the currently listed rates, although the council seemed open to changing the pricing to raise additional funds. There are 12 single-family lots at $45,000 each, six premium family lots at $75,000, and an eight-acre multi-family lot at $200,000.
However, the total payout could be more than the revenues for the project. At 15 years, the total payoff would be $1,428,073, leaving a shortfall of $435,000. However, that number does not include a $200,000 contingency fund.
Eilertson said there could be some flexibility on paying off the bonds early. He said moving up the payoff date would also reduce the cost for the project.
“If there is good demand for these lots, you could look at a five-year call date,” said Eilertson. “But you might get a slightly higher interest rate.”
Jason Chopp of SEH Engineering advised the council to add five to 10 percent for contingency costs.
Council member Jim Lassi said when the lots are sold in addition to the one-time funds, there would be continuing additional tax revenues.
“The PUC would also be getting revenue,” said Lassi.
Chopp said he spoke with Rachel Contracting and they could get started this fall but can bring in more crews to meet the construction deadline of next September.
“We need to fish or cut bait,” said Zupancich.
“Unless we get moving on it, Babbitt is never going to get any further,” said Lassi.
“This will bring more tax base, more funding, more kids,” said Zupancich.
Council member Duane Lossing said there needs to be a breakdown of the numbers to show the tax impact on an average house in Babbitt.
Lossing asked about the potential to deal with removing rock in the project.
Chopp said there are funds built in for dealing with rock. He said the amount is about $33,000.
Eilertson said new clerk-treasurer Nancy Sanford was correct that the funding would need to be in place first. However, the city would receive interest income to offset the cost of borrowing the money first.
Sanford said she didn’t know what the date would be to have all funding in place in order to receive state funding.
The council debated waiting to approve the project until all of the funding was in place.
Chopp said a delay in approving the low bid could cause the project deadline to be extended. He said the city would have to give final approval after the documents are signed by the contractor.
There is also the unknown cost for Minnesota Power to install underground power to each lot. The budgeted cost is $250,000 but that could change.
The council voted 3-0 to award the $4 million contract with Joe White absent and Lossing abstaining due to what he said was being contacted by a contractor that bid on the project.
The council also voted to set a five percent ($200,000) contingency for the project.
When it came to funding, Eilertson recommended contracting with his company, Northland Securities, to prepare the city’s bond for the project. He said this would likely be a 15-year bond with an early payoff date.
Eilertson said if the city could get funding from the Minnesota Public Facilities Authority, the interest rate could be lower. However, Chopp said there is normally a one-year timeline to get those monies.
The council decided to wait on awarding the contract with SEH for the project management at a cost of $393,400 since it wasn’t included on the agenda for the meeting.
The council will also take another look at the price of the lots.
