Unsold properties a burden on Duluth school district

• Central High School

The view from the former Duluth Central High School is seen during a football practice in 2011. (2011 file, Clint Austin / caustin@duluthnews.com)

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• Duluth school properties

Central High School and Secondary Technical Center sit on 76 acres high above Duluth with what real estate agents would say is a “view, view, view!”

But Central High School has been closed for 18 months, and the technical center has been rented for a few months by the Federal Emergency Management Agency. While the Duluth school district has had six inquiries for Central, nine inquiries for Secondary Technical Center and two for Rockridge Elementary from public and private entities — its highest-priced properties — they remain unsold.

The effect of that and the remaining unsold properties has created a $16 million albatross around the school district’s neck, which means taxpayers almost certainly will be asked to pay more next year toward debt from the long-range facilities plan than originally projected.

The Duluth School Board votes Tuesday on an 11.9 percent increase in property taxes for 2013, which will help the district make its Red Plan debt payment for 2014.

Revenue of $16 million had been budgeted from the sale of properties still on school district books, including Central, Morgan Park Middle School and the Secondary Technical Center. Without that income, the district’s once-robust fund reserve is dwindling. With the reserve sitting at $3.6 million, the district must consider alternatives to avoid steering into statutory operating debt.

Why aren’t properties selling?

The district is working with Duluth broker F.I. Salter to market its properties. Superintendent Bill Gronseth said he has asked that the property listings be broadened from regional to national databases to cast a wider net. The property listings also have appeared on a local Craigslist.

Interest has been expressed in all the properties, said Natalie Hoff, an agent with F.I. Salter, who noted the market has changed dramatically since 2006 when the Red Plan was put into motion.

“We’re working with different parties, and they are all at different stages,” she said. “I can’t disclose who they are and what they are, but there are potential buyers at each one of them.”

The years 2010 and 2011 were difficult times to be selling larger commercial properties, said Dave Holappa, a commercial real estate agent in Duluth.

“The market is soft,” he said. “I have a number of listings that have been on the market for a couple of years. That’s not uncommon in the commercial business when they are large-ticket properties. It’s much easier to sell a $75,000 fixer-upper home than it is a multimillion-dollar commercial property.”

Investors also consider the end-use of the building and what it will cost them to rehabilitate, said Len Sarvela, president of the Duluth Area Association of Realtors, noting it’s not just about the price listed by the school district.

“The school district might be stuck in a situation where they can’t find a buyer to do what that particular building is best suited for,” he said. “If we take an older elementary school and the end-use is an apartment complex, if the rental market is not there, no one is going to put the money in.”

Greg Carlson purchased the old Kenwood Edison school from the district, which he is converting into apartments. His biggest hurdle has been zoning, he said.

“How can the school district sell a nice piece of property when the buyer doesn’t know if they can zone its intended use? It’s a lengthy process, and it costs money going through the zoning process,” he said. “You lose the interest of potential buyers and investors.”

Carlson said the district has been helpful, with staff members attending City Council meetings and advising him through the process.

“Reusing for a different purpose has been costly,” he said. “You have to get plumbing and electrical up to code. You have to have an architect to configure things for you. They have the vision.”

Gronseth said “reasonable agreements” have been reached with the city on zoning for redevelopment of the Central property, but it took a lot of time.

“Since then, money for developers is scarce,” he said.

A revised mixed-use plan for the 77-acre site was approved by the City Council in the spring.

Should the district lower prices, or sell to other schools?

Gronseth said the idea is to develop assets for the community and not merely to sell properties for “whatever they can get.”

“We care about what they turn into and how they are used,” he said. “We’ve had meetings with the city and the community about what they’d like to see developed at the Central site. We’d like to work with someone who’s going to respect and honor that. It’s more than just getting the money.”

Board Chairwoman Ann Wasson said the district has already lowered price expectations.

“They are great facilities and great acquisitions,” she said. “Whoever is looking at buying these is getting a great deal for the price they are at.”

But Harry Welty, a former School Board member and critic of the Red Plan, said initial price estimates made before the economic collapse — about $26 million for all properties — were “pie-in-the-sky.”

“They made unrealistic expectations on how much money they would make on sales,” he said, noting a general lack of buyers for old schools. “Obviously, they are trying to avoid more trauma in the classroom by raising taxes, because they haven’t been able to sell these schools for the absolutely unimaginable sums they thought they could.”

No K-12 schools have made offers to the district, according to business services director Bill Hanson.

But would the district consider any?

School Board bylaws say that closed schools can’t be sold for reuse as schools, but board member Art Johnston says that should be changed.

“It takes so much money to retrofit them, it’s a solution we should be looking at,” he said. “We’re not always here just to protect Duluth public schools from competition. People of Duluth pay for these schools. There is maintenance involved. … We have to keep heating them. I think they have to be sold.”

Wasson said she opposes selling to other K-12 schools.

Gronseth said the district would consider all offers, but it’s unlikely to recommend selling to another K-12 institution based on the School Board’s preference against it.

What happens next?

Unless enough revenue is earned through property sales to help make the district’s yearly Red Plan debt payment of about $4.9 million, taxpayers could face another increase in 2014. The $1.9 million that would be raised next year through the probable 11.9 percent increase isn’t even enough to cover the 2014 Red Plan debt. The district is gambling on selling $3 million worth of properties in the coming year to close the gap.

“People in town are furious,” Johnston said, noting the Red Plan isn’t “tax-neutral” as predicted by its manager, Johnson Controls, in its 2007 Review and Comment.

“The School Board and administration got themselves into that position by not minding the store,” Johnston said. “We have to quit denying we have a problem.”

But Gronseth isn’t willing to point fingers at anyone from the past for the district’s current predicament.

“When we’re in a process this long, you make the best decisions you can, given the information you have at the time,” he said. “I think it’s pretty easy to be an armchair quarterback and in hindsight say, ‘This is what I would have done.’ All you can do is go forward with the information we have now, which is different information than they had then.”

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