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Property foreclosed on, leaving city with half-million dollar unpaid loan

What started as a promising project to rehab a historic but blighted city property and rent it to people with low incomes has the city of Duluth and its Housing and Redevelopment Authority worried it might have lost more than half a million dollars.

Eustone property
The Eustone property at 301 to 307 E. Third St. in Duluth. [2006 File / News Tribune]

What started as a promising project to rehab a historic but blighted city property and rent it to people with low incomes has the city of Duluth and its Housing and Redevelopment Authority worried it might have lost more than half a million dollars.

By all accounts, the rehabilitation of the Eustone property at 301 to 307 E. Third St. was a success. Two years ago, Twin Cities businessman Edward Yu was given a Duluth Preservation Award for restoring the blighted building designed in the late 1800s by legendary Duluth architect Oliver Traphagen and inhabited by Charles Salter, the first chaplain of Duluth's Bethel Association.

"By the 21st century," a May 20, 2006, story in the News Tribune reported, "those apartments were occupied by drug dealers, prostitutes and other tenants, more than a few of them unsavory."

In addition to getting a bank loan for $1 million for the building, which had been slated for demolition, Yu received more than $560,000 in loans from the city and the Duluth HRA. But after he failed to make the loan payments, the property was foreclosed on earlier this year, leaving the status of the loans up in the air.

In early October, the city filed a lawsuit against Yu in an attempt to get back $118,000 from its portion of the loans, granted through its utility energy conservation loan program. The city also gave $470,000 in federally funded community block development grant money, which the HRA administered.

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The HRA provided the loan through its rental rehabilitation program, which requires renters to meet certain income guidelines, according to HRA director Rick Ball.

"We're investigating options to recover the money," Ball said, referring those questions to the HRA's attorney, Dan Maddy.

Maddy said it's unclear whether that can happen. "I'm still investigating what our options are," he said.

Yu could not be reached for comment. His attorney, Jon Koneck, declined comment.

If the city and HRA aren't able to recover their money, Keith Hamre, the city's community development director, said they would have to write the loan off their books. It also would mean that money will be lost for future low-income multi-family housing projects, Hamre said.

Ball said it's unclear whether only low-income renters will be qualified to live at Eustone.

"It's one of the questions we're asking -- once it goes through foreclosure, do the terms and conditions continue?" he said.

But, said Keir Johnson, chief financial officer for the A. H. Zeppa Foundation, which purchased the property through a charitable trust, the units are open to renters of any income level.

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"As a practical matter, the units are small and don't command much rent," Johnson said. "That was always one of Ed's problems -- he was trying to get the rent higher."

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