Thursday, December 24, 2009

JNS BLOG HISTORY LESSON: Paul Koenig And The So-Called "Dream Houses" Fiasco...

(Not having a photo of a Dream Home, I have substituted this video as a kind of commentary)

The Pamiko Properties scandal which has dominated the attention of this blog lately is also drawing in commenters on the infamous Minneapolis issues list forum. One of those commenters was Steve Brandt of the Star Tribune, who re-posted some stories he'd written years ago about the "dream homes" debacle.

Since moving to NoMi only a couple years ago, I'd often heard there was a complicated story involved with the so-called Dream Homes, but I never had all the gory details laid out in front of me. These STrib stories tell a...

...lot of the tale, and since Brandt sees fit to reproduce the stories online in a public forum, I see fit to do likewise. As the Pamiko Properties scandal continues to unfold, it is good to review what damage Paul Koenig has already done to North Minneapolis.

New modular rental houses draw criticism from some on North Side

By Steve Brandt

August 25, 2002

After years of accumulating empty lots as boarded homes were razed, the lower North Side of Minneapolis now has a booming housing demand. Chanhassen-based Dream Home Development has filled some of it, erecting six-bedroom, factory-built houses that are hauled to sites in four pieces and assembled in a matter of hours.

"We go from dirt to tenant in three weeks," said Dream Home partner David Kohlenberger. But two neighborhoods have told city officials they don't want Dream Home's style of development, and some housing activists express similar views. They object to adding low-income rental units in areas that already have plenty, and they worry about the homes' design and durability.

"I really see that housing as becoming future slum landlord housing," said Deb Wagner, a real-estate seller and a member of the Jordan neighborhood's housing committee. Activists question the single-family homes' lack of basements and garages, asking where residents will store lawn mowers or bikes. They point to bedrooms as small as 82 square feet, not far over the city housing code's 70-square-foot minimum. They say the all-electric heat in many of the houses will be expensive for tenants. And they dislike the fact that Dream Home buys lots directly from private owners or county tax-forfeit auctions. Such purchases cut neighborhoods out of design reviews they get when the city acquires lots for redevelopment.

Kohlenberger said that his homes meet building codes and are designed "to be as durable as possible." He said a design revision will address many of the objections. But an even bigger issue for some is that Dream Home is reintroducing rental housing on lots they targeted for owner-occupied houses. In Near North, Willard-Hay and the adjoining Harrison neighborhood, for example, the last census showed that half of the households were renters. Almost half lived in government-subsidized housing, according to Patti Marsh, a veteran housing activist. The settlement of a federal lawsuit alleging segregation in public housing curbs the government's ability to develop federally subsidized housing in the city's poorer, more minority areas. But private developers aren't bound by those limits.

"Our neighborhoods are prime targets for investors who are trying to cash in on the affordable-housing mania," Marsh said. So far, Dream Home has put up 30 homes, most in Minneapolis.

In St. Paul, where it installed its third home last week, DFL state Sen. Mee Moua said she likes a model she was shown and sees potential for sales to large immigrant families, who she said have trouble finding homes with enough bedrooms in the urban core. Dream Home has worked to hold down the cost of the homes so it can make a profit renting to people holding federal Section 8 rental vouchers. A family big enough to qualify for one of its typical six-bedroom homes holds a voucher worth $1,889 per month in Minneapolis. The family pays 30 percent of its income toward rent and utilities, and the voucher pays the remaining rent. Kohlenberger said tenants have flocked to the 1,856-square-foot houses. One of the renters, Aziza Sarwar in Minneapolis' Jordan neighborhood, said that many Section 8 units are dumps and that their landlords are "out for the money." But "it seems to me these people, so far, want to help the poor people," she said.

Diminished role

The Minneapolis Community Development Agency (MCDA) used to get its pick of tax-forfeit lots in poor neighborhoods for no cost. When it felt the market was right, it offered them to developers for a few thousand dollars. Neighborhoods had design leverage because their views on proposed sales were forwarded to the City Council. That changed, apparently inadvertently, with a 2001 rewrite of state law that has been interpreted to mean the city must pay the appraised value for such lots. It has obtained fewer as prices have risen.

"We are seeing developers go to the county auction and picking up vacant lots mostly, and then putting up housing that doesn't fit the neighborhood," said state Sen. Linda Higgins, DFL-Minneapolis.

Kohlenberger said his company is finding it harder to dig up Minneapolis lots outside MCDA control. It made offers on 10 MCDA lots in the Jordan neighborhood, and three in Near North/Willard-Hay. But the neighborhoods told the agency they don't want lots sold to Dream Home, and agency officials say they will recommend against the sales.

"We refused them flatly," said Char Perry, housing director for the Jordan Area Community Council. The neighborhood group's letter to the MCDA said its housing committee members who toured a Dream Home house found its quality less than adequate and doubted the houses will hold Dream Home's estimated finished value of $220,000. Dream Home has said it hopes to develop a plan in which tenants may buy the houses in which they live. But it will be months before it firms up details, Kohlenberger said.

Some who work with neighborhood housing predict that tenants will be disappointed if they move in expecting to buy.

About the company

Dream Home is a partnership of Kohlenberger - a former commercial general contractor - and Paul H. Koenig, a rental property manager. They met about a year ago and decided that modular housing with a long-term warranty offered fewer headaches than older housing stock. The company is accelerating its pace and could be installing three homes a week by November, Kohlenberger said. If Dream Home can hold that pace for another 20 months - meaning it will have installed more than 350 houses - Kohlenberger said the cash flow from rents will cover all overhead and debt. He said the firm is finding cheaper, more plentiful lots in St. Paul and is starting to talk to suburbs. The firm also installed its first fourplex this month, on a Cedar Avenue parcel only slightly bigger than a typical single-family lot.

Carol Pass, an activist in the housing committee for that area, said putting the 20-bedroom fourplex on so small a lot gives children no room to play. "It's just not a very responsible way to do development," she said. Pass recalls with distaste Dream Home partner Koenig's stint as the manager of a duplex in the area. Koenig and duplex owner Michelle Milbrandt, now his wife, were sued by a housing advocacy group last year. Tenants had called a city inspector who found 34 building code violations. After many went uncorrected, the city condemned the building, and the group sued to force repairs. A housing referee found that although tenants didn't always make timely payments and had poor housekeeping, Koenig gave them eviction notices to punish them for calling the inspector. The referee ordered cuts in rent as compensation until repairs were made. At one point in the dispute, a judge ordered Koenig not to have any contact with tenants after their attorney described him in court papers as "very volatile and intimidating."

Koenig described the issue as a vendetta against landlords by the advocacy group. Michelle Koenig sold her seven rental properties shortly afterward, which helped Dream Home get its start late last year. She is listed as Dream Home's co-owner with Kohlenberger in offers the firm made to buy city lots, but Kohlenberger said Paul Koenig is his partner in the enterprise. There are indications of financial stress in both men's pasts. Koenig shed some of his debt by filing a bankruptcy liquidation petition in 2000. He listed assets of less than $21,000 and debts of about $107,000, including back taxes and bad checks written at Mystic Lake casino.

Kohlenberger last year paid off a federal lien for $31,177 in federal income taxes for 1997 and 1999. Both Koenig and Kohlenberger acknowledged these events. .

(Now here is the second Steve Brandt story about the Dream Homes fiasco)

February 19, 2005

Steve Brandt

The factory-built houses started popping up three years ago across the North Side of Minneapolis, on vacant lots where dilapidated housing had been razed years before. Now the company that erected dozens of instant houses, there and elsewhere in Minneapolis and St. Paul, is folding. That leaves neighbors wondering who will run the six-bedroom rental units, most lacking basements or garages. They fear the reappearance of blight.

"I truly believe that the afterlife of each one of these is going to be a horror story," said Roberta Englund, who staffs a livability task force that covers much of the North Side. She's concerned about maintenance of the houses, mounting back taxes owed on some of them, the impact on tenants, and potential public costs for dealing with the properties. "This is a case where building new homes in a community diminishes the value of the property around them," she said.

The homes were put up by Dream Home Development of Chanhassen. The plan was to finance manufactured housing with the federally subsidized rents of the people who occupied them. The homes were assembled from factory-built modules and were completed in days. Erect 350 houses, co-founder David Kohlenberger said in a 2002 interview, and the company could make a profit. But Dream Home barely got one-fifth of the way there before running out of money.

Now its stock of houses is being sold to try to pay the firm's debts.

"My main goal is to get these things liquidated," said Paul Koenig, Kohlenberger's onetime partner in Dream Home, who has assumed control of the properties. Kohlenberger didn't respond to repeated requests for comment.

A cautionary tale

The firm's story is a cautionary tale of the difficulties of trying to catch the right wave in the housing market, and of meshing a company's goals with a neighborhood's aspirations. Dream Home began buying vacant lots in 2001 just as the prices began rising because of increased demand from developers of owner-occupied housing. The company began renting its housing just as the demand for rental homes softened noticeably. And its cash flow suffered last year when federal subsidies that supplement tenant payments were cut back 7 percent.

"He had good ideas, probably bad timing," said Mike Czarnik, the firm's former housing administrator, about Kohlenberger. Moreover, Dream Home's path never meshed with neighborhood aspirations. Neighborhood groups had earmarked for homeownership the lots that Dream Home snapped up for rental development. They argued that much of the North Side was saturated with rental housing. They lobbied successfully to keep the city from selling lots it owned to Dream Home. And the boxy minimalism of houses by Dream Home and some other developers prompted the City Council to impose a one-year moratorium on North Side residential construction until design standards could be enacted.

Dream Home was a marriage of Kohlenberger's general contractor background with Koenig's experience as a rental property manager. But by the fall of 2003, Koenig was ready to sell his share of Dream Home and two related firms. Kohlenberger agreed to pay Koenig $1.2 million for his half, according to court documents. But employees say that as 2004 wore on, Kohlenberger's refinancing plans were put off in anticipation of a large sell-off of homes to provide an infusion of cash. He sold more than a dozen properties to investors, but that was fewer than the firm hoped for, according to Czarnik, the firm's former housing administrator. Some employees were laid off in November, and subcontractors began pressing for payment. An excavating contractor won a judgment for $83,847 in December, while a foundation contractor sought a judgment for $147,393.

When Dream Home auctioned office and field equipment in December, the Ramsey County Sheriff's Office seized proceeds for partial payment of the excavating debt. Then the Koenigs sued the Kohlenbergers and the companies, alleging they'd not been paid the $1.2 million and that the properties hadn't been managed properly. According to Koenig and his attorney, Steve Silton, the lawsuit was settled recently, and Koenig will assume control of the properties, sell them in an effort to pay debts, and fold operations.

Failure's fallout

But more problems may lie ahead. Out-of-state investors who bought six Dream Home houses have filed a federal suit alleging fraud. They sued Dream Home, the Kohlenbergers and real estate agents representing the firm. The investors allege that the rental income on the properties was inflated with fictitious rent subsidies from nonprofit sources. A Twin Cities investor, Peter Bazil, bought seven Dream Home properties and said similar cash flows were shown to him. "I've had many problems, many issues with them," he said of Dream Home.

Meanwhile, six former employees have sued to recover almost $67,000 in wages, expenses and a $20,000 loan Czarnik made to the company. Czarnik defended the quality of the houses, although he acknowledged the neighborhood opposition to cookie-cutter designs. "I heard mostly good things from the tenants about the units because they were almost brand new," he said. The firm added basements and garages in its latest models, he said, but those added tens of thousands of dollars in costs. Yet some community leaders fear that the problems of Dream Home property may linger long after those financial and legal issues are sorted out. They wonder how long the vinyl-sided houses will hold up with intense use by large families. With no basement or garage storage, they fear blight spreading across lots, some of which have yet to be sodded. The reappearance of blighted properties is a sensitive issue in some north Minneapolis areas that worked hard and spent hundreds of thousands of dollars in the 1990s to get such housing razed.

"What do you do with this very poor quality housing, and what does the future hold for it?" asked Council Member Barb Johnson, who represents part of the North Side. "It's a very scary thing. It just is not going to last. Eventually we'll be tearing them all down in five years." 

(And here is the third article, which has no author listed)

Dream Home's demise - Dream Home Development is folding after putting up 80 "instant" homes in Minneapolis and St. Paul.

Six-bedroom rental homes, most without basements or garages, are being sold to pay off company debts. Back taxes are owed on some houses, creditors are demanding payment and out-of-state investors have filed suit claiming fraud. North Minneapolis neighborhood activists fear return of blighted properties the homes were supposed to replace.

Disappointed dreams

Dream Home Development got building permits for close to 80 factory-built homes in Minneapoils and St. Paul in a three-year period, most on the North Side of Minneapolis. A chart shows the neighborhoods with Dream Home houses and their shares of the firm's Minneapolis total.

Dream Percent of Neighborhood Homes city total

Willard-Hay 15 21%
Hawthorne 15 21%
Near North 14 20%
Jordan 10 14%
Phillips 5 7%
McKinley 3 4%
Central 2 3%
Lind-Bohanon 1 1%
Camden 1 1%
Cleveland 1 1%
Logan Park 1 1%
Harrison 1 1%
Whittier 1 1%

Percentages are rounded.

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