City housing partnership aims to bring more accessible pricing to east-side development

Buying a newly built home in the $200,000s could become reality again if a plan to incentivize an eastside development is approved.

The Sioux Falls City Council is considering offering tax increment financing to the East Prairie Estates neighborhood, which sits on 85 acres near Madison Street and Veterans Parkway.

If approved, it will offset enough of the development costs that owner Kelly Nielson will be able to sell more than 60 newly built homes at about $300,000 or less.

“I haven’t had anything at $275,000 or less in over 12 months,” said Nielson, the owner of KN Construction.

“Once COVID hit and the price increases came, they’re not going to go away. Ninety percent of wages in town went up 20 percent and nobody is going to take less money. So it’s the nature of the beast and we’re trying to work together to see if we can make something work.”

The proposal stems from more than a year of looking into how to make home prices more accessible for more buyers, including a 2021 summer study by the South Dakota Legislature and work sessions with various groups in the Sioux Falls area.

The city heard input from developers, builders and banks on what financing tools are needed to make such a development work, said Jeff Eckhoff, director of planning and development services.

“We had some general agreement on the direction, but it still took a lot of fine-tuning with the price of homes and building in a contingency to make sure it goes to what we wanted, and it has to work for the developer or it will never be used again,” he said.

Using tax increment financing allows the developer to use a portion of property taxes paid as the land appreciates on improvements to it – in this case, water, sewer, streets and sidewalks.

“What we’re really trying to do is bring down the cost of the lot,” Eckhoff said.

Without that help, “I wouldn’t even do it,” Nielson said. “It’s a large enough piece (of land) where I can absorb some of the risk. With the TIF, I’m willing to risk it knowing I can absorb some other costs in the development.”

The South Dakota Housing Development Authority has established $340,000 as the maximum price for first-time homebuyer financing currently and these homes will be priced at 60 to 100 percent of that — potentially as low as $232,000 or less.

East Prairie Estates is being developed as a mix of housing, including rental properties and about 300 total homes. While the homes that fall under the TIF will include prices less than $300,000 – designed primarily for first-time homebuyers – other homes in the neighborhood could sell for up to $600,000. The development also sets aside some land for commercial use such as a strip mall or daycare.

“Nobody wants to segregate this price point of a house,” Nielson said. “Inclusive of these, there’s probably six price categories in that 85 acres, and that’s what I liked.”

Of the 65 TIF-financed homes, 26 will be twin home-style with unfinished basements and the remaining 39 will be single family slab-on-grade homes from 900 to 1,200 square feet with two or three bedrooms.

“It starts with the development of the land,” Nielson added. “To get smaller lots was part of this. This is smaller than the Sioux Falls standard lot size.”

That’s not unlike how the city developed years ago in neighborhoods such as McKennan Park, with a skinnier lot size, he said.

“We’re working on getting more lots per acre, so you can get your lost cost more affordable and then it’s on the contractor to design a home that’s affordable yet effective,” Nielson said. “We want to be efficient to help this price point buyer out and have it as a transitional home, so they can establish roots and then move on to the next available home.”

Buyer covenants will stipulate that the home must be the  buyer’s primary residence and cannot be rented. If a buyer sells the house in less than five years, the price can only be increased by an amount set by a housing pricing index.

The hope is this approach will work for other builders, Eckhoff said.

“It won’t fit everybody,” he said. “For custom home builders, it won’t be in their wheelhouse. But there are two or three developers that would maybe do this. And we don’t want to create 40 acres of just small homes. We want to integrate them into other neighborhoods.”

The City Council is scheduled to vote on the TIF in early October, allowing it to take effect by the end of the month.

In a perfect world, Nielson said he would do a similar project elsewhere. But first, he has to wait to see if the market responds to what he builds at East Prairie Estates.

“I’ll have to wait at least until the end of 2023 to see if some of these units I get built actually sell, even at the price point I have them,” he said. “I don’t know if it’ll be enough of a discount to make it sell.”

The homes will be move-in ready, and while the square footage won’t be as much as buyers might find in a four-plex, the hope is having their own single family or twin home will make up for it, he said.

“I just think it’s a good joint effort between contractor and the city trying to defeat the beast we all talk about,” Nielson said. “We’ve talked about it for 10 years trying to figure out a plan and I hope it works and that other contractors can partner with the city to provide more housing at this price. The key is to make sure it’s available in multiple areas of the city. It would be nice to find hubs for this.”