FARGO — The Prairie Heights apartment complex was welcomed in a Watford City that was straining to provide affordable housing during an oil boom that drew thousands to North Dakota's Oil Patch and skyrocketed rents out of reach for service workers.
Prairie Heights provided 124 units of affordable housing in a complex of 12 buildings, each with 10 to 12 apartments ranging from one to three bedrooms on the growing west edge of Watford City, located in the heart of the Oil Patch in northwestern North Dakota’s McKenzie County.
The vision for the project came with amenities including easy access to recreation trails and day care. Community leaders praised Prairie Heights as one of the keys to attracting families to a once-sleepy town of 1,500 that they thought could mushroom to 20,000 within several years.
But affordable housing doesn’t come cheap. The cost of the project, which opened in 2013 and was built in two phases, was $17 million.
Lutheran Social Services of North Dakota served as developer of the project, one of many the charity was building in the Oil Patch and elsewhere in rural areas as it moved aggressively to meet a dire need for affordable housing that was going unmet.
“Watford City was absolutely booming then,” said John Phillips, who was a housing program leader at Lutheran Social Services when Prairie Heights was developed. People were living in mobile homes and paying $2,000 a month in rent.
“There were horrible living conditions,” he said. “So recognizing that need, we got involved in housing.”
Prairie Heights was one of the program’s jewels, with convenient drive-in parking beneath the units. “It was a great development,” Phillips said. “It was really, really well received when it was built.”
But Prairie Heights and other housing projects in the Oil Patch ran into serious problems when the price of oil dropped in 2015 — and only grew worse over time, exacerbated when oil prices collapsed as the coronavirus pandemic struck like a sledgehammer early last year, triggering a steep recession.
Apartment vacancies swelled as workers were laid off and moved away — delivering a severe financial blow to projects that required high occupancy rates to stay afloat and resulting in a downward financial spiral for Lutheran Social Services of North Dakota as it funneled millions of dollars in recent years to prop up the housing program, leaders of the charity told The Forum.
Hopes of gradually working through the financial crisis with the forbearance of lenders crumbled, and on Friday, Jan. 15, 283 Lutheran Social Services employees were told their jobs were eliminated and the organization was preparing for bankruptcy and the end of many of its human services programs.
The mortal blow came a few weeks earlier, on Nov. 5, when a bank filed a foreclosure lawsuit against Lutheran Social Services, demanding immediate repayment of $8.3 million — all owed for the Prairie Heights project.
The door slammed shut on a gradual unwinding of troubled housing properties, the charity’s board chairman said.
“We were successful in working with about a dozen lenders on a workout program,” Murray Sagsveen said. “There was one bank that refused to cooperate, which is my understanding of what happened.”
There simply was no way to immediately pay the remaining $8.3 million debt for Prairie Heights given the $4 million annual rent income all of Lutheran Social Services’ properties took in during 2019, the most recent figures available, and the $712,149 from development and management income.
And Lutheran Social Services was already strapped for cash; expenses exceeded public support by $647,893 in 2019, before the pandemic, according to the charity’s annual report. An organization that had been slowly bleeding for years now was suddenly hemorrhaging.
“Nearly all the banks are cooperating on this,” Sagsveen said. “Nearly.”
'Everybody got priced out'
The beginning of the end of Lutheran Social Services of North Dakota is thoroughly rooted in the boom that rocked the Oil Patch in the early 2010s.
Thousands of job seekers poured into the state as job opportunities in much of the rest of the country were dismal because of the lingering effects of the Great Recession of 2008.
The state of North Dakota, whose employers were desperate for workers, placed billboards inviting people to flock to the state — but housing, especially affordable housing, was in critically short supply in the Oil Patch.
Private developers weren’t interested in building affordable housing units, given the financial risks, said Lisa Richmond, who worked on Lutheran Social Services’ housing program from 2010 to 2017 as special projects director.
Business and community leaders in Oil Patch towns, including Williston, Watford City, Tioga, Stanley and Belfield, were pleading for housing for workers, especially those who couldn’t afford soaring rents, she said.
“We had been told these apartments would be full forever,” she said, referring to predictions that it would take 30 or 40 years to fully develop the rich Bakken Formation.
“Yet nobody was building affordable housing stock for those people,” Richmond said. “Everybody got priced out of their apartments.”
So, into that void, Lutheran Social Services jumped, considering housing important to its Christian mission. It had formed a subsidiary, Lutheran Social Services Housing, in 2008. The sense at the time was, “We really can’t build fast enough to help people,” she said. By the early 2010s, “We were building hundreds of apartments.”
There were more than a few bumps along the way. The labor shortage hampered the housing program’s ability to hire managers, and the tenants their buildings were serving, low- and moderate-income earners as well as seniors, often required case management, Richmond said.
“We were opening apartments without having a clear property manager,” she said. “I was saying, ‘We can’t do this, Jess,’” a reference to Jessica Thomasson, who was housing director at Lutheran Social Services starting in 2008, then its president and CEO until she resigned in February 2020. (Thomasson declined to be interviewed for this story.)
Also, the program was reluctant to evict tenants after their first mistake, Richmond said. “That was a tension, always. All of that takes staffing,” which she said was inadequate.
“I think leadership was there,” Richmond said. “But there was a missing level of property managers who were skilled.”
It fell to Bob Otterson, Lutheran Social Services of North Dakota’s current top executive, to announce that the organization would have to close its doors after 102 years of service.
In a telephone conference with employees on Friday, Jan. 15, Otterson said new top managers over the past year had gradually come to realize the scope of the financial problems facing the organization.
“This agency has been using its reserves to hold up this housing facility,” he said, according to a recording obtained by The Forum. “Some of our housing units rarely if ever have covered their own costs.”
The financial crisis stemmed from decisions made two, four and 10 years ago, said Otterson, who was in his 45th day as CEO when he announced the grim news. Some properties had very low occupancy rates and some had “questionable business plans,” a bad situation that he said was exacerbated by the pandemic.
Thomasson, who was running the housing program or served as CEO during the years cited by Otterson, declined to offer specific comments. “Those statements are not factually inaccurate,” she said in a text message.
Her text message was referring to statements that some properties rarely if ever paid for themselves, that decisions made during her tenure set the stage for some of the financial problems that bedeviled the agency later, and that it was difficult to hire qualified property managers.
"I can tell you the work the organization has done has never been easy," Thomasson said. "LSS' closure is a huge loss for North Dakota."
By Dec. 1, the board had set a course to “systematically exit” from obligations to its housing creditors, but that plan disintegrated when First International Bank & Trust filed the foreclosure lawsuit involving Prairie Heights, Sagsveen said.
Steve Stenehjem, president and chairman of First International Bank, based in Watford City, said his bank could no longer exercise forbearance on the loan for Prairie Heights.
“They haven’t made a full payment to us in over a year, and they haven’t been providing any financial statements for three years,” he said. “They’re collecting rent, and they’re not making the loan payments, so where’s the rent going?”
By Stenehjem’s estimate, Prairie Heights’ 124 units are 30% occupied, compared to an average in Watford City of around 65%. “So what’s that say?” His answer: “Very poor management.”
Often, projects with federal financing don’t allow any flexibility to lower rents when a housing market softens, Richmond said. Without that ability, she said, vacancy rates go up and the building doesn’t cash flow.
The bank concluded it had no alternative to foreclosure, and didn’t want to “besmirch” the reputation of an organization that has done lots of good work, Stenehjem said. “They ignored our calls and emails for a long, long time,” he said, only responding recently.
“It’s sad,” he said. “I feel bad it’s come to this.”
Cash flow crunch
As Lutheran Social Services siphoned its reserves to prop up the failing housing program, signs of a cash flow crunch began to emerge visibly by 2017.
An elderly Jamestown couple sued Lutheran Social Services in small claims court and won a monetary judgment of $1,800 in November of 2017, but the judgment remained unpaid as of Friday, Jan. 22, according to court records.
An internal email exchange from July and August of 2019 obtained by The Forum discusses a bill from a vendor for less than $550 that remained unpaid despite repeated submissions to Lutheran Social Services’ accounting department.
An accounting staff member explained that unpaid bills were stacking up and were paid when the agency could release money under a “prioritizing system.”
Another email in the chain, from the charity's director of finance, said, “We must always manage cash across the entire agency.”
Sagsveen acknowledged cash was tight because agency reserves were being depleted to support the housing program. That remained the case even after Lutheran Social Services received a $2.6 million federal loan under a pandemic relief payroll protection program, approved in April.
Leaders are working to find “colleague organizations” to take over Lutheran Social Services’ programs, Otterson said. Possibly within days, its housing portfolio will go into voluntary receivership, Sagsveen said. An independent receiver will offer the buildings for sale to pay off lenders.
Lutheran Social Services Housing owns and operates 22 properties in 14 communities and manages another 14 residential properties in 10 communities — providing housing for 1,400. To develop its projects, it invested $16 million, plus secured other financing.
Although Lutheran Social Services is going away, its housing projects remain and can continue to serve tenants around the state, Sagsveen said.
"The housing is there," he said. "The housing was built, and people are living in these affordable housing units. But the agency was a casualty."