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Essentia pushes unprecedented tax benefit in state legislature for Duluth development

Essentia Health has proposed the largest private investment in Duluth’s history. It wants a lot of public investment to help make it happen.

The health system is pushing a bill in the Minnesota Legislature that would offer a big pot of tax incentives for the city’s medical district and up to $184 million in state infrastructure spending in exchange for Essentia’s own $800 million investment upgrading and consolidating its downtown campus.

“This bill is really a tool that uses private investment as triggers that allows the city to make some of those what we call extraordinary infrastructure investments,” said Essentia CEO David Herman.

If the bill passes, an advisory board of elected officials and Essentia representatives will plan public projects and other developments in the medical district — which in many cases will mean redevelopment, based on Essentia’s plans.

“We will take our medical center that spans multiple blocks, has about 2.2 million square feet, and really compact it down into two blocks at about 1.8 million square feet,” Herman said. “That will open up a significant amount of land in downtown Duluth for future development. And we’re hoping that that will be used for housing and light industry and perhaps the University of Minnesota and others that want to move and be part of a more vibrant downtown Duluth.”

The proposed public-private partnership is similar to Mayo Clinic’s Destination Medical Center in Rochester. Herman said it also mirrors how US Bank Stadium was built in Minneapolis.

In Duluth, though, it has no precedent.

“It is unprecedented in terms of giving these tools to local units of government to facilitate economic development,” said Sen. Erik Simonson, DFL-Duluth, who is co-sponsoring the bill. “We want Essentia to stay downtown, and we want to find a way to help facilitate their projects.”

For the defined medical district, the bill would lift restrictions on tax abatements and tax increment financing, suspend the sales tax for construction materials, make eventual use of city tourism taxes and allow the competitive bidding process to be skipped “for certain joint public-private development projects,” according to the bill’s summary.

The advisory board’s recommendations would have to be approved by the Duluth City Council, but it still gives Essentia leverage over public money. The advisory board would comprise the mayor, a City Council member, a St. Louis County commissioner, a Duluth Seaway Port Authority official, three Essentia representatives and an eighth member voted in by the board.

Once development in the district passes $360 million, state money would be unlocked at a rate of up to $15 million per year to help pay bonds Duluth is expected to issue for infrastructure projects.

From there, supporters of the plan say additional dollars will follow.

“We’re hoping that attracts another $700 million or $800 million of private investment within the medical district,” Herman said.

Not everyone is on board with the proposal the way it is written. St. Luke’s hospital is part of the bill's defined medical district, but the current bill does not give it a seat on the advisory board.

“My concern would be if one of those partners wasn’t included in this kind of a plan we may be getting rid of that partner at some future point unintentionally,” said Michael Delfs, the administrator of Mercy Hospital in Moose Lake, which refers patients to both Essentia and St. Luke’s.

For its part, St. Luke’s is not yet taking a stance.

“It’s a fairly complex bill so we are sitting down and taking it all under consideration, trying to understand what it’s all about and what it means,” CEO John Strange said.

Simonson said the bill is far from its final form, and he would like to see St. Luke’s better represented. The senator also said he doesn’t support transitioning the city’s tourism taxes to benefit the medical district, a proposal now included in the House version of the bill. Duluth officials are opposed to that measure as well.

“We’re concerned that if you start moving those from tourism to something like economic development, while certainly a worthwhile activity, we think that starts raising questions in people’s minds about other tourism taxes and the potential to go in and divert those for other purposes,” said Duluth Chief Administrative Officer David Montgomery. “So we will work to make sure that the tourism tax component is not part of the final package.”

The bill is set to get committee hearings in the House and Senate later in April. If it is passed, it will likely be part of the Legislature’s omnibus tax bill.

With or without the bill, Essentia is moving ahead with its plans to reshape large swaths of downtown Duluth and plant its headquarters firmly on the shores of Lake Superior.

If the bill doesn’t pass, Herman said: “We would be very disappointed, because then it kind of places our project out on an island and it doesn’t help it act as a catalyst for further economic development in downtown Duluth.”

The new Essentia Health campus would be between Superior Street and Second Street on either side of Fourth Avenue East and connect with the existing First Street Building, Herman said. It would include a new St. Mary’s Medical Center, with the existing hospital either demolished or repurposed.

“We hope to have a spade in the ground next March​,” Herman said.

Vision Northland

What Essentia Health calls “Vision Northland” has city leaders thinking about Duluth’s version of the Mayo Clinic-led Destination Medical Center in Rochester.

“We think this would generate additional spinoff private development, similar to what’s happening down in Rochester,” said David Montgomery, Duluth’s chief administrative officer.

Essentia’s Vision Northland plan envisions $1.5 billion in private investment over the next two decades, about $800 million of which would come from Essentia itself. And if other investors go even further, that’s fine with Dr. David Herman, Essentia’s CEO.

“If at the end of 20 years from now we are the smallest investor in this, I’m happy,” he said.

Essentia plans a smaller footprint in the district than it has now, which would create room for private investment, said Michael Mahoney, the health system’s vice president for public policy. That could include the family practice residency program and the Duluth campuses of the University of Minnesota medical and pharmacy schools, which now are located on the University of Minnesota Duluth campus. If those schools moved, more space would be freed up on the UMD campus, he added.

Discussions with university officials about the idea already have taken place, Herman said.

Multi-generational housing also could be developed in the district, Mahoney said, and Montgomery is looking at that possibility as well.

"The area where the city is particularly interested is up along Fourth, when they vacate those facilities up there,” he said. “It really opens up a tremendous opportunity to create much-needed housing that is supportive both of the medical district — Essentia and St. Luke’s — as well as our downtown businesses and the broader Hillside community.”

State Sen. Erik Simonson, DFL-Duluth, said he’s enthused about the development opportunities that could come along with Essentia’s investment, buoyed by public infrastructure upgrades.

“We’re saying here’s this employer making this huge investment,” he said. “And it opens up all these other properties in the district for other private developers. ... Some of the key pieces of this is there will be spinoff development.”

Peter Passi of the News Tribune staff contributed to this report.

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