OWATONNA — Soon, the buildings of the old Owatonna Hospital on South Oak Avenue — or at least most of the buildings — will be reduced to a pile of rubble, all of which is just another step in a very complicated deal negotiated by the City of Owatonna to bring a new business to a space that has sat empty and dormant for nearly three years.
If all continues according to plan, the deal will bring a Fareway grocery store to Owatonna as early as the autumn of 2013.
But getting to the current point was “complicated” and had “many moving parts,” according to city administrator Kris Busse.
What mainly complicated matters was the number of players involved. It wasn’t simply Fareway and the City of Owatonna, but also included Mayo Health Systems and Sacred Heart Catholic Church.
The process of trying to find a use for the old hospital goes back to before the hospital was vacated in October 2009.
Owatonna Community Development Director Troy Klecker served on a task force to determine a use for the property once the hospital moved to its current location on 26th Street.
“They did a study to see what some of the re-uses could be,” Klecker said. “Residential was going to be hard to do because of demolition costs. I don’t know that we had a real clear direction about what way we were going to go.”
The city put the property up for sale in 2009. Busse said a lot of people thought new housing would have been useful to the area.
“Part of the study looked at that and said that would not make sense from a cost standpoint,” Busse said.
At the same time that the city was looking to sell the old hospital, Fareway was beginning to look at Owatonna as a place to relocate.
Fareway had been looking to expand into Minnesota for some time. The Iowa-based chain opened a new store in Faribault this month and also will open a store in Rochester in addition to the store in Owatonna, according to Fareway’s President and CEO Fred Greiner.
“We’ve been expanding into Minnesota since 2009, so we’re just looking to expand further,” Greiner said. “We always have trucks going that way. It’s time to expand out a little bit.”
With that in mind, Fareway officials began to look at several locations in Owatonna, including on 26th Street on the north side of town and even the location where Family Video is at the intersection of Oak Avenue and Vine Street, said Wayne Klinkhammer, who was the city’s Realtor throughout the process. He became involved about two years ago.
“(Fareway) wanted a minimum of three acres. At that time, the hospital wasn’t even in the picture because it was listed at $2 million or more,” Klinkhammer said. “They wanted to be downtown. They’re a neighborhood grocery store.”
In the meantime, Sacred Heart Catholic Church, whose property sits adjacent to the old hospital property, expressed interest in purchasing the property — property that the church wanted primarily for parking and for a new entrance from Cedar Avenue. However, part of that deal that the church proposed to the city would have had the city footing the bill for the demolition of the old hospital. And because the church is tax-exempt, the city would not have collected any taxes if the property had gone to Sacred Heart.
That, council members said at the time, was a deal-breaker.
“Really, to make this deal work,” said Klecker, “we needed a taxable property” — something that the city will have with Fareway.
About that time, Fareway — which will employ about 100 workers with both part-time and full-time staff when it opens — began to take an interest in the property.
Greiner said that though the deal was very complicated, the location was exactly what they wanted.
“We felt that it would be a great location, with all the residential housing, and sometimes things don’t come easy. You’ve got to work hard at it,” Greiner said.
At about the same time, city officials approached Mayo Health System in Owatonna about the property — or at least some of it.
“Mayo expressed some interest in the old property,” said Klecker.
Dr. Brian Bunkers, CEO of Mayo in Owatonna, said the clinic wasn’t necessarily looking to expand. But Mayo, which currently uses the Southview Owatonna Clinic building adjacent to the old hospital for administrative and informational technology offices, said it wanted to help the city out, Bunkers said.
“We weren’t looking for it. We had enough space, but this seemed like the right thing to do, from a city perspective,” Bunkers said. “It takes a partnership, and we were certainly willing to partner.”
Under the current plan, Mayo will obtain some of the old hospital — specifically, the approximately 12,000 square feet that was added to the hospital building in 1990-91. With that additional space, Mayo not only will be able to continue what it is doing in the Southview clinic building, but it will be able to add more jobs to Owatonna, Bunkers said.
Furthermore, Klecker said, by taking that 12,000-square-foot building out of the mix, the demolition costs will be reduced.
But in order for the deal to go through for both Fareway and Mayo, it had to be cost-effective for both organizations. That is where TIF, or tax-increment financing, came into play.
First, as part of the deal, the old hospital would be demolished and the property would then be renovated by Fareway through construction of a new, 30,000-square-foot store. Fareway will pay the city $600,000 for the property. That money, then, will be gifted back to Fareway to help fund the demolition of the hospital.
Demolition is expected to begin this fall.
In order to help offset the cost of renovations, the city will set up the property as a TIF, with both Fareway and Mayo benefiting from the TIF.
“We’ve been in cities where there have been TIFs and cities where there haven’t,” Greiner said. “To tackle the costs for the demolition would have been very expensive. For Fareway to do what we do and come in to try and sell groceries at an economic price, our overhead costs may have been too high.”
Fareway will pay the demolition cost and then be reimbursed through the TIF as the company pays its property taxes. The TIF runs for 25 years. Greiner said the deal may not have been possible without the TIF to help offset the costs of renovation. For Mayo, the money from the TIF will go toward helping close off the clinic from the hospital demolition.
“It’s really an excellent utilization of that existing resource,” Bunkers said. “The TIF goes to offset a portion, not all, but a portion of the cost to close off that part.”
The Owatonna City Council will hold a public meeting on the TIF at its Sept. 4 meeting. The TIF agreement would also need to be approved by the Steele County Board of Commissioners and the Owatonna school board.
Going back to church
Still, there was one problem.
The old hospital location isn’t very visible from South Oak Avenue, which made the property a little less attractive to Fareway. At that point, the city approached Sacred Heart Church to see if they wanted to be involved in the deal.
The Rev. John Sauer, pastor of Sacred Heart, said the church had been looking to expand its campus for some time.
“Our involvement really has been (asking) ‘Was there a possibility of expanding our campus by either getting all or part of the old hospital?’” Sauer said.
No deal was ever reached for the church to get the space occupied by the hospital.
But as part of the current deal, the church would purchase three homes in the 800 block of South Oak Avenue and one in the 800 block of South Cedar Avenue, which will give better access to the church and allow more visibility of the property from both streets. Sauer declined to comment on how much the church will pay for the homes.
As repayment for purchasing the homes, Fareway will fund the demolition of the homes as well as allow Sacred Heart to use its parking lot on Sundays when the store isn’t open. Sauer said the church and Fareway are working on an easement agreement to allow each party the use of the other’s parking lot.
“The city kind of brought us together and we let them know what we were hoping to do. Fareway knew what we were hoping to do, and Fareway was open to working with us,” Sauer said.
Klecker said one of the biggest keys to the deal was the willingness of all the parties to work through problems that came up, as well as how well the parties work together to come to a common understanding of what was best for everyone involved.
“Through all negotiations you try and find what each party really wants out of the deal and you kind of focus on that,” Klecker said.
Reach reporter Al Strain at 444-2376 or follow him on Twitter.com@OPPalstrain
Reach reporter Al Strain at 444-2376 or follow him on Twitter.com@OPPalstrain