Skyrocketing demolition costs for riot-damaged Minneapolis, St. Paul properties delay rebuilding

One day after rioters destroyed the Sports Dome retail complex in St. Paul, a construction crew hired by the city knocked the building down because it was dangerously unstable.

Then the city presented the property owners with a $140,000 bill for what it would cost to haul away the debris.

"We were really upset about that," said property owner Jay Kim, whose insurance policy covers a maximum of $25,000 in demolition costs. "We thought that was high. But we didn't know how much demolition would cost at the time."

Like dozens of other investors whose properties were severely damaged in the May riots, the Kim family was stunned to discover that the money it would collect from its insurance company for demolition won't come close to the actual costs of doing the job. Most policies limit reimbursement to $25,000 to $50,000, but contractors have been submitting bids of $200,000 to $300,000. In many cases, the price of the work is not much lower than the actual value of the property, records show.

"I think that is price-gouging and they should contact the attorney general," said Andrea Jenkins, vice president of the Minneapolis City Council. "That is a symbol of capitalism run amok."

Contractors acknowledge that prices for riot-related work are far higher than usual, but they said that is because government regulations require them to treat all debris from a burned-out building as hazardous. Industry veteran Don Rachel said those rules can double demolition costs.

"We aren't taking advantage of anybody," said Rachel, CEO of Rachel Contracting, one of the largest demolition contractors in the state. "Some people might have sticker shock, but how do they know? Most of these folks have never had to wreck a building."

Demolition costs are so high that many rebuilding projects remain stuck in neutral, leaving large sections of Minneapolis and St. Paul with scorched buildings and piles of rubble that will linger for months.

"It's been a big barrier to getting the street cleaned up," said Allison Sharkey, executive director of the Lake Street Council. "I am becoming really concerned that people who want to reinvest won't be able to."

Some property owners are begging city officials to take the lead with contractors by combining their projects and seeking public bids for the work. They say that is the only way to make sure contractors don't exploit inexperienced property owners, many of whom are immigrants and people of color.

"There is power in numbers. If I were the mayor, I would start thinking collectively about how we can help," said Kelly Drummer, president of MIGIZI Communications, which was destroyed in the riots.

St. Paul officials have already coordinated demolition work on a handful of projects, including the Sports Dome. Kim said he was grateful to accept the $140,000 bid arranged by the city after other companies offered to do the same work for as much as $285,000.

In Minneapolis, city officials are considering similar moves on a larger scale.

"We understand there is a role for the city to make this happen," said Steve Poor, Minneapolis' director of development services. "The mayor told us to go and see what you can do. We are looking at what is possible."

Finding 'the right people'

Tom Roberts stands on top of the Highland Plaza shopping center, which was severely damaged in the riots, and watches a giant hose suck up roofing material. Roberts expects his first tenant to reopen in November, with the rest of the center following over the next two months.

Though fires destroyed most of the 45,000-square-foot center at the corner of Lake and Nicollet in Minneapolis, Roberts decided to salvage the shell and haul away everything he couldn't save. Demolition work began Aug. 1 and is almost complete. The veteran real estate developer expects to pay less than $150,000 for the job, primarily because he is working with a contractor that has done several other real estate projects with him in the past 10 years.

"You have to make sure you are working with the right people," Roberts said.

Roberts said rebuilding the center will cost about $5 million, but he expects insurance to cover the majority of his expenses. "My insurance company is paying every nickel that we've asked for," he said.

A few blocks away, Ruhel Islam is bewildered by the technical language in the bids he's received to remove the debris from his Indian restaurant, Gandhi Mahal. Most of the companies want more than $200,000 for the work.

"I think all of these people are trying to take advantage of immigrant people," he says.

Islam decided to move forward on a $125,000 bid; insurance will cover just $50,000 of those costs.

"Our neighborhood looks like a war zone," Islam said. "As a property owner, it is my moral responsibility to somehow get it done."

The move will leave him with almost no money for rebuilding. Most of the money he got from his policy went to pay off his mortgage.

Other immigrant property owners are facing the same situation. Faisal Demaag said a contractor first offered to demolish his store, Chicago Furniture Warehouse, for $18,000. Then the company started revising the price. He is now facing a total bill of $133,000 if he moves forward.

"I am not even sure they are going to remove the whole thing," said Demaag, whose store was destroyed in the riots.

Help is not enough

Demaag doesn't know how he will pay for the work. His insurer will cover just $25,000 and the Lake Street Council — which has provided $5 million in rebuilding grants to 350 business owners — agreed to kick in another $25,000.

"All of the city officials came and looked, but it is almost 11 weeks now and no answer," Demaag said.

Ade Alabi said he was billed $75,000 by the city of Minneapolis after contractors knocked down his 32,700-square-foot retail complex on East Lake Street, but he said he has struggled to find a company willing to finish the job. Two of the three contractors he contacted last month have yet to submit a bid, and the third told him last week that it will cost $363,000 just to haul away the debris.

"The guy down the road paid $114,000 for demolition and removal," Alabi said.

Alabi said he will have just $200,000 left for rebuilding after paying off his $3.4 million mortgage — leaving him far short of what he needs to rebuild.

"I don't know what to do," he said. "I think the city should have helped us more, but they haven't."

Property owners said some insurance companies have been holding up payments after questioning the price and scope of the work.

"Demolition is usually a fraction of what it costs to rebuild a building, so this surprises me," said Robert Passmore, vice president for auto and claims policy at the American Property Casualty Insurance Association, an industry trade group.

Minnesota does not have a law against price-gouging, but the practice is illegal under the governor's executive orders for "essential" goods and services during the pandemic. John Stiles, a spokesman for Minnesota Attorney General Keith Ellison, said it's not clear if the order would cover demolition work, but he encouraged property owners and others to contact the department if they have evidence of price-gouging.

Passmore said insurers want to help their clients rebuild their properties, but he said many policies would not let a company cover the shortfall in demolition costs by providing money designated for other losses.

"There are limits on their flexibility," Passmore said.

City considers 'all options'

Though DFL legislators have proposed creating a $300 million rebuilding fund to cover uninsured losses from the riots, the bill has stalled in the GOP-controlled Senate, which opposes requiring the state to pay for damage in Minneapolis and St. Paul.

Senate Majority Leader Paul Gazelka said he favors loosening regulations that are driving up the cost of demolition and rebuilding, such as requiring that all of the debris be treated as hazardous material. But contractors and city officials said the state controls hazardous waste regulations. They noted that many of the damaged properties are old and contain asbestos, lead and other carcinogens.

"It wouldn't be fair to waive those requirements because you'd be putting our workers in a bad situation," Rachel said. "And it is not fair to the environment where you've got to dump the demolition debris."

In Minneapolis, which suffered the most property destruction, city officials said they have helped owners by providing documentation to insurers proving their structures were uninhabitable, allowing stalled payments to resume. Now, city officials said, they are trying to figure out how to expedite demolition for cash-strapped owners.

"The city may have to play a very proactive role in making sure the debris is cleared and the holes are filled before winter," said Andrea Brennan, the city's new director of housing policy and development. "We are looking at any and all options."