Developers' plans to convert the former Colonial Manor nursing home in Balaton into apartments will be moving forward more slowly than anticipated, after the project failed to get state grant funding. On Tuesday, Lyon County Commissioners heard a proposal to complete the first three out of a total nine planned apartments.

MARSHALL — A proposal to convert a former nursing home in Balaton into apartments didn’t get the state funding developers were looking for, Lyon County Commissioners learned this week. Developers will still be moving forward with the project – but in smaller pieces over time.

“What you have in front of you is a proposal from the developers for the project that would allow them to start moving it forward,” Lisa Graphenteen, of Development Services, Inc., said at Tuesday’s commissioner meeting. “What they would do is, they would develop the project in phases . . . they would move forward with the first three units. The project is a total of nine (units).”

After discussion of the project’s status, commissioners voted to move ahead with putting $100,000 in affordable housing aid funding toward the project, as a deferred loan to the developers.

Last spring, county commissioners heard a development proposal at the former Colonial Manor nursing home in Balaton. Colonial Manor, which was originally owned by the city of Balaton, closed in 2019. Developers KEH, Inc., purchased the property with a plan to renovate it into market-rate apartments.

“They were in front of you back in 2024 to request funding as part of your Statewide Affordable Housing Aid (SAHA) allocation,” Graphenteen told commissioners. “You did approve the $100,000 to the project, and that was part of them submitting a state application to Minnesota Housing, to get an additional $250,000 of funding for the project.”

The proposal scored high, but in the end did not receive funding, Graphenteen said.

“The state does have the right to make changes to funding decisions, based on geographic allocation or other reasons,” she said.

Without the additional $250,000 in state funding, developers were proposing to break the project up over time, Graphenteen said. “They essentially would develop the first three units, start to generate revenue from those, and then continue to finish the other six units within the project.”

The first three apartments could be finished by the end of this year, and construction of another three could start next year, Graphenteen said.

“What I did as part of the project is essentially underwriting,” Graphenteen said. “So I had the developer rework their numbers, provide that to me.” She said part of her analysis of the project looked at whether the funding request to the county would still be reasonable.

“The recommendation would be to continue to allocate $100,000 of the SAHA funding to the project, and structure it as a 0% loan or a deferred loan for a 10-year term. And as long as the developer continues to own the property, completes the development of the additional six units, the funds would be forgiven at the end of that 10-year term,” Graphenteen said. “If the developer would decide to sell the property within the 10 years, or does not finish the additional six units, the funds would then be repaid to the county.”

Lyon County received $104,699 in SAHA funding in 2023, and the same amount in 2024, Graphenteen said. In 2025, the amount was reduced to about $44,000.

“It sounds like it’s a good project,” said Commissioner Todd Draper. However, commissioners did have some questions about the proposal.

Based on an operating budget for the first part of the project, the net operating income for the first three apartments was $8,000 a year.

“I’m kind of confused as to how they can make that work,” said Commissioner Paul Graupmann. “Do they expect to make money once they get all nine built and rented out?”

“It’s not going to make a huge profit, but it would turn a profit,” Graphenteen said.

Commissioner Rick Anderson said the apartments would also not be the only occupants in the former nursing home. A wing of the building has also been converted into rental storage, Anderson said.

A motion by Anderson to approve the $100,000 in funding for a 0% deferred loan with a 10-year term was passed by commissioners.