MN Housing board update: Proposed changes to 4 percent tax credit
During its October meeting, the board of the Minnesota Housing Finance Agency (MHFA) covered several critical topics, including $80 million in funding awards from the 2016 Consolidated RFP and proposed changes to the allocation of 4 percent federal housing tax credits.
In her opening remarks, Commissioner Mary Tingerthal informed the board that prior to its November meeting board members were encouraged to participate in a tour of the nearly completed Catholic Charities Higher Ground project. After the tour, Agency staff provided an overview of housing plus services programs related to Hunger and Homelessness Awareness week.
Proposed changes to 4 percent tax credit allocation
Join MHP’s discussion on these proposed changes on Thursday, Nov 10, at 3 p.m. by calling 800-220-9875, ID 72658579
One of the weightier topics before the board in October was the board’s approval to open a public comment period for a set of proposed amendments to the Agency’s 2017 and 2018 Qualified Allocation Plans (QAPs), which establish the criteria for awarding federal Low Income Housing Tax Credits. The approval also included a temporary moratorium on accepting applications for 4 percent federal housing tax credits until the board can consider comments on the proposed amendments because the proposed amendments would revise the criteria for awarding such credits. Tingerthal told the board that a combination of market factors has recently made 4 percent credit projects a very viable development alternative. Tingerthal said she is concerned that, if the proposed changes are not made, federal tax exempt bond authority will not be available next year for projects that meet a higher level of state housing priorities. (To access federal 4 percent credits, which are not limited by the federal government, a project must have at least 50 percent of its development cost paid by tax exempt bond financing, which is limited in the amount allocated to the state by federal statute).
Tingerthal continued with additional background on the proposed amendments. Until recently, she said, developers hoping to make projects pencil out with 4 percent credits and tax exempt bond financing typically needed to also access the housing subsidy programs of the Agency. Consequently, these projects were typically subject to the competitive selection criteria adopted by Minnesota Housing that reflect the state’s affordable housing priorities. Minnesota Management and Budget (MMB), the state agency that administers the process for allocating the state’s tax exempt bonding authority, applies only the priorities set forth in the statute governing tax-exempt bonds. Generally, projects may apply to MMB for allocations of tax exempt bonding authority on a first-come, first-served basis, with priorities applying only if there are more applications during an application period than there are bonds available. Preservation projects have priority over new construction projects, and projects which limit occupancy to senior citizens may not apply for bonding authority until May of each year.
Moving to a description of the current environment, Tingerthal said that projects being financed with tax-exempt bonds and tax credits can be used for apartments renting for amounts affordable to a household whose income is no more than 60 percent of area median. Because, at least in the Twin Cities, median incomes have increased considerably in recent years, permitted tax credit rents have also increased considerably. The current rent for a Twin Cities two-bedroom apartment financed by tax credits could be as high as $1,300 a month, Tingerthal said.
Now, because of these high rents that can be used with tax credit housing, and because tax credits are fetching very high prices thereby bringing in a lot of equity for these projects, and because the interest rates for permanent project financing are very low, developers can produce viable projects without seeking deferred financing from Minnesota Housing.
The proposed changes to the state’s 2017 and 2018 Qualified Allocation Plans to ensure greater public purpose for projects using tax-exempt bonds, which have become a scarce resource, include:
1) require developments seeking 4 percent credits to score at least 50 points (up from 30 points in the 2017 QAP and 40 points in the 2018 QAP);
2) require 4 percent credit developments to meet one or more of the Agency’s seven strategic policy priorities (e.g. economic integration);
3) require the developer to commit to a 30 year affordability period (up from 15 years); and
4) require development costs to fall within a range not more than 25 percent above of the Agency’s predictive cost model unless the board approves an exception.
Tingerthal said that Minnesota Housing’s oversight of 4 percent credits does not cover Minneapolis, St. Paul, nor Dakota or Washington counties. These jurisdictions are authorized by state statute to directly administer the federal tax credit program.
The staff proposed a temporary moratorium on any application for 4 percent credits until a public comment period has concluded and the board has taken action on the proposed QAP amendments at its December 22 board meeting. This quick timeframe was needed, Tingerthal added, because the state’s 2017 allocation of federal tax exempt bonding authority will become available on January 2, 2017. In the past, developers would typically seek bond allocations and then apply to Minnesota Housing for an allocation of 4 percent tax credits. Now, should the tighter rules be adopted, developers will likely want to make sure that they can meet the minimum qualifications for the credits before seeking the bond funds. The Agency will make a new pre-application process available by November 1, 2016 to facilitate this process of earlier assessment and scoring of applications.
In response to the proposed QAP amendments, Daniel Buchholtz was given permission to address the board. Buchholtz is the city administrator of Spring Lake Park, a city of 6,500 people. Buchholtz stated his concerns about the proposed policy and the risk it created for a planned senior housing development that the city had been working with a developer to fund through tax exempt bonds and 4 percent tax credits. He said that this project was very important to the vitality of his community, enabling seniors to move to apartments within the community, and to free up their homes for young families. He said that the proposed Agency action was short sighted; it would take away an important economic development tool for the city. This development that the city was supporting also would help Spring Lake Park to meet it housing goals as identified by the Metropolitan Council. Should the project be halted by imposition of the moratorium and QAP change, substantial time investments by both the developer and the city would be rendered moot, Buchholtz said. He added that the city had committed $4 million in tax increment funds and provided a density bonus for the project. Board members asked Buchholtz to submit his concerns in writing during the comment period and to identify which of the proposed changes was of most concern.
Board members asked staff for more clarification on the impact of the temporary moratorium on accepting application for 4 percent credits, which had been made retroactive to October 1. Staff responded that no tax credit requests had been received by the agency between October 1 and the day of the board meeting and that the moratorium would conclude soon, when the board is expected to adopt any amendments to the QAPs at its December 22 meeting. Commissioner Tingerthal said that the board will likely need to have a special committee meeting in early December to consider QAP modifications in light of comments it would have received by the end of the comment period on November 16.
Board and staff next turned to approval of projects under the 2016 Consolidated RFP, the Agency’s annual funding of home ownership and rental proposals. Proposals being funded had been submitted to the Agency in June. In addition to those of Minnesota Housing, the Consolidated RFP includes funds from Greater Minnesota Housing Fund, the Metropolitan Council and the state Department of Employment and Economic Development (DEED), whose awards are subject to approval by those organizations. This year’s RFP also included 30 project-based rental assistance vouchers from the Metro HRA
Staff said that the awards would support production or renovation of 1,831 housing units, and leverage a total of $300 million in real estate development costs.
For single family awards, the Agency was able to fund 32 of 42 proposals submitted, and $8.9 million of the $16 million requested. This year the Agency emphasized large family housing and investments to enable seniors to age in place. Workforce homeownership proposals were approved for Marshall and Perham, where in both cases local businesses were contributing down payment assistance funding.
Staff also highlighted funding the replacement of manufactured homes in Mankato. Board member Stephanie Klinzing said that manufactured housing represented a pretty good temporary housing choice, that in some cases represented permanent housing. Tingerthal said that in the current year’s workplan the Agency will continue to investigate manufactured housing issues because concerns about these homes, and the people who reside in them, have increased recently. Klinzing said that she also appreciated the Agency’s funding support for multi-generational homes as well as aging in place.
Turning to rental housing, staff said that funding requests to available funds was even more lopsided than it was for homeownership. Requests for tax credits outpaced funding availability by 4 to 1; and requests for deferred repayment funds exceeded availability by 3 to 1.
Among the rental projects funded, Agency staff highlighted a USDA Rural Development (RD) preservation package of 11 properties located in eight communities. They said this packaging of RD properties as a single transaction was the first of its type in Minnesota; the consolidation will enable an economy of scale by spreading management and administrative costs over a number of smaller properties.
Staff said that through this funding award the Agency was able to help the City of Austin, where the vacancy rate is 1 percent, to accommodate 120 new Hormel jobs. Staff said that the developer of this project, Three Rivers Community Action, will enable the immigrant population employed by Hormel and other areas businesses to move to Austin and end long commutes.
Also included in this funding round are allocations to the communities of Woodbury and Mora to build apartments through the Agency’s new Senior Rental Housing Pilot. In another project, women leaving incarceration will be housed in a proposed Southwest Minnesota Housing Partnership development in Saint Peter, the first project in Minnesota proposed to be funded by the National Housing Trust Fund, subject to approval of the Agency’s Trust Fund plan by HUD.
Board member Terry Thao asked how the 1,400 rental units compared to last year’s production. Commissioner Tingerthal responded that last year, the Agency funded 1,100 units. She added that these numbers cannot be simply compared because in the prior year the agency was able to use Housing Infrastructure Bond proceeds to fund more supportive housing, which generally requires much more subsidy on a per unit basis than other rental housing.