MN Housing board update: Proposed tax credit changes pushed to 2018
During its November meeting, the board of the Minnesota Housing Finance Agency (MHFA) dedicated most of its discussion to proposed changes to the 2017 and 2018 Qualified Allocation Plan (QAP) and the public’s response to those changes. The board also considered the history, governance, and use of tax exempt bonding authority.
Commissioner Mary Tingerthal opened the meeting by stating that many of the projects recently approved for funding through the Consolidated RFP are moving forward with their project launch (intake) meetings. Not going as well, she continued, is the reception to a set of proposed changes to 2017 and 2018 QAP, suggested by the Agency in October. QAPs establish the criteria for awarding federal Low Income Housing Tax Credits. Tingerthal acknowledged opposition to the proposed changes, as some saw the changes as the Agency stopping projects mid-track. Tingerthal said that Agency staff now recommends that it forgo the changes to the 2017 QAP, and take more time in listening to concerns regarding the proposed changes for the 2018 QAP.
Tingerthal reminded the board of the proposed changes for projects seeking tax exempt bonding and 4 percent housing tax credits. The Agency proposed these changes because the state’s tax exempt bond authority, significant enough to meet all demand just a few years ago, is rapidly becoming a scarce resource due to a marked increase in development of rental housing that utilizes the 4 percent tax credits.
Agency staff proposed that starting in 2018, to qualify for 4 percent credits, projects must:
- Score a minimum of 50 points under the QAP criteria,
- Be subject to limits set by the Agency’s predictive cost model,
- Meet at least one of the Agency’s strategic policy priorities,
- And the developer must waive right to opt out of program restrictions in year 15 to maintain affordability for a 30-year period.
According to Tingerthal, several themes emerged during the comment period for proposed changes to the QAP. First, commenters argued that the notice period of the proposed changes was too brief because developers had already made commitments of time and money under the old rules. Second, commenters felt that the changes would erode local control by limiting communities’ capacity to pursue funding for a range of projects that are eligible under the current rules. Third, commenters felt that the proposed changes would require additional subsidy to meet the proposed criteria, and that those subsidy funds do not exist. Therefore, the commenters reasoned, the proposed changes would ultimately decrease the quantity of affordable housing developed.
By and large, said Tingerthal, commenters felt that the Agency was being unfair. In response, Tingerthal requested that the board delay adopting the QAP amendments to allow more time for thoughtful dialogue. She added that the interplay of practices and guidelines between tax exempt bonds and the use of 4 percent tax credits is even more complicated than the dynamics surrounding 9 percent credits. Tingerthal said that the Agency welcomes dialogue regarding proposed changes to ensure that no unintended negative consequences occur.
Agency staff recommended that the Agency extend the comment period on the initial 2018 QAP proposed amendments until the end of November, withdraw proposed amendments to the 2017 QAP, and continue engagement with stakeholders through early January. Staff will present its recommendations on the 2018 QAP at the January meeting, and another public comment period will follow. The board will not take final action on proposed changes to the QAP until its February meeting.
Tingerthal said that she hoped that this extension will allow a more collaborative atmosphere to replace the adversarial one that emerged in response to the initial proposal. Staff will provide the board an update regarding their conversations with stakeholders at the December meeting.
Board member Craig Klausing pointed out that, regardless of the conversations, the amount of available tax exempt bonds would not change. The Agency still needs to address the question of how to create criteria for allocating a scarce resource. Tingerthal agreed with that assessment, and stated that resources would still be targeted to areas of greatest need.
Board member Rebecca Otto said that this was the first time in her experience as a board member that many of the comments submitted to the Agency appeared to be political in nature and not well-informed.
The board voted to approve the Agency staff’s proposal to withdraw proposed amendments to the 2017 QAP and to delay action on the amendments proposed for the 2018 QAP. Tingerthal ended the board meeting discussion by saying that the Agency’s lead staff for the tax credit program, Kayla Schuchman, would be leaving the Agency for a project management position at CommonBond in December. Tingerthal added that Schuchman assured her that her departure was not related to the 4 percent tax credit.
Tax Exempt Bonding Authority – History, Governance, and Use
After the conclusion of the board meeting, members reconvened in committee to expand their understanding of governance and history of utilization of tax exempt bonding authority. [Download the slides from the presentation here.]
As background, Tingerthal said that for many years, the Agency QAP de-emphasized the use of 9 percent credits for senior housing. According to Tingerthal, the reasoning for this is that affordable housing for families is far more acute than the need for affordable senior housing and it is often difficult to obtain local approval for affordable family projects. Therefore, she explained, the Agency QAP provides more points for family developments in geographic areas that provide access to opportunities such as jobs, access to transit and good schools. In the Agency’s recent RFP cycle, there was a special senior pilot program which resulted in the selection of two senior projects that target some units to lower income seniors. The Agency will continue to look at the relative need for family and senior housing.
Points made in the bonding/tax credit overview, led by Agency Chief Financial Officer Kevin Carpenter:
Private Activity Bonds (tax exempt bonds) are allocated by federal statute based on a state’s population. Four percent tax credits can only be obtained for projects funded by the tax exempt bonds.
The National Council of State Housing Agencies wrote a best practices guide for the administration of 4 and 9 percent tax credit programs. Minnesota Housing essentially follows this guide, although the Agency has been out of step with the recommended practice for cost containment with respect to 4 percent credit projects. The Agency and several other state housing agencies are now looking at this issue in light of the recent significant increase in demand for tax exempt bonds and 4 percent credits.
Under the federal allocation formula, Minnesota received $550 million in tax exempt bonding authority in 2016. Minnesota law governs the administration of this authority. Of the state’s bonding authority, four listed entitlement jurisdictions receive $238 million. Minnesota Housing, as an entitlement jurisdiction, receives $126 million and local government entitlement jurisdictions (Minneapolis, St. Paul, and Dakota County) get the remainder.
Minnesota Management and Budget (MMB) administers the balance of bonding authority (the amount not for entitlement jurisdictions). In 2016, this balance amounted to $312 million divided by Minnesota statute among three pools ($182 million for housing, $111 million for small issue, and $19 million for public facilities). Senior housing projects may not access the housing pool until May of each year. If any amounts remain in these individual pools by August of each year, they are collapsed into a unified pool (available for any of the three uses). In December of each year, any unused amount in the unified pool goes to Minnesota Housing to be used for housing.
Emphasizing the current scarcity of tax exempt bonds, in typical years the unified pool normally is in the hundreds of millions. Due to strong demand, this year’s unified pool will amount to only $20 million.
In recent years, MMB has not allocated approximately $150 million of the housing pool because few applications for projects were submitted. At the end of each year, MMB transferred those funds to Minnesota Housing, where they were utilized for either single family or multifamily housing. In 2016, for the first time in 10 years, the amount unallocated is likely to be $0.
Contrary to some of the comments received, approximately equal amounts of the state’s tax exempt bonding authority go to rental financing and to homeownership financing. From 2011 to 2016, $1.4 billion in tax exempt bond authority was used for rental developments and $1.7 billion for ownership. The Agency quickly pivots its use of tax exempt bonds between the two housing uses as it adjusts to changes in the financial markets and to ensure that all of the state’s private activity bonding authority gets used rather than allowing it to expire (expiration occurs if the authority is not used within three years of allocation).
Commissioner Tingerthal said that the Agency will develop a strategy on the use of the state’s bonding authority based on predictions about where financial markets are heading. She added that she fully understood the strong value of utilizing bonding authority for multifamily projects that access 4 percent credits in Minnesota.
Board member Rebecca Otto said that it would be important for the Agency to create a Frequently Asked Questions report and to address the inaccuracies included in some of the comments about proposed changes to the 2017 and 2018 QAP. Otto added that it bothered her that some commenters questioned the intentions of the Agency. The session ended with a discussion of new financial modelling created by the Agency to minimize the use of tax exempt bonding authority for single family financing.