How should the state allocate its bonding resources for housing to have the biggest impact — and take full advantage of federal funds? A new proposal, supported by MHP, seeks to amend Minnesota bond statute to develop more rental housing to meet the tremendous need among low and moderate-income Minnesotans.
HAVEN is a newly formed Minnesota non-profit association conceived in late 2016 to promote "a full and public discussion of how best to support Minnesota’s urgent demand for affordable multifamily housing by making most efficient use of tax-exempt bonds and 4% low-income housing tax credits." Its current proposal would amend the state’s statute that governs use of Minnesota’s allocation of the federally authorized tax-exempt bonds. Currently Minnesota is allowed to issue approximately $550 million annually in these tax-exempt bonds. The HAVEN proposal would affect the Housing Pool, which amounted to $182 million in 2016.
What would the HAVEN proposal do?
HAVEN would amend the priorities in state statute for allocation of tax exempt bonds. Currently a minimum 31% of bonds in the Housing Pool are required to be used for homeownership, and any use of bonds for senior housing is suspended for five months into the year. HAVEN would rank allocation of bonds for tax credit rental projects above use of bonds for homeownership, and give senior housing equal priority to general occupancy housing.
Most notably, the HAVEN proposal would create a new priority structure regarding where and how bonds are awarded through the Housing Pool.
- Priority 1: Projects that preserve federally assisted housing and restrict the issuance of bonds to no more than 55% of the reasonably expected eligible basis (this is a tax credit term for an amount that approximates 90% of a project’s development costs).
- Priority 2: General occupancy and senior tax credit housing where (i) 80% of the units are at or below 60% AMI affordable, (ii) uses federal housing tax credits, and (iii) restricts the issuance of bonds to no more than 55% of the reasonably expected eligible basis.
- Priority 3: All other rental housing projects utilizing federal tax credits.
- Priority 4: Home ownership mortgage loans.
- Priority 5: All other rental projects not using federal tax credits.
Under existing law and continuing under HAVEN all rental housing developed with tax exempt financing must meet minimum rent and income restrictions of at least 20% of the units affordable at 50% AMI, or 40% at 60% AMI, and have a minimum 15-year affordability period. Minnesota also requires that at least 20% of the units be restricted to rents at or below HUD determined Fair Market Rents. Home mortgage recipients would typically need to have incomes under 80% of AMI.
Additionally, HAVEN would:
- Institute a lottery system for awarding bonds within a given priority level to ensure that projects either receive adequate awards to move to development or do not receive any bond allocation
- Restrict the amount of bonds to no more than 55% of eligible project cost for Priority 1 and Priority 2 projects.
Why does MHP support the HAVEN Proposal?
More bonds would be available for rental housing, and with the new priorities, the rental housing developed would benefit those with lower incomes than is now taking place. With the vacancy rates at extremely low levels, Minnesota metro areas desperately need new non-luxury rental housing at a variety of price points.
More federal tax credit resources would be brought to Minnesota. Under HAVEN hundreds of millions of dollars in new development would occur and tens of millions of additional federal subsidy dollars would be invested in Minnesota’s rental housing and economy annually. In addition, permanent and construction jobs would be created, and sales, income and property taxes would be generated for local and state government.
Housing for seniors would no longer be penalized. Seniors lack modestly priced rental options in many communities. Because Minnesota Housing’s priorities for use of 9% tax credits make it very difficult to use that resource for senior housing, it is important that the bonding / 4% credit allocations do not also discourage affordable senior housing development.
Limited federal bond resources would be used more efficiently. The lottery allocation and the 55% maximum bond usage priority would help ensure that bonds are not wasted, and that projects are not stalled because they receive bond amounts that are less than is needed for development.
What needs additional consideration?
While MHP believes HAVEN sets the right direction for an improved use of the state’s bond allocation there are a number of issues that should be vetted with the possible result of modifications being made to improve the current proposal.
Should there be a level of greater affordability added to the HAVEN priority structure? While the affordability in Priority 2 is an improvement over current law, why not create a new, higher level priority that would bring greater affordability — for instance, 20% at 30% AMI, and a 30-year affordability requirement? To reach a deeper level of affordability developers would need more project subsidies, so for this priority to be meaningful new sources of development subsidy should be identified.
Will homebuyers, particularly those in rural communities, maintain their access to lowest cost mortgage financing if home ownership housing falls to a lower priority than rental? Currently there is little benefit to the homebuyer whether a mortgage loan is funded with tax-exempt or taxable debt. But if interest rates increase and the spread widens between taxable and tax-exempt interest rates, the benefit to homebuyers receiving tax-exempt financed mortgage loans becomes more pronounced.
Will state progress in helping households of color become homeowners be sustained under HAVEN? To its credit, Minnesota Housing has made significant strides in helping households of color become homeowners, and thereby incrementally reducing the racial disparity in homeownership rates. It is important that efforts to address this disparity are not impeded by amendments to bond law.
Will Minnesota Housing stay financially strong? Minnesota Housing earns a substantial portion of its total revenue through the mortgage program interest and fees it collects. In addition to covering its own operating expenses, the Agency commits net earnings back into its programs. For many affordable housing reasons it is important that Minnesota Housing continue to be financially strong.