Despite Minnesota’s strong affordable housing industry, leaders throughout the sector agree that our current approach to development simply cannot keep pace with the demand for affordable units. Why? Market factors and changes at the federal level are growing financing gaps.
On June 14, more than 120 leaders from the affordable housing sector convened for MHP’s quarterly Investors Council breakfast to zero in on “Filling the Financing Gaps to Make Affordable Housing Pencil Out.” Dan Smith of U.S. Bank moderated a panel discussion by Mark Moorhouse of Dominium, Kayla Schuchman of CommonBond, and Paul Williams of Project for Pride in Living.
Photo: Kayla Schuchman (left) and Paul Williams (right)
Filling growing gaps
“By far, the biggest policy response to the affordable housing shortage is the tax credit program”, Smith explained. “As long as that remains to be true, what we need to build housing is more money. We’ve got good developers in Minnesota, and these projects simply don’t pencil like they used to.”
According to Moorhouse, several factors drive growing financing gaps including rising construction costs, climbing interest rates, and federal tax reform. Smith said the impact of these factors is major. “A deal that penciled out two years ago now has gaps in the seven figures.”
Because there are simply not enough tax credits to go around, developers must look to other resources to fill gaps. Schuchman said that at CommonBond, to make projects work, they submit applications for City, county, Federal Home Loan Bank, and Metropolitan Council resources, combined with philanthropic fundraising. “It’s any stone we can find and turn over,” she explained. The key, Schuchman said, is finding a site with community support so that local government also contributes resources to the project through zoning, fee waivers, and more.
The time it takes to “find and turn over” stones is significant, making developing affordable housing a complex and lengthy process. Schuchman explained that the best case scenario for a nine percent deal that closes in one year is to have units under construction two to five years from the time of the site concept, making development a slow process despite high demand.
Investors Council members and guests enjoy breakfast before the panel. See more photos from the event here.
Panelists agreed that developers simply need more resources. “Without other ways to fill financing gaps, it’s getting harder to make projects pencil,” Moorhouse explained. “The issue is how to make your budget balance and keep it balanced.”
Community support and the commitment of local resources, Moorhouse said, are rays of hope for developers. “I’ve been in this industry for nearly 25 years, and I can’t tell you how much it’s changed,” he said. “Communities welcome us rather than question why we’re there, and the amount of resources communities are committing is remarkable.”
Moorhouse pointed to two solutions: tax abatement for affordability by State statute and income averaging within the LIHTC program. According to Moorhouse, Colorado, Texas, and Utah have implemented tax abatement measures that, he explained, prevent communities from having to defend a direct subsidy for a project. Income averaging allows developers to charge rents appropriate for households earning up to 80 percent Area Median Income (AMI), as long as those rents are offset with units charging lower rents. The project must ultimately average out to meet affordability criteria for households earning at or below 60 percent AMI.
Smith said that state tax credits are another tool to fill gaps. Georgia, Colorado, Missouri, Tennessee, and Wisconsin have implemented state tax credits. Smith said that the MN Tax Credit Contribution Fund, a state tax credit championed by MHP at the legislature in 2018, would be an effective avenue for private businesses and local communities to contribute to affordable housing projects.
Williams, a member of the Governor’s Task Force on Housing, said that “a production mismatch” has emerged as a key issue among members. Minnesota needs “more units and the right kind of units” he said. Solutions under consideration by the Task Force include a dedicated and permanent revenue source for housing, land use and density zoning changes, and increasing homeownership opportunities across the state — especially for communities of color.
Minnesotans have an opportunity to make affordable housing a key issue in elections this summer and fall. To conclude the event, MHP Executive Director Anne Mavity urged attendees to ask candidates how they would increase investments in housing to meet the growing need for affordable housing in Minnesota.
Recognizing 2018 Legislative Leaders & Outstanding Advocates
To recognize exceptional dedication to the advancement of affordable housing — and MHP’s key legislative goals — at the State Capitol in 2018, Mavity announced the inaugural recipients of MHP’s Legislative Leader and Outstanding Advocate awards at the breakfast.
Lawmakers receiving the 2018 Legislative Leader award played a central role in building support for key MHP initiatives from the Homes for All MN bonding request to the MHP’s MN Tax Credit Contribution Fund. MHP’s 2018 Outstanding Advocates made exceptional efforts to engage with lawmakers, sharing personal and professional experience to further MHP’s policy agenda and secure more resources for affordable housing. Read more and see a full list of awardees here.
MHP's 2018 Outstanding Advocates (from left): Buffy Beranek (accepting on behalf of Joe Wheeler of SEMMCHRA), Tom O'Neil (Dougherty Mortgage), Ryan Lunderby (Dominium), Deidre Schmidt (CommonBond), Randal Hemmerlin (Red Wing HRA), Erin Anderson (Commonwealth Development), Skip Duchesneau (D.W. Jones)
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