Loading...
2025-01-14 WS City Council Agenda W ORK SESSION RICHFIELD MUNICIPAL CENTER, BARTHOLOMEW ROOM JANUARY 14, 2025 5:45 PM Call to order 1.Discuss a request for financial assistance and 4d tax status from Hempel Real Estate for the acquisition and preservation of three affordable rental communities. Adjournment Auxiliary aids for individuals with disabilities are available upon request. Requests must be made at least 96 hours in advance to the City Clerk at 612-861-9739. AGENDA SECTION:Work Session Items AGENDA ITEM #1. WORK SESSION 1/14/2025 REPORT PREPARED BY: Julie Urban, Asst. Community Development Director DEPARTMENT DIRECTOR REVIEW: Melissa Poehlman, Community Development Director 1/7/2025 OTHER DEPARTMENT REVIEW: CITY MANAGER REVIEW: Katie Rodriguez, City Manager 1/8/2025 ITEM FOR WORK SESSION: Discuss a request for financial assistance and 4d tax status from Hempel Real Estate for the acquisition and preservation of three affordable rental communities. EXECUTIVE SUMMARY: Background: Three Richfield apartment communities, New Orleans Court, Richland Court, and Winton House (Properties), were recently listed for sale after having been under the same ownership and management for decades. The Properties, containing a total of 236 units are located along 77th Street at Wentworth, 14th, and Cedar Avenues (see attached map). The Properties were built in the 1960s and are considered Naturally Occurring Affordable Housing, or NOAH properties. Rent levels are considered affordable to households earning between 50% and 60% of the Area Median Income (AMI). The Properties are currently home to 43 Housing Choice Voucher or Section 8 (HCV) clients and five Kids@Home Program families. The management company (Highland) has been a cooperative partner with the City, managing and maintaining the Properties well and keeping rents at modest levels. Proposal: Hempel Real Estate is seeking to purchase the Properties and maintain their affordability. Hempel is a local real estate firm, with both a commercial and multi-family portfolio, that has acquired and preserved several NOAH communities in St. Paul and West St. Paul over the past few years. Hempel would utilize equity from the Greater Minnesota Housing Fund's NOAH Impact Fund, which contributes equity to NOAH acquisitions in exchange for preserving affordability for 15 years. Hempel is requesting additional assistance from the City's Housing and Redevelopment Authority (HRA) to be able to ensure affordability, limit rent increases, and undertake modest rehabilitation work ($2.578 million). Hempel is seeking up to $1.77 million from the City's Affordable Housing Trust Fund (Trust Fund) in exchange for limiting rents and capping resident income levels, which would enable the Properties to qualify for 4d(1) tax status. Apartment properties taxed at the 4d rate pay taxes at a rate of 0.25% instead of the typical apartment rate of 1.25%. Hempel is proposing that affordability levels for all one and two-bedroom units be capped at 60% of the AMI and have agreed to cap the three-bedroom units at 70% AMI. Rents are projected to increase between two and four percent over the first ten years for an overall average of less than three percent. Hempel would also continue to accept HCV and Kids@Home rental assistance clients. Funding from the Trust Fund would be in the form of a deferred loan that would be forgiven at the end of 15 years. The HRA would need to shift funds from the Spending Plan fund in order to meet the obligation. A portion of the funding ($200,000) could be provided in the form of apartment remodeling loans funded out of repayments from the current owner upon the sale of the Properties. The 4d tax status would provide a significant reduction in property taxes for the Properties annually (estimated $352,050 annually based on pay 2025 values and tax rates). Ehlers, the City/HRA's financial consultant, reviewed the proposal and determined that, if the HRA were to provide the requested assistance, the returns on investment to Hempel would not exceed what is typical in the market. The returns are well below an average 10% return on equity over 20 years. Tradeoffs/Risks: 4d: While 4d provides a significant savings to properties with the classification, it shifts that portion of the tax burden to other taxpayers in the community. If 4d were to be approved for the Properties, the average median-valued home's taxes would increase by an estimated $9.97 annually in City taxes (estimated using 2025 rates). Other NOAH rental properties would also pay more with the tax shift. To avoid the additional tax burden on other properties, the City would need to lower its levy by a commensurate amount. The 4d classification would be automatic if the City requires rent/income restrictions as a condition of its financial assistance. An additional $3.88 million in up-front funding would be necessary to make up for the benefit of the 4d tax classification. Conversion risk: The Properties' current Net Operating Income (NOI) does not support the price being paid for the Properties, so the HRA assistance is, in a sense, helping to "overpay" for the Properties. In the current market, however, there is a risk of another buyer "overpaying," converting the Properties to a higher class, and using increased rents to fund the "overpayment." There is no way to know how great this risk is. Rental Assistance Programs: 43 HCV recipients currently reside in the Properties (out of a total 177 vouchers in use in the City). If the Properties were sold to a non-preservation buyer and rents raised significantly, the loss of this housing for rent-assistance clients could impact the viability of the HCV Program. It can be challenging to find property owners willing to accept HCVs and properties with rents that voucher holders can afford. There are also 24 three-bedroom townhome units at New Orleans Court that are the only affordable three-bedroom units available in the community, aside from some single family/duplex rental homes. Next Steps: Hempel submitted a bid for the Properties in November, and their offer was accepted. They recently signed the purchase agreement and began the due diligence period. They anticipate closing on the Properties within 60 to 90 days. Hempel is seeking a commitment from the HRA and the City in January. Consideration of the request for funds from the Trust Fund is scheduled for the HRA meeting on January 21. Any approval will be contingent on the Council passing a resolution authorizing 4d tax status at their meeting on January 28. The State does not require a resolution from the City in order to grant 4d tax status; however, because the decision has an impact on the City's tax capacity and distribution of the tax burden, it is important that the City Council be involved in the decision. DIRECTION NEEDED: 1. Are policymakers willing to consider 4d tax classification and the related tax shift (or future reductions to the City levy) to assist in the purchase of the Properties and preservation of affordability for 15 years? 2. Are there concerns related to the transfer of Spending Plan funds to the Affordable Housing Trust Fund for this use? BACKGROUND INFORMATION: A.HISTORICAL CONTEXT In 2018, The Concierge (fka Crossroads at Penn) at 7700 Penn Avenue South was purchased, rehabilitated, and rents increased. While much-needed physical improvements were made to the aging complex, many people were displaced as a result of the ownership change and subsequent rent increases. The current owners of the Properties and management company (Highland Management) own and manage two additional apartment communities in Richfield: Woodlake Park (Dupont and 63rd) and Fountainhead (76th and Knox). B.EQUITABLE OR STRATEGIC CONSIDERATIONS OR IMPACTS Preserving the City's NOAH apartment communities furthers the Strategic Plan goal to maintain Richfield as an affordable place to live. The City's rental housing is also occupied by a significant number of Black, Indigenous, and People of Color (BIPOC) residents and residents with lower incomes. Investing in housing stability is an investment in the health and vitality of these communities. While 43% of Richfield renters are considered "cost-burdened" and pay more than 30% of their income for housing, the 5-year American Community Survey (2019-2023) found that 22% of Richfield homeowners are as well. Approval of a tax shift could help one group in need, while hurting another. C.POLICIES (resolutions, ordinances, regulations, statutes, exc): Minnesota Statutes 273.128 provides a property tax break for affordable rental properties under the Low Income Rental Classification Program (LIRC), commonly referred to as the 4d program. The Class 4d property class rate is 0.25%, and the typical classification for rental housing is 1.25%. Affordable rental properties are eligible for the 4d tax classification when a property restricts at least 20% of the units at rents affordable at 60% of the AMI and when financial assistance is provided by federal, state or local government requiring these rent and income restrictions. D.CRITICAL TIMING ISSUES: Hempel recently signed the purchase agreement, is in the due diligence period, and anticipates closing on the properties within 60 to 90 days. Application for 2026 4d property tax status is due to Minnesota Housing by March 31st. E.FINANCIAL IMPACT: The NOAH Impact Fund is providing over $8.7 million in equity to the acquisition and preservation of the Properties; however, a financial gap remains. High interest rates, high operating costs, the large number of units, modest rents, and limit to the amount of equity the NOAH Impact Fund can provide create the gap that Hempel is asking the HRA to fill with funds from the Affordable Housing Trust Fund and with 4d tax status. Hempel is requesting up to $1.77 million from the Trust Fund and 4d tax status, which has a value of $352,050 annually (pay 2025). Following the due diligence period, which includes physical inspections of the properties, a final determination of the amount needed will be made. There is $2.8 million of uncommitted funds available in the Spending Plan fund that could be transferred to the Trust Fund for the assistance. Apartment Remodeling loan repayments could also fund up to $200,000 in rehabilitation loans thereby reducing the amount needed from the Trust Fund. Ehler's, the City/HRA's financial consultant, reviewed the proposal and determined that, if the HRA were to provide the requested assistance, the returns on investment to Hempel would not exceed what is typical in the market. The returns are well below an average 10% return on equity over 20 years. The Properties' current Net Operating Income (NOI) does not support the price being paid for the Properties, so the HRA assistance is helping to "overpay" for the Properties. In the current market, however, there is a risk of another buyer "overpaying," converting the Properties to a higher class, and using increased rents to fund the "overpayment." Forty-three HCV recipients reside in the Properties. If the Properties were to sell to a non-preservation buyer and rents raised, the loss of this housing for rent-assistance clients could impact the viability of the HCV Program. F.LEGAL CONSIDERATION: The NOAH Impact Fund requires 15 years of affordability, that a minimum of 40% of the units be affordable at 60% of the AMI and the remainder at 80% of the AMI, and that the property accept Housing Choice Vouchers. A Declaration of Restrictive Covenants will be filed against the Properties to memorialize the terms. If assistance is approved, staff would recommend that the HRA file its own declaration requiring that all one and two-bedroom units charge rents affordable at 60% AMI and three bedroom units affordable at 70% AMI and that units be restricted to households meeting those income requirements. The limits will be required for 15 years. Providing assistance and placing rent/income restrictions will make the Properties automatically eligible for the 4d tax classification. ALTERNATIVE(S): NA PRINCIPAL PARTIES EXPECTED AT MEETING: Josh Krsnak and Ryan Tauer, Hemple Companies John Errigo, NOAH Impact Fund ATTACHMENTS: Description Type Map of properties Backup Material NOAH Impact Fund Backup Material 4d(1) Tax Classification Summary Backup Material a Social Impact Investment Fund for the Preservation of Naturally Occurring Affordable Housing across Minnesota’s Twin Cities Metropolitan Area NOAH Impact Fund provides low-cost, long-term equity capital to support non-profit and mission-minded private affordable housing owner-operators to acquire unsubsidized affordable rental housing in the Twin Cities 7-County Metro Area, maintaining affordability for low-income households for 15 years. NOAH Impact Fund • Social Impact Investors: Banks, State/County Government, and Philanthropy • Maintain Long-Term Stewardship and Prevent Resident Displacement • Operating Partners Must Accept Section 8 and Maintain Affordable Rents • Recorded Land Use Regulatory Agreement for 15 Years of Affordability NOAH Pool I o $25 Million for NOAH Property Acquisition/Preservation o Deployed 2017 through 2019, 701 Units Preserved in 25 Properties NOAH Pool II o $25 Million for NOAH Property Acquisition/Preservation o Deployment in 2025 and 2026, Goal is to Preserve 500+ Units NOAH Property Acquisition Structure • Conventional Fannie/Freddie Debt • Equity from NOAH Impact Fund (90%) and Operating Partner (10%) • Potential 0% Deferred Loan to Manage Cash Flow and Rehabilitation Needs • 10-Year Hold, then Refinance (Preferred) or Sell (if Needed) to Exit GMHF is Minnesota’s largest statewide non-profit affordable housing Community Development Financial Institution with a nearly 30-year history of social impact lending and investing – including starting NOAH Impact Fund. Contact: John Errigo Fund Manager jerrigo@gmhf.com 1 January 2025 Low-Income Rental Classification Program – “4d” Summary Minnesota Statutes 273.128 provides a property tax break for affordable rental properties under the Low Income Rental Classification Program (LIRC), commonly referred to as the “4d” program. 4d is one of several tax classifications the State of Minnesota applies to rental property. During the 2023 Legislative Session, the State lowered the Class 4d property class rate from 0.75% to 0.25%. The typical classification for rental housing is 1.25%. Affordable rental properties are eligible for the 4d tax classification when a property meets two conditions: 1. The property owner agrees to rent and income restrictions serving households at 60% of the AMI or below. 2. The property receives financial assistance from federal, state or local government requiring rent and income restrictions. At least 20% of the units must meet the income requirements. The 4d tax status applies only to the rent/income-qualifying units. The application deadline to Minnesota Housing is March 31 of each year for taxes payable the following year. To maintain the class 4d classification, the property owner must annually reapply and certify to the Housing Finance Agency that the property tax savings were used for one or more of the following eligible uses: property maintenance, property security, improvements to the property, rent stabilization, or increases to the property's replacement reserve account. Savings to Property Owners/Cost to Other Taxpayers The 4d tax classification provides a benefit to property owners, which lowers the total taxes collected by a municipality. For a municipality to collect the same amount of total taxes, the tax burden is shifted to other taxpayers. Example: 42-units valued at $4,729,000 in Pay 2025 Non-4d property taxes payable in 2025: 4d property taxes (all units): $4,729,000 x 0.125 = $59,113 tax capacity $4,729,000 x .0025 = $11,823 tax capacity 2025 City Tax Rate = 54.57% Estimated City Tax Rate = 54.9% City Taxes = $32,258 City Taxes = $6,491 TOTAL SAVINGS/COST = $25,767 ($613/unit) 2 January 2025 Current 4d Properties in the City Several properties in the City are classified as 4d because they receive federal subsidies in exchange for income/rent restrictions: Richfield Towers (7717 Chicago Ave S) Sheridan Court (2500 66th St W) Robert Will (6345 Pleasant Ave S) Lyndale Plaza (20%) (6401 Lyndale Ave S) The City has approved the 4d classification for one property: Seasons Park The HRA approved $150,000 in assistance to Seasons Park and as a condition requires all units to be affordable at 60% AMI. The affordability is required for 40 years. At the time assistance was provided, the 4d tax rate was 0.75%. The total savings in City taxes to these properties classified as 4d will be $343,376 (payable in 2025). Rent Limits ---- Maximum Gross Rents by Bedroom Size (4/1/24) ---- 0 1 2 3 4 50% AMI 1087 1,165 1,397 1,615 1,801 60% AMI 1,305 1,398 1,677 1,938 2,161 70% AMI 1,522 1,631 1,956 2,261 2,521 *actual rents must be adjusted to accommodate utility costs.