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2025-01-14 Council and HRA Joint Work Session Minutes CITY COUNCIL MEETING MINUTES Richfield, Minnesota City Council/HRA Joint Work Session January 14, 2025 CALL TO ORDER Mayor Supple called the work session to order at 5:45 p.m. in the Bartholomew Room. Councilmembers Present: Mary Supple, Mayor; Sharon Christensen; Walter Burk, Sean Hayford Oleary, Rori A. Coleman-Woods Staff Present: HRA Commission: Guests: Katie Rodriguez, City Manager; Melissa Poehlman, Community Development Director; Julie Urban, Assistant Community Development Director; Courtney Miller, Management Analyst; Michelle Friedrich, City Clerk. Gordon Hanson; John Young Josh Krsnak, CEO Hempel Real Estate; Ryan Tauer, Hempel Real Estate Acquisitions; and John Errigo, Greater MN Housing Fund. ITEM #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. Community Development Director Poehlman introduced the presentation to the Council. Assistant Community Development Director Urban introduced the applicant request for financial assistance and 4d status and preservation of three affordable rental communities. Assistant Community Development Director Urban noted the properties contain a total of 236 units and the properties are considered Naturally Occurring Affordable Housing or NOAH properties. Assistant Community Development Director Urban reviewed Hempel Real Estate is seeking to purchase the properties and maintain their affordability and is requesting additional assistance from the City's HRA to ensure affordability and is seeking up to $1.77 million from the City's Affordable Housing Trust Fund. Assistant Community Development Director Urban noted the HRA would need to shift funds from the Spending Plan Fund to meet the obligation. Josh Krsnak, CEO of Hempel Real Estate, provided an overview of the company’s background and introduced his team, outlining their roles. He highlighted that Hempel Real Estate has acquired 20 NOAH properties over the past 10 years, all of which have been maintained as NOAH properties. Mr. Krsnak explained the company’s commitment to investing in NOAH properties and emphasized their importance as long-term assets for Hempel Real Estate. John Errigo, Greater Minnesota Housing Fund, discussed the benefits of funding through the organization. He explained their available capital is limited due to their role as a non-profit preservation buyer, market pricing, and their mission to keep rents affordable. City Council Work Session Minutes -2- January 14, 2025 Community Development Director Poehlman commented on the risks and tradeoffs. She explained 4d provides tax savings to the property, by shifting the tax burden to other taxpayers in the district. Community Development Director Poehlman noted an average home of $319,000 would see a city tax increase of $10.00 annually, and other NOAH properties would also pay more. Community Development Director Poehlman added the city could lower the tax levy to avoid redistribution of payment of taxes. She added that there is a conversion risk, and if the properties were sold to a non-preservation buyer and rents increased significantly, the loss of this housing for rent-assistance clients could impact the viability of the HCV Program. HRA Commissioner Hanson asked if there are other 4d properties in Richfield. Assistant Community Development Director Urban noted through a federal subsidy there are several other properties that are classified as 4d. Mayor Supple asked if the rate before was .75 and when the Legislature changed the rules in 2023, all of those dropped to .25. Community Development Director Poehlman stated yes, they did. Councilmember Hayford Oleary noted the sale price agreed to is higher than what normally would be justified. Assistant Community Development Director Urban noted the price is not far from the assessed value. Ryan Tauer explained that the typical investor return is a minimum of 10% return on capital. Mr. Tauer, noted that today, if they put leverage on the property, their return would be around 1-2%. Mr. Tauer added that the assessed value and the purchase price are almost identical. Councilmember Hayford Oleary asked for clarification on the income requirements for residents and whether a resident who increases their income would lose the ability to remain in the building. Ryan Tauer noted income requirements are based upon move-in income. John Errigo discussed certifying incomes upon new occupancy plus utility allowance. Mr. Errigo noted an $8.6 investment with a cap of 2% max rental increases over the next 15 years. The difference between this property and normal rental properties is that they will be holding that line more flat than other properties where rents will increase more each year. He noted that the goal is ultimately to maintain long-term affordability. HRA Commissioner Young asked how much debt, and equity would be acquired for the city and the State in this process. John Errigo explained the numbers behind the project. HRA Commissioner Young asked if there were other interested buyers for the property. Hempel CEO Krsnak described the process. He noted that Errigo asked him if he would be interested in the project. There were about 10-15 different offers and most offers were for the buildings separately. There was one other buyer interested in all three, but the seller went with them in the end. HRA Commissioner Young asked about the effect of putting $1.77 million on the project and whether they would still be able to fund other projects. Community Development Director Poehlman noted the Spending Plan Fund is the most flexible of all their funds and would allow funding for commercial development. She noted the Spending Plan Funds must be committed by the end of 2025 and spent by the end of 2026. The opportunity cost is that spending the money here would not allow them to spend it elsewhere. As a part of the strategic plan, there is a priority for Richfield to be an affordable place to live. City Council Work Session Minutes -3-January 14, 2025 HRA Commissioner Young asked whether raising and lowering the levy is a big deal for the city. Community Development Director Poehlman explained that it is about setting the budget. City Manager Rodriguez added that cutting the levy would be very difficult. Mr. Krsnak noted the most important thing is to get the 4d taxes, followed by getting assistance with the repairs. Mr. Krasnak noted at this time it is uncertain how many repairs are required to qualify for 4d taxes, and noted they need City assistance. Mayor Supple noted the benefit of stabilizing affordable housing so people are not displaced from their housing by rising rents. Mayor Supple expressed concern regarding the potential impact to senior citizens on a fixed income. Mayor Supple requested clarification on how different taxing jurisdictions might be affected. Councilmember Hayford Oleary stated the amount requested seems like a very large subsidy and creates an impact on the tax base long-term. He added there are other projects he would like to see the money be used for. Mr. Errigo discussed the issues he raised about the rent market. HRA Commissioner Hanson noted the risk of setting a precedent that other NOAH properties would seek the same 4d taxes. Community Development Director Poehlman explained there has been an increase in inquiries because of the drop to the .25 rate. She added she does not believe this would set a precedent. HRA Commissioner Hanson inquired about how funds would be allocated in a potential partnership, specifically whether they would be spent on cosmetic updates or on infrastructure like electrical, plumbing, etc. Mr. Krsnak explained that their approach begins with safety and security, followed by addressing heating and boiler systems, roofing, windows, and energy efficiency. Cosmetic changes are considered only after these critical improvements. Community Development Director Poehlman briefly discussed the next steps in the process, ADJOURNMENT Mayor Supple adjourned the work session at 6:55 pm. Date Approved: January 28, 2025 Mary B. Supple Mayor Michelle Friedrich Katie Rodriguez City Clerk City Manager