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MARKET UPDATE: AFFORDABLE RENTAL HOUSING IN THE TWIN CITIES | 16 EMERGING TOOLS FOR AFFORDABLE RENTAL DEVELOPMENT STATE AND LOCAL TOOLS Housing Trust Funds –The Minnesota Legislature passed legislation in 2017 to encourage local communities to establish local housing trust funds (LHTFs) using HRA levies and other local funds. The financing of affordable housing is one of the specified uses of LHTF monies. Minneapolis, Red Wing, St. Paul and Goodhue County either have current LHTFs or are developing them, and Duluth Mayor Emily Larson has announced plans to create a new trust fund with $1-2 million in annual money to be used for affordable housing. Tax Credit Contribution Fund –Also referred to as a “state housing tax credit,” the Tax Credit Contribution Fund would establish a program to allow Minnesota taxpayers to contribute funds to affordable housing development in return for equal credit against their state income tax liability. Investments could go toward a specific development or general loan pool that is used for several affordable projects. According to the Minnesota Housing Partnership, a similar program in North Dakota has leveraged about $5 for every $1 of investment in its fund, creating more than 2,500 affordable units across the state since 2011. TIF and TIF Pooling –Tax increment financing (TIF) is a decades-old tool to leverage the long-term gain in tax revenue from a new development to help fund its initial construction. TIF pooling allows a city to use excess tax revenues from one or more over-performing TIF districts to invest in new affordable housing projects in other parts of the city. The City of Minnetonka, as an example, is forecasting to have $3.585 million in pooled TIF funds for use between 2019 and 2022 towards new affordable rental development. Inclusionary Zoning and Opt-Out Payments – Many cities require new developments of a given size to set aside a certain portion of the units at affordable rents, ensuring that affordable housing is built in some proportion to overall growth. The City of Edina recently enacted a policy whereby all new multifamily developments of 20 or more units that require re-zoning or a comp plan amendment to provide at least 10% of rentable area to be reserved at 50% area median income (AMI) rent or 20% of rentable area to be reserved at 60% AMI rent. The policy gives developers the option to build the units in another location, build the units in partnership with another project, or buy out of the obligation for $100,000 per required affordable unit. Funds generated by this last option are then applied to another affordable development. FEDERAL TOOLS Streamlined Loan Processing for HUD Affordable Financing – Over the past three years, HUD has made a number of major changes that enable faster, easier processing of multifamily loans coupled with low-income housing tax credits (LIHTC), tax increment financing and abatements, subordinate government loans and grants, and other tools used on affordable rental projects. HUD provides clearer directions and faster loan package review and approval for all categories of affordable rental investment: new construction, substantial rehabilitation, and “heavy” refinance with repairs. Income Averaging with LIHTC Financing – In March 2018, Congress added “income averaging” as a third minimum set-aside election for LIHTC financing of affordable rental projects. The new selection allows LIHTC-qualified units to serve households earning as much as 80% of AMI as long as the property’s overall average income limit is no more than 60% of AMI. Projects selecting income averaging must set aside at least 40% of units as affordable. Income averaging should allow for more households to be served by affordable housing on the upper and lower sides of the income scale. Higher rents paid by households at the upper range (e.g., 80% AMI) would offset lower rents paid by very low- and extremely low-income households. Opportunity Zone Funds –The tax reform law of 2018 created a tax incentive through Qualified Opportunity Zones (QOZs) that could ultimately benefit affordable rental developments. Individuals and businesses that sell assets with taxable gains are allowed to invest in projects in qualified low-income areas representing about 11% of the U.S. census tracts. Qualifying investments are eligible to defer current capital gains and permanently avoid some portion of gains. While final federal rules are still being developed, there are no restrictions on using these benefits in conjunction with other development tax incentives such as LIHTC, New Markets Tax Credits (NMTC) and Historic Tax Credits (HTC).