Minneapolis-St. Paul Market Stumbles But Still Has Need for Credit Units
By Caitlin Jones
8 min read
Tax Credit Advisor, May 2009: Metropolitan Minneapolis-St. Paul is a tale of two cities.
The Twin Cities boast demographics historically favorable to apartment development, including low-income housing tax credit (LIHTC) projects. But the worsening economy is putting a crimp in the region.
According to the U.S. Census Bureau, the seven-county Twin Cities metro area as of 7/1/08 had 2,810,414 residents, nearly 54% of Minnesota’s total. Population growth was nearly 1% for the year ending 7/1/08, 6.3% in the past eight years.
The largest cities in the seven-county Twin Cities area (Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington counties) are Minneapolis, in Hennepin County with 1.1 million residents, and St. Paul, the state capital in Ramsey County with nearly 499,000 people.
Housing industry officials note the Twin Cities area is blessed by some favorable demographics. One, according to Minneapolis LIHTC market analyst Sam Newberg, of the firm Joe Urban, is a highly educated workforce. This has made the area attractive to corporations. This includes around 20 Fortune 500 companies, among them Target Corp., 3M, U.S. Bancorp, General Mills, and Best Buy.
Additional positives are historically stable and steady population, job, and income growth; an economy not prone to booms and busts; a relatively high median household income; and consistently strong demand for additional affordable housing.
“The Metro market has been very, very strong” for LIHTC projects, especially 9% deals with rents based on 50% of the area median income, said Derrick Metz, of tax credit syndicator WNC & Associates, Inc.
Challenging Times
Unfortunately, the bloom on the rose is fading somewhat.
The metro jobless rate, historically well below the national average, has accelerated in recent months to approach the national level. According to federal data, the jobless rate in February 2009 for the Minneapolis-St. Paul-Bloomington, MN-WI metropolitan statistical area (MSA) was 8.2%, up from 7.7% in January and 4.6% a year earlier. The national rate in February 2009 was 8.9%.
A sharp downturn in construction, layoffs at corporations and manufacturers, and other upheavals have inflated the metro jobless rate.
The recession has spurred home foreclosures. Chip Halbach, executive director of the Minnesota Housing Partnership, a nonprofit affordable housing advocate, said the Twin Cities is near the top nationally in home foreclosures, largely due to lots of speculative home building in recent years. He said home prices have fallen substantially as well.
According to county sheriff’s data, the city of Minneapolis alone saw 439 home foreclosure sales in just the first two months of 2009 – nearly on pace with the 3,077 sales for all of 2008 and 2,895 in 2007. Statewide, home foreclosures soared to nearly 27,000 in 2008 from 6,500 in 2005.
The median sales price for existing single-family homes in the metro area was $188,600 in the fourth quarter of 2008, according to the National Association of Realtors. This was 13.2% less than 12 months earlier.
According to 2009 figures published by the U.S. Department of Housing and Urban Development (HUD), the median household income for a four-person household in the Minneapolis-St. Paul-Bloomington metropolitan statistical area is $83,900.
The income limit for a four-person household at 50% of the area median income (AMI) is $41,950, which translates into a maximum monthly housing credit unit rent of about $1,048.
Help for Tax Credits
Despite darker economics, developer Paul Sween, a principal of Minneapolis-based Dominium Development & Acquisition, LLC, said his firm’s LIHTC properties in the seven-county Twin Cities area (38 projects, 2,657 units) have benefited from the for-sale housing downturn. “We were very much like other communities where the extension of [mortgage] credit to less and less qualified people cut into the market share for rental housing,” he said. “And now we’ve been steadily gaining that market share back. That’s been good for our affordable portfolio.”
Sween said Dominium’s economic vacancy rate for its LIHTC properties in the Twin Cities area is 5.66%, down from nearly 11% in 2006. The firm’s tax credit unit rents are trending slightly above inflation, he noted, compared to only 2% or so per year when vacancies were higher. In the metro conventional apartment sector, Sween said the vacancy rate is holding around 7%-8%, rents are “pretty flat,” but prior concessions have pretty much “worked their way out of the market.”
Dominium has roughly 5,000 affordable and market-rate apartments in the Twin Cities area, its largest market. The firm owns and manages about 17,000 total rental units nationwide.
Halbach said there’s “great need” today in the Twin Cities area for additional affordable housing renting substantially below permitted maximum tax credit rents. He warned that LIHTC developers, though, need to be “very picky” about the submarkets they develop in. He suggested good submarkets are the western and southwestern suburbs and along existing and pending light rail lines.
Several sources said there’s particular need for additional large-bedroom tax credit units for families, and noted rental townhomes are popular. Metz said enclosed parking (e.g., underground garages) is virtually mandatory because of the cold climate.
Developer Rob McCready, a partner of St. Paul-based MetroPlains, LLC, said his firm has generally succeeded in achieving maximum tax credit rents based on 50% of AMI at its LIHTC properties in the Twin Cities area, but not maximum rents based on 60% of AMI. He noted MetroPlains in October 2008 completed lease-up of a new, 37-unit LIHTC property in less than three months. The company develops LIHTC projects in Minnesota, North Dakota, Wisconsin, Iowa, Kansas, and Oklahoma.
Basing tax credit street rents on 50% of AMI, while accepting applicants up to 60% of AMI, is common in LIHTC projects in the Twin Cities area. This is both because of market factors – sources said many existing local conventional apartments have affordable rents – and because the housing credit allocators serving the Twin Cities area favor projects with a portion of units affordable to households at 50% of AMI or even lower. This motivates developers to go this route to compete successfully for a tax credit award.
Sween suggested that for an identical apartment in the metro area, the gap between the rent for a typical tax credit unit and the rent for a typical existing conventional unit is probably $20 to $40 at most. But he added there is a much larger gap compared to new market-rate units. Newberg said there hasn’t been much new market-rate rental production locally for some time.
Sub-Allocators, CRA Demand
One unique feature of the Twin Cities area is multiple housing credit allocating agencies. In addition to Minnesota Housing, the state housing credit agency that awards credits for projects statewide, there are four sub-allocators. These are the cities of Minneapolis and St. Paul, and Dakota and Washington counties.
These allocators may have different priorities and scoring. For example, Minneapolis’ Dollie Crowther said her agency likes mixed-income projects, requires 20% of project units to be at 50% of AMI, and offers extra points to projects on transit lines.
Minnesota Housing typically holds two application rounds per year for 9% housing credits. The sub-allocators each hold one, with their application deadline the same as Minnesota Housing’s first round. In general, projects within the jurisdictions of the sub-allocators can’t apply in Minnesota Housing’s first round unless the sponsor is a nonprofit.
Sween said it’s easier today than in the past – though “still competitive” – to win a 9% credit award for a Twin Cities area project.” In 2008, Minnesota Housing received applications requesting nearly $27 million in housing credits, but had just $10.8 million available.
Sources said LIHTC projects in the Twin Cities still attract interest from “CRA” investors – financial institutions motivated largely by the federal Community Reinvestment Act – but that it is more difficult now to raise equity from syndicators and direct investors. “Being in the Twin Cities is definitely a benefit compared to many other areas in the Midwest,” said McCready, referring to other equity-starved areas.
Major local tax credit investors include U.S. Bancorp, and Wells Fargo. The Twin Cities area also traditionally has had abundant amounts of state, local, and regional soft funding sources for tax credit projects.
Sween said Dominium is currently developing three LIHTC projects in the Twin Cities area. One is a fully leased 38-unit new construction project near completion in Albertville, MN. It contains two-, three-, and four-bedroom townhomes, each with a two-car garage, for families. The other deals are acquisition/rehabs of two existing Section 8-assisted properties: a 50-unit property in Northfield and a 23-unit project in Brooklyn Center.
McCready said MetroPlains is building a 30-unit, three-story infill tax credit project with underground parking in Minneapolis. The development will be mixed-income, with four units for formerly homeless individuals plus units set aside for households earning up to 30%, 50%, and 60% of AMI.
