History: Hennepin County has over 45,000 units of unsubsidized multifamily rental housing with rents affordable to households with incomes at or below 60 percent Annual Median Income (AMI) ($60,000 for a family of four). Rents in these “naturally occurring affordable housing” units tend to average between $900 and $1,200 per month. The properties range in size, age, location, and ownership. Hennepin County accounts for approximately 50 percent of the naturally occurring affordable housing rental units in the seven-county metropolitan area.
Rental vacancy rates in the Twin Cities metro area remain historically low around 3.0 percent, making it difficult for families and individuals to find available housing. National and local investors continue to rapidly acquire rental portfolios, while nonprofit and socially motivated landlords lack the nimble capital needed to compete in the market. As a result, we continue to see naturally affordable rental developments converted to higher market rent properties.
Compounding the problem, many of the “market” conversions limit or eliminate altogether the use of Federal Section 8 housing choice vouchers and state Housing Support. Resulting displacement negatively impacts Hennepin County social service participants, who rely heavily on the programs for the provision of safe, stable housing.
In response, Greater Minnesota Housing Fund (GMHF) created a Housing Impact Investment Fund (HIIF) to finance the acquisition and preservation of unsubsidized affordable rental housing and preserve affordability for the long term. Investments target rental properties at risk of conversion to higher rents and the threatening displacement of low and moderate-income residents. Lower-cost equity is essential to capitalizing the HIIF.
In 2016, the Hennepin County Housing and Redevelopment Authority (HCHRA) was an early and critical participant in the first phase of the metro-wide HIIF, investing $3,000,000 to preserve naturally occurring affordable housing (Resolution 16-HCHRA-0021).
HIIF Phase I invested $25 million dollars from institutional, philanthropic, and socially conscious investors, leveraging approximately $100 million in traditional mortgage debt. The HIIF investment in each property provides the needed equity (approximately 30 percent) in the real estate acquisition and is further leveraged by traditional bank financing (approximately 70 percent). Overall, 701 units were preserved region-wide, including 459 (65 percent) in Hennepin County. HCHRA’s average investment per unit preserved in Hennepin County was approximately $6,500. In return, the HCHRA receives modest annual interest payments ($15,000-$30,000) with the potential for full repayment of the HCHRA’s investment in or about 2031.
After evaluation of HIIF Phase I and persistent market conditions, GMHF has proposed creation of a similar, Phase II fund, and requested additional HCHRA investment.
Based on Phase I’s low cost per unit investment, modest annual return, and potential for full or partial repayment of the entire investment at some future time, staff recommends a second investment in the amount of $2,000,000 for Phase II. Like Phase I, HCHRA Phase II participation would provide low rate, non-collateralized, financing. Under the funding agreement, one or more disbursements could be made, each structured with a likely term of 10 years, with no payments due until the end of the term. By not requiring any collateral, the financing acknowledges that the HCHRA is at risk of losses and write-downs.
This board action request aligns with Hennepin County disparity reduction efforts by preventing resident displacement and the loss of existing affordable rental housing opportunities in communities throughout the county. Funding is included in the 2020 HCHRA Fund 37 Special Projects budget.
Current Request: This request is to authorize negotiation of Agreement PR00001996 with the Greater Minnesota Housing Fund to preserve naturally occurring affordable housing during the period March 1, 2020 through February 28, 2040 with the not to exceed amount of $2,000,000.
Impact/Outcomes: Investment of $2,000,000 in the naturally occurring affordable housing HIIF Phase II is expected to leverage approximately $30.5 million in institutional, philanthropic, and socially conscious investor funds and approximately $70 million in private bank financing to preserve 400 – 500 naturally occurring affordable housing units.