NOVOGRADAC JOURNAL OF TAX CREDITS – JULY 2020
Focus On: St. Paul, Minn.
TERESA GARCIA, SENIOR MARKETING MANAGER, NOVOGRADAC
How does a landlocked, fully developed city like St. Paul, Minn., prepare to accommodate a growing population?
St. Paul's strategy is to increase densities on infill parcels as they become available for redevelopment and to enhance transit options for new developments. The capital city released an economic development plan predicting that while a few large infill sites will be redeveloped over the next 20 years, much of St. Paul's growth will come from increasing density on smaller infill parcels. This presents an opportunity for housing developers that are experienced in acquisition and rehabilitation.
"St. Paul is an old city and they have a lot of old multifamily properties-it's important for them to preserve that," said Loren Brueggemann, principal of Phoenix Development, a Minneapolis-founded rental housing developer that is now headquartered in Santa Rosa, Calif. "But, [the city's] resources are limited so they can only do so much at a time. Their need is going to be there for a long time because only so much can get done with the resources available."
Phoenix Development, through its subsidiary BB Housing Associates LLC, formed a partnership with St. Paul in 2010 after the city purchased hundreds of foreclosed, scattered-site, multifamily housing properties and turned 22 buildings into 45 duplex units. Many of the properties were original duplexes subdivided into six- to eight-unit properties.
"We acquired them from the city and they gave us Neighborhood Stabilization Funds to help with the rehab," said Brueggemann. "They were beautiful properties and they were, in some cases, historically restored. They had high ceilings and hardwood floors. We rented them to families earning 50 percent of the area median income (AMI) or less. That started our relationship with the city of St. Paul."
About St. Paul
With about 304,000 residents, St. Paul is the second- most populous city in Minnesota, after Minneapolis. The Twin Cities anchor the Minneapolis-St. Paul-Bloomington, Minn.-Wis. Metropolitan Statistical Area (MSA), which is home to about 3.7 million people.
A Novogradac market study found that health care, social assistance, educational services and manufacturing industries collectively account for 41.1 percent of St. Paul's workforce. The U.S. Bureau of Labor Statistics showed unemployment levels in the MSA were at about 3.1 percent in March, before the COVID-19 pandemic and ensuing economic downturn led to a 9.2 percent unemployment rate in April.
The Need for More Affordable Housing
The pandemic-triggered downturn makes the existing need for affordable housing even more critical. A 2019 report by the local metropolitan council found that St. Paul and surrounding areas need an additional 37,400 affordable homes built or preserved between 2020 and 2030 for households earning 50 percent or less of the AMI. More of than half of the units are needed for extremely low-income households earning 30 percent or less of the AMI. Demand for affordable housing will likely increase as effects of the pandemic crisis, such as unemployment and underemployment, make it even more difficult for households to afford rent.
St. Paul faces the issue of an aging housing stock, with about 72 percent of housing in the city being 50 years old or older and in need of extensive renovations. The median construction year for all housing in St. Paul is 1949.
"There are a lot of old, tired C-class properties and I know that a big motivation for the city is to get those in stabilized condition and upgraded,” said Brueggemann.
To help preserve and maintain its affordable housing stock, the St. Paul Public Housing Agency (PHA) converted a majority of its public housing units through the U.S. Department of Housing and Urban Development Rental Assistance Demonstration program. PHA converted 3,855 public housing units out of its 4,300-unit portfolio to project-based rental assistance. The debt-free conversion was finalized in October 2019, allowing the PHA to retain full ownership of the units and to continue maintaining and operating them.
Two New LIHTC Developments
The low-income housing tax credit (LIHTC) is an important resource in building affordable housing in St. Paul. The Housing and Redevelopment Authority of the City of St. Paul (HRA) acts as a sub-allocator of federal LIHTCs, so developers apply directly to HRA for both 4 percent and 9 percent LIHTC allocations.
Two of St. Paul's newest LIHTC properties are under development by Phoenix Development: Preservation Project, a competitive 9 percent LIHTC redevelopment, and Rice Street Flats, a 4 percent LIHTC bond new-construction development.
Preservation Project is a scattered-site, tenant-in-place rehabilitation of 172 units across five properties. "Stabilization is high on the agenda for the housing authority and so we took five scattered properties with 172 units and we basically did an arm's length transaction," said Brueggemann. CREA syndicated the tax credits and Phoenix put in place a Freddie Mac immediate fund with a hold back, bridging both the hold back and the tax credit equity. Preservation Project has been under construction since September 2019.
Rice Street Flats, which Phoenix will build in partnership with Community Housing Development Corporation, is a 41-unit development in St. Paul's North End. The site was a vacant parcel formerly owned by the housing authority. The housing authority contributed HOME funds and Phoenix purchased the parcel with a land note, while HUD provided a 221(d)4 mortgage. Financing of Rice Street Flats closed in May.
Outlook
A challenge of developing affordable housing in St. Paul is finding sources of gap financing to make transactions feasible. ''All these deals take gap assistance and so you have to carefully underwrite your project," said Brueggemann. "If you have too many units it takes too long to get the gap assistance you actually need to build. As a developer, I always have to see how big is the gap. How many units is it because every additional unit increases the gap. You can pretty much design yourself out of getting the [development] actually funded and built."
For affordable housing developers who are able to successfully structure a transaction, Brueggemann said there is no shortage of demand.