Partial tax exclusion plan to fund more affordable housing gets House division’s OK

It is widely accepted that multiple solutions are needed to address the lack of affordable housing in the state.

There is disagreement if HF3588 is an answer.

Sponsored by Rep. Samantha Vang (DFL-Brooklyn Center), the bill, as amended, calls for a discretionary program whereby cities could receive the affordable housing market value exclusion, thereby reducing the taxable market value by 50% for apartment properties that meet certain affordable housing requirements. Unlike tax-increment financing, it would not affect a city’s statutory debt limits.

Approved on a 6-3 party-line vote by the House Local Government Division Wednesday, the bill’s next stop is the House State Government Finance and Elections Committee.

Kelly Doran is the founder of Doran Properties Group, which has developed thousands of multi-family units — including the high-end sector — in Minnesota.

“I’m here to represent an idea of how to increase the amount of available capital that will allow our society to meet the growing demand for affordable housing, and do it in a way that brings in that private capital to supplement limited government resources,” he said.

Doran estimates less than 10% of real estate developers participate in funding and construction of affordable housing because the process is too costly and too complicated, including additional property management requirements once a project is built.

He calls the affordable housing market value exclusion a simple premise.

“A city assessor or any assessor that’s involved values the building upon completion at market rate, as if every unit was a market-rate apartment. Then simply that value that’s established by the city assessor is cut in half. The saving that results from the taxes basically being cut in half as well will result in allowing the property owner to retain that from operating expenses and use that money to offset the difference in rents between a 60% (adjusted median income) renter and a market-rate renter.”

The program could not be used in conjunction with other subsidy programs and would require zero state funding.

“This will take people like me — as a developer I do not build affordable housing — and turn us into affordable housing developers,” said Doran, who believes this will be a “catalyst for the construction of many thousands of new housing units.”

Mark Krupski, property records and licensing director for Olmsted County, said programs already exist, such as a 4d Low-Income Rental Classification that provides a 40% tax rate reduction on qualifying units if property owners keep at least 20% of their rental units at or below 60% adjusted median income. He said a Revenue Department report shows the number of 4d housing units rose 5% from 2020 to 2021, and has risen 34% in the past decade.

“The exclusion may provide a slightly greater benefit, but is it significant enough to warrant another program that creates a property-tax exemption that shifts property taxes to other property owners and further complicates an already complicated property-tax system?”

Charlie Vander Aarde, government relations specialist with Metro Cities, submitted a letter against the bill, in part because it “puts the responsibility on local property taxpayers to provide supports that are traditionally a state function and responsibility. Local taxes are levied to pay for a range of basic public services, and a fifty percent exclusion as proposed in the bill would have significant implications for local taxes and budgets.”

Representatives from the League of Minnesota Cities said the bill has been improved, but unease remains.

“We are also concerned that a 50% market value exclusion on an entire property for 20% of new units to be made available to households at 60% AMI may be an overly generous level of assistance in some cases,” they wrote.

Doran counters with an assumption these buildings don’t get built without the program, and it’s 50% more in taxes cities would receive than if the building isn’t there.

Sen. Tom Bakk (I-Cook) sponsors the companion, SF3200, which awaits action by the Senate Taxes Committee.