Minnesota Legislative Session
Housing Update & Potential Community Impacts

By Keith Dahl, Municipal Advisor
and Schane Rudlang, Municipal Advisor

Housing, primarily affordable housing, has been a focal point at both the state and local level in Minnesota for many years. Rising interest rates, inflationary pressures on construction costs, perpetually high rents, and a general lack of housing availability have made it increasingly difficult for Minnesota communities to deliver critical housing resources to their constituents. However, this year’s sweeping legislative session resulted in a comprehensive suite of programs intended to address the production and preservation of affordable housing, rental assistance, and down payment assistance for first-time home buyers, just to name a few. This year’s package of housing legislation will have wide-ranging and direct impacts on local resources – some for better, and likely some for worse.

General Overview:

The housing bill appropriates more than $1 billion in spending to enhance many existing housing programs, as well as create new ones such as a metro-wide sales tax dedicated to affordable housing. Guidance from the state is beginning to emerge relative to how these resources will be deployed and we fully expect the summer will be spent by many working to understand how these legislative changes can best be leveraged for both local government use and developers of housing alike. A summary of the appropriations in the housing bill by category include:

For a more detailed overview of the housing bill and its appropriations, please read the state’s summary of housing funding in the 2023 One Minnesota Budget.

In addition to the housing bill, housing policy initiatives were integrated into other pieces of legislation, as well. Specifically:

Metro-Wide Sales Tax for Affordable Housing:

Beginning in October of this year, a 0.25% sales tax will be additionally imposed throughout the seven-county metropolitan area (Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington). Taxable items currently included in the state’s base sales and use tax will be subject to the new tax, while traditionally non-taxable items such as clothing, food, medicine, etc. will remain exempt.

Funds collected through this new sales tax will be allocated to three specific areas for local affordable housing aid:

• 25% to the state rental assistance program
• 25% to metropolitan cities
• 50% to metropolitan counties

According to state estimates developed during the legislative session, annual disbursements will be approximately $100 million to counties and $25 million cities.  The Department of Revenue will remit these funds to jurisdictions twice a year, in mid-July and late-December, following the same schedule as Local Government Aid payments.

Counties and cities can deploy these funds for several qualifying activities, such as rental assistance and gap financing for the construction and rehabilitation of affordable housing.  The legislation stipulates that household incomes must be at or below 115% of the area median income (AMI) for home ownership projects, and at or below 80% AMI for rental housing projects. For reference, the following table provides the 2023 income limits by household size released by the U.S. Department of Housing and Urban Development.

Moreover, the state prefers these funds be used to provide affordable housing for households earning incomes below 80% AMI for home ownership projects and 50% AMI for rental housing projects.

Counties and cities have three years from receipt of the local affordable housing aid to spend it on a qualifying activity. Any funds left unspent by the stated deadline must be transferred to Minnesota Housing. It’s important to note that, according to state statutes, these funds are considered spent if they’re deposited into a local affordable housing trust fund. This fact can effectively eliminate the “use it or lose it” associated with the time restriction, thereby creating an incentive for all counties and cities to establish a local housing trust fund.

Qualifying Low-Income Rental Housing:

After extensive testimony and deliberation over the last three legislative sessions, the 2023 tax bill made adjustments to the qualifying low-income rental housing tax classification, commonly referred to as the affordable housing tax classification, or “4d.” These changes eliminate the tiered structure that had been in place since 2014 and lowers the tax classification rate to 0.25%.  When this legislation takes effect for pay 2025, it will essentially shift the local property tax burden of these 4d properties onto other property classifications. The table below illustrates the estimated impact of the tax classification changes for an affordable housing development in the Twin Cities metro area.

* Pay 2023 rates were used for comparison purposes.
**Pay 2024 rates and estimated market values were carried forward for comparison purposes.

In the example above property taxes are estimated to fall by approximately 58% from pay 2022 to 2025. While this year’s tax bill did include a two-year transition aid for cities whose tax base has at least 2% of properties classified as 4d, only five cities in the seven-county metropolitan area – Brooklyn Center, Columbia Heights, Lexington, Spring Lake Park, and St. Paul – will benefit from the aid, and the payment amounts will unfortunately not come close to covering total impact from the reduction. For example, the city’s tax rate in 2023 is 59.286% and its housing project noted above forecasts a property tax reduction to the city of slightly less than $44,000 from pay 2024 to 2025. The city is only estimated to receive $47,634 annually for its transition aid, which just barely covers one of its respective 4d properties.

In addition, there may be other unintended impacts to cities relative to their local zoning controls being contested. Tax increment financing (TIF) districts established with 4d property prior to the legislature amending the affordable housing tax classification in 2021 and now in 2023 will see a drastic reduction in the amount of annual tax increment collected starting with taxes payable in 2025. Zoning allows a city to control real estate development, both structure type and corresponding use, within its community. Referencing the example housing project again, the property tax in pay 2025 is estimated to be $126,200. If this development were market rate housing, property taxes under the aforementioned assumptions would be estimated at $620,233, a difference of almost $500,000. Will cities rezone property knowing the development may qualify as 4d? Will the legislature exempt affordable housing development from local zoning control entirely? Will cities establish any TIF districts for affordable housing developments, given the sales tax for affordable housing aid? Will cities even need to provide public assistance to affordable housing at all, given the implicit property tax subsidy under these changes? At this point, there are more questions than answers on how this change will ripple through your community – for better or worse.

What Comes Next?

As stated previously, it will likely be imperative for local jurisdictions presently without one to create a housing trust fund to effectively deploy their allocations of affordable housing aid within their jurisdictions.  Ehlers has experience assisting many communities with establishment, administration, and deployment of housing trust funds.  We welcome the opportunity to discuss the practical implications, tactics, and policy considerations that all come into play with this important community resource.  Additionally, we will continue to monitor guidance from various state agencies for any actionable recommendations that might become available over the next weeks and months.  Many industry groups will likely collaborate on solutions that may, or may not, have broad applicability.  Finally, if you’d like to examine the impacts of the changes to the 4d tax classification, Ehlers would be happy to introduce you to our modeling resources to help further discussions among your decision makers.

Contact an Ehlers Municipal Advisor if you have questions, concerns, or need assistance evaluating specific impacts within your community.

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