Request for Committee Action

2019-00399 - Memorandum of Understanding with Minneapolis Public Housing Authority relating to public housing subsidy conversion

Built in 1970, the Spring Manor One and Two are two high rise apartments with 221 units owned and operated by the Minneapolis Public Housing Authority (MPHA) as public housing. Both buildings are comprised of one- and two-bedroom units. As part of this rehabilitation of the two existing buildings, a new 15-unit building will be built adjacent to the 828 Spring St building with one and two-bedroom accessible units. Collectively, this project will be referred to as the Springs Manor Expansion Project.

Currently, MPHA is working with the United States Housing and Urban Development department (HUD) to finalize MPHA's application to use the Rental Assistance Demonstration (RAD) program to facilitate the rehabilitation and preservation of the 221 existing public housing units and the construction of 15 additional units that will be handicapped accessible. The 15 new units will be built as public housing units and will be converted to Section 8 units via RAD before occupancy. The project includes 71 units affordable at 30% Area Median Income (AMI) and 165 units affordable at 60% AMI. Because of the rental subsidy, residents will continue to pay no more than 30% of their income towards rent.

The 15 new units will be built with the Restore and Rebuild authority (aka Faircloth Authority) of MPHA. RAD allows housing authorities, with HUD approval, to convert properties from Section 9 public housing operating subsidy to Section 8 project-based rental vouchers (PBV). The conversion to Section 8 provides higher operating subsidies and opportunities to access private financing to fund needed capital repairs. To ensure MPHA’s commitment to providing quality affordable housing and serving low-income households is maintained, MPHA will hold a ground lease for a minimum of 65 years under the Springs Manor Expansion Project and land use restrictions will be recorded against the property. These affordability and ownership structures meet the RAD conversion guidance outlined in the Memorandum of Understanding (MOU) with MPHA that the City approved in 2019.

In addition to the 15-unit new construction building, planned improvements at the property include plumbing and electrical updates, replacement of the roofs and windows, and improvements to protect the building from the elements. Additionally, updates will be made to individual units to ensure they are up to current standards. A more detailed list of updates is below. MPHA plans to phase the rehabilitation to minimize the construction impact to existing tenants. Entities wholly owned and controlled by MPHA will be the general partner of Springs LP and act as developer and property manager of the site. The project will close on its financing and begin rehabilitation in second quarter 2025.

FINANCING OVERVIEW

The estimated total development cost (TDC) of the Springs Manor Expansion Project is $78,511,087. Primary financing for the project includes up to $39,200,000 in Housing Revenue Bonds (HRBs) issued through Hennepin County, 4% Housing Tax Credits (HTCs) allocated through the Minneapolis/Saint Paul Housing Finance Board for the rehab and new construction. A deferred loan of $1,300,000 from the City will support rehabilitation and upgrades only in the existing buildings. Funding for this loan was allocated in the City’s adopted 2025 Budget.

MPHA will capitalize a ground lease of approximately $18,700,000. MPHA equity in the project includes an MPHA sponsor loan of $12,987,951, an additional $6,000,000 in Public Housing Levy funds, and a deferred developer fee of $682,711. The total proposed developer fee of $4,551,404 falls within the AHTF and HTC guidelines. Project sources and uses are shown on the attached Project Data Worksheet.

PROPOSED LOAN TERMS

The $1,300,000 in City funding will be loaned to the project to support the rehabilitation and upgrades to the existing buildings. This loan will be structured as a deferred loan, similar to the City’s Affordable Housing Trust Fund loan program. The City will impose its rent and income restrictions on the project, which will be included in a declaration filed against the property. Proposed loan terms include:

• Lender: City of Minneapolis
• Borrower: Springs LP, a Minnesota limited partnership or related entity
• Amount: $1,300,000
• Interest Rate: 1% or AFR
• Payments: deferred loan with interest accruing during the term of the loan. Principal and accrued interest are due upon maturity, sale, or refinance.
• Maturity Date: no less than 30 years and not to exceed 50 years.
• Collateral: subordinate position mortgage on the real estate.
• Requirements for funds: income and rent restrictions to match the term of the City’s loan with a minimum of 30 years.

SCOPE OF WORK

The approximately $40,000,000 construction contract includes the following upgrades, enhancements, and new construction:

• Plumbing/Electrical: replacement and upgrade of housing unit and common area electrical plumbing systems.
• Building Envelope: replacement and repair of external materials on the building, roofing, and windows.
• Units: Comprehensive unit rehabilitation including appliances, cupboards, flooring, and new heating/cooling system to replace previous window cooling units.
• Common Area Mechanicals
• New Construction (824 Spring): one-story addition that expands common area amenities at 828 Spring St and connects to the new residential units; 824 Spring St will consist of a four-story building that includes fifteen (15) new residential units [nine (9) one-bedroom and six (6) two-bedroom units]. All new units will be Type A accessible/UFAS compliant. New construction includes two interior garages that will be used for staff parking.
• Common Area Upgrades: flooring, lighting, and upgrades to the meeting spaces, offices, and fitness areas.
• Site / Parking: repair and upgrades to parking lot and landscaping.
• Security: replacement of aging security systems in the interior and exteriors of the buildings.

RESIDENT ENGAGEMENT AND PROTECTION

In 2019, the City approved an MOU with MPHA that outlined the guiding principles for any City assistance on RAD conversions. Staff believes this project is consistent with the housing conversion principles and conditions outlined in the MOU. Residents of Spring Manor have been informed and engaged in both the rehabilitation scope of work and design as well as resident relocation rights and protections, including:

• Fall 2023 - MPHA began engagement with residents at 809 and 828 Spring St to hear feedback on what improvements may be needed at both buildings.
• February 2024 - MPHA held four meetings with residents to review the Resident Information Notice and updates on concept plan for improvements (one meeting at 809 Spring St and three meetings at 828 Spring St).
• July 2024 - MPHA held four meetings with residents to review the General Information Notice and updates on design (one meeting at 809 Spring St and three meetings at 828 Spring St).
• August 2024 - MPHA held four meetings with residents to review relocation options as outlined in the Relocation Plan and introduced the general contractor to review preliminary construction approach.
• August 2024 - conducted four building wide resident meetings to have residents vote on preferences for several unit/common area finishes and fixtures (flooring, countertops, cabinets, common area furniture, exterior plantings).
• November 2024 - MPHA held four meetings with residents around the RAD conversion the project is pursuing and provided another update on design. MPHA will hold additional meetings with residents as required by HUD after the plan is approved by HUD.

MPHA staff are also attending Resident Council meetings as an opportunity to provide updates on the project and respond to resident questions.

MPHA developed a relocation plan for the property rehabilitation, which has been reviewed by a third party under contract with the City. All renovations under RAD must satisfy federal requirements to protect residents, including:

• RAD retains essential resident processes and rights, including the grievance process and funding for resident organizations
• Residents have a right to return to the property after work is complete; in this case everyone has the option to be temporarily relocated on-site so no displacement is expected.

• If relocation is necessary in the interim, residents will have comparable housing throughout the process.
• The rent calculation after the RAD is 30 percent of household adjusted income, as it was before.
• Residents are not rescreened and do not lose eligibility during a RAD conversion.