2019-00757 - 2019 Hennepin County Transit-Oriented Development Program applications

2019-00284 - Grants from Minnesota Department of Employment and Economic Development (DEED), the Metropolitan Council’s Tax Base Revitalization Account (TBRA), and Hennepin County's Environmental Response Fund (ERF) for the fall 2018 brownfield grant round

2018-01261 - 2018 Affordable Housing Trust Fund staff directions report and recommendations

Gateway Northeast is a proposed 128-unit new construction mixed-use and mixed-income housing development in the Bottineau neighborhood. The project consists of 51 studios, 46 one-bedroom, 21 two-bedroom, and 10 three-bedroom units with a range of affordability at 30, 50, and 60 percent of Area Median Income (AMI). Fifty-one of the units are proposed at market rate rents. The five-story building includes underground parking and 8,500 square feet of ground floor commercial space in two tenant bays. The project is well located on transit and bike routes, and at a scenic location on the Mississippi River.

Gateway Northeast will include 10 three-bedroom homeless units, providing much needed large family homeless housing in a highly desirable location. Families in these units will receive services from CommonBond Communities. These services are possible because CommonBond is using a new Fannie Mae mortgage product that allows a rebate on the interest rate, with the savings used to fund supportive services. CommonBond secured 26 project-based vouchers (PBVs) from the Minneapolis Public Housing Authority and these units will be affordable to households at or below 50 percent AMI and these households will not pay more than 30 percent of their income towards rent.

The project site currently comprises seven parcels and will require the demolition of existing structures, including a liquor store, two single family homes, and a small commercial property. The affected tenants of the demolished structures include two single family home renters and two commercial tenants. A relocation plan has been prepared in accordance with applicable federal policies and regulations.

Financing Overview

In 2018, the City made a $700,000 Affordable Housing Trust Fund (AHTF) award to Gateway Northeast and CommonBond is requesting an additional $280,000 from the AHTF for the project. The AHTF maximum award amount was increased from $25,000 per unit to $30,000 per unit in 2019. This $280,000 request is a supplemental application to allow for the increased difference to be included in the original award as well as additional funds from the Large Family Housing Initiative to account for seven additional three-bedroom units at 30 percent AMI.

Primary financing for the Gateway Northeast project includes a combination of 4% Housing Tax Credits (HTC), Housing Revenue Bonds (HRB), and Tax Increment Financing (TIF). In addition to the original AHTF award, CommonBond also secured $1,650,000 in Met Council Livable Community Demonstration Account funds and $650,000 in Hennepin County TOD funds. Environmental clean-up funds in the project include Met Council TBRA, Hennepin County ERF, and a Minnesota Brownfield grant, which are all secured. CommonBond commitments to the project include a General Partner Loan of $2,750,000, a seller Note of $905,000, and a deferred developer fee of $2,128,029. The developer fee meets AHTF program criteria.

The total development cost (TDC) is $39,129,978 and the TDC per unit is approximately $297,040 without the commercial construction costs included. The requested AHTF amount of $280,000 and the previous award of $700,000 represents approximately three percent of the TDC.

Tax Increment Financing

The developer has requested pay-as-you-go TIF assistance from the City to assist with the construction of this project. Pending City Council approval, the Gateway Northeast TIF Plan will establish a new housing TIF district and the City of Minneapolis will issue a Pay-As-You-Go tax increment note in the amount of $2,500,000 as a source to the project. This source will act as an income stream for the debt service and this income will increase the amount of supportable first mortgage debt due to the additional revenues. It is currently projected that the TIF note will be repaid by tax increment in 26 years, the maximum duration that is allowed by State Statute.

The Gateway Northeast TIF Plan was transmitted for 45-day review to Hennepin County, the Minneapolis School Board, the City Planning Commission, the Bottineau Neighborhood Group, and other interested parties on August 15, 2019.

Proposed Redevelopment Contract Terms

1. Within 18 months after closing, the developer will construct 128 units of housing in a five-story building, including the following provisions:
   1. 10 units will be affordable at or below 30% AMI
   2. 16 units will be affordable at or below 50% AMI
   3. 51 units will be affordable at or below 60% AMI
   4. 51 units will be at market rate rents
   5. A total of 97 enclosed parking spaces will be constructed
2. The City will provide TIF assistance in the form of one Pay-As-You-Go TIF Note in a principal amount not to exceed $2,500,000. The TIF Note will pay interest at 4.10% per annum. The developer will assign the TIF note to the first mortgage lender.
3. The developer has agreed to the City's proposed TIF recapture provisions.
4. The developer has agreed to subordinate $2,128,029 of its developer fee for the benefit of the project.

Financial Review

The increased property value resulting from the construction of this project will not be included in the City's general tax base. The increased property value will be applied to the City's general tax base once the TIF district is decertified, which is anticipated to occur in 26 years. The City will retain 10 percent of the tax increment generated each year for the payment of the TIF administrative costs.

Housing Revenue Bond Financing

The City also received a bond application from the developer requesting up to $23,000,000 in Tax Exempt Housing Revenue Bonds (HRBs) to support construction of the project. City staff propose to utilize HRB volume cap recycling for Gateway Northeast. Volume cap recycling is an innovative affordable housing finance strategy being utilized across the country in states like Minnesota where the volume cap is over-subscribed. In a recycling scenario, projects utilize the minimum amount of Entitlement HRBs needed to secure 4% HTCs. In this case, Gateway Northeast would utilize approximately $20,000,000 in new HRBs and $3,000,000 in recycled HRBs from the Albright Townhomes project. Recycled bonds extend their tax-exempt status to the new project, but do not come with a new allocation of 4% HTC. This strategy can help the City make the most efficient use of its Entitlement HRBs.

The status of the City’s HRB Entitlement is shown in the table below:

Bond Underwriter: Dougherty & Company, LLC

Tax Credit Equity Syndicator: National Equity Fund

Bond Counsel: Kennedy & Graven

City Council Member: Steve Fletcher

Proposed Project Timeline

Final TIF Approval – October 2019

Project Closing – November 2019

Construction Start – December 2019

Construction Completion – March 2021

Full Occupancy – Fall 2021

The recommended TIF, HRB, and AHTF approvals represent the final sources of financing necessary to complete this project. If approved, construction is anticipated to begin December 2019.