Tax Change Undercuts Affordable Housing

Alan Arthur of the Central Community Housing Trust: Trouble is on the way
Nathan Grumdahl

According to a study commissioned by the Minnesota Housing Finance Agency, 16 percent of all Minnesota households already occupy dwellings they can't afford. And housing activists now say that many thousands more could fall into this category, or lose their homes entirely, thanks to a little-noted aspect of the 2001 legislature's property tax overhaul.

The property tax package passed that year eliminated a tax break that encouraged landlords to keep rents low. The owners of some 30,000 units of rental housing across the state used to get what was called a "4D" tax break if they agreed to keep rents within a specified affordable range. Under the 4D program, such properties were taxed at a 1 percent rate, while market rentals paid 2.4 percent. But after a phase-out period of a couple of years, the 4D break is off the books completely. Now all rental properties are taxed at the same 1.25 percent rate.

As a result, for-profit landlords have no incentive to keep rents low. The ramifications could be disastrous, according to Janna Vukelich of the Minneapolis Consortium of Community Developers. For the working poor, many of whom already pay half their income in rent, even a small hike can land people on the street.

Gary Kent is a case in point. He's been homeless before, but for the last six years, the 53-year-old Kent has lived in downtown Minneapolis at the Continental apartment building, whose owners used to take advantage of the 4D tax break. His studio apartment costs $375 a month, which is about 30 percent of his income from a full-time job at the downtown Barnes & Noble. Without the Continental, Kent says, "I'd be paying between 50 and 60 percent of my income on rent. A lot of people are making choices--can I buy this medicine or do I pay my rent?"

The loss of the 4D tax break could have wide-reaching effects beyond the realm of for-profit landlords. It also threatens to put some of Minnesota's nonprofit housing developers out of business altogether. Between the for-profits and the nonprofits, as many as 80,000 units of affordable housing could be in jeopardy throughout Minnesota--50,000 in the metro area alone.

The tax code change put nonprofit developers in a double bind. In addition to losing the 4D break on their tax bills, they lack the option of raising rents--since the funding nonprofits have used to develop their projects is contingent on keeping rents low. The tax bills alone can be staggering, according to Nancy Doyle of the Central Community Housing Trust, a major player in the world of nonprofit affordable housing. If lawmakers fail to correct this problem, Doyle says, organizations like CCHT may have no choice but to go out of business.

Doyle points out that affordable rental properties are also being squeezed at another level: Many of them now find themselves surrounded by upscale condos and trendy lofts that push up all the surrounding property values. This in turn means higher taxes for the rental properties, and that factor combined with the loss of the 4D tax break could equal insurmountable financial trouble for the nonprofit developers.

Here's how it looks in dollars and cents. An apartment building called The Barrington at 911 Park Avenue South in Minneapolis has been a source of decent, affordable housing since 1991. This three-story walk-up was a condemned crack house when it was bought and renovated by the nonprofit CCHT. In 2002 the group paid taxes of $11,173 on the Barrington. By next year, their tax bill is expected to more than triple that figure, to $37,451. Driven by rising taxes, CCHT is raising rents in the building, from an average of $442 a month last year to a predicted $506 next year.

That's a big increase to the people at The Barrington. There are 26 residents in the building's one-bedroom and efficiency apartments. Their average income is just $16,284 a year. If rents rise as expected, residents on average would be paying almost 40 percent of their income in rent. (Housing is considered "affordable" if it does not exceed 30 percent of a household's income.)

Doyle thinks CCHT will be able to survive this year, through a combination of raising rents and cutting costs. But she says that if tax bills continue to mount, its future could be in jeopardy. CCHT has developed 1,200 units of affordable housing in the Twin Cities and plans to provide 765 more within the next three years. Losing just the CCHT housing would be a heavy blow to thousands of low-income Minnesotans.


As a result of the 2001 property tax changes, taxes on market rentals actually went down as the rates on affordable rentals were going up. In fact, according to Alan Arthur of CCHT, "affordable apartments were one of the only classes of residential property to experience a rate increase as a result of property tax reform."

Lawmakers who backed the property tax reform package claimed they wanted to simplify the tax system so that it was used for just one purpose--to generate revenue, according to Rachel Callanan of the Minnesota Housing Partnership, a nonprofit affordable housing advocacy group. This reflects a philosophical argument about the purpose of taxes in America: Callanan says lawmakers argued that if affordable housing is the goal, the state should spend money on it directly--a tough sell, especially in tight times--rather than trying to manipulate the market through the tax code.

This is a popular notion at the legislature now, and housing activists hold out little hope that lawmakers will reinstate the tax break for affordable housing. Doyle believes the issue has gotten so little attention for a couple of reasons--because tax laws are confusing, and because this change "doesn't affect homeowners," who are lawmakers' bedrock constituency.

The Minnesota Housing Partnership's Callanan likewise doubts that the 4D tax break will ever be returned to the tax code. "We're going into an election," says Callanan, "and one of the greatest victories for these legislators was the overhaul of the property tax system. They don't want to monkey with that."

There may be another way to mitigate the problem: Change the way affordable housing is assessed for tax purposes. Bob Odman, of the state Housing Finance Agency, says he's trying to convince county tax assessors to put lesser values on "rent-restricted properties." It's an uphill battle by its nature, since counties are under budget constraints themselves and want to raise as much revenue as possible. But Odman is optimistic that a solution may be reached as early as the 2005 tax year.

Even if a new assessment formula is worked out, and every county can be convinced to accept it, Odman admits that "some of those rents will still have to increase. But those units won't necessarily be lost to the housing supply. They just won't be as affordable. It may cost a little more and we're trying to analyze just what that impact is going to be."

All of this comes at a time when those who rely on affordable housing are being hit by "significant cuts to social services and housing programs," in the words of Alan Arthur. Not to mention the abysmal job market. Nancy Doyle points to a Minnesota study that projects a shortfall of 33,000 affordable rental units across the state by 2010--and that's if we don't lose any of the rental stock we already have.

The number of people who stayed at homeless shelters nearly tripled between 1990 and 2001, according to the Minnesota Demographic Center. Governor Tim Pawlenty claims to want to end homelessness in Minnesota. Losing tens of thousands of units of affordable housing hardly seems a good start.

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