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Affordable Housing Discussion; ElverumPlanning & Economic Development MEMORANDUM TO: Honorable Mayor and Hopkins Ci{y Council Members FROM: Kersten Elverum, ©ijector of Planning & Development DATE: October 4, 2017 iL (/ SUBJECT: Affordable Housing Discussion Staff has scheduled a follow-up discussion on affordable housing policies for the October 10, 2017, City Council work session. The purpose is to continue our discussion of possible policies the City could enact in order to protect tenants, preserve naturally -occurring affordable rental housing and produce more affordable housing units going forward. Discussion will largely focus on the four policies that are currently being discussed in our region: • Advanced Notice of Sale • Section 8 Source of Income Protection • Just Cause Eviction • Inclusionary Housing (Mixed -Income) Staff will discuss the issues associated with each tool, including implementation and other challenges. Included in the agenda packet is a FAQ on Naturally Occurring Affordable Housing Policies prepared by the Housing Justice Center. Staff will also be sharing other possible tools currently in the early planning stage, including pilot programs and new rental rehabilitation funding sources. The intent is to determine which policies the City Council is interested in pursuing further as we continue to find the right policy/program fit for Hopkins. Naturally Occurring Affordable Housing Policies: Frequently Asked Questions Prepared by Housing Justice Center August 2017 Note: HJC has produced a separate memo just on legal issues raised by these housing proposals which expands on some of the legal points below, and is also available by request. Advanced Notice of Sale a. How does this help? Advanced notice helps nonprofit preservation buyers compete more effectively to bid on these properties. It also gives the community the chance to prepare better for when buildings are upscaled. b. What's the difference between advanced notice and right of first refusal? They are both policies which try to encourage properties staying in the hands of those who want to keep them affordable. Advanced notice provides the opportunity to get to the table early to negotiate while ROM goes a step further by seeking to guarantee that the residents or their proxy has the chance to match any purchase price. c. How would you determine what is a NOAH property? There is no formal definition, though most people are referring to unsubsidized properties where the market rents are at a level affordable to households at 50% AMI —60% AMI. Depending on the policy adopted, a city may need to define more precisely what they mean by NOAH. One concern of some cities is that when they receive word a particular property is for sale, they don't necessarily know if it is NOAH or not. The burden of determining if notice must be given is on the owner, however, not the city. Also, some cities now collect rent information as part of their rental licensing process and others are considering doing so. d. Should advanced notice apply just to NOAH properties or all multifamily properties for sale? If the goal is to encourage preservation purchases of NOAH properties, then a policy requiring advanced notice of sale just of NOAH properties makes sense. However, some cities are considering applying the requirement to all multifamily properties of a certain size since they don't know how to distinguish NOAH properties from all properties. The city doesn't necessarily need to distinguish them, however—see above. Also, the downside of applying the requirement to all properties is that higher end properties will have to comply with a policy that is not relevant for them. e. How do we enforce when owners fail to give notice? Several cities are looking at enforcing notice through the city housing code and rental licensing process. If the city or the residents happen to learn that a closing is scheduled and notice hasn't been given, either the city or the residents could take legal action through a Tenants Remedies Action or other summary proceeding. However, once a property is sold without notice, the city's main enforcement leverage is probably with the new owner. When the new owner applies for a rental license and lacks evidence the notice requirement was complied with, the city could impose a fine or a higher license fee. The challenge is raising the cost of noncompliance to a level where there is an incentive to comply. While some consider penalizing the buyer to be unfair, any sophisticated buyer would want to confirm compliance with all legal requirements at sale, as part of their due diligence process. f. Following NOAH sales, should there be a delay period before rent increases kick in or evictions without cause? The proposal currently under review in Minneapolis would also seek to provide tenants in NOAH sold buildings to for-profit purchasers a breathing period before the building is upscaled. Once a building is sold, the new owner would give the tenants 90 days notice before rent can be increased or before evictions without cause are initiated. A variation on this idea is to give the new owner the choice of either giving this 90 day breathing period or paying displaced tenants relocation benefits. g. Will owners have any legal basis to challenge this in court? Advanced notice periods have occasionally been challenged around the country but generally have been upheld. They are quite common, but mostly for subsidized rental housing, less so for NOAH. In the few instances of NOAH advanced notice policies, there have been no legal challenges that we are aware of. If a policy included delays in rent increases, it could lead to a legal challenge under the state law limiting rent control. In the one case we are aware of, a court rejected the argument that delaying a rent increase for a limited time was rent control. h. What will cities do with this information? Most cities considering advanced notice plan simply to pass the information along to potential preservation purchasers and other interested parties. i. Who will have access to the information? The only information the city would have to share publicly is that which it would require be included in the notice—typically, the name and address of the building, the owner and contact information, the number, type and current rents for all units, and an asking price where available. j. Doesn't this limit a landlord's right to sell their property? No. The landlord remains free to sell to whomever he wishes. He simply cannot enter into any purchase agreement before he has given the city the 90 days' notice so others can attempt to bid on the property. k. Are there other cities that have done this? Seattle has an advanced notice requirement for sale of NOAH properties. The only other city we are aware of imposing this kind of requirement for properties other than subsidized rental properties is Chicago, which has an extensive policy regulating and preserving single -room occupancy (SRO) properties. Many larger cities with strong real estate markets are recognizing the threat to their NOAH supply and are exploring a variety of policy responses. Section 8 Source of Income Protection a. How does this help? Source of Income protections gives voucher holders a level playing field when applying for an apartment. Landlords can no longer simply state they don't participate in the Section 8 program — instead, they have to consider the tenant's qualification to rent regardless of the fact they have a voucher. b. Isn't Section 8 voluntary? Section 8 is a voluntary federal program. However, federal regulations allow for local municipalities to create source of income protections for their community members. Additionally, courts across the country have recognized the rights of states, counties and cities to pass stronger source of income protections than what exists under federal law. c. Does this mean if a person has a voucher a landlord has to accept them as a renter? No. What this means is that a landlord can't say no to the applicant simply because that person has a voucher. The applicant has to be assessed just like any other applicant, and if they meet all of the landlord's qualification policies, then they cannot be disqualified from renting. d. Does a landlord have to lower their rents? No. A landlord does not have to lower their rent to fit within the payment standards established by the housing authority. However, a landlord cannot raise their rent simply to avoid being part of the program; that could be considered intentional discrimination. e. What if there is a problem with the renter? Landlords retain all of the rights they already had to deal with troublesome tenants. If they have a problem with the renter, they can contact the housing authority for assistance, or if appropriate they can move to terminate the lease. f. How would this be enforced? This can vary by city. If a city already has a complaint process for discrimination claims, they can choose that process for handling the discrimination claims. Cities can also choose to provide a private right of action to bring the claim in district court. g. Have other cities done this? Minneapolis is currently the only city in Minnesota that provides this specific protection for Section 8 voucher holders. Around the country, there are currently 13 states other than Minnesota with source of income protections; 10 counties; and over 45 cities. Just Cause Eviction a. How does this help? Frequently when new owners upscale buildings, they issue notices to quit, without cause, in order to clear out units and facilitate the upscaling of the buildings. This would limit the arbitrary removal of tenants without good cause. b. How is just cause defined? Typically just cause policies spell out a list of circumstances where eviction is appropriate, from nonpayment of rent or lease violations by tenants to legitimate circumstances where a landlord needs to vacate a unit (urgent and major rehabilitation, or conversion to a use other than rental, for example). c. Does this mean a landlord can never terminate a contract without going to court? No. The policy would spell out the circumstances where termination is appropriate, and just as in the case now, most tenants agree to move before any court case is filed. d. Does this help with buildings being upscaled? In some cases it will. And it also provides a measure of protection for tenants seeking to assert their rights but fearing retaliation by the landlord (beyond the limited retaliation protections under state law). e. Does the city have to decide whether there was just cause to terminate the contract? No. If a landlord issues an eviction notice and the tenant contests it, that issue will be resolved by the eviction court, not by the city. f Can a city create a legal defense to an eviction process governed by state law? Although both Minneapolis and St. Paul have enacted ordinances which create a private right to sue in state courts in particular circumstances, we are unaware of any Minnesota court rulings addressing this issue. Around the country courts are split on this question. The law firm of Dorsey & Whitney has written a memo specifically addressing a just cause defense. This memo is available by request. Inclusionary Housing / Mixed Income a. How do i know if this policy will work in my city? Inclusionary policies work best in cities with active markets with new multifamily market rate development. This is usually the case where the local market can support rents high enough to cover development costs. It also helps if the city has incentives it can offer to offset the reduced revenue from affordable units (density bonuses, reduced parking, fee waivers, TIF, etc.). For more information, see Mixed Income Calculator, at www.housingcounts.org. b. Is this legal? What about the rent control statute? In several states courts have determined that inclusionary policies violated state laws limiting rent control. In the case of Minnesota, the Legislature adopted a law authorizing inclusionary policies several years after the rent control law, indicating that the Legislature did not intend the rent control law to bar inclusionary policies. c. Will this policy apply to all new construction? Inclusionary policies vary in their coverage and their exemptions. They may cover both new rental housing and new for sale housing, though there are additional complications to work out with ownership housing. d. What other cities have inclusionary housing policies? Nationally over 400 jurisdictions have either mandatory inclusionary policies, voluntary inclusionary policies, or some hybrid of both. Most large cities with strong markets have them, as do many suburban cities. Perhaps a dozen cities in the Twin Cities metro have inclusionary policies in some form, with St. Louis Park and Edina being prime examples. 4D Tax Program a. 1 thought this program was repealed —can we still use it? The program originally covered both "deemed" properties (subsidized) and "pledged' properties (unsubsidized, but where the owner voluntarily agreed to rent and income restrictions). In 2003, the legislature repealed the 4d program, then restored it in 2005, but only for deemed or subsidized properties. The possibility of covering certain NOAH properties generally thought of as 'unsubsidized" remains a possibility under current law, if financial assistance is provided. b. Does this apply to new construction or rehab? Generally speaking, it can apply to any multifamily rental property where the owner receives 'financial assistance' from federal, state or local government, and the owner agrees to rent and income restrictions. c. What kind of "financial assistance" does it require, and how much? The statute does not define "financial assistance." Staff from Minnesota Housing, which administers the program, have taken a liberal view of the term, meaning some form of monetary assistance, even minimal assistance. d. What circumstances are best for this type of program? The program exists now primarily to ease operating costs for operators of subsidized rental properties by reducing their property taxes. There is a report that suggests that under some circumstances, a local government could offer financial assistance to an owner of a NOAH property, in exchange for affordability restrictions, effectively extending the program to additional properties. In many cases, however, additional incentives must be combined with the 4d tax break to adequately incent private landlords to participate and accept rent limits.