Housing Opportunities Enhancement (HOPE) Fund Program Evaluation

Housing Opportunities Enhancement (HOPE) Fund Program Evaluation May 23, 2007

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Dakota County Board of Commissioners: Joseph Harris District 1 Kathleen Gaylord District 2 Thomas Egan District 3 Nancy Schouweiler District 4 Michael Turner District 5 Paul Krause District 6 Willis Branning District 7 Dakota County Administrator: Brandt Richardson This report was prepared by: Daren Nyquist, Dakota County Office of Planning, Evaluation, and Development Dawn Thongsavath, Dakota County Office of Planning, Evaluation, and Development With input and assistance from: Cheryl Jacobson, Dakota County Community Development Agency Deborah Haugh, Dakota County Community Development Agency Heidi Welsch, Dakota County Office of Planning, Evaluation, and Development Jack Ditmore, Dakota County Operations, Management, and Budget Division Kelly Berg, Dakota County Community Development Agency Lynn Moratzka, Dakota County Office of Planning Maribeth Lundeen, Dakota County Resource Development Unit Mark Ulfers, Dakota County Community Development Agency Dakota County Office of Planning, Evaluation, and Development (OPED) Dakota County Administration Center 1590 Highway 55 Hastings, Minnesota 55033-2372 Telephone: (651)438-4433 Facsimile: (651)438-4405 Website: www.dakotacounty.org The mission of the Dakota County Office of Planning, Evaluation, and Development is to provide skilled resources to develop and process information for use in making County programs and services better

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Executive Summary Introduction In response to the growing need for affordable housing in Dakota County, the Board of Commissioners created the Housing Opportunities Enhancement (HOPE) Program in 2001. The HOPE Program provides a local source of financing to housing developers and first time homebuyers in Dakota County in order to encourage and assist in the development and preservation of affordable housing; and to provide indirect and direct assistance with homeownership opportunities. The purpose of the 2007 HOPE Program evaluation is to: Determine the Program’s overall effectiveness in providing affordable housing units in the County through 2006; Make recommendations for the Program’s continued existence, including possible alternative funding structures, and policy changes for the program; Assess the continuation of the affordable housing workgroup; and Document any areas of unmet and continued demands on affordable housing needs in the County. Findings The HOPE Program has proven effective at assisting in the creation or preservation of affordable housing in Dakota County. Since March 2002, the HOPE Program has provided gap financing to 31 projects in ten Dakota County cities, totaling $9.39 million. With this amount, the fund has been able to: Create or assist in the construction or rehabilitation of 1,166 total affordable housing units (662 HOPE units and 504 additional affordable units), an average of 233 units per year. Leverage $220 million total in project funding for affordable housing, or about $44 million per year since its inception. Leverage on average $23 for every $1 of HOPE funding invested in affordable housing projects. These results exceed the annual objectives set for the HOPE Program. Major goals for the program are to: Annually assist 175 to 200 affordable housing units. Leverage between $16 and $23 million in public and private funding annually. Maintain a program leverage ratio of 10:1 ($10 of public-private funding to $1 HOPE gap financing). Recommendations The need for affordable housing continues to persist, despite the significant gains made by the program. Resources to assist households facing barriers to securing affordable housing in the County continue to be important. The forecasted countywide housing needs warrant the HOPE Program’s continued work to support affordable housing generally, and to specifically provide gap financing for the development and preservation of affordable units. The fund balance for the HOPE Program totaled approximately $2.9 million as of FYE June 30, 2006, of which $1.8 million was committed to specific projects. The current strength of the Program’s balance suggests that adequate resources exist to continue providing gap financing on a project-by-project basis to support ongoing creation and retention of affordable housing in Dakota County over the near term. The existing balance in the fund and other revenue sources should be used before drawing any additional appropriation from the Dakota County fund balance. 1. To sustain continued financing of the HOPE Fund, the Dakota County Board of Commissioners should continue to authorize the Dakota County Community Development Agency (CDA) to maximize its allowable levy amount, with the increment above the CDA’s base levy dedicated to providing support through deposit in the HOPE Fund. The Board’s authorization to maximize the CDA’s levy will add approximately $1.3 million during the next fiscal year to available funds. The authorization and declaration of this levy will sustain the HOPE Fund in the next year.

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2. Furthermore, increases in median home prices have made homeownership mostly unattainable for buyers earning 50% or less of median income. Currently, for a family of four 50% of median income is $39,250 per year. At this income level a buyer would be able to afford a home priced around $125,000. It is recommended that the maximum allowable income for purposes of affordable owner-occupied units be increased from 50% of median income to 80% of median income for the metropolitan statistical area. 3. In response to the continuation of the affordable housing workgroup, it is recommended that the workgroup meet on an as needed basis as opportunities and/or issues arise that require discussion and/or action. The Dakota County CDA staff continues to maintain a pulse on demographic and economic trends, and has consistently and effectively kept abreast on emerging housing trends and topics. Although the affordable housing workgroup has allowed the necessary key CDA and County staff to formally convene, discuss, and address new affordable housing topics and emerging trends; these discussions can happen concurrently with the application and review meetings. 4. Lastly, both the 2004 and the current evaluation conclude that the HOPE Program continues to be successful in maintaining and establishing affordable housing throughout Dakota County. In order to determine if alternative funding structures and/or policy changes should be made to the Program, and to document any new areas of unmet demands on affordable housing in the County, it is necessary that future formal evaluations be conducted. Therefore it is recommended that evaluations of the HOPE Program be conducted every five years, either by Dakota County or the CDA.

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Table of Contents Page Introduction HOPE Program Background and Policy Purpose of the Evaluation

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Analysis of the HOPE Program HOPE Program Financials Overview of HOPE Program Requirements and Application Process HOPE Program Projects New Pilot Programs Affordable Housing Workgroup Conclusion and Program Recommendations

7-8 9 9-10 10-14 14-15 15-16

Housing Data and Trends County Population Growth County Residential Building Permit Trends Index of Housing Affordability Sales price of Housing Monthly Vacancy and Rental Rates Total Cost of Development Cost and Availability of Land

17-18 19-22 22-24 25-26 27-28 29 29-30

Affordable Housing Demand Cost Burdened Households Homelessness Housing Choice Voucher Program (Section 8) CDA Affordable Housing Wait List Forecasted Affordable Housing Demand

31 31-33 33 34 35-36

Appendix A: Section 8 Voucher Homeownership (VHO) Program Background

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Introduction HOPE Program Background and Policy In response to the growing need for affordable housing in Dakota County, the Board of Commissioners created the Housing Opportunities Enhancement (HOPE) Program in 2001. The HOPE Program provides a local source of financing to housing developers and first time homebuyers in Dakota County in order to encourage and assist in the development and preservation of affordable housing; and to provide indirect and direct assistance with homeownership opportunities. The Program provides gap financing for affordable housing projects that serve households at or below 50% of the metropolitan statistical area (MSA) median income. As funding of last resort, the HOPE Program maintains a requirement of a 2:1 leverage match (external funding to HOPE dollars) for all housing projects awarded funding. Eligible projects include: new construction, acquisition, rehabilitation, preservation, and indirect/direct assistance with homeownership opportunities Operational since 2002, the HOPE Program is administered by the Dakota County CDA. According to the Joint Powers Agreement (JPA), the CDA carries out the management and disbursement of HOPE Program funds and has exclusive authority to approve or deny, in whole or in part, all applications submitted. Additionally, the CDA assists in the development, preservation, rehabilitation, and acquisition of affordable housing through the HOPE Program. Expectations for the HOPE Program include the following objectives: Creation or retention of between 175 to 200 affordable units each year, Total value of housing leveraged between $16 and $23 million annually, and Utilization of a leverage ratio of 10:1 (total project dollars to HOPE Program funding), across all HOPE projects. Purpose of the Evaluation In November of 2004, the first evaluation1 of the HOPE Program was completed. It was found that the Program has proven effective at leveraging additional funding dollars in support of affordable housing development. While significant progress has been made during the course of the HOPE Program’s current operations, unmet affordable housing needs continue to persist in Dakota County. Recommendations from the 2004 evaluation include: Continuance of the HOPE Program. Focusing the Program on meeting strategic housing needs to include targeting innovative homeownership proposals in order to free up limited Section 8 program vouchers for use by others; encouraging the development of additional supportive housing; and supporting the rehabilitation and preservation of existing affordable housing. Establishment of an affordable housing workgroup to assist in providing strategic direction for the HOPE Program. The purpose of the 2007 HOPE Program evaluation is to: Determine the Program’s overall effectiveness in providing affordable housing units in the County through 2006; Make recommendations for the Program’s continued existence, including possible alternative funding structures, and policy changes for the program; Assess the continuation of the affordable housing workgroup, and Document any areas of unmet and continued demands on affordable housing needs in the County. This evaluation proposes to measure the Program’s ability to provide affordable housing opportunities in Dakota County, and to leverage continued investment in affordable housing opportunities in the future.

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The entire 2004 Dakota County HOPE Program Evaluation Report can be found on the following website: http://www.co.dakota.mn.us/oped/data_reports/reports_archive.htm

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Analysis of the HOPE Program HOPE Program Financials The Dakota County Board of Commissioners included an appropriation of $1 million from the County’s fund balance in 2002, 2003, and 2004 to create the HOPE Program. In addition, the HOPE Program has been the recipient of match dollars granted through the Family Housing Fund (FHF), totaling $1.5 million over three years. Lastly, the Board of Commissioners authorized the Dakota County CDA to approve the statutory maximum levy for the agency, which has provided additional dollars to the fund. Table A, outlines the HOPE Program’s funding sources and amounts contributed by fiscal year ending. Table A. HOPE Program Funding Sources2 by Year, Fiscal Year Ending 2002 to Estimated Fiscal Year Ending 20073 FYE

Dakota County

CDA Levy

FHF

2002 $3,675 -2003 $909,659 $856,352 2004 $1,086,666 $964,493 2005 $1,000,000 $1,085,477 2006 -$1,251,430 -2007 (Est) $1,388,812 Total by Funding $3,000,000 $5,546,564 Source Source: Dakota County Community Development Agency

HOPE Fund Program Total by Year

-$456,666 $246,026 $797,308 ---

$3,675 $2,222,677 $2,297,185 $2,882,785 $1,251,430 $1,388,812

$1,500,000

$10,046,564

Based upon annual inputs from the CDA’s levy, the HOPE Program’s funding totaled $1.25 million in FYE 2006, and is estimated to total $1.38 million by FYE 2007. Table B presents the total number of HOPE Program projects by calendar year. 4

Table B. HOPE Fund Program Applicants , Calendar Year 2002 to 20065 2002

2003

2004

2005

2006

Program Total

11

5

4

4

7

31

HOPE Units

232

107

83

114

126

662

Other Affordable Units Market Rate Units

207 332

91 327

77 261

94 229

35 83

504 1,232

771

525

421

437

244

2,398

Number of Projects

Total Number of Units:

Source: Dakota County Community Development Agency Table C presents summary revenue and expenditure information by program year for the HOPE Program from 2002 to 2006. HOPE Program expenditures are restricted to development, land acquisition, rehabilitation and acquisition, and preservation projects. The fund balance for the HOPE Program totaled approximately $2.9 million as of FYE June 30, 2006. At that time, approximately $1.8 million of this 2

Funding sources does not include interest. Please see Table C for interest dollars. Note that the Dakota County’s CDA fiscal/budget year extends from July 1 through June 30 of the year following, in contrast to Dakota County’s fiscal year, which follows the calendar year. Data presented in the table conforms to the CDA’s budget year. 4 Includes First Time Homebuyer and Rental Rehabilitation Loan Program applicants. 5 Calendar year is from January 1 to December 31. This is different than the CDA’s fiscal year ending (FYE) which runs from July 1 to June 30. Also, please note that projects approved for funding in one year are not necessarily reflected in the HOPE loan disbursement for that year. Some approved projects encounter unforeseen hold ups, such as acquisition of land was not successful, relocation of tenants is taking longer than expected, and/or landlord/management issues. 3

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balance was committed to specific projects. Additional commitments have been made since this time. The uncommitted balance as of April 30, 2007 is approximately $286,000. The current strength of the Program’s balance suggests that adequate resources exist to continue providing gap financing on a project-by-project basis to support ongoing creation and retention of affordable housing in Dakota County over the near term. In the next several years, funding available to address the spectrum of affordable housing needs is a high priority -- particularly given the current lack of market incentives to construct new, affordable housing units in the County. By continuing to authorize the Dakota County CDA to levy up to the maximum rate allowed for programs administered by the agency, the HOPE Program will be ensured the support necessary to address needs across a spectrum of housing demand. However, it is important to recognize that relying solely on taxes and tax growth will decrease the fund balance over time, as illustrated in the 2006. Table C. HOPE Fund Balance, Actual Fiscal Year 2002 through 2006

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FYE June 30, 2002

FYE June 30, 2003

FYE June 30, 2004

FYE June 30, 2005

FYE June 30, 2006

$—

$856,352

$964,493

$1,085,477

$1,251,430

$3,675

$909,659

$1,086,666

$1,000,000

$—

Interest

$—

$9,058

$11,101

$51,070

$135,411

Other -- Family Housing Fund

$—

$456,666

$246,026

$797,308

$—

Total Revenue

$3,675

$2,231,735

$2,308,286

$2,933,855

$1,386,841

Administration

$3,675

$62,958

$76,086

$80,219

$65,765

HOPE Loans

$—

$1,388,419

$1,244,079

$1,350,000

$1,450,663

$3,675

$1,451,377

$1,320,165

$1,610,219

$1,516,428

$—

$780,358

$988,121

$1,323,636

($129,587)

$—

$—

$—

$—

$—

$—

$780,358

$988,121

$1,323,636

($129,587)

$—

$—

$780,358

$1,768,479

$3,092,115

$—

$780,358

$1,768,479

$3,092,115

$2,962,5287

Revenue Taxes -- DCCDA Levy Intergovernmental -Dakota County

Expenditures

Total Expenditures Excess of Revenues Over Expenditures Transfers Out Excess (Deficiency) of Revenues Over Expenditures and Transfers Beginning Fund Balance Ending Fund Balance

Source: Dakota County Community Development Agency

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Note that the Dakota County’s CDA fiscal/budget year extends from July 1 through June 30 of the year following, in contrast to Dakota County’s fiscal year, which follows the calendar year. Data presented in the table conforms to the CDA’s budget year. 7 As of June 30, 2006, approximately $1.8 million of this balance is committed to specific projects.

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Overview of HOPE Program Requirements and Application Process Applicants eligible to receive funding are developers, governmental agencies, nonprofit organizations, and for-profit companies. Applications for HOPE Program funding are taken on an open basis throughout the year until funds are exhausted for that fiscal year. The HOPE loan has a maximum limit amount of $20,000 per unit or a maximum of $500,000 per project. Terms of the loan are based on the length of affordability and the ability of the developers to repay. A typical loan term is 15 to 30 years after the project completion date or upon the sale or refinancing of the unit. The HOPE Program utilizes a revolving loan fund concept. Therefore, as loans are repaid and prepaid, the payments will be considered program income and deposited back into the fund to make additional loans. Based on the HOPE Program policies, an advisory committee comprised of staff from the CDA and Dakota County reviews and scores all applications submitted for funding. Next, the committee determines whether to approve or decline funding of the project in whole or in part. Then CDA staff presents project recommendations to the CDA Board of Commissioners for final approval. Recipients of funds from the HOPE Program must comply with the following reporting and ongoing requirements of the program: Monitoring. Developers need to initially and annually certify that tenant rents and household incomes are in compliance with the guidelines established by the program, therefore developers are required to provide to the CDA a list of actual tenant rents and incomes. Continued Affordability. Units funded by the program must remain affordable for no less than 15 years or in accordance with an established affordable housing program. Participation in the Section 8 Program. For the duration of when the loan is outstanding, developers of multifamily rental units must participate in the Section 8 Rental Assistance Program. Section 8 participants could reside in a HOPE Program assisted unit, resulting in rental subsidy for the household and a rent rate limit set by the US Department of Housing and Urban Development. HOPE Program Projects There are three types of housing units associated with the HOPE Program. These units are characterized as HOPE units, affordable units, and market rate units. “HOPE units” refer to those housing units directly assisted by the HOPE Fund. “Affordable units” are defined as those additional units of housing affordable to households at 60% of AMI or less, not including HOPE units, and representing units created as a result of successful leveraging. The final category of housing -- “market rate units” -are those units created as a consequence of a HOPE funded development, but feature market rate rents, and so are therefore not included in calculations of the leverage ratio. For example, if a developer applied for the maximum amount of $500,000 and allocated $20,000 to each unit, the maximum number of units the project directly assisted would be 25. The 25 directly assisted units are called HOPE units. Any additional housing targeted to low and moderate-income households (Section 8 and other affordable units) in the development are defined as leveraged units. The total number of units in a project is the sum of HOPE, leveraged (or affordable), and market rate units. In order to qualify as a HOPE unit, funding must directly assist the units as defined, and the units must be affordable to households earning at or below 50% of AMI. In addition to the HOPE units, developments may also offer additional affordable units aimed at households earning at or below 60% of AMI and Section 8 units. Unless otherwise specified, this evaluation includes additional units affordable at 60% AMI and Section 8 units as constituents of affordable/leveraged units, since HOPE funds did not directly assist these units. Since the inception of the program, HOPE has provided gap funding to 31 projects in ten Dakota County cities, totaling $9.39 million. Collectively, the 31 projects supported development or rehabilitation of a total of 2,398 housing units in the County. Of this total, 1,166 units were affordable to households earning an income at or below 60% AMI. More specifically, of the 1,166 affordable units, 662 were directly assisted HOPE units (affordable to households at or below 50% AMI) and 504 were other affordable units (affordable to households at or 60% AMI). Figure 1 provides the number of housing units by type from calendar year 2002 to 2006.

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Figure 1 HOPE Program, Type of Housing Units by Year Calendar Year 2002 to 2006 100%

80%

83 332 1,232

229 Percentage of the Total

327

261

60%

35

207 40%

504

94 91

77

107

83

126

20% 232

662

114

0% 2002

2003

2004

2005

2006

Total Units by Type

Number of Housing Units by Type HOPE Units

Affordable Units: HHs at or below 50% AMI

Market Rate Units

Source: Dakota County CDA

Of the 662 HOPE units created, a majority (94%) of the HOPE units were rental apartments and townhomes, with the remaining 6% designated owner-occupied homes8. In five years of operation, the majority (77%) of project applications approved for HOPE funding were for family housing developments (485 HOPE units created to target family housing over five years). Approximately, 23% of the funded project applicants targeted senior and supportive housing needs (total of 177 HOPE units). From 2002 to 2006, 48% of the funded project applicants through the HOPE Program were new construction/land acquisition projects. About 10% of the awarded project applications offered homeownership opportunities and 42% were renovation and/or preservation efforts. A possible reason for the relatively small percentage of homeownership projects participating in the HOPE Program is the income level restriction of 50% AMI. Many households at this income level are unable to afford the purchase of a home, given the increasing median home prices in the County. This income level restriction may be keeping many potential participants out of the program. New Pilot Programs Since the 2004 evaluation of the HOPE Program, the CDA has created two new pilot programs: the Section 8 Voucher Homeownership (VHO) Program and the Rental Rehabilitation Loan Program. These programs address the strategic housing needs identified in the 2004 evaluation by: Targeting innovative homeownership proposals in order to free up limited Section 8 program vouchers for use by others, and Supporting the rehabilitation and preservation of existing affordable housing. Section 8 Voucher Homeownership Program The Dakota County CDA launched a two-year demonstration of the Section 8 Voucher Homeownership Program in March 2005. The VHO Program allows participants that meet initial homeownership program criteria (such as participation in the program for at least 12 months and income of at least twice their voucher payment standard) to purchase a home in Dakota County. The home must also meet eligibility criteria. Participants are allowed to apply their monthly subsidy to homeownership expenses in lieu of 8

Owner-occupied projects include the First Time Homebuyer Program and Habit for Humanity

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rent. Prior to purchasing a home, the participant must attend Home Stretch homebuyer education classes as well as one-on-one pre-purchase counseling sessions. The VHO Program offers participants up to $20,000 for down payment and closing cost assistance with an additional $10,000 if the buyer’s income is at or below 50% AMI. HOPE funds are used to fund the additional $10,000 in assistance. Outcomes of the Section 8 VHO Program Demonstration. Of the 2,202 vouchers allocated to the Dakota County CDA, 10 vouchers were targeted for homeownership use during the demonstration9. Section 8 tenant based rental assistance participants that met the U.S. Department of Housing and Urban Development’s (HUD) income and employment guidelines, as well as the CDA’s minimum participation and income requirements were invited to participate in the VHO program. At the initial launch of the program a potential pool of 1,163 households met federal minimum income requirements10. However, by setting a local minimum income requirement of two times the voucher payment standard, the potential participant pool was reduced to 592. In addition, when factoring out the rental assistance participants that did not meet the tenure requirement, this left a total of 363 households that received an invitation to participate in the VHO Program; see Table D below. Table D. Targeting and Outreach of the Section 8 VHO Program Total Number of Section 8 Vouchers Allocated to the CDA 2,202 Number of Vouchers Targeted for Homeownership 10 Households Meeting Federal Income Requirement 1,163 Households Meeting CDA Income Requirement 592 Households Initially Invited To Participate 363 (16.4% of the total 2,202) Source: Dakota County CDA, As of September 1, 2006

Of the 363 households that were invited to participate, 60 households registered to attend an informational meeting on the program, but 50 actually showed. The informational meetings were designed to give interested households a better understanding of VHO Program requirements and of the homeownership process in general. It was further expected by the CDA that as households got further into the assessment and counseling phase, opting out of the program would continue to occur. Of the 50 households that attended an informational meeting, 47 expressed interest in continuing with counseling and education sessions. From those 47 interested households, 38 households made and attended the first of three required one-on-one counseling sessions with the CDA’s Homeownership Coordinator. Of the 38 that entered the program and began counseling, 18 are still working through the counseling and education process (see Table E below). Given the number of participants in the pipeline and the time remaining in the demonstration, the Dakota County CDA is not aggressively recruiting new homeownership participants. Table E. Interest in Voucher Homeownership Program Households Who Registered for Informational Meetings Households Who Attended Informational Meetings Households Who Expressed Interest in Counseling Households that Made and Attended First Counseling Appointments Households Still Participating in Counseling

60 50 47 38 18 (30% of the total 60 HHs)

Source: Dakota County CDA, As of September 1, 2006

As of September 1, 2006, the VHO Program assisted five households with the purchase of their first home. Additionally, three other households on the Section 8 Program purchased a home with no 9

Housing authorities may limit the number of families participating in a local VHO program. Refer to Appendix A for federal program background. 10 At the time the Section 8 VHO Program was launched, income minimums based on voucher payment standards for bedroom size were: 1 bedroom $16,944; 2 bedroom $21,672; 3 bedroom $29,328; 4 bedroom $33,216; 5 bedroom $38,184.

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assistance. These three households graduated out of the Section 8 Program, their vouchers are now in use by other participants selected from the Section 8 waiting list. Participants of the VHO Program are allowed to purchase an existing or already under construction single 11 family home, townhome, or condominium in Dakota County . Following is an overview of the purchases: 3 of 5 households purchased a single-family home. The remaining 2 households purchased a townhouse. Purchase locations were primarily in northern Dakota County: Eagan, Burnsville, W. St. Paul, and Inver Grove Heights. Average purchase price = $186,000. A purchase prince range of $150,000 to $239,000. Average loan amount = $156,720. A loan range amount of $120,700 to $203,000. Average household income was $41,460, with a range from $37,477 to $47,379. The amount of purchasing power a VHO participant has is based on a combination of income and assistance, in the form of housing assistance payments (HAP) and supplemental financing from the CDA 12 (denoted in Figure 2 as 2nd mortgage ). All five assisted households received supplemental financing from the CDA, with an average amount of $24,000. Furthermore, four of the five households used the Minnesota Housing Community Activity Set Aside 13 (CASA) loan program offered through Bremer Bank . The CASA loan is denoted in Figure 2 as 3rd mortgage. By using a CASA loan, participants were able to access an additional source of supplemental financing. Three of the households utilized this additional supplemental financing, with an average 14 amount of $6,400. Of the assisted households, four receive a monthly HAP payment . The average monthly HAP amount paid by the CDA is $205, ranging from $126 to $370 per month. Figure 2. Breakdown of Assisted Household Purchases using the Section 8 VHO Program $250,000

$0

Housheold 1

Sales Price

Household 2

1st Mortgage

Household 3

Household 4

2nd Mortgage

$30,000

$166,900

$193,500

$20,000

$163,000

$185,000

$13,000

$30,000

$203,000

$239,000 $20,000

$3,000

$130,000

$162,500

$20,000

$50,000

$13,000

$100,000

$120,700

$150,000 $150,000

Dollars ($)

$200,000

Household 5

Third Mortgage

Source: Dakota County CDA, As of September 1, 2006

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Purchasing outside of Dakota County is allowed if the receiving jurisdiction operates a VHO Program and is accepting new families and they qualify. nd 2 Mortgage Financing includes HOME and HOPE dollars (i.e. First Time Homebuyer and Down Payment and Closing Cost Assistance). Household 1,2, and 4 received $20,000 in HOME funding. Household 3 and 5 received $20,000 in HOME dollars and $10,000 in HOPE funding. 13 The CDA and Bremer Bank applied and was awarded a set aside of mortgage funds from Minnesota Housing’s Community Activity Set Aside (CASA) Program. 14 Under the VHO option, a participating household may utilize monthly voucher assistance payments (or HAP) to purchase a home. Subsidies that would normally go towards paying rental expenses are used to pay mortgage payments and other expenses related to homeownership 12

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The two-year demonstration of the VHO Program will end spring of 2007. Shortly after the conclusion of the demonstration period, CDA staff will conduct and present a full evaluation of the VHO Program in order to determine if the program should be implemented on a permanent basis and/or if modifications to the design of the program need to be made. Rental Rehabilitation Loan Program The Dakota County Board of Commissioners approved the rental rehabilitation program in July 2005. The purpose of the Rental Rehabilitation Loan Program is to provide owners of affordable rental housing in Dakota County with a financial tool to improve the safety, integrity, accessibility, and curbside appeal of their property. By upgrading existing rental housing, the program will stimulate further reinvestment in the surrounding neighborhoods. The Rental Rehabilitation Loan program is a pilot program introduced for the 2006 CDA fiscal year. Funding available to projects cannot exceed $20,000 per designated assisted dwelling unit or a maximum of $500,000 per project. The minimum loan amount is $50,000. Funding is in the form of a zero-interest, deferred loan. Repayment will be required upon sale or other transfer, refinancing, or the end of the Affordability Period (minimum of 15 years). Applications must demonstrate a minimum owner contribution of one-third the rehab cost. Private, public and non-profit rental housing owners are eligible to apply. Applications are due by December 1st each year. Eligible rehabilitation improvements include: Compliance with state, county, or municipal health, housing, building, fire and housing maintenance codes and quality standards. Curbside appeal and property livability. Garage and parking facilities. Accessibility improvements. Professional services and fees related to improvements (not exceeding 5% of loan amount). Properties that are eligible: Must have four or more units Must be in need of rehabilitation improvements, be structurally sound and also be in compliance with local ordinances and codes. Must be current on property insurance, taxes, assessments and any other liens. 20% of Dwelling Units must have rent and occupancy restrictions for the entire Affordability Period. Rents must be restricted to the most current HUD rent schedule for 50% of AMI (less applicable utility allowance) and units must be occupied by households with incomes below 50% of AMI. Developers of multifamily rental units must participate in the Section 8 Rental Assistance Program for the duration of the loan. Outcomes of the Rental Rehabilitation Loan Program. Since its inception, the Rental Rehabilitation Loan Program approved applications for three projects in the cities of Farmington and West St. Paul, totaling $709,000. Project Two is finished and all funds have been expended. Project One is nearing completion. Project Three is finalizing details in preparation for a loan closing. Of the total dollars awarded, $604,500 came from the HOPE Program and the remaining $104,500 came from either TIF or the CDA’s general fund. Collectively, the three projects supported the rehabilitation of 46 affordable housing units in the County with a total rehabilitation amount of $1,304,750. Figure 3 provides a breakdown of the projects by funding sources. An evaluation of the program was conducted after the first year of operations and was presented to the CDA Board in August 2006. The program was approved for another year of funding. Another evaluation will take place in June 2007.

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Figure 3. Rental Rehabilitation Loan Program: Breakdown of Projects by Funding Source

$0

Total Award Dollars

$72,250

$144,500

Elm Terrance

$72,250

$100,000

$32,250

$200,000

$32,250

$300,000 $64,500

Dollars ($)

$400,000

West View Park

HOPE Funding

$500,000

$500,000

$500,000

TIF

Oaks of W. St. Paul CDA General Fund

Source: Dakota County CDA, As of December 31, 2006

Affordable Housing Workgroup The Affordable Housing Workgroup was created as a result of the 2004 evaluation of the HOPE Program. The workgroup is comprised of county and CDA staff that met regularly in 2005 and periodically in 2006. The workgroup has accomplished the following: The regular and ongoing monitoring of available housing data, and social and economic indicators. Dakota County CDA staff carried out additional networking and outreach efforts, in order to secure complementary resources and to solicit project proposals from a diversity of interested property owners and managers. Suggested changes to HOPE Program policies that might create additional incentives for projects facing particularly steep barriers for implementation. Assumed the responsibility for assessment and review of project proposals for funding. Participation in projects across the county that have an impact on affordable housing. o A member was appointed to the Physical Development Division process improvement project. The project was regarding the sales/vacate of county property. o A member served as the liaison with the tax forfeited properties process improvement project team. The project was regarding the process of informing interested stakeholders on the availability of county owned-properties and tax-forfeited properties. During the 2005 year-end update to senior leadership, the workgroup concluded that significant gains have been made in establishing affordable units throughout Dakota County through the use of the HOPE Program. The workgroup also concluded that, the CDA through continued efforts has provided targeted initiatives and funding to assist households facing barriers to securing affordable housing in Dakota County15. The workgroup also suggested to senior leadership that the county continue to implement the recommendations from the 2004 HOPE program evaluation. It was also decided at the time that determining whether any other strategies could be pursued regarding the HOPE program should be considered during the second program evaluation. Analysis of the affordable housing workgroup’s effectiveness and current key trends in housing data suggest that Dakota County CDA staff continues to maintain a pulse on demographic and economic 15

Following is a list of some of the programs and services provided by the CDA to residents of Dakota County: Down payment and Closing Cost Assistance, Family Self Sufficiency Program, Family Townhome, First Time Homebuyer, Section 8, and the Senior Housing Program.

14

trends, and has consistently and effectively kept abreast on emerging housing trends and topics. Although the affordable housing workgroup has allowed the necessary key county staff to formally convene, discuss, and address new affordable housing topics; these discussions can happen concurrently with the application and review meetings. Conclusion The HOPE Fund has proven effective at assisting in the creation or preservation of affordable housing in Dakota County. Since March 2002, the HOPE Program has provided gap financing commitments to 31 projects in ten Dakota County cities, totaling $9.39 million. With this amount, the fund has been able to: Create or assist in the construction or rehabilitation of 1,166 total affordable housing units (662 HOPE units and 504 additional affordable units.) Leverage $220 million total in project funding for affordable housing, or about $44 million per year since its inception. Leverage on average $23 for every $1 of HOPE funding invested in affordable housing projects. These results clearly exceed the annual objectives set for the HOPE Program. The major goals for the program are: Annually assist 175 to 200 affordable housing units. Leverage between $16 and $23 million in public and private funding. Maintain a program leverage ratio of 10:1 ($10 of public-private funding to $1 HOPE gap financing). Additionally, the HOPE Program was recognized in Fall 2006 with a national Award of Excellence from the National Association of Housing and Redevelopment Officials (NAHRO). The program received the award in the affordable housing category. The HOPE program was one of 24 programs nationwide to receive an award, out of 265 applicants. Program Recommendations The need for affordable housing continues to persist, despite the significant gains made by the program. Resources to assist households facing barriers to securing affordable housing in the County continue to be important. The forecasted countywide housing needs warrant the HOPE Program’s continued work to support affordable housing generally, and to specifically provide gap financing for the development and preservation of affordable units. The fund balance for the HOPE Program totaled approximately $2.9 million as of FYE June 30, 2006 of which $1.8 million was committed to specific projects. The current strength of the Program’s balance suggests that adequate resources exist to continue providing gap financing on a project-by-project basis to support ongoing creation and retention of affordable housing in Dakota County over the near term. The existing balance in the fund and other revenue sources should be used, before drawing any additional appropriation from the Dakota County fund balance. 1. To sustain continued financing of the HOPE Fund, the Dakota County Board of Commissioners should continue to authorize the Dakota County Community Development Agency (CDA) to maximize its allowable levy amount, with the increment above the CDA’s base levy dedicated to providing support through deposit in the HOPE Fund. The Board’s authorization to maximize the CDA’s levy will add approximately $1.3 million during the next fiscal year to available funds. The authorization and declaration of this levy will sustain the HOPE Fund in the next year. 2. Furthermore, increases in median home prices have made homeownership mostly unattainable for buyers earning 50% or less of median income. Currently, for a family of four 50% of median income is $39,250 per year. At this income level a buyer would be able to afford a home priced around $125,000. It is recommended that the maximum allowable income for purposes of affordable owner-occupied units be increased from 50% of median income to 80% of median income for the metropolitan statistical area.

15

3. In response to the continuation of the affordable housing workgroup, it is recommended that the workgroup meet on an as needed basis as opportunities and/or issues arise that require discussion and/or action. The Dakota County CDA staff continues to maintain a pulse on demographic and economic trends, and has consistently and effectively kept abreast on emerging housing trends and topics. Although the affordable housing workgroup has allowed the necessary key CDA and County staff to formally convene, discuss, and address new affordable housing topics and emerging trends; these discussions can happen concurrently with the application and review meetings. 4. Lastly, both the 2004 and the current evaluation conclude that the HOPE Program continues to be successful in maintaining and establishing affordable housing throughout Dakota County. In order to determine if alternative funding structures and/or policy changes should be made to the Program, and to document any new areas of unmet demands on affordable housing in the County, it is necessary that future formal evaluations be conducted. Therefore it is recommended that evaluations of the HOPE Program be conducted every five years, either by Dakota County or the CDA.

16

Housing Data and Trends Many variables affect affordable housing in Dakota County. Indicators of the relative depth of affordable housing in a community are mostly based on demographics, employment and other economic variables, affordability indices, sale prices of housing, land costs, construction costs, and vacancy rates. These measures, coupled with predictions in population growth, help to approximate both adequate housing supplies and possibilities for additional development. Demographic and Economic Trends Affecting Housing County Population Growth In 2005, the Minneapolis-St. Paul Metropolitan Statistical Area was the nation’s 16th largest metropolitan area.16 According to the Metropolitan Council, Dakota County is expected to add 120,000 people, 61,000 households, and 47,000 jobs by 2020. These patterns of growth will gradually move to the southern parts of the County as the northern portion becomes fully developed. Development continues to progress outwards from the Twin Cities. Second and third ring suburbs as well as more rural areas have seen some of the larger gains in population over the last several years. The largest increases in percentage growth in population occurred in Hampton (73% growth), Northfield (57% growth), and Sciota Township (51% growth). Table F lists the population estimates by Dakota County jurisdiction. The largest growth in absolute numbers occurred in Lakeville, which increased by over 8,500 people in five years. Future growth in Dakota County is anticipated to remain within the contiguous urban areas. As development pushes outward, the cities of Apple Valley, Lakeville, Inver Grove Heights, and Farmington are situated to capture a large portion of the next decade’s growth. Lakeville is expected to be the County’s most populous city with nearly 81,000 residents by 2020. Housing demand will be tied to population growth, employment, and the aging population within the County.17 Between now and 2030, Dakota County is expected to experience strong growth in population, and lead in job growth. The added population and added jobs creates a situation where more people will want to live where they work. Moreover, with an aging population, housing preferences will change requiring more choice in the market. All of these trends add to the need for more housing in Dakota County communities.

16

http://www.census.gov/population/www/estimates/Estimates%20pages_final.html Comprehensive Housing Needs Assessment for Dakota County, MN, Maxfield Research Inc, 2005. http://www.dakotacda.org/pdf/DC%20Housing%20Needs%20Assessment.pdf

17

17

Table F: Population Estimates by Dakota County Jurisdiction, 2000-2005 Population DAKOTA COUNTY

2000 Census

2005 Estimate

Percentage Change

Apple Valley

45,527

48,988

8%

Burnsville

60,220

61,262

2%

Castle Rock Twp.

1,495

1,523

2%

Coates

163

162

-1%

Douglas Twp.

760

889

17%

Eagan

63,557

66,709

5%

Empire Twp.

1,638

2,226

36%

Eureka Twp.

1,490

1,540

3%

Farmington

12,365

18,023

46%

Greenvale Twp.

684

858

25%

Hampton

434

751

73%

Hampton Twp.

986

1,003

2%

Hastings (part)2

18,201

21,486

18%

Inver Grove Heights

29,751

33,195

12%

Lakeville

43,128

51,722

20%

Lilydale

552

809

47%

1,263

1,353

7%

197

182

-8%

Marshan Twp. Mendota Mendota Heights

11,434

11,582

1%

Miesville

135

171

27%

New Trier

116

120

3%

Nininger Twp.

865

978

13%

Northfield (part)2

557

874

57%

Randolph

318

365

15%

Randolph Twp.

536

615

15%

Ravenna Twp.

2,355

2,450

4%

Rosemount

14,619

19,418

33%

Sciota Twp.

285

429

51%

South St. Paul

20,167

20,078

0%

Sunfish Lake

504

543

8%

Vermillion

437

455

4%

Vermillion Twp.

1,243

1,355

9%

Waterford Twp.

517

595

15%

West St. Paul

19,405

18,849

-3%

Dakota County Total

355,904

391,558

10%

Source: Metropolitan Council Population and Household Estimates

18

County Residential Building Permit Trends New home construction and the housing market in general are in the midst of a downturn. The early years of this decade witnessed explosive growths in construction of single and multi-family homes. Construction of new units has slowed and this trend is expected to last through 2007.18 Although construction has slowed, Dakota County remains a busy place for building in relation to the surrounding metropolitan area. Since 2002, Dakota County has accounted for nearly 18% of all residential building construction in the seven-county metro area (see Table G). However, in spite of slowing growth, Dakota County remains one of the most active metro area counties in regards to new construction. Table G: Number of New Home Building Permits in the Metro Area Anoka Carver Dakota Hennepin Ramsey All Residential Buildings 2002 2,379 1,467 3,494 6,488 1,219 2003 2,818 1,370 4,168 5,507 1,567 2004 3,309 1,138 3,541 5,031 2,208 2005 2,282 993 2,456 4,867 1,127 2006 1,473 822 1,666 4,227 953 Single Family 2002 2,239 1,097 2,185 2,660 424 2003 2,752 873 2,704 3,059 422 2004 2,887 840 2,169 2,670 587 2005 2,156 842 1,490 2,320 616 2006 1,420 610 1,242 2,255 402 Multi Family 2002 140 370 1,309 3,828 795 2003 66 497 1,464 2,448 1,145 2004 422 298 1,372 2,361 1,621 2005 126 151 966 2,547 511 2006 53 212 424 1,972 551 Source: Metropolitan Council

Scott

Washington

2,069 2,311 1,917 1,612 1,143

1,678 2,224 2,688 2,665 1,683

1,722 1,893 1,800 1,433 1,019

1,281 2,024 2,423 2,520 1,584

347 418 117 179 124

397 200 265 145 99

Figures 4 and 5 illustrate the general decline of new home construction in the Metro Area occurring over the last several years. Construction began to fall in most counties in 2004. By 2006, no metro area county was experiencing growth in building permit applications from the previous year. Between 2004 and 2006, the issuance of building permits has fallen off by 53% in Dakota County. Hennepin County experienced the least decline in new development, with a 16% decrease. The steady addition of multifamily housing is one reason why Hennepin County has been able to weather the market downturn in new construction. There are several reasons for the general downward trend in new construction. First, due to increased building activity occurring early in 2000 and the rapid appreciation of home prices happening at the same time, the market experienced an excess of units for sale.19 Second, low mortgage interest rates and the increased availability of non-traditional mortgage products enticed developers to build and buyers to buy. This situation has changed as interest rates creep up and the consequences of sub-prime lending are being felt in increased rates of foreclosure. The combined effect of these forces has shifted developers’ focus to selling off excess supply rather than building more and taking risks on increased debt.20

18

Residential Building Permits Issued in the Twin Cities Region During 2005, Metropolitan Council Publication No. 74-06-026, March 2006 http://www.metrocouncil.org/metroarea/ResBuild2005/bp2005.pdf Butterfield, Ethan,”Inventory Hangover”, BUILDER Magazine, March 2007 20 “Subprime Loan Uncertainties Erode Confidence of Builders”, National Association of Home Builders, March 2007: http://www.nbnnews.com/NBN/issues/2007-03-19/Economics+%26+Finance/index.html 19

19

The declining building rate is being felt across the country. Only five states (South Dakota, North Carolina, Alabama, Mississippi, Louisiana, and Texas) posted positive growth in building activity from 2005-2006.21 National spending on residential construction fell by 2 percent during this same time period. This is the first national decline since 1995.22 Figure 4 Percentage Change in Total Permits Issued in Metro Area Counties, 2004-2006

-37.4%

Washington

Scott -40.4% Ramsey -56.8% Hennepin -16.0% Dakota -53.0% Carver -27.8% Anoka -55.5% -60%

-50%

-40%

-30%

-20%

-10%

0%

Source: Metropolitan Council

Figure 5 Annual Percentage Changes in Residential Building Permits Issued 2002-2006 -36.8% W ashingto

-1.0%

20.8% 32.5%

- 29.0% - 15.9%

Scot t

11.6%

- 17.0% - 15.4% Ramsey

40.9%

- 48.9%

28.5% - 13.1%

Hennepin

-8.6%

2005-2006 2004-2005

- 3.2%

2003-2004

- 15.1% - 32.1% Dakota

- 30.6%

2002-2003 - 15.0%

19.2%

-12.7% - 17.2%

C arver

A noka

-50%

-16.9% - 35.4% -31.0%

-40%

-30%

-6.6%

- 13.3%

-20%

18.4%

-10%

0%

10%

20%

30%

40%

50%

Source: Department of Housing and Urban Development

21 22

http://socds.huduser.org/permits/index.html Scherer, Ron, “Building Slump? Not on the Commercial Side,” Christian Science Monitor, February 2007

20

Figures 6 and 7represent the overall downturn in the absolute number of single and multi-family units constructed between 2002 and 2006 in the Twin Cities Metropolitan Area. In Dakota County, both single and multi-family building permit issuance has dropped off dramatically in the last 5 years. Though this drop has occurred, this does not mean new development has halted all together. According to many industry journals and newspapers, developers are in a holding pattern. They have permission to build, but actual construction will not begin until excess units are bought and taken off of the market. Figures 6 and 7 also illustrate the different building patterns representative of single and multi-family units. From 2002-2006, Dakota County was the only metro area county to post consistently falling permit applications. Other counties still experienced dropping applications in 2006, but most experienced small increases before application numbers dipped. This up and down trend in multi-family housing is most likely due to the difficulties inherent in the permitting and zoning processes found in localities across the metro area. Condos and town homes have been a large part of new development in multi-family housing. Half of all sales occurring in 2006 in the cities of Inver Grove Heights, Eagan, Burnsville, and Apple Valley were condo and town home transactions.23 The construction of these units, depending on the community, is often a divisive issue and therefore affected by more exogenous pressures than single-family home construction. Similarly, condo construction attracted a lot of speculative developers and buyers during the last several years, making condo living a sought after lifestyle in metropolitan areas.24 Hennepin County is a prime example of this change. In 2006, nearly half (44.6%) of all multi-family housing permits issued in the metro area were located in Minneapolis.25 Most of this construction was town home and condo development. Figure 6 Number or Building Permits Issued for Single-Family Residential Units 2002-2006 3,500 3,000 2,500 2,000 1,500 1,000 500 0

2002

2003

2004

2005

2006

Anoka

2,239

2,752

2,887

2,156

1,420

Carver

1,097

873

840

842

610

Dakota

2,185

2,704

2,169

1,490

1,242

Hennepin

2,660

3,059

2,670

2,320

2,255

Ramsey

424

422

587

616

402

Scott

1,722

1,893

1,800

1,433

1,019

Washington

1,281

2,024

2,423

2,520

1,584

Source: Metropolitan Council

23

Minneapolis Area Association of Realtors Kemba Dunham & Ray Smith, “What is Fueling High Condo Prices?”, The Wall Street Journal, August 2005 25 Minneapolis Quarterly Trends Report, 2006: http://www.ci.minneapolis.mn.us/cped/docs/4Q_trend_report_2006.pdf 24

21

Figure 7 Number of Building Permits Issued for Multi-Family Residential Units 2002-2006 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

2002

2003

2004

2005

Anoka

140

66

422

126

2006 53

Carver

370

497

298

151

212

Dakota

1,309

1,464

1,372

966

424

Hennepin

3,828

2,448

2,361

2,547

1,972

Ramsey

795

1,145

1,621

511

551

Scott

347

418

117

179

124

Washington

397

200

265

145

99

Source: Metropolitan Council

Index of Housing Affordability Housing is considered less affordable when costs outpace inflation and/or personal income. An index developed by the National Association of Realtors measures whether a family earning the median income for a given area could qualify for a mortgage on a median-priced single-family home. An index value of 100 indicates that a family earning the median area income has the minimum income to purchase a median-priced home. The higher the index is above 100, the more affordable the housing. For instance, an index of 120 means that a family that earns the median income has 120% of the income needed to buy a median priced house in a particular community.26 According to the affordability index (Figures 8 and 9), housing in Dakota County is the most affordable in the Twin Cities area with an index of 158. However, housing is less affordable in the county now than it was five years ago (158 compared to 162). This change is mostly due to the rapid appreciation of home prices occurring over the last several years and the corresponding stagnation in personal income. This decrease in affordability was less apparent in Dakota County as it was in Hennepin and Ramsey counties, whose indices fell by 54 and 85 points since 2003, respectively. Similarly, Figure 10 illustrates the general decrease in housing affordability in the Twin Cities region as a whole.

26

Assumptions for this calculation include 20% initial down payment, qualification for prime lenders, and no more than 25% of monthly income goes to mortgage payments.

22

Figure 8 Dakot al Co unt y Ho us ing A ffo r dab ilit y Ind ex b y Y ear 180

164

Index > 100 = Greater Affordability

16 2

16 2

158

157

160

14 8

140 120 100 80 60 40 20 0 2 00 1

2 0 02

2 00 3

2 0 04

2 00 5

2 0 06

Source: Minneapolis Area Association of Realtors

Figure 9

180 160

149

140

158

150

129

120

110

134

134

108

106

100 80 60 40 20

n Na t io

ro

ng t as hi W

Me t

on

t Sc ot

Ra m se y

pin He

nn e

a Da ko t

Ca rv er

ka

0

An o

Index > 100 = Greater Affordability

Regtiona l a nd Na tiona l Indices of A ffordability, 2006

Source: Minneapolis Area Association of Realtors

23

Figure 10 Twin Cities Housing Affordability Index Over Time

Index > 100 = Greater Affordability

180 160

173

160

161

165

154

140

163

157

156

156

157 155

146

148

140

120 100 80 60 40 20 0 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: Minneapolis Area Association of Realtors

One important point to note, however, is that this index model assumes that a family is able to put down 20% of the median home price at purchase. In Dakota County, this would be $46,730. According to the U.S. Commerce Department, personal savings rates in the nation are at all time lows. This means that people are saving less money and therefore having to take out larger mortgages making monthly payments more expensive. Ultimately, because of the assumptions made for the index calculation, the model can overestimate affordability. A good example of this overestimation is the rising foreclosure rates being witnessed in Dakota County and in the wider metropolitan area. From 2000 to 2005, foreclosure notices increased by 157% in Dakota County. The primary drivers of these foreclosures were sub-prime lending practices, association fees for condos and town homes, and sudden loss of income.27 These conclusions suggest that people are overstretching their budgets to get into housing. And with a wide array of mortgage products available, lenders have been less scrupulous; borrowing without fully disclosing the risk of future fee increases or interest rate hikes and making riskier loans. In Minnesota, 23% of all sub-prime loans have late payments, making the state one of the worst performing states in the nation in regards to sub-prime mortgage payments.28 Nationally, foreclosure rates have increased by 25% between January 2006 and January 2007.29 Minnesota is ranked 33 among states in foreclosure rates.

27

OPED Report on Foreclosures in Dakota County, October 2006 Jennifer Bjorhus, “Mortgage lenders are going under, too,” Pioneer Press, March 4, 2007 29 RealtyTrac Newsletter, January 2007 http://www.realtytrac.com/news/Press/newsletter-articles.asp?a=b&ItemID=1912&accnt=140204 28

24

Sale Price of Housing Home prices in Dakota County and the metro area have appreciated rapidly over the last several years. However, this trend is beginning to slow down. As Figure 11 illustrates, housing prices in the Twin Cities are going against the national trend of steadily increasing appreciation and are beginning to experience slowing appreciation. Figure 11

Source: Minneapolis Area Association of Realtors

In Dakota County, the median price30 of a home has increased 22% since 2002, increasing from $192,000 in 2002 to $233,650 in 2006. Figure 12 shows median home prices in Dakota County from 2002 to 2006. Average prices, on the other hand, have remained relatively flat over the last few years and actually decreased from 2005-2006. The Minneapolis Area Association of Realtors projects that metro area home prices have only appreciated by only 1.3% in 2006 and estimates appreciation rates for 2007 to be no more than 1%.31 Figure 13 illustrates the median home price by county. Dakota County has the third lowest median home price at $233,650. Ramsey and Anoka are the only other counties with lower median prices. Carver County has the highest median home price at $262,000.

30

Median sales data is based upon qualified sales of new and existing homes in the County, in which price reflects actual value. Data reflect sales prices for all residences (e.g., single-family homes, condominiums, townhouses, twinhomes), and do not include multifamily or commercial properties (e.g., duplexes, apartment complexes). Median sales price refers to the sales price located directly in the middle of the year’s distribution of prices, above and below which exist an equal number of prices for all closed sales. 31 “Short-Term Pain, Long-Term Gain,” Minneapolis Area Association of Realtors, February 2007

25

Figure 12 Dakot a C oun t y A v er ag e and M edia n Home P r ice s, 200 6 $350, 000 $299, 115

$300, 000

$250, 000

$231, 668 $216, 195 $220, 000 $208, 050 $ 1 9 2 , 0 0 0 $200, 000

$304, 794

$293, 909

$233, 650

$232, 000

M e dia n P rice A ver ag e P rice

$150, 000 $100, 000 $50, 000

$0 2002

2003

2004

2005

2006

Source: Northstar MLS

Figure 13 Median Home Prices for Metro Area Counties, 2006 $300,000

$262,000 $238,000

$250,000

$245,000

$233,650

$224,000

$253,925

$216,500

$200,000

$150,000

$100,000

$50,000

$-

Anoka

Carver

Dakota

Hennepin

Ramsey

Scott

Washington

Source: Saint Paul Association of Realtors

26

Monthly Rental and Vacancy Rates The vacancy rate is an important indicator of rental housing affordability and accessibility. Decreasing vacancy rates may suggest that the demand for housing is generally becoming greater, and that competition for existing units is becoming more intense. Area economists consider a 5% vacancy to represent a healthy rate of vacancy for rental units from year-to-year. A vacancy rate of 5% supports the interests of landlords and renters by striking a balance between the supply and demand for rental housing. While private market rental vacancy rates have risen substantially over the past three years to more than 8% in 2004, the cost of rental housing remains high. Average monthly rent reflects the availability and accessibility of rental units, particularly when coupled with rental vacancy rate trends. In the early 2000, Dakota County recorded very low vacancy rates, hovering around one percent. With an active homeownership market and increased rental housing development, more rental units became available, easing the pressures on vacancy. By 2004, Dakota County saw its highest vacancy rate in the last 12 years at around 8%. This rate has steadily dropped since that time as development cools and populations continue to rise (see Figure 14). Figure 14 Da ko ta County A vera ge Rental Vacancy Rate , 2000 to 2006 9%

8%

8%

8%

Rental Vacancy Rate

7%

6%

6% 5%

5% 4%

4%

3%

2%

1%

1%

1%

0%

20 0 0

2 0 01

2 00 2

20 0 3

2 0 04

2 00 5

20 0 6

Source: Dakota County Community Development Agency

Dakota County currently appears to have a healthy vacancy rate of rental units. There was an estimated 6% vacancy rate in 2006. In addition, average monthly rental rates have remained relatively consistent over the last seven years. In six years, average monthly rents for 1-bedroom apartments have increased 8% ($60), average rents for 2-bedrooms have increased 10% ($82), and average rents for 3-bedrooms have also increased by 10% ($112). The current average monthly rent for 1-bedroom units is $735, for 2bedroom units its $900, and for 3-bedroom units average rent is $1,188 per month. However, as the vacancy rate continues to drop and rental housing becomes harder to obtain, average monthly rents will most likely increase on a faster scale than the county has experienced during the last several years. Figure 15 illustrates this trend in increasing rental rates. These data also illustrate that the difference between the monthly cost of three-bedroom and two-bedroom units is larger than the difference between the one-bedroom and two-bedroom units. This difference is important because it means that larger families pay significantly more for rental housing.

27

Figure 15 Dakota County Average Rental Rates, 2000 to 2006 $1,400

Average Monthly Rent

$1,200

$1,000

$800

$600

$400

$200

$0

2000

2001

2002

2003

2004

2005

2006

1-Bedroom

$675

$707

$740

$741

$740

$721

$735

2-Bedrooms 3-Bedrooms

$818 $1,076

$874 $1,142

$892 $1,148

$892 $1,142

$902 $1,192

$895 $1,190

$900 $1,188

Source: Dakota County Community Development Agency

The standard federal definition of affordable housing is housing that costs no more than 30% of a family’s monthly income. Following this accepted standard, a family would have to earn an annual income of $48,000 (about $23.00 an hour) to afford an average 3-bedroom apartment in Dakota County. To afford a 2-bedroom or a 1-bedroom apartment a person would have to make $30,000 to $36,000 per year or about $16 to $19 an hour (see Figure 16). Figure 16 Income Needed to Afford Average Monthly Rents in Dakota County, 2006

3-Bedroom

$48,000/yr

2-Bedroom

$25/hr

$36,000/yr $18.75/hr

1-Bedroom

$30,000/yr

$0

$10,000

$20,000

$15.60/hr

$30,000

$40,000

$50,000

$60,000

Source: Dakota County Community Development Agency

28

Total Cost of Development Development costs such as land and material have risen in conjunction with home value appreciation. Energy costs have also increased. Rising average costs per square foot for single-family homes reflect these cost increases. Figure 17 illustrates the rising costs of material nationwide. Some of the biggest increases in material costs in the last fifteen years have occurred since the start of this decade. Between 2003 and 2005, average material costs increased by almost 15%. Considering that a common size for a newly constructed home is around 2,000 square feet, rising material costs added an extra $23,000 to the cost of the home. Increases in energy costs (gasoline) and shortages in supplies due to the construction boom have been the primary drivers for ratcheting up material expenses. Figure 17 Nationwide Median and Average Cost per Square Foot in New Single-Family Homes, 1991-2005 $100 $90 $80 $70 $60

Average Price per sq. ft. Median Price per sq. ft.

$50 $40 $30 $20 $10 $0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: National Association of Home Builders

New construction of homes has slowed in the last several years, and housing related employment has decreased. As a result, material costs have come down. However, multi-family unit construction remains strong nationwide and shortages in various construction materials such as gypsum, cement, and oriented strand board (OSB) have recently inched prices higher.32 The future for material cost is tied to transportation costs.33 Ultimately, material needs to be transported and as diesel fuel experiences price fluctuations, so will the price of construction products. Cost and Availability of Land Land is the major cost of new home construction. Most often the price of land determines the relative affordability of a new unit. One can argue that a primary reason that multi-family units are becoming popular developments is that land prices have dictated higher densities necessary to make new projects financially feasible. However, land appropriately zoned for multi-family housing is in short supply.34 This lack of appropriately zoned land increases development prices. The problem could be reduced if communities promoted changes in zoning and redevelopment.35 If all available multifamily parcels in the County’s 11 largest cities were dedicated exclusively to affordable housing at the highest densities allowable, the County would meet approximately one-half of the demand for affordable rental units estimated by 2020. The majority of the land available for multifamily housing 32

Builder’s Economic Council Survey, National Association of Home Builders, 2006 Jamie McAfee, The Rising Cost of Development, Urban Land Institute, February 2007 Analysis of the Demand for Tax-Credit Family Rental Housing: Dakota County, Minnesota, Market Research Partners, Inc. December 2002 35 Model Zoning Technical Advisory Group Report, Minnesota Housing Finance Agency, August 2003 http://www.mhfa.state.mn.us/about/MZTAG_ReportFinal.pdf 33 34

29

projects in Dakota County will likely be developed for market rate units, including owner townhomes, condominiums, and rental apartments. Developers of rental housing will need land other than multifamilyzoned parcels to meet current and future needs, including acreage zoned for commercial and perhaps industrial uses, and planned unit development (PUD) parcels.36 Summary: Housing and Data Trends Dakota County is growing and will continue to do so for the next several decades. This means that housing must keep apace of population trends and housing demand. Currently, the County has a healthy rental vacancy rate and a high housing affordability index when compared to the rest of the metro area. However, foreclosures and development costs are increasing, rental rates are high compared to the metro area, and home affordability has been decreasing over time. Rising foreclosure and lower affordability rates necessitate proactive solutions to keep the homeownership market open to as many people as possible. Furthermore, high rents and affordable housing program waiting lists are indicators that affordable housing needs are persistent and pervasive. Waiting list numbers for the CDA housing programs are discussed in the Affordable Housing Demand and Forecasted Need section.

36

Analysis of the Demand for Tax-Credit Family Rental Housing: Dakota County, Minnesota, Market Research Partners, Inc. December 2002

30

Affordable Housing Demand and Forecasted Need A number of important indicators help illustrate the current affordable housing demand in Dakota County. These same factors also allow for the forecasting of future affordable housing needs in the County. Indicators of affordable housing include cost burdened households, homelessness, and waiting list counts for affordable housing programs. Cost Burdened Households With the rapid appreciation in home prices and the general stagnation in personal income, housing affordability is a major public issue. According to the 2005 American Community Survey, 32.4% of rental and owner households (46,347 families and individuals) in Dakota County are cost burdened, as illustrated by Table H. Cost burdened means that housing costs exceed 30% of a household’s monthly income.37 This is an increase of 11.5 percentage points over the 2000 count of 24,495 rental and owner households. Furthermore, the growth in the number of severely cost-burdened38 households has more than doubled in Dakota County, from 7,200 households in 2000 to 16,208 households in 2005. Residents are spending a disproportionate share of their income on housing costs, which may cause them to divert resources from other basic needs, possibly resulting in homelessness. Table H. Cost Burdened Rental and Owner Households, Dakota County, 2000 and 2005

2000

Households Paying 30% + Number Percentage 24,495 20.9%

Households Paying 50% + Number Percentage 7,200 6.1%

2005

46,347

16,208

32.4%

11.3%

Source: U.S. Census, 2000 and American Community Survey, 2005

Homelessness A recently released report on the homeless39 population by the Wilder Research Center40 found that on October 26, 2006 there were an estimated 6,292 individuals in emergency shelters and transitional housing programs in Minnesota. An additional 1,421 homeless people were identified as unsheltered or not staying in a formal shelter or housing program, the total homeless count for Minnesota equals 7,713, a slight decrease of 1.3% from the 2003 count41. Dakota County’s homeless population in 2006 included 132 adults, one youth, and 120 children with parent(s). An additional 11 adults were counted as unsheltered or living in an informal shelter. Table I provides a count of the homeless population in the metropolitan region by county on October 26, 2006.

37

The methodology used by the American Community Survey consistently undercounts households in poverty. This means that housing cost burden in Dakota County is probably higher than projected. Using a high end margin of error, households experiencing cost burdens in Dakota County is more likely to be around 13%. 38 Severely cost-burdened is defined as households spending more than half of their income on housing related cost. Data comes from the American Community Survey. 39 Homelessness is defined as a person who (1) lacks a fixed, regular, and adequate nighttime residence; or (2) has a primary nighttime residence that is a supervised, publicly or privately operated temporary living accommodation, including emergency shelters, transitional housing, and battered women’s shelters; or (3) has a nighttime residence in any place not meant for human habitation, such as under bridges or in cars. This is based on the definition established by the US Congress. 40 Overview of Homelessness in Minnesota, Wider Research Center, March 2007. http://www.wilder.org/fileadmin/user_upload/research/Homelessoverview2006_3-07.pdf 41 2003 Minnesota data: 7,015 in shelters or transitional housing and 796 are unsheltered/informal shelter = 7,811 total homeless.

31

Table I. Homeless in Metropolitan Area on -- Emergency Shelters and Transitional Housing Programs, October 26, 2006 Men County

Youth42

Women

Children

Total

2003

2006

2003

2006

2003

2006

2003

2006

2003

2006

Anoka

29

23

63

54

6

2

120

91

218

170

Carver/Scott

7

9

24

12

-

-

33

23

64

44

Dakota

30

49

88

83

1

1

145

120

264

253

1,071

978

859

766

22

29

1,138

1,104

3,090

2,877

514

350

420

421

46

49

491

491

1,471

1,311

3

3

24

26

-

-

39

31

65

60

1,654

1,412

75

81

1,965

1,860

5,172

4,715

Hennepin Ramsey Washington Metropolitan Area

1,478 1,362

Source: Overview of Homeless in Minnesota, March 2007, Wilder Research Center In Dakota County, the Supportive Housing Unit (SHU) was established in 1996 to address the growing number of homeless in the County. Data from SHU show that the number of homeless families receiving services in Dakota County has declined in the past years, as Figure 18 illustrates. While 2006 totals (185 households) reflect a slight drop from a high of 237 households in 2003, the number of families and individuals receiving SHU services during 2006 nevertheless represent the continued demand for supportive and affordable housing in Dakota County. Figure 18 Number of County Households Receiving SHU Services, 1997 to 2006 300

Total Number of Households

250

200

150

100

50

0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Total # of Families and Individuals Receiving SHU Services

95

144

144

174

180

237

230

231

176

185

# of Families/Individuals Placed in Motels

16

20

31

43

20

29

25

34

35

30

# of Families/Individuals Placed in Shelters

52

46

54

48

54

48

44

56

47

53

# of New Referrals to Family Homeless Prevention Program

19

39

35

34

39

39

37

40

25

26

# of Families Provided Crisis Intervention

8

39

24

49

67

121

124

101

69

76

Source: Dakota County Supportive Housing Unit

42

Youth refers to individuals under the age of 18 years who are on their own (not with their families).

32

As discussed in the following section, rental subsidies are intended to help individuals and families in critical need of stable, affordable housing. This population includes the homeless population, individuals and families with physical and/or mental disabilities, and households facing economic hardship. Subsidies are a key step for many households in their successful transition from crisis or emergency housing situations, to stable affordable housing through attainment of a Section 8 voucher, supportive housing, or a market rate unit if financially feasible. Housing Choice Voucher Program (Section 8 Housing) The Section 8 Program has served as a critical program helping households with limited incomes to continue along the path towards self-sufficiency by providing market rental housing at a subsidized rate. With the help of a voucher, low-income families transition from shelter and other crisis housing situations to more stable housing situations. From Section 8, some households have been able to transition to homeownership with an increase in household income and the support of Dakota County CDA’s FirstTime Homebuyer Loan Program, and/or other assistance. However, due to changes in the Section 8 funding formula, resources are not keeping up with demand in the County43. The Section 8 Program was established in 1975. The program is administered by the Dakota County CDA to subsidize a baseline of 2,202 units. A total of 1,891 households are listed on the County’s waiting list as of January 2007. Figure 19 presents a point-in-time survey of the Dakota County CDA’s waiting list for Section 8 program vouchers over the past decade. Figure 19 Dakota County CDA Section 8 Program Waiting List, Point in Time - Jan. 1998 to Jan. 2007 4,000

Waiting list opened in April 2002, then closed in May 2002.

Waiting list opened in Aug 2005, then closed in Sept 2005.

3,497

Total Number of Applicants on Waitlist

3,500

3,000

2,500 2,193 2,000 1,891 1,500

1,286 1,217

1,000

500

469

737

1,155

830

879

0 Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Source: Dakota County CDA, Housing Assistance Program

43

Various affordable housing studies report the current housing situations of individuals and families on the Section 8 waiting list as: living with family or friends, renting a unit -- but paying more than 30% on housing cost, or are homeless.

33

Dakota County CDA Waiting List Waiting lists for housing programs administered by the CDA can be viewed as a proxy for overall demand of affordable housing. Figure 20 illustrates waiting list numbers for Dakota County’s CDA housing programs. The number of people on the waiting list for senior housing remained relatively consistent over the last two years. A slight dip in the August counts for senior housing was a result of opening a new senior development in Dakota County. The family town home program is continuously experiencing an increasing number of families on the waiting list. Since January of 2005, there has been a 20% increase in families wanting to enter into the program. This rise is most likely a result of a successful program and decreasing affordable home ownership options in Dakota County. The most apparent trend in Figure 20 is the dramatic drop in people waiting for public housing. This drop was the result of CDA staff conducting an update of the waiting list. This process expunged the names of those who had found housing, those who could not be located, those who were unresponsive to the update, and those who removed themselves from the list. Immediately after this update, the waiting list began to grow again. The trend continued for the remainder of the year and still continues today. As the waiting list numbers suggest, the need for additional affordable housing units in Dakota County continues to persist, particularly for low-income households and seniors. Coupled with the rise in cost burdened households, and the strong demand for supportive housing and Section 8 vouchers, it is clear that the need for affordable housing will continue to grow and cause pressure on the current programs and services. Given the situation, the HOPE Program is well suited to help address and alleviate the affordable housing demands. The following section highlights the forecasted affordable housing need in the County based on two current studies completed by the Dakota County Community Development Agency and the Metropolitan Council. Figure 20 F ig u r e 18 : Wa it in g Li st N u m b e r s fo r C DA H o u si n g P r o g r a m s, Ja n u ar y 2 005 - D e ce m b e r 20 06 3 ,0 00

Number of People

2 ,5 00

2 ,0 00

Pu b lic H ou s ing

1 ,5 00 S en io r H o u sin g 1 ,0 00 F am ily T ow n h om es 5 00 J a n u a ry '0 5

Ja n u a ry '0 6

D e ce m b e r ' 0 6

Source: Dakota County Community Development Agency

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Forecasted Affordable Housing Need As illustrated by the waiting list numbers for CDA housing programs and Section 8 vouchers, demand for supportive housing services, and the continuous increase in cost burdened households, availability of affordable housing is an issue in Dakota County. According to a study by the Metropolitan Council44, Dakota County is facing strong demand for affordable rental and owner housing units. The study45 estimates that about 7,600 new units of affordable housing are needed in Dakota County by 2020. Most of the new affordable housing will be needed in the City of Apple Valley and Lakeville, as those communities are experiencing some of the more rapid growth. Table J lists the largest cities in Dakota County and their respective new affordable housing demand by 2020. Table J: 2011-2020 Affordable Housing Need in Dakota County

Source: Metropolitan Council

Dakota County’s population is expected to grow through the next two decades. As the population grows, housing demand is also expected to increase. This means that both market rate and affordable units will be needed in order to ensure accessible housing to new residents. Moreover, Dakota County’s population of seniors is expected to increase by 225% by 2030. As people age, their housing needs change and their income decreases. Affordable housing will become even more important as people age in Dakota County. Furthermore, in a separate study, Maxfield Research46 conducted a housing needs assessment for the Dakota County CDA. This study47 concluded that by 2020 at least 3,998 new affordable rental units and almost 13,000 modest for-sale units are needed to satisfy housing affordability needs in the county (Table K).

44

2011-2020 Allocation of Affordable Housing Need, Metropolitan Council, December 2006 http://www.metrocouncil.org/planning/housing/HousingNeed.pdf 45 Methodology for calculating affordable housing demand is tied to the growth of sewer-serviced areas, followed by taking into consideration the current affordable housing stock in each community. 46 Comprehensive Housing Needs Assessment for Dakota County, Minnesota, November 2005, Maxfield Research, Inc. 47 Demand calculations and housing recommendations were made based on the following: demographic trends, housing stock characteristics, rental occupancy rates, senior housing market situation, for sale housing market conditions, and housing for special needs populations.

35

Table K: Dakota County Housing Demand Summary, 2005 to 2020 Housing Type

Demand in Units

Senior Rental

1,660

General Occupancy

2,338

For Sale (less than $250,000)

12,655

Source: Dakota County CDA, Maxfield Research Given the projected demand for future affordable housing in Dakota County, and the current waiting list numbers for CDA affordable housing programs, the need for affordable rental and owner housing is critical. To date, the Dakota County CDA has constructed 15 affordable workforce and family housing developments for a total of 455 affordable units located throughout seven different cities in the County. Additionally, three more developments have been approved for a total of 122 new affordable units in Dakota County: 32 units in Rosemount, 50 units in Lakeville, and 40 units in Farmington. Furthermore, the CDA has 20 senior housing developments for a total of 1,135 affordable units specifically for seniors aged 55 plus. In October 2006, the Dakota County Board of Commissioners granted approval to the CDA to construct ten additional affordable senior buildings over the next 12 years. This will add an estimated 600 new affordable senior rental units in Dakota County.

36

Appendix A: Section 8 Voucher Homeownership (VHO) Program Background In October 2000, the final rule implementing the Section 8 Voucher Homeownership (VHO) option was issued by the U.S. Department of Housing and Urban Development (HUD). Under the VHO option a participating household may utilize monthly voucher assistance payments to purchase a home. Subsidies that would normally go towards paying rental expenses are used to pay mortgage payments and other expenses related to homeownership. In most cases, the VHO Program provides a maximum 15 year commitment to assist with homeownership related expenses if the initial first mortgage is 20 years or longer48. In general, a housing authority that administers Section 8 has the choice of whether or not to offer homeownership assistance to qualified participants. HUD does not designate or provide separate or additional Section 8 funding for homeownership vouchers. Housing authorities must use current tenantbased program funding received under the annual contributions contract to fund any VHO program49. As of December 2005, HUD reported more than 450 public housing authorities (PHAs) were operating VHO programs and more than 4,000 purchases had been made by participating households.

48

Section 8 homeownership assistance may only be paid for a maximum period of 15 years if the initial mortgage has a term that is 20 years or longer. In all other cases, the maximum term of homeownership assistance is 10 years. The maximum term, however, does not apply to an elderly or disabled family. 49

HUD Notice PIH 2006-5, set aside additional administrative fee funding to support homeownership voucher program closings. For CY2006 PHAs may receive a one-time fee of $1,000 for each homeownership closing reported during the calendar year.

37