City Council Meeting Date: May 6, 2025
To: Mayor and City Council
City Administrator
From: Brenda Angelstad, Finance Director
Jake Reilly, Community Development Director
Melissa Hanson, Housing Coordinator
Title
Consider Resolution for the City of Northfield Granting Preliminary Approval of the Issuance of Conduit Debt for Standard Communities (Jefferson Square Townhomes Project).
Body
Action Requested:
Consider Resolution Granting Preliminary Approval to the Issuance of Conduit Revenue Bonds to Finance the Costs of a Multifamily Rental Housing Facility Under Minnesota Statues, Chapter 462C, as Amended; Calling for a Public Hearing; Establishing Compliance with Certain Reimbursement Regulations under the Internal Revenue Code of 1986, as Amended; and Taking Certain Other Actions with Respect Thereto (Jefferson Square Townhomes Project).
Summary Report:
Standard Communities, or an affiliate thereof (the “Borrower”), has requested that the City of Northfield, Minnesota (the “City”) issue conduit multifamily housing revenue bonds in an amount not to exceed $10,000,000 (the “Bonds”) to finance the acquisition, construction, rehabilitation and equipping of an approximately 50-unit multifamily housing development for households of low and moderate income and functionally related facilities, including garages and surface parking, located at 1356 Jefferson Road in the City (the “Project”).
This is a common approach around the state and the country and is considered an affordable housing “preservation” project in that it extends the affordability term an additional thirty years and enables the property owner to completely rehabilitate the property. Many HUD-funded projects convert to market rate units after their affordability term has sunset. This process ensures that Northfield residents are not displaced while also allowing the property to be completely rehabilitated with no risk to the residents of a rent increase, as the property continues to be income restricted in the same way. Residents at this townhome property pay no more than 30 percent of their gross income for the rent amount, less approved HUD deductions such as medical and childcare expenses, and other allowances, including a utility allowance.
Attached is a preliminary resolution to be considered by the City Council on May 6, 2025 (the “Preliminary Resolution”), providing preliminary approval to the issuance of the Bonds. Prior to the bonds being issued, the Council will need to hold a public hearing and provide approval. There is no risk to the City or its credit rating or its debt level through this process.
Background on Conduit Bonds:
The Bonds, if authorized by the City, will be issued in calendar year 2025 as tax-exempt bonds under Minnesota Statutes, Chapter 462C, as amended and the Internal Revenue Code of 1986, as amended (the “Code”). Under the Code, Congress seeks to promote certain kinds of activities, like the development of affordable housing, by allowing private borrowers who undertake those activities to obtain tax-exempt financing for said projects. Tax-exempt financing allows borrowers to realize lower interest costs and thereby makes the financing and development of these activities more feasible. To obtain tax-exempt financing, the private borrower must request that a municipality, like the City, issue the bonds.
Because of the for-profit ownership of the Project, the Bonds will need an allocation of bonding authority from Minnesota Management and Budget (“MMB”) as required by the Code and Minnesota Statutes, Chapter 474A, as amended (the “Allocation Act”). The Preliminary Resolution is the first step of the conduit bond process and allows the City to submit an application for allocation of bonding authority with MMB. If the City receives a certificate from MMB allocating bonding authority to the City, the City may issue the Bonds. The Allocation Act provides the City and the Borrower with 180 days to issue the Bonds from the date of allocation.
If the Project receives an allocation of bonding authority from MMB, on a later date prior to closing, the City will also need to hold a public hearing, approve a housing program for the Project, and provide final approval for the issuance of the Bonds and the execution of various related documents (the “Final Resolution”). The Preliminary Resolution authorizes City staff to set a subsequent public hearing relating to the Project and the issuance of the Bonds.
Security for the Bonds
If authorized by the City Council, the Bonds will be issued as conduit revenue bonds secured solely by the revenues derived from a loan agreement or similar document (the “Loan Agreement”) to be executed by the City and the Borrower and from other security provided by the Borrower. The lender or bondholders provide the funds for the loan, either directly or through a trustee, and the City assigns its rights and obligations under the Loan Agreement to the lender or the trustee. No money actually flows through the City. No money or assets of the City would ever be pledged or available to pay the Bonds.
The bond documents will include provisions requiring the Borrower to indemnify the City for any potential liability incurred by the City with respect to the Bonds and the Project. In addition, the bond documents will recite that the Bonds, if and when issued, will not to be payable from nor charged upon any of the City’s funds, other than the revenues received from the Borrower under the Loan Agreement and pledged to the payment of the Bonds, and the City will not be subject to any liability on the Bonds. The Bonds will not constitute general obligations of the City and will not be secured by or payable from any property or assets of the City and will not be secured by any taxing power of the City. No holder of the Bonds will ever have the right to compel any exercise by the City of its taxing powers to pay any of the principal of the Bonds or the interest or premium thereon, or to enforce payment of the Bonds against any property of the City.
Because the Bonds will be conduit revenue bonds, the Bonds will not affect any debt limitation imposed on the City and the issuance of the Bonds will not have any adverse impact on the credit rating of the City, even in the event that Borrower encounters financial difficulties with respect to the Project to be financed with the proceeds of the Bonds.
Not Bank Qualified Bonds
The Bonds are proposed to be issued as tax-exempt obligations, the interest on which is excluded from gross income for federal income tax purposes. However, because the Project will be owned by a for-profit owner, the Bonds cannot be designated as “qualified tax-exempt obligations” for purposes of Section 265(b)(3) of the Internal Revenue Code of 1986, as amended (the “Code”) which relates to a deduction available to banks and other financial institutions (sometimes referred to as “bank-qualified bonds”). Because this type of Bonds is not eligible for designation as bank-qualified bonds, the Bonds will not count against the City’s $10,000,000 limit in 2025 on its ability to designate its own bonds, if any, as bank qualified bonds and issuing the Bonds in 2025 will have no impact on the City’s ability to issue bank-qualified bonds in future years.
Expenses and Costs
The bond documents will provide that the Borrower will be required to pay all the expenses of the City paid or incurred with respect to the Bonds and will be required to indemnify the City for any potential liability or costs incurred by the City with respect to the Bonds, the Project, and granting necessary approvals. In addition, the Borrower will pay any administrative fee charged by the City for the issuance of conduit revenue bonds.
Alternative Options:
Council may choose not to pass the resolution. This may negatively impact the ability of Standard Communities to preserve and rehabilitate the 50 units of family-size affordable homes.
Financial Impacts:
No impact to the City of Northfield.
Tentative Timelines:
The Council will need to hold a Public Hearing and provide approval later this year before issuance of the bonds.