Hennepin County officials are focusing most of the first round of funding from a new 0.25% sales tax for affordable housing on helping providers that have struggled since the pandemic.

The new tax will provide about $48 million to metro counties and cities this year. Hennepin County will get $12 million, the largest share, due to its population size and the number of households paying a large portion of their income for rent.

Next year, tax collections are expected to be higher, and Hennepin County could get as much as $30 million. The new tax for housing is part of a 1% sales tax increase approved by the DFL-led Legislature in 2023 with the remaining 0.75% dedicated to transit.

Hennepin County's Housing and Economic Development Department opened grant applications for its Repair and Grow program Aug. 28. The county plans to spend about $10 million this year and another $14 million in 2025 on the program that aims to help providers address "challenges standing in the way of new development" of affordable housing.

The remainder of the county's 2024 revenue from the sales tax will be dedicated to emergency rental assistance. Ramsey County is taking a similar approach with the $6 million it received, also focusing on rental aid and its "Support and Stabilize" effort.

Julia Welle Ayres, director of housing development and finance, said Hennepin County officials asked affordable housing providers how they could help boost the production of new units. Providers responded that they were "focused on massive challenges and operating deficits" and nervous about investing in new units.

"We cannot create the amount of housing we need in this county if we don't have our partners on board," Welle Ayres said.

Why providers are struggling

Caroline Hood, president and CEO of RS EDEN, which operates affordable and supportive housing across the metro, said some pandemic policies and rising costs have many providers in a cash crunch.

Staffing, insurance and safety costs have climbed, many buildings are in need of repair and there are years of unpaid rent on housing providers books, Hood said. She added that it was more cost effective to stabilize existing affordable units than to build new ones if property owners decide to sell or transition to market-rate rentals.

The county's Repair and Grow grants can be used for things like deferred maintenance, retention bonuses for staff or to pay off outstanding debts from the pandemic. RS EDEN will likely apply for a grant to help recoup unpaid rent and to cover the costs of repairs.

"There are a lot of options, which is great," Hood said, noting that county officials recognized housing providers often have unique challenges. "I appreciate that partnership."

Affordable housing advocates have expressed support for the county's approach.

Elizabeth Glidden, deputy executive director of the Minnesota Housing Partnership, said it was clear affordable housing providers are struggling and the county was taking a "smart approach" to ensure families don't lose existing affordable options.

"Families are already feeling tremendous pressure from the market, even in affordable units," Glidden said.

Progress towards a big deficit

County officials hope the grant program will help housing providers get on better footing by 2026,when Welle Ayres says the plan is to again ramp up production. The county has helped fund 10,000 affordable units since 2000 and made big investments with pandemic recovery funds that are now becoming available.

This year, Hennepin County will spend nearly $200 million on its homelessness prevention and affordable housing efforts, including about $23 million to help create and maintain affordable units. Typically, the county provides forgivable loans in exchange for 30-year commitments to keep units affordable.

Yet Hennepin County still needs more than 34,000 affordable homes, according to a 2023 analysis by the Minnesota Housing Partnership. Nearly half of county renters are considered cost burdened because they pay more than 30% of their income for housing.

Margaret Kaplan, president of the Housing Justice Center, said the new metro sales tax for affordable housing will send important resources to communities to address the housing crisis.

In addition to helping housing providers, cities and counties can use the money for rental assistance, to build and maintain affordable homes and to help reduce homeownership disparities.

"Having this locally controlled, dedicated source of funding is a new thing for a lot of communities," Kaplan said. "Funds like this create tools and incentive to get to the level of affordability our communities desperately need."