ROCHESTER – A local program that gives landlords tax breaks in exchange for low rents is being adjusted to encourage future affordable housing creation.

“We really viewed this as a tool to preserve the city at the beginning,” said Dave Dunn, director of the Olmsted County Housing Authority, of the Rochester-Olmsted County incentive program launched in 2020. “Frankly, we didn’t think new construction would be an option unless it was already subsidized by the state.”

The program provides a tax reduction per unit. Participants must register at least 20% of the units in the building to qualify. Anything from a four-unit home to a larger apartment building can qualify.

To qualify for the tax relief – an 80% reduction in property tax rates for cities, counties and schools – landlords must agree to cap rents, choosing the less expensive of two options:

• Standard payments under the federal Housing Choice Voucher Program
• A government-set rate that is considered affordable for households earning 60% of the region’s median income

Dunn said the guidelines made it difficult for developers to pay rent because, without other assistance, they were already eligible for the state program that had boosted the county’s efforts.

He said a local developer who does not receive government assistance asked for some flexibility to make a planned project affordable through the reduced tax rate.

“In order for the project to remain profitable, they want a little higher rent,” he said, noting that tenant costs would be based on the 60 percent AMI guideline rather than the lower standard payment.

The difference between the two rates, which are updated each year, can be $200 to $300 for smaller apartments where the standard payment option is preferred. Larger four-bedroom apartments may have slightly lower rents due to the 60 percent calculation.

Dunn said the standard payment for local housing is typically lower, which is the case for the 611 homes enrolled in the local program. These homes are spread across 32 lots.

HRA board members voted 5-0 to update the requirements for newly constructed housing to allow owners to choose between the payment caps for buildings first occupied after January 1, 2025.

“We don’t think we’ll see this very often,” Dunn said, noting that developers will need to balance the benefits with the program’s requirements.

The savings on a $50,000 property tax bill for a 30-unit apartment building would be $1,334 per unit, according to a report submitted to the board of the Olmsted County Housing and Redevelopment Authority.

At the same time, landlords must agree to the following:

• Use the tax savings for permissible purposes, such as property maintenance, property security, property improvements, rent stabilization, or increasing the property’s replacement reserve account.
• Limit annual rent increases to 6% unless approved by an authorized county official.
• Ensure that new tenants meet income requirements of 60% of the area median income or less.
• Acceptance of Housing Choice Vouchers as a means of payment, which provide government assistance for rents above 30% of the holder’s income.

Failure to comply with program guidelines may result in a temporary loss of tax benefits and require landlords to refund overpaid amounts to tenants.

After the ten-year enrollment period expires, Dunn said the county must decide whether to grant an extension to landlords who wish to continue participating in the program.