Dominium, one of the nation’s largest for-profit developers, has called off plans to convert a sprawling warehouse in the North Loop neighborhood in Minneapolis into 200 income-restricted rentals after reaching an impasse with the city of Minneapolis over the use of low-income housing tax credits.

The owner of that building is scratching his head about why the two sides couldn’t compromise at a time when the city says affordable housing is a top priority.

“You think they would have jumped over every hoop they could to get 200 units of affordable housing,” said John Duffey, who’s about to put the building back on the market for the fourth time in three years.

The city says it is simply trying to be a good steward of the scarce funding that’s used primarily by nonprofit developers to build housing that’s affordable to low-income and working-class families.

The situation highlights the challenges developers and communities sometimes face when trying to stitch together complex deals using layers of state and federal funding. It’s even more challenging in the highest-rent communities where demand for affordable housing is most intense.

That’s why this week Minneapolis Mayor Jacob Frey celebrated a $40 million commitment to affordable housing as part of his 2019 budget, and the City Council to approved a sweeping change to the city’s comprehensive plan that allows higher-density development to ease the housing crunch.

The proposed North Loop project, which was announced with much fanfare this summer, would have used a combination of state and federal tax credits, including those used to turn historic tax buildings into housing.

Though the city wasn’t providing any funding, it acts as a gatekeeper and must sign off on those projects, per federal rules.

“The city of Minneapolis would very much like to see the Duffey buildings redeveloped,” said Andrea Brennan, the Minneapolis director of housing policy and development. “And the city would also like to see more affordable housing created in the North Loop.”

The city evaluates such projects using a scoring system. Priorities include cost containment, an emphasis on large units and developers who use those credits agreeing to keep their buildings income-restricted for at least 30 years.

“The project did not meet the city’s minimum scoring requirements,” Brennan said. In this case, the city was being asked to sign off on $50 million worth of federal tax-exempt bonds issued by Hennepin County.

Brennan said the two biggest barriers for this project are that total development costs exceed $550,000 per unit, more than double the typical affordable housing project, and the affordability period is only 20 years.

She said the city has had a positive working relationship with Dominium and has partnered with the company on several projects. The city recently awarded similar funding to two other North Loop affordable housing projects — Great River Landing and YouthLink — and is reviewing a request for another 109 units of affordable housing in the area.

Nick Andersen, a Dominium vice president, said the company was eager to add more income-restricted units to the North Loop and that he was surprised by the decision.

When the company did its analysis, he said, it determined that income growth in the area wasn’t keeping pace with the cost of running the building, so the company decided it was too risky to make a 30-year commitment to keeping it income-restricted.

“We couldn’t get comfortable with the requirement,” Andersen said. “As a developer and an owner the rent you can generate is directly tied to growth in median income and that’s a risky place to be.”

Andersen said property taxes are the biggest expense, but other variables are difficult to control including building maintenance and utility costs.

Andersen said the company isn’t pursuing any new projects in the city, and is instead now focused doing projects in suburbs where, he said, it’s easier to do development.

Dominium is a powerhouse national developer that has tackled some of the region’s most complicated, and sometimes controversial, tax credit projects. When a for-profit developer failed in its attempt to convert the historic Pillsbury A-Mill building along the Mississippi River into luxury condos several years ago, Dominium was able to successfully resurrect the fragile, limestone building into an award-winning income-restricted rental building for artists.

Dominium recently moved forward with its plans to convert 26 buildings at Fort Snelling into 176 units of affordable housing for families and veterans.

Duffey, the owner of the North Loop building, says he’s confident he’ll find another buyer for one of the last undeveloped warehouses in the neighborhood.

Still, he’s frustrated. “I thought everything was going along fine,” he said. “You would have thought they [the developer and the city] could have done something.”