As Minneapolis and the Twin Cities grow, one challenge is the increasing demand for housing affordable to those in the middle to lower ranges of the income spectrum. Affordable housing is an issue facing every major city in the country, and in some places the situation is truly dire. The problem here is serious and has risen to the top of the policy agenda at City Hall.
Since spring, Building Minneapolis Together (BMT), an advocacy group composed of for-profit and not-for-profit housing developers, has been engaged in this discussion about affordable housing. Many of the participants are seasoned affordable-housing providers. Their perspective based on years of experience is a benefit as city officials work to craft a program that will bring significant expansion of affordable housing stock in Minneapolis.
Individuals representing BMT have visited with staff and elected officials to reinforce two key principles: First, ensure that all city actions support the continued flow of investment into building additional housing of all types in Minneapolis. And second, leverage this continued investment by identifying a “tool kit” of locally controlled resources and policies to directly address affordable housing development and preservation.
One new policy idea that city officials intend to adopt is Inclusionary Zoning (IZ). All housing developed anywhere in Minneapolis will be required to include a defined percentage of units affordable to residents at a below-market rent. This approach has the advantage of distributing affordable units across the city.
It is, however, a form of regulation of a housing market that is dynamic and ever changing. IZ imposes costs on developments that otherwise are built with purely private investments based on their economic return. If the cost of this regulation is too high, investments will be curtailed and additional housing production of any kind reduced.
A sound IZ policy — which takes into account market realities for those working to build new housing — can make a modest contribution toward the creation of additional affordable units. Under current circumstances, when every such unit will help address the affordability challenge, BMT supports adoption of a sound policy.
But an IZ policy that is out of step with market conditions will backfire. Financing for new housing supply will dry up. Lenders and investors are not compelled to support projects in Minneapolis if their requirements can’t be met because of the impact of an overreaching regulation.
No matter what an IZ policy requires, there will be no new affordable units from a project that is never built in our city because it can’t be financed. And discouraging investment in any additional housing would simply compound the affordability problem by forcing a growing population to chase fewer living options, thereby bidding up costs.
There are two key aspects to a sound IZ policy of the kind BMT is recommending to Minneapolis officials.
1) When affordable units are included in an otherwise market-driven project, offer assistance to achieve the affordability goal to ensure that such projects “pencil out” and can continue to attract private financing.
BMT believes the right standard is 10 percent of units affordable to families and individuals earning 60 percent of the area median income. The right tool for the city to use to offer needed assistance is Tax Increment Financing.
2) Develop a menu of ways that housing developers can contribute to meeting the affordable housing challenge. This might mean developing a separate 100 percent affordable project or contributing funds directly to a nonprofit developer or to the city’s Affordable Housing Trust Fund. This degree of flexibility, exercised at the city’s discretion, is a typical feature of IZ policies in surrounding cities.
The mayor and City Council can already point to significant steps they are taking to fulfill their commitment to address the affordable housing challenge, including a proposed substantial increase in city funding and a successful expansion of a property tax relief program targeting preservation of highly affordable units. They should be applauded for their actions thus far.
Adding a sound IZ policy as a new tool will help. Overreaching with that tool won’t, and in fact will make the problem even worse.
Steve Cramer is president and CEO, Minneapolis Downtown Council.