After three years of planning, the developer of an apartment building that would provide 304 income-restricted rentals along North Lexington Parkway in St. Paul says the project is now on hold.

Bob Lux, Alatus principal and founder, said the decision was made after a key equity partner pulled out of the project because of increased financial risk that was created by passage of a rent control ordinance that caps annual increases at 3%.

Lux said the project's financing was scheduled to close last week and construction was expected to begin within weeks.

"It's incredibly unfortunate," he said. "We were fully approved."

The six-story, $70 million Lexington Station project was to be built on a vacant two-acre site that is owned by the Amherst H. Wilder Foundation.

Armando Camacho, CEO of the nonprofit, said in an e-mail that the organization is waiting to learn more from Alatus before determining how it will move forward.

"Our board of directors has affirmed our intention to sell the property," he said, "so that funds from the sale can go back into the community in the form of services that help families remain healthy and stable."

Half of the 304 units in the $70 million project would have been made available to renters with a household income at 60% or below the area median income (AMI); 20 units would have been affordable to those who earn 50% of AMI.

In addition, Alatus also had applied for project-based federal housing vouchers that would make 20-plus units even more affordable.

"The level of affordability that was going to be in this project was very unique for a project that received zero subsidy from the city or any other agency," Lux said.

Developers and lenders have said passage of the rent control ballot, which was approved last month, would force them to pause or pull out of projects in the city. Some have said the ordinance — which has been pegged as one of the most stringent rent control policies in the nation — is prompting them to look outside the city for sites that would come with less financial risk.

The ordinance is set to take effect in May. Mayor Melvin Carter has said he wants to amend the policy to exempt new construction, which could assuage some of the concerns from investors.

Alatus' planned apartment and retail complex drew controversy during Planning Commission and City Council debates early in the year, long before the rent control vote.

The Frogtown Neighborhood Association campaigned against the development for months, saying the apartments would not be affordable for many living nearby and could drive up taxes and rents on other properties in the area. In January the St. Paul Planning Commission voted against the project. In April, the City Council denied an appeal by the developer.

Carter effectively gave the project the go-ahead last spring, using a mayoral veto to overturn a split council decision to reject the site plan. At one point, the neighborhood association challenged Carter's veto with a court appeal, which was later withdrawn after promising conversations with Alatus about ways to make apartments more affordable. Alatus later increased the size of the project and the level of affordability.

Lux said the equity partner is an institutional investor that backed out after previously committing $23 million to the project. Others have also been unwilling for the same reason.

"If they can invest in Nashville or St. Louis or Milwaukee where they don't have rent control, why would they take the risk of investing $20-plus million in St. Paul and take the risk of inflation destroying their investment?" he said. "Most of this is pension fund money and they're not going to risk someone's life savings."

Lux said that unless the city is willing to exempt new construction from the ordinance, the project is a no-go.

"We're assessing whether or not the city will consider making any moves that would make it acceptable to make an investment of this size," he said. "The ball right now is in the City Council's court."

Includes reporting from Star Tribune staff writer Katie Galioto.