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‘Inclusionary zoning’ is supposed to increase affordable housing. Critics say it could do the opposite in Minneapolis

On Wednesday, partly in response to developers’ concerns, the research firm working for the city of Minneapolis released revised recommendations for the proposed policy.

The interim ordinance for inclusionary zoning calls for developers of new rental properties to make 10 percent of their units affordable to households that earn 60 percent of the area’s median income.
The interim ordinance for inclusionary zoning calls for developers of new rental properties to make 10 percent of their units affordable to households that earn 60 percent of the area’s median income.
MinnPost file photo by Peter Callaghan

Minneapolis officials’ approach to affordable housing has developer Steve Minn second-guessing future projects in the city. As co-founder of Lupe Development, which he started in 1989, he has built hundreds of homes across the city. But now, he says a plan to diversify the city’s housing stock with new construction rules could force him to take new ideas elsewhere.

“It’s getting harder and harder to do,” he said of building in Minneapolis. “If it’s easier to do in other municipalities, then you know, we gotta do work where we can make money.”

The plan, dubbed “inclusionary zoning,” aims to put more responsibility on the private housing market to fill Minneapolis’ shortage of low-income housing by requiring developers to set aside a portion of units in all future complexes as affordable housing. Supporters say it is among the best tools to diversify neighborhoods over time, giving low-income residents access to amenities such as transit, schools or parks from which households of more affluent areas currently benefit. 

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But some developers, like Minn, have said the added cost of mandatory affordable units will keep investors from building in Minneapolis, further exacerbating the city’s housing crunch and eventually depleting the supply of affordable housing altogether. 

“It’s exactly opposite what they are hoping to accomplish,” said Minn, who is part of a group of developers — from both the for-profit and nonprofit sectors — that have organized a group, “Building Minneapolis Together,” to push back against the inclusionary zoning plan. 

A deterrent to doing business in Minneapolis? 

The pace of new housing construction is at the core of Minneapolis’ housing problems. To meet existing demand for housing and build for future residents, cities across the Twin Cities metro would need to add more than 14,000 homes each year for the next two decades, according to the Family Housing Fund. Currently, the region is building homes at about three-fourths of that pace on average.

Meanwhile, increasing costs for land, labor and construction are driving up housing prices for both buyers and renters. And while the hikes are impacting all households, the rising cost of housing has hit low-income residents especially hard, coming after decades of declining federal funding for housing subsidies. 

Enter inclusionary zoning, which has become a hot idea in urban planning across the country, especially in cities facing a shortage of affordable housing. More than 900 jurisdictions across 25 states have already established inclusionary zoning programs, including several in the Twin Cities: Bloomington, Edina, Richfield and St. Louis Park all have local inclusionary policies, though the guidelines in those places primarily apply to projects for which developers have received some sort of help from the city, such as subsidies or tax increment financing.

In Minneapolis, the City Council adopted an interim ordinance for inclusionary zoning last December, a vote that coincided with Minneapolis 2040, the city’s long-term plan for development. The ordinance calls for developers of new rental properties to make 10 percent of their units affordable to households that earn 60 percent of the area’s median income (AMI), or $56,580 annually for a family of four. Developers who get tax increment financing from the city, meanwhile, have to make 20 percent of their units affordable to households that earn 50 percent AMI (or slightly more than $47,000 per year for a family of four), which translates to a monthly maximum rent of roughly $1,179

The temporary measure was limited in scope, however. It only pertains to any new private housing project that needs a variance, or permission to depart from what’s allowed under the current zoning for its lot. Only a handful of developments have been subject to the interim policy. To have a greater impact, supporters of the policy want new requirements that apply to all future construction of big complexes.

Instead of the mandatory approach, opponents of the policy would rather pay into a new system of tax increment financing (or TIF) for big, market-rate housing complexes in which new tax revenue pays for affordable housing. Alternatively, the developers have proposed a three-tiered system that would set aside no more than 10 percent of building units for low-income families, no matter the level of government financing. It would also offer different compliance options, allowing developers to pay for affordable housing in different ways, while also advocating for changes to the state’s existing property tax system to reduce operating costs so that existing buildings maintain affordability. 

“We’ve never been against inclusionary zoning, but we’ve always said, ‘Look, you can’t overbake this policy or you run the risk of cutting off private investment into the housing supply expansion generally,’” said Steve Cramer, who is the president of the Minneapolis Downtown Council and also part of the group “Building Minneapolis Together.”

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Cramer and Minn are not the only local developers worried that current conditions could deter people from doing business in Minneapolis. Council Member Lisa Goodman told the housing committee that she has friends in the development community who are taking a break from the market now because it’s too risky for their bottom line.

“I hear a lot: We just can’t do it,” Goodman said.

In part, that’s because private developers use outside investors to help finance the construction of new buildings. “We all get access to capital through investors,” said Minn, a former Minneapolis City Council member and state commerce commissioner under former Gov. Jesse Ventura. “Any investor can just go down the road to St. Louis or up the road to Milwaukee or over to Memphis or into Louisville and, you know, get the same kind of yield that they’re getting here in Minneapolis. If we make it harder, they’ll just go there.”

Cramer, a former City Council member who once led Project for Pride in Living, a nonprofit developer that currently operates about 1,570 homes for low-income households across the Twin Cities, said that the inclusionary zoning policy is a misguided approach to addressing the root of the city’s affordability problem: a lack of supply. 

“The strategy of basically overregulating our marketplace… just has never been a long-term successful solution for creating more affordable housing, and you see that’s the path that the council is going down,” he said. “They’re hearing about it from their constituents. They want to do something and something they can do is pass this ordinance, pass that ordinance. But in the long run, it’s not helping. In fact it’s hurting.”

“There should be some trust invested in that advice based on a track record that goes back decades and decades of commitment to affordable housing in this community,” Cramer said.

According to Seattle’s Sightline Institute, the key to a successful inclusionary zoning policy is allowing developers to offset the cost of including less-than-market-rate housing in other ways, such as by making their buildings taller than what current zoning allows or building less parking. 

Without those offsets, the cost of mandatory below-market rate housing can push some profitable developers into debt and halt new investors from starting new projects suppressing housing choices for residents and driving up costs across the market, the institute found. “Once housing prices rise enough to make up for the expense of the new … rules, developers resume construction,” Sightline researchers wrote. “But now every home-seeker in town has to pay more for her home, not just during the slowdown in building but ever after.”

Emily Hamilton, a research fellow at the Mercatus Center at George Mason University, has come to similar conclusions: Inclusionary zoning is a popular solution to “provide affordable housing that seems like it doesn’t have trade offs, like developers or landowners will bear all of the cost of the program, but research doesn’t really bear that out,” she said. “For some cities, it has had no effect on the housing supply … but those that have had an effect have gotten an increased prices.”

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Group hired by city recommends changes to proposal

On Wednesday, representatives of the Portland-based housing nonprofit Grounded Solutions Network which is under contract to research inclusionary zoning for the city of Minneapolis — released draft recommendations for the permanent zoning change that seek to respond to some of the developers’ concerns. The council wants to finalize the plan in coming months, and the policy’s success or failure could hinge on small details, say Grounded Solutions officials. 

They pointed to a study of development in Minneapolis that supports some of the worries articulated by opponents of the current plan. The study found that many of the projects that would be subject to the current inclusionary zoning proposal, especially in the downtown and Uptown areas, would not be financially feasible under the new rule.

In response, Grounded Solutions is recommending dialing back requirements from the city’s current policy. Under the recommendations, developers of new rental properties would need to make 8 percent (instead of 10 percent) of their units affordable to households that earn 60 percent AMI, or 4 percent for households that earn 30 percent AMI ($28,300 annually). Developers who get tax increment financing from the city would still have to make 20 percent of their units affordable to households that earn 50 percent AMI or go through other steps to prove that that requirement would hinder the construction project. 

Grounded Solutions also recommended the city offer multiple compliance alternatives for developers: they could pay fees in lieu of affordable units on site; or they could build new affordable units elsewhere in the city or donate land to the government for affordable housing. 

“The development process is incredibly risky, and when developers say, ‘We can’t make it work’ often you later see them make it work,” said Grounded Solutions’ Rick Jacobus. “It’s not necessarily the case that they were lying when they said they couldn’t make it work, it’s just that in order to make it work, they had to do something else — so they make the units smaller, they push the land prices down, they renegotiate some other deal.”

Leaders of the city’s Community Planning and Economic Development (CPED) department will use the recommendations as a guide to writing a draft ordinance, which council members are set to review in December.

In an interview last month, Andrea Brennan, the city’s director of housing policy and development, said the city acknowledges that it costs developers to add affordable units in market-rate development. But it also believes that loosening zoning codes so that developers can build bigger, taller complexes in more places throughout the city will be a benefit to the development community. She said it is good governance for the city to shift that benefit to the public good by implementing the rules for affordable housing.

“The details really matter,” she said. “It’s really important to structure a policy that really considers the specific context of the local community and that you have options, and I mean we’re doing our best to do that exactly.”

Correction: This story has been updated to note that Steve Cramer is a former leader of Project for Pride in Living.