It was a two-word phrase in the developer’s presentation to a Minneapolis neighborhood group that got housing and development circles buzzing.
That is what Downtown Resource Group of Minneapolis and Fe Equus Development of Milwaukee dubbed their plan to offer lower-than-market-rate pricing on 22 of 110 units of a proposed 15-story condo project at the intersection of SE Central Avenue and East Hennepin Avenue.
In a presentation made to the Nicollet Island-East Bank Neighborhood Association earlier this month, the development team noted that while a one-bedroom condo unit in the building would start at $359,000, the “approachable-unit pricing” for families with incomes well below the city median might be $199,000, while a two-bedroom unit that would have a market price of $409,000 would be priced at $224,000 for those who qualify for the “approachable” pricing.
“We made positive noises regarding the project,” wrote Victor Grambsch, president of the neighborhood association. “My expectation is that Fe Equus will take the summer to figure things out.”
The association is usually interested in building design and the zoning code, not how the units will be sold. But it considers this proposal vastly improved over another developer’s plan for the site, which is now a small parking lot and an empty building.
More important, while condos are just starting to emerge from the recession, those being built are being priced at the higher-edge of the market, and some affordable housing advocates think the ‘approachable’ plan could offer a new model for providing housing options for low-income buyers.
“This is a key parcel and a key intersection,” said Ward Three City Council Member Jacob Frey. “The goal is to produce an urban midrise development that is owner-occupied and including a component of affordable housing.”
“I’m excited because it’s a combination of owner-occupied, which is needed, and affordable home ownership, which is rarely done effectively,” Frey said. “So this is potentially breaking new ground in the city and I’m very pumped at the prospect. But we’ve still got a long way to go.”
Another option for affordability?
As part of the proposal, the developers are working with the City of Lakes Community Land Trust, which has been helping lower-income families purchase homes since 2004.
Jeff Washburne, the executive director of the trust, said that since offering its first purchase assistance in 2004, the organization has 240 properties across the city and is adding between 20 and 30 more each year. And while the land trust currently has some condos in its portfolio, the new project would double that number, while offering another option for low-income buyers.
Families eligible for trust homes must earn 80 percent of Minneapolis median family income or less, though Washburne said those earning between 45 percent of the median and 65 percent are the trust’s “sweet spot.” That translates to a range of $31,950 to $46,150 based on Minneapolis’ $71,000 median family income.
The financial arrangement is crafted not just to make the initial purchase of a home affordable but to have all subsequent resales affordable as well. For a house, the trust makes what it calls an “affordability investment,” which consists of the difference between the mortgage the family is eligible for and the purchase price. That figure is usually between 20 percent and 50 percent of the purchase price.
The trust holds the title to the land while the homeowner has title to the house. The homeowner pays a small lease fee to the trust — $20 a month — for the use of the land, and pays all taxes and assessments, though the homeowner also retains the tax deductibility of the mortgage interest.
If the homeowner wants to sell, the deed requires that they sell to another eligible family. At sale, the homeowner gets keep 25 percent of the increase in value, while the trust would keep 75 percent. But rather than pocket the profit, the trust uses it to discount the purchase price for the next buyer. So far, 43 homes purchased with trust help have been resold to eligible families.
In the case of a condo, the homeowner and the trust are both on the deed, and the homeowner is responsible for the condo association dues and special assessments at the same level as market-rate owners. “We don’t want them to be treated differently,” Washburne said. “We don’t want them to be the subclass owners. So part of it is them paying their fair share so they do have a fair say at the table.”
Can the numbers work?
The proposal, still in its fledgling stage, would ask the city to approve tax increment financing (TIF) with the benefits going toward buying down the purchase price.
Tax increment financing is a mechanism by which local governments can promote development of desired projects. Generally, under TIF, a development would pay property taxes based on the value of the property before anything is built. The additional taxes generated by the improvement — in this case: a 15-story condo project with ground floor restaurant-retail space and some public parking — would go to pay off bonds sold by the government.
Often, the proceeds from the bond sales in TIF projects are used to build infrastructure around a development. But in this example, the money would be used to subsidize the development costs of the units. Once the bonds are paid off, all of the taxes would flow back to the governments that assess property taxes.
The city’s role would be to consider a tax increment financing application, coordinate with the land trust and conduct regular land use approvals.
Even with TIF, however, Washburne said that the prices the developers of the East Bank project consider “approachable” aren’t yet low enough to be affordable for the trust’s clients, and that the gap will require additional funds, perhaps through other housing grants and programs.
“The developers and financers have yet to totally dial in on the numbers, but I think the prices we would need to get at would be lower than what they had initially stated,” Washburne said. “I’m hopeful that we could be selling the land trust units in that development — one and two bedroom [condos] — in the range of $120,000 and $160,000 at the high end.
“I just don’t think we’re going to serve the households that we’re looking to serve if the price points are much higher than that,” Washburne said.
Joe Grunnet of DRG referred questions to Fe Equus owner Tim Dixon, who did not respond to phone messages or e-mails.
Asked about his level of confidence that the numbers can be worked out, Washburne was circumspect. “My take on it is those who have the most control over community development investments in the city have been very opposed to using TIF financing for affordability gap on ownership projects.”
Frey agreed on the pricing gap. “He could make it more affordable,” Frey said of Dixon, who recently developed a historic building in the Warehouse District into the Hewing Hotel. “It depends on who’s willing to bridge that gap between the market rate and whatever constitutes the affordable rate. It’s up to us collectively to see how deeply affordable we make it.”
Time running out?
Washburne said he thinks that Minneapolis is relatively affordable now compared to places like Seattle, Denver and Portland. That means that homes can be purchased now and the affordability can be locked in before major price acceleration.
“People cannot find a home and they cannot find a home that they can purchase on their own for quite some time,” he said of the trusts’ clients. “Every year that goes by there will be fewer and fewer that we are able to assist. There will be a point down the road where it just doesn’t make financial sense anymore.”
About that whole “approachable pricing” thing: Washburne said the first time he heard the term was in connection to the project at Central and Hennepin. “That’s not a term that we had used in the past,” he said. “It’s perhaps a developers’ approach to not using the term ‘affordable.’ We’ll see if it catches on or not.”