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Inclusionary zoning: Will Minneapolis see it this year?

The term is used to describe a variety of local measures that either require or encourage developers of larger residential buildings to make a certain percentage of the rental units in a project available to lower income people at less-than-market rents.

Some ordinances allow developers to pay fees in lieu of providing lower-rent units, with the money then used to provide affordable housing elsewhere in the city.
MinnPost photo by Peter Callaghan

It was already the subject of a City Council ordinance (but no action) two years ago; it was an issue in the 2017 city elections; and it has already been adopted in hundreds of American cities, most recently Seattle and Portland.

The issue is inclusionary zoning, imposing rules that would require developers to set aside some units for affordable housing or offer incentives to get developers to participate voluntarily. And now, partly because of that 2017 election, it could be coming to Minneapolis sometime this year.

Council President Lisa Bender, who introduced an inclusionary zoning ordinance in 2015 as well as one two weeks ago, said the city has commissioned a consultant to look again at the economics of what’s been termed mixed-income housing. But Bender, who said the politics on the council have changed since she first introduced the issue, also said she thinks the council will strongly consider a mandatory affordable housing program downtown — and perhaps look at offering incentives in other parts of the city.

“I think the best … approach for Minneapolis is to do a policy that applies to the most developments possible and require a certain percentage of units to be affordable,” said Bender, who added that she thought any mandatory program would be phased in.

What is it?

The term “inclusionary zoning” is used to describe a variety of local measures that either require or encourage developers of larger residential buildings to make a certain percentage of the rental units in a project available to lower income people at less-than-market rents. Often, the number of units is set at 20 percent of new apartments, but some cities allow fewer units to be set aside depending on how low the rents are.

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Some ordinances also allow developers to pay fees in lieu of providing lower-rent units, with the money then used to provide affordable housing elsewhere in the city.

Portland, for example, requires 20 percent of new units to be priced at 80 percent of the area’s median income or 10 percent of new units at 60 percent of the area’s median income. New buildings with fewer than 20 units are exempt from the law, and the projects that are subject to it get a 10-year tax exemption on the affordable units, lower parking requirements and density bonuses that allow more rentable space in buildings.

In Minneapolis, the Metropolitan Council has determined the area median income for a family of four to be $90,400, with 80 percent of that being $68,000 (based not on actual math but on how HUD  makes the calculation.) A two bedroom apartment, therefore, would have to rent at $1,627 to be considered affordable for that family. At 60 percent of area median income, that same apartment would have to cost $1,220.

Supporters of inclusionary zoning point to studies finding that policites have little impact on market rents. But other research has been less unequivocal, showing that there are vast differences in the breadth of ordinances — and vast differences in their impacts.

Did the city blow its moment?

Housing advocates have been calling for inclusionary zoning for a decade at least, worried that the city’s failure to act before the current rental housing construction boom represents a lost opportunity.

Russ Adams, the executive director of the Alliance for Metropolitan Stability, a Minneapolis nonprofit, said that there is still an opportunity to secure affordable units if the city acts soon. “It absolutely has potential to be one of the more important tools in the bundle,” Adams said. “The proof is in the design of the ordinance — the design and the reach and how they define affordability.”

Adams said cities, including Minneapolis, have been demanding of developers when their policies offer financial benefits. But the next step is to see how bold they can be when they’re not providing money, but rather land use alterations like variances or zoning changes.

“I feel they should have an equally strong program,” Adams said. Development activity is high right now, he said, and the council can take advantage of the desire to develop in certain neighborhoods.

“Some people would say they blew it, they missed the big expansion moment, and they should have had a policy 10 years ago,” Adams said. “Yes, they should have. But the opportunity still exists to get some decent numbers here. It won’t be the only solution to the affordable housing situation, but it would be a chance to leverage the private sector energy and commitment to investing in the city.”

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It is legal?

So does state law even allow the city to create inclusionary zoning rules? Probably. A legal analysis by the Housing Justice Center presented to the city earlier this month looked at two state laws related to inclusionary zoning. One law allows cities to impose affordability requirements if a developer requests a “subdivision, planned unit development, site plan or other similar type action.”

The Housing Justice Center wrote that it thinks the last clause “appears to include virtually any request for discretionary city land use decision.”

The analysis also cites a 2007 state attorney general opinion that found that the statute authorizes cities to make affordability requirements of developers or require them to pay in-lieu-of fees.

But the second statute, which outlines the state’s ban on local rent control ordinances, could also come into play, since housing developers might argue that forcing building owners to charge below-market rents could be interpreted as a form of rent control.

Housing lawyers point out that the state affordable housing provisions were passed after the rent control law and should not be affected by it. Still, the rent control statute led the Housing Justice Center to suggest that Minneapolis tie any inclusionary zoning policies to discretionary city land use decisions “rather than simply imposing a mandatory policy.”

MinnPost photo by Peter Callaghan
Housing advocates have been calling for inclusionary zoning for a decade at least, worried that the city’s failure to act before the current rental housing construction boom represents a lost opportunity.

The rent control law, whether it could be applied to inclusionary zoning or not, is not a complete ban, however. It permits home rule cities such as Minneapolis to impose rent controls as long as those ordinance are approved by city voters in a general election. In other words, Minneapolis would likely have to first amend its charter to authorize rent control in one election, and then put the underlying issue before voters in a second election.

Bender said the city is examining the legal ramifications of inclusionary zoning, but said she doubts any measure that ties land use permissions to affordability elements would work in downtown Minneapolis, mostly because builders already have broad authority to develop there: If they don’t need height or density variances, there is little the city can offer in exchange for affordable units.

That is why she thinks the city will look at a mandatory policy rather than an incentive-driven one for downtown where variance or rezoning requests are common.

Unintended consequences

In Portland, where an inclusionary zoning ordinance was passed just over a year ago, developers rushed to the permit window prior to the effectiveness date. According to the City Observatory, pre-ordinance permit requests total nearly 19,000 units of housing, a three- to four-year supply.

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In addition, the city has seen more requests than in the past for buildings of less than 20 units, which are exempt from the ordinance. In fact, between Feb. 1. — when the law went into effect — and September, there were no permit requests for buildings with more than 20 units. Since then, 12 projects with a total of 682 units have made application under the inclusionary housing ordinance, a slower pace than Portland has been experiencing since the Great Recession.

Portland Mayor Ted Wheeler has said he will offer changes next month to sweeten the deal for developers in hopes of getting some of those grandfathered projects to come in under the new program.

Kelly Doran is the founder and principal of Doran Companies, which has built 30 rental apartments in the Twin Cities and upper Midwest since 2007. The latest, done in conjuction with CSM Corporation, is The Expo, a 372-unit complex at the site of the former General Mills facility near St. Anthony Main that recently received city approvals. (Doran recently joined the board of MinnPost.)

The Expo will include 10 affordable units, but Doran opposes a city mandate.

“None of the solutions, including inclusionary zoning, are without other consequences, and there will be a push back on those kinds of policies that will not have a positive impact,” Doran said.

What’s more, because increasing interest rates are tightening the financing for new projects, he said, “all of a sudden margins between cost of money and return on costs start to shrink,” he said. “And you add to that the economic consequences of adding this inclusionary zoning requirement, these deals just won’t work. And they won’t get done.”

“I’m sure that goes in one ear and out the other at some political level, because they just don’t believe it,” Doran continued. “They believe the developer is just posturing. But it will not happen.”

“There’s nobody in the investment business or development business that says, ‘By God, I’ve gotta build in Minneapolis.’ You can build anywhere, and so they’re building in Minneapolis because it works there. … It’s a good city, a lot of really positive things. But at the end of the day, it’s all about the numbers.”

Doran said developers would build affordable units now if they could do so in a way that lets them earn a profit. “I don’t think there’s a developer out there that isn’t interested in being part of the solution,” he said. “We’re part of the society too, you know, and so we see these issues. Why would we not want to be part of the solution?”

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For all the talk about affordable housing during the 2017 city election, Doran said there has been little conversation between the city and the development community about the issue. He said he and other developers have suggested to officials in both Minneapolis and St. Paul ways to provide for more affordable units without a requirement. They suggested simplifying land use rules so developers knew what they could build without the case-by-case negotiations that are common now.

For a site where a 100-unit building could be built, for example, a developer could build 120 with 20 being priced affordably. In return, the city would not require variances for the larger building; would waive permit and licensing fees and forgive property taxes on on the affordable units; and urge the Met Council to waive sewer and water connection fees.

Doran estimated that through such incentives, he could lower rents by between $400 and $700 a month. “And nobody really lost anything because those units wouldn’t have existed in the normal world,” Doran said. “If you didn’t do this, you wouldn’t have gotten those fees anyway, and you still got the fees on the hundred market rate units that you thought you were going to get on this site. So you’re really whole on what your expectations would be.”

Criticism of inclusionary zoning is not exclusive to developers. In 2016, Evan Roberts, an assistant professor of population studies and sociology at the University of Minnesota, wrote that inclusionary zoning shifts the costs of what should be a societal duty onto a relative few: developers and those who might pay higher rents in buildings that have affordable units.

“Why not … have the city capture some of the developers’ profits and some of the well-off residents’ income to finance a few units for people on lower income,” is how Roberts described the argument.

He called the politics “understandable if undesirable.”

“Inclusionary zoning is basically a tax on the construction of new market-rate housing,” Roberts wrote. “Proponents understandably don’t want to describe it as a tax, but a tax it is. Unless the city is funding the difference between a break-even and affordable price from general taxation, inclusionary zoning is a tax on new construction.”

“… the evidence is clear that inclusionary housing provides a tiny number of units relative to need, at best has no impact on overall housing prices while sometimes increasing them, discourages new construction, and come with significant administrative transaction costs,” he concludes.

Not every neighborhood can support mandate

A study by the consulting group Grounded Solutions Network conducted after the Minneapolis City Council first considered an inclusionary zoning ordinance in 2015 concluded that some areas of the city could support a requirement that new developments also include affordable housing units: downtown, Uptown and the University of Minnesota. 

But the study also found that “a single citywide affordable housing requirement with no offsetting incentives might not be the most effective policy. … Many communities with economic conditions similar to Minneapolis’ have developed mixed income housing policies that attempt to produce affordable units where market conditions permit without overburdening more sensitive projects or areas.”

In other words, neighborhoods with less demand for development might not be able to support the economics of setting aside units at lower-than-market rents. “That’s partly why this is a complex policy,” Bender said. “We don’t want to discourage housing development in parts of the city where the market is still recovering because we do have a low vacancy rate and need housing. But we know there are parts of the city that can support affordable units.

“In practice, I think the best approach for our city is to make affordable units mandatory in the strong markets,” Bender said.

Grounded Solutions has now been commissioned to expand on its initial study: to look at policy options for the City Council related to inclusionary zoning, including the use of incentives.

Council Member Jeremy Schroeder, chair of the council’s zoning and planning committee, said he expects that study to be returned by mid-spring, and expects to see recommendations from city staff on an ordinance later in the year.

“I’m excited that we’re looking at it,” said Schroeder, who was policy director of the Minnesota Housing Partnership before winning election in November. “We’ve been talking about inclusionary zoning for a long time. I see it as one tool. I don’t want to make it out to be more than it is. It has limitations. But this is one thing we’ve been talking about that we should do.”

Mayor Jacob Frey, who made affordable housing one of the centerpieces of his 2017 campaign, said he wanted to wait for the consultants’ report before committing to details. But he said he favors some sort of inclusionary zoning ordinance for the city. He has spoken about the need to fill the gap between market rents and rents that could be considered affordable at different income levels.

“I would be for an incentive-based system that links some form of incentive — whether it’s zoning, variance, conditional use permits — to affordable housing in areas where demand is high,” Frey said. “Whatever policy is implemented will not be a blunt instrument. I’m confident the council can move in that direction.

“The trick is to do something that’s helpful and not detrimental.”