New Minneapolis housing policies won't work economically

The Minneapolis City Council has recently approved new ordinances it hopes will solve several issues, from correcting historic racism in housing and the criminal justice system to creating more affordable housing. The goals here are admirable and the council should be commended for its attempt to discuss and address them ("Changes approved in Minneapolis 2040 plan begin to take shape," Dec. 29).

However, starting with the 2040 Plan and the elimination of single-family zoning, these policies will not work economically for creating affordable housing.

The current median price of a single-family home in Minneapolis is about $282,000. The construction costs, including demolition, lot preparation and new utilities, to build a three-unit building with units averaging 1,200 square feet (the typical size of a new two-bedroom apartment today) would be about $200 per square foot. Add in the costs of buying an existing home, design fees, government fees, legal costs, interest, developer profit, marketing costs and commissions, and the total development cost would be about $300-plus per square foot. These new units, if sold, would each cost $360,000 to $400,000. If rented, the monthly rent would be in the $2,400 range or more, plus utilities.

The 2040 triplex plan may selectively add more density, but it will economically fail in creating more affordable housing.

The City Council's "inclusionary zoning" mandate, requiring developers to make 8% of the units in a market-rate, multifamily project "affordable," will also fail economically. There are numerous variables in the economics of a multifamily development project. But on average, using the renter income benchmark established by the city — 60% of the region's adjusted medium income ("AMI") — and taking 30% of that number as the maximum for housing expenses, this rent supports a total development cost of between $100,000 and $150,000 per apartment unit, depending on the size of the unit, etc.

But the current cost to develop and build a market rate multifamily project in Minneapolis is in the $300,000-per-unit range.

The gap between the amount of cost the 60% AMI rent can support and the cost of developing the market rate apartment is between $150,000 and $200,000 per unit. Thus, if a developer decides to build a 100-unit market rate apartment building in Minneapolis, the developer is in essence agreeing to pay an affordable housing tax of between $1.2 million and $1.6 million.

It takes a lot of time and expense for a developer even to determine whether a project will work economically. So it is much more likely that developers will simply choose not to pursue projects in Minneapolis at all, rather than take on this additional uncertainty and risk, pay this tax and accept a lower return on investment.

In 2017, a state-organized, highly qualified task force conducted a study. It identified the need to build 300,000 housing units across our state by 2030, including 60,000 affordable units. Even with the current pace of housing construction it will be a difficult goal to meet.

Minneapolis will continue to see significant new construction over the next few years as projects that rushed for approvals before the implementation of the inclusionary zoning mandate are built. But thereafter, Minneapolis's new 2040 Plan, when combined with inclusionary zoning, will result in much of the needed development happening elsewhere.

All of the recent new development has driven a significant increase in the city's property tax base and revenue. Yet the City Council just passed a 7% increase in the property tax. What will the tax increase be when the growth in the tax base is reduced due to a reduction in new development? How will housing become more affordable?

The economics of these policies will not work.

Kelly Doran is founder of Doran Companies.