Homebuilders concerned about proposed Minneapolis "inclusionary zoning" rule

Resistance is building among housing developers and business community allies to a proposed Minneapolis requirement that developers reserve 10 to 20 percent of new rental units for affordable housing.

Kelly Doran, a developer and Minneapolis resident who has been one of the city's most prolific builders of market-rate apartment housing since 2009, warned Mayor Jacob Frey and the City Council in a letter this month that builders and investors would pull out in response to a blanket policy.

"I know that is my company's position," Doran wrote.

Doran is part of a coalition formed this year of for-profit and nonprofit developers focused on affordable as well as overall housing supply in housing-pressed Minneapolis.

Building Minneapolis Together, led by Downtown Council President Steve Cramer, the former CEO of affordable housing developer-manager Project for Pride in Living, has joined with Doran and other developers to argue the unintended consequence of an "inclusionary zoning" ordinance of 10 percent or more affordable units could kill a lot of planned housing.

"I keep telling council members that you can require whatever you want, but it's a matter of math," Cramer said.

In a position paper, the coalition embraces the "vast majority" of credible housing experts who contend the expansion of housing supply should be the primary goal, and policies that would "constrain new supply directly results in higher rents across the entire market … thus exacerbating housing affordability."

Council President Lisa Bender, guided by populist sentiment and a city consultant that recommended inclusionary zoning, said it's the best way to create thousands more affordable units without additional cost to the city.

Frey, who has proposed a record $40 million in subsidies toward low-income housing from a variety of sources next year, is holding his fire on the proposed ordinance.

"The ordinance should complement other efforts so that it doesn't stymie our work to address [the overall] housing shortage amid low vacancy rates," Frey said in an interview. "I'm committed to working with council colleagues to make sure this is done thoughtfully."

In an interview, Doran said requiring 10 percent of units go to low-income renters in the Expo, a $100 million 368-unit apartment complex he is building with co-developer Gary Holmes of CSM Corp. on a former parking lot near St. Anthony Main would drive up the cost by $8 or $9 million and require raising base rents on unsubsidized units by $100 or more, starting with $1,000-a-month units.

"There's unanimity that there's an affordable housing problem," Doran said last week. "There are more thoughtful ways to a solution."

Basically, the business lobby says the blanket requirement will wound or kill the housing business in town, particularly in what's likely the late stages of a long economic recovery that is being threatened by higher interest rates. That's compounded by rising construction and labor costs.

The building coalition said to meet demand the city must add "7,500 new housing units today plus 5,000 new housing units every year to reach equilibrium, representing a capital need of $3.1 billion [this year] and $1.25 billion every year thereafter."

That would get the vacancy rate to about 5 percent.

Cramer and others argue that institutional investors, insurance companies, pension funds and other investors will balk over a restrictive ordinance. The group wants to work with the city on raising subsidy money available for affordable housing, possibly by millions through dedicating the tax increment from new developments to a housing fund, or other means. They also recommend more affordable-housing construction on vacant, city-owned land.

Alan Arthur, longtime CEO of nonprofit developer-manager Aeon said inclusionary zoning has shown limited success in some cities.

"However, it is not the [solution] and avoids the real challenge," Arthur said. "We are heading toward the greatest housing problems for low-income people since the Great Depression. It will cost billions in private and public dollars. We just can't argue policy tweaks."

In short, Arthur notes that wages have eroded for working people, a third of Minnesota's new jobs pay less than $15 an hour and rents are up.

"The federal government has backed away from funding affordable housing [in real-dollar terms] since the 1980s," he said. "We're headed toward being short up to 200,000 units of affordable housing [in Minnesota]."

CEO Deidre Schmidt, of CommonBond, the area's largest affordable housing developer-owner, is concerned an ordinance could "disrupt the market" and that not all for-profit developers can handle a mix of tenants, including support services that nonprofit managers often provide.

"Regardless of what occurs in Minneapolis, I hope the city continues to invest local resources in construction, rehabilitation and preservation," she said. "The level and dependability of such investments is critical for those of us who do this work because of our mission, not a mandate like inclusive zoning. The very low-income households cannot afford housing without rent subsidies. This isn't just a supply issue."

Neal St. Anthony has been a Star Tribune business columnist and reporter since 1984. He can be contacted at nstanthony@startribune.com.