Report on Minneapolis Inclusionary Zoning policy sees decrease in large apartment projects

An early review of a Minneapolis policy mandating affordable housing in new apartment construction shows a significant drop in major projects in the city.

Minneapolis' new Inclusionary Zoning program, a policy that applies to market-rate projects of 20 or more units, has been in place since 2020. The number of major developments — 20 or more units — fell from 48 in 2020 to 23 in 2021. Last year was a five-year low for all land use applications in Minneapolis, declining 34% from 2020.

Meanwhile, permitted buildings have resulted in 103 units of affordable housing — 4% of 2,397 units of market-rate housing, according to the staff report on the policy's 2021 outcomes detailed to council members earlier this week.

"When this policy started being imagined well before I was in office, council members at the time maybe had bigger visions for how much we can impose," Council Member Jeremiah Ellison said. "But I think the truth is that we're seeing affordable units come online that wouldn't have existed otherwise. And that is, I think, the goal of the policy, and we're achieving that goal."

There could be plenty of factors that played into the building slowdown, notes city spokesperson Sarah McKenzie.

"Market conditions such as rising interest rates, supply chain issues, and construction and labor costs have contributed to a more challenging environment for real estate development since the start of the pandemic," McKenzie said.

Guided by the 2040 Comprehensive Plan, which is being challenged in court, the Inclusionary Zoning policy aimed to create mixed-income communities by mandating affordable housing within new housing developments.

A developer's options under the policy include:

Yet so far, no one has opted to build anything more affordable than 60% AMI.

One project, NorthStar East — a 13-story office-to-apartment conversion in downtown Minneapolis, is pursuing the 50% AMI option. A public hearing on that project is scheduled for Aug. 23 in the Business, Inspections, Housing and Zoning committee.

"Several other projects have explored the 50% AMI path with staff but ultimately decided to go another route," said McKenzie. "It is possible that a lack of familiarity with providing more deeply affordable units may discourage a market-rate developer from choosing the 30% or 50% options."

One developer has taken an option to develop affordable housing off-site, putting down a security deposit to insure he would build the required affordable units in the future. Others have opted to pay an in-lieu fee instead. But no developers have chosen the alternative of donating land to the city.

It's not surprising that the policy has not created any deeply affordable units, nor many affordable units overall, said Nick Erickson, research and regulatory affairs director at Housing First MN, formerly known as the Builders Association of the Twin Cities.

"We need more housing and we need it at all price points," Erickson said. "But as we commented on the IZ policy when it was in development ... in any city that they've tried this in United States, it's never achieved the goals that they've set out."

Erickson said if developers are not opting to create 50% or 30% AMI units with lower rents, it's likely because they can't price their remaining market-rate units at a level that would both absorb the cost of those units and stay competitive.

"Our point, when the development community was arguing against Inclusionary Zoning as drafted, was that it would have this immediate impact on chilling development activity," said Steve Minn of Lupe Development Partners. "It would force developers to scale back work so that the production of housing would not fit into the Inclusionary Zoning ordinance ... People started putting their lots into smaller property development — under 50 units, under 20 units."

Not counting regulated affordable housing projects, which are always exempt from Inclusionary Zoning, nine permitted projects were also exempt because they are smaller buildings of 20-49 units. The city will not require new projects of that size to include affordable housing until six months after the first 500 units across the 20-49 unit category are approved.

The city has permitted 340 units in such projects to date, leaving 160 units to go.

The rationale was to give builders of smaller-scale multi-family housing, which has historically faced a number of challenges, more time to prepare for the inclusion of affordable units, said McKenzie.

Two such buildings in the development pipeline, located at 400 and 336 2nd St. NE., have raised eyebrows in the St. Anthony West neighborhood.

Developer Danny Perkins received Planning Commission approval in 2020 to concurrently build two four-story buildings of exactly 49 units each. Although the adjacent sites will look like a cohesively designed complex, share a driveway and have consolidated mechanical and electrical equipment, they are moving through the permitting process as separate projects.

The building at 336 2nd St. NE has completed construction and is permanently exempt from Inclusionary Zoning. The one at 400 2nd St. NE. was later revised to 83 units and will be subject to the policy. Its permit is in review.

The city has not yet received Perkins' Inclusionary Zoning compliance form and Perkins did not respond to requests for comment about how he plans to comply with the policy.

City staff are planning to complete a full review of the policy's effectiveness between 2024 and 2026, after which they may recommend changes.