Affordable housing advocates and developers need help, but not a rent cap

Affordable housing developers and advocates are pleased with the $1.5 billion Gov. Tim Walz wants from the Minnesota Legislature over several years in various subsidies and tax breaks to relieve the long-chronicled housing shortage for working-class and low-income households.

And they generally oppose, as does Minneapolis Mayor Jacob Frey, the proposed 3% cap on rents to make housing more affordable. A city commission will make recommendations on that by summer.

The industry argues that increased housing supply, more subsidies and rising wages are best ways to produce more housing for the working poor.

"It's how we achieve quality affordable housing," said Chris Sherman, president of Sherman Associates. "Particularly low-income workforce earners. It's easy to take the wrong rent-control approach. We need to understand the tools that have the optimal result, like increased wages, direct rental assistance and lower taxes on affordable housing."

Hard rent caps have unintended negative consequences, according to studies by the Federal Reserve and others.

"Rent-mitigation legislation, if thoughtfully crafted and implemented, is a potentially useful tool to temporarily slow down dramatic rent increases that leave so many lower-income renters stressed and homeless," said Alan Arthur, retired CEO of nonprofit developer-manager Aeon. "However, it is not the long-term solution. That would require a serious combination of scaled rent support and living wages for the 30% of adult wage earners. Up to $22 or $23 an hour … to afford rent. ''

Economists at the Massachusetts Institute of Technology calculate that a Twin Cities couple with two kids need to make $43 an hour between them as "living wage" to cover market-rate rent, transportation and other basic costs of living.

Walz, including through the Minnesota Housing Finance Agency, has proposed $1.5 billion in bonding, rental assistance, veterans housing and restoration of the historic building tax credit to accelerate insufficient housing construction and renovation since the 2008-09 Great Recession.

The growing Twin Cities area needs 13,000 units a year through 2040 to keep up with demand from projected population and workforce growth, according to the Metropolitan Council and Minneapolis Regional Chamber of Commerce. Most homes are beyond what thousands of state households can afford.

Housing advocates, along with Sherman and Paul Williams, chief executive of nonprofit developer-manager Project for Pride in Living (PPL), all say stepped-up investment is needed from the $17 billion projected state budget surplus.

Housing projects are more expensive as construction costs and interest rates rise. And affordable housing costs the same to build as market-rate housing. But it requires myriad financing sources, including government and philanthropy subsidies.

Sherman hopes to close on the $85 million redevelopment of downtown's Northstar Center East office tower into 217 apartments this year. About 20% of the units will be reserved for households that make less than $60,000, or about half the Twin Cities-area median income.

PPL expects to break ground this year on a $50 million-plus residential-commercial complex at Nicollet and Lake Street on 110 apartments for low-income residents who make under half the Twin Cities-area median income, as well as a small-business center and Wells Fargo branch. The project would replace the block-square Nicollet-Lake Wells Fargo complex that was destroyed by rioters in 2020 after the police murder of George Floyd.

The Twin Cities Housing Alliance of about 40 developers and the Minnesota Housing Partnership have led the chorus for more investment to produce more housing to accommodate working-poor households that make up to about $50,000 annually and pay more than 30% of their income in rent. The state median household income is about $80,000.

The additional funding would include long-term renewal of the state historic-building tax credit to accelerate conversion of more abandoned and underused properties into housing.

"For every $1 in that historic credit there is a $9 return from other sources," Sherman said.

"It's expensive [initially] but there's also a sustainability component to revitalizing century-old school buildings, government and office buildings into housing," Sherman added. "The tax credits make it financially viable to private investors and have helped produce a lot of affordable housing.''

Sherman would benefit from tax credits sold to investors on the Northstar project as well as conversion of St. Paul's Landmark Towers to apartments.

Advocates also want the Legislature to drop the property tax on affordable housing from 0.75% to 0.25%. That would increase private financing available by around $10,000 per unit. The property tax on Twin Cities market-rate properties is about 1.75%.

"Property taxes have gone up 70% in six years,'' noted PPL CEO Williams. "And inflation and construction cost increases have increased the [financial] gap.

"The proposed reduction in the property tax in our PPL portfolio of 1,600 units would free up $1 million in operating revenue that we could use for maintenance," Williams said. "And less pressure to raise rents. We find it hard to do more development. We need relief. And we've lost significant money since COVID, even after federal-state rental assistance.''