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Do the Economics of Density Really Create Affordable Housing?

A draft of the Minneapolis 2040 comprehensive plan proposes building fourplexes across the city, sparking a heated debate among residents and policymakers.

Do the Economics of Density Really Create Affordable Housing?
Lawn signs have sprouted in Minneapolis to protest the draft version of the Minneapolis 2040 comprehensive plan. (Photography by Deb Van De Weghe)

The most fractious, acrimonious, and emotional political fight in Minneapolis this year comes down to a single F-word: fourplex. The city is overhauling its comprehensive plan, with 97 different policies on a wide range of topics: skyways, tree canopy and urban forest, the creative sector economy, air quality, storm-water management, social connectedness, and aging. For the most part, they have not generated large-scale public reaction.

But the draft version of the Minneapolis 2040 plan, which will continue to be revised and discussed until it goes to the Metropolitan Council at the end of the year, also floated the idea of allowing duplexes, triplexes, and fourplexes on “traditional-size city lots.” That proposal kicked up a hornet’s nest of protest from angry residents—many in the city’s affluent Linden Hills, Lynnhurst, Fulton, and Kenwood neighborhoods—who say that the plan will lead to developers buying up sites, razing homes, putting multi-unit buildings everywhere, and ruining the character of the city’s single-family-home neighborhoods.

Bright red “Don’t Bulldoze Our Neighborhoods” signs sprouted in many front lawns. The issue has been intensely, sometimes bitterly, debated back and forth on social media and through a seemingly endless series of commentary pieces and letters to the editor in the Star Tribune.

“It’s upzoning the whole city,” says Lisa McDonald, a former member of the Minneapolis City Council who is one of the founders of Minneapolis for Everyone, a group that objects to the Minneapolis 2040 draft plan. “They have told folks that this will create more affordable housing.”

But the city’s point person for the plan says it’s not that simple. Increased density is touted as one solution to create more affordable units, yet, while the apartment building boom of recent years has added thousands of new units, most are pricey market-rate rentals. Minneapolis has lost approximately 15,000 affordable units since 2000, according to city planners. (Most of those units still exist, but are no longer considered affordable.)

“You can’t really address affordable housing simply through density,” acknowledges Heather Worthington, director of long-range planning for the city’s Community Planning and Economic Development Department. “It’s part of an overall strategy. It’s not a single strategy, it’s not a panacea.”

Worthington notes that city planners started looking at different housing types to partially address concerns they’ve heard from older residents that they don’t have enough good options if they’re moving out of a single-family home. Smaller apartments such as fourplexes were much more common before World War II. But it’s not clear that a wave of fourplexes could create more affordable units.

Steve Cramer, president/CEO of the Minneapolis Downtown Council.

The looming challenge is that the city is already getting more crowded. Minneapolis is growing faster than it has since 1950, and has added more than 40,000 new residents since 2010–an increase of 11 percent in just seven years. Multifamily housing is up more than 13,000 units (primarily new apartments) since 2010. The total number of multifamily units in Minneapolis has increased 19 percent since 2010; there are now more multifamily housing units (both condos and apartments) in Minneapolis than single-family homes.

But that’s being driven more by the market than policy goals.

“Added density–it’s only occurring as a response to the strength of the Minneapolis market,” says Matt Rauenhorst, vice president and general manager for Minnetonka-based Opus Development Co. He says that people are drawn here by a solid economy and job growth, pointing out that there’s an increased desire to live in core cities.

Twenty years ago, for example, there was no North Loop. The area at the edge of downtown was once dominated by surface parking lots and aging industrial buildings. Today it’s a hip, urban neighborhood jammed with scores of expensive new apartments. But some residents note that not every section of the city can be the North Loop.

“It’s a rather crude effort taking a sledgehammer to land-use issues where a scalpel is more appropriate,” says Tim Keane, another member of Minneapolis for Everyone. “It’s just a radical overlay of density for density’s sake, without consideration of where density is most appropriate, where the infrastructure exists to the support the density.”

How much for that fourplex?

For all the debate about land use, fourplexes, and density, the heart of the issue boils down to finding a way to add affordable housing in the city and create more mixed-income communities throughout Minneapolis. Philosophically, everyone is in favor of affordable housing. But many people don’t want affordable housing plopped onto the street of their own picture-perfect neighborhood; they would like it to go somewhere else, thank you. The city’s comp plan also encourages denser housing along transit corridors.

It isn’t just single-family homeowners who have concerns about the new comp plan. Behind the scenes this spring, the Minneapolis Downtown Council business group helped organize Building Minneapolis Together, a group of about two dozen for-profit and nonprofit developers. Building Minneapolis Together has not been issuing public proclamations or handing out lawn signs. The developers involved with the group aren’t giving much thought to fourplexes, either.

Collectively they’re concerned that city policy leaders don’t fully understand the fundamental costs and market realities of multifamily housing and what makes deals work. They have been quietly meeting with city leaders. They are focused on outlining strategies that could help create more affordable housing.

Steve Cramer, president and CEO of the council, says that the developers in the group estimate that it currently costs about $265,000 to build an average unit of multifamily housing in Minneapolis–whether it’s market-rate or affordable.

“I think the first thing to recognize is that you can’t will a solution here. You have to recognize where market forces are taking us,” says Cramer. “Doing more in the affordable area is important and necessary. … This is a group of folks that know how to build rental housing.”

One-bedroom apartment, affordable housing monthly rent limits (2018):

30% AMI: $531
50% AMI: $885
60% AMI: $1,062
80% AMI: $1,416

The group includes prominent developers like Sherman Associates, Ryan Cos., Schafer Richardson, Kraus-Anderson, Mortenson, Dominium, and CommonBond Communities. They are collectively concerned about a push toward “inclusionary zoning”–policies that could mandate affordable units in any project.

“I think if there were requirements around mandatory inclusion of affordable [units] … that would be the kind of step that could result in a slowdown, if not a choking off, of private investment,” says Cramer. “These projects have to pencil out at a level of return that’s competitive.”

He says that some public resources could be more tactically deployed toward affordable housing.

“We’re not using TIF [tax increment financing] and some of the other development tools as effectively as we could be,” says Cramer.

Good intentions and policy goals alone can’t build affordable housing. Pulling together even a modest affordable housing project takes years, because of complicated financing deals that include both federal tax credits and gap financing from state and local government agencies. Perhaps the greatest asset for an affordable housing developer is patience.

The Blue Line Flats apartment project in South Minneapolis offers one case study. St. Paul-based Wellington Management Inc., a for-profit developer, completed the $25.5 million, 135-unit affordable housing project in November 2016. Blue Line Flats reflects many city policy goals: dense, affordable housing along a transit corridor.

But it was a long road. Wellington acquired the site, consisting of vacant land from the light rail corridor, in 2008. After settling on a development plan, David Wellington, director of acquisitions and development, says it took about four years to arrange the financing before starting construction in 2015. More than half of the total budget came from public sources: $7.5 million from selling the tax credits to investors, $4.9 million from eight different public allocations, and $1.5 million in tax increment financing from the City of Minneapolis.

At the end of the day, it took an experienced, savvy, for-profit developer eight years after site acquisition to complete a single mid-sized affordable apartment project.

The annual contest for the city’s Affordable Housing Trust Fund program, which offers loans to help finance affordable housing development, underscores those challenges. Requests always exceed the amount of money that’s available. In 2017, Minneapolis received 15 proposals requesting $18.1 million in AHTF financing. The city green-lighted $8.8 million for nine projects, consisting of 517 new units; four of those had previously received allocations from the program. The six projects that did not make the cut called for a total of 615 newly constructed units of affordable housing.

“Really what we’re competing against is other projects for the grant dollars,” says Wellington. “It’s a friendly competition, but we’re all trying to get money to build our projects.”

Alan Arthur, president/CEO of nonprofit affordable housing developer Aeon.

Big ideas needed

Most of Minneapolis’ big-picture goals are nothing new. The city’s current comprehensive plan approved in 2009 called for increasing the city’s overall housing supply, boosting density, and adding more affordable housing. But in the intervening years, the affordable housing issue has only gotten worse, even as density has increased.

Alan Arthur is a nonprofit housing developer in the metro with more than three decades in the trenches. He has been with Aeon since its founding in 1988 as Central Community Housing Trust and is now its president and CEO; today, the Minneapolis-based nonprofit ranks among the largest affordable housing developers and property owners in the region.

With respect to Minneapolis 2040, Arthur says that he wholeheartedly supports anything that will create even one new unit of affordable housing. But given what he calls an affordable housing crisis, he believes that the city needs much bigger ideas.

“The comment that building housing alone will automatically fix our affordable housing problem is absolutely false. . . . I suppose if we overbuilt housing for 15 years, then maybe prices would come down.”
—Alan Arthur, president and CEO, Aeon

“The comment that building housing alone will automatically fix our affordable housing problem is absolutely false,” he says. “Putting $1 billion into an account to produce affordable housing would be better than the fourplex solution. … Doing a major bonding issue that really does have to approach $1 billion over a reasonable period of time would show a seriousness to do something about affordable housing.”

Basic economic theory holds that increasing supply can bring down prices. But in the current housing climate, Arthur says it’s not that simple.

“The market theory is correct, but you’d have to overbuild for a long period of time,” he says. “I suppose if we overbuilt housing for 15 years, then maybe prices would come down.”

The primary tool for financing affordable housing across the U.S. is Low-Income Housing Tax Credits (LIHTC), a program created under the Tax Reform Act of 1986 to help spur private investment. A limited value of tax credits is allocated to states based on population. Developers compete to land the credits, which can then be sold, or “syndicated,” to private investors. But the finite nature of tax credits also limits financing for affordable housing.

“Another thing cities could do would be to push the federal government to triple the allocation of federal tax credits,” says Arthur. “That would be a major, major boost for us all.”

Apart from the 2040 plan, city leaders are pushing several ideas. In May, the City Council voted to create the Minneapolis Advisory Committee on Housing to help address “multiple housing challenges” in the city. Mayor Jacob Frey is supportive of inclusionary zoning as a tool to create more affordable housing. In his first budget address in mid-August, he called for $40 million toward affordable housing, touted as more than triple any previous city investment.

Arthur says that focus should go to preserving existing affordable housing units, which is much cheaper than building brand-new apartments. Cities could also tap other tools to help improve affordable housing financing. “If they really wanted to make inroads to help sustain affordable housing they would immediately say that all affordable housing has a 100 percent tax abatement,” he says. “I don’t anticipate them doing that, but that would make a huge difference in our ability to do more affordable housing.”

Heather Worthington (standing, third from left), Minneapolis’ director of long-range planning.

Regional challenges

The Minneapolis Area Association of Realtors (MAAR) is another business group wary of the Minneapolis 2040 draft plan. MAAR raised concerns about whether the average single-family home lot could even support a fourplex, in a letter to the city: “It is questionable whether fourplex housing is actually feasible on 5,000- to 6,000-square-foot lots while limiting building height to 1 to 2.5 stories as recommended on the Built Form Map.”

Another issue MAAR raised: whether new policies would spur “teardown activity,” create parking problems, and actually lead to the loss of more affordable starter homes within the city.

Architect Ali Awad doesn’t see much of a market for duplex, triplex or fourplex projects in southwest Minneapolis, where he does most of his work.

“I think the [southwest Minneapolis] land prices are too high to warrant tearing down a single-family home and putting up a fourplex.”
–Ali Awad, co-owner, Awad + Koontz Architects Builders

“Nobody in southwest Minneapolis wants to live next to an apartment building … I haven’t seen much opportunity there. I think the land prices are still too high to warrant tearing down a single-family home and putting up a fourplex,” says Awad, co-owner of Minneapolis-based Awad + Koontz Architects Builders.

Echoing issues raised by MAAR, Awad says that it could be challenging to build fourplex properties on the average city lot.

“Most of the lots are 40-foot lots, which is tough,” says Awad. “I think it would be a challenge in a way that respects the scale of the surrounding houses.”

But not everyone can afford a single-family home in southwest Minneapolis. City statistics show that 49 percent of households are now considered “cost-burdened” because they are spending more than 30 percent of their income on housing.

“One of the reasons why affordable housing is in such high demand is because the cost of housing is rising faster than wages are increasing,” says Nick Andersen, vice president and project partner with Plymouth-based Dominium. “There’s a lot of demand.”

The for-profit Dominium is one of the largest affordable housing developers in the U.S. But in the current economy, it is getting tougher to get deals financed.

“We’re finding projects are much harder to make work right now than they were two to three years ago,” says Andersen, noting that while interest rates and construction costs are climbing, tax credit pricing is falling, which translates into less money for deals. The previous climate of very low interest rates, lower construction costs coming out of the recession, and higher tax credit pricing created a good overall climate for financing affordable housing. “We can develop when those things kind of align; and when they don’t align it becomes very, very difficult to develop affordable housing.”

Projects also need scale to work financially. Dominium is not in the fourplex business.

“As a general rule of thumb, we generally don’t consider a project under 100 units,” says Andersen, adding that they would be unlikely to do anything smaller than 150 in the city of Minneapolis. Dominium is currently pitching a 200-unit project in the North Loop with plans to convert the former Duffey Paper building. Housing is very dense in the North Loop, but affordable units have been rare.

Critics of the Minneapolis 2040 plan say that it shouldn’t be designed to fix all societal problems.

Tim Keane, Mary Belfry and Lisa McDonald of Minneapolis For Everyone.

“So many of these issues are regional–the affordability issues, the equity issues. Those are not all owned by the City of Minneapolis. Minneapolis does not stand alone in bearing the responsibility to fix all the ills of the region,” says Tim Keane of Minneapolis for Everyone. “The solution is not more density everywhere.”

City planners stress that the draft version of the plan was meant to be a starting point. “That was a draft and we were trying some things out in terms of recommendations,” says Worthington. As for fourplexes, Worthington says that city planners are “trying to think about how we can reach a middle ground on that issue.”

But if density by itself isn’t the answer, how can the city spur more affordable housing development?

“That’s kind of a multilayered conversation that the City Council needs to have. Part of it is about land use, which is really about access. Part of it’s about resources: How are you going to incentivize or subsidize the construction of more affordable housing?” says Worthington.

As Twin Cities Business went to press, it was not known what was in and was out of the revised Minneapolis 2040 plan due out in late September. But it’s clear that city leaders and planners are looking for solutions and strategies to balance growth with a range of housing options. It’s also clear that no matter what gets hammered out, not everyone is going to be happy.

Arthur argues that big fixes are needed, given the state of the market.

“The situation is so dire that we basically need to be adding all kinds of housing, and half of it needs to be affordable,” says Arthur. “I use those numbers because half of the jobs we have and half of the jobs we’re creating are jobs that pay annual incomes that qualify people for affordable housing. We can’t sustain an economy and a social community that’s functional unless we have places for people to live that they can afford.”

Burl Gilyard is TCB’s senior writer.

What’s a “Comp Plan”?

“Comp plan” is shorthand for a city’s comprehensive plan. Cities within the seven-county metro area are required to update comp plans every 10 years. Minneapolis’ current comp plan—The Minneapolis Plan for Sustainable Growth—was approved by the City Council in October 2009. The plans are submitted to and reviewed by the Metropolitan Council, a regional government agency for the seven-county area, with 187 cities, townships, and counties under the agency’s jurisdiction.

The deadline for the city to submit its comp plan to the Met Council is December 31, 2018. The Met Council then has 120 days to review the plan. Under state law, extensions are allowed if a city and the Met Council mutually agree to the provisions. The Met Council may require changes so the city plan conforms to regional guidelines, in which case plans are sent back to a city to be reworked.

What About St. Paul?

Lucy Thompson, interim director for St. Paul’s Planning and Economic Development Department, says that the city is not considering fourplexes across the city in its comp plan update, but is looking at spots that might accommodate four-, six-, or eight-unit buildings, a housing type Thompson calls “the missing middle.”

Thompson says that St. Paul is looking for “incremental increases in density,” focusing on neighborhood nodes along transit corridors and accessory dwelling units (e.g., adding an additional dwelling unit to a home or garage such as a “mother-in-law apartment”). The Metropolitan Council granted St. Paul’s request for an extension; the city now has until June 30, 2019, to submit its comp plan.

Where Are the Single-Family Affordable Homes?

Statistics from the Minneapolis Area Association of Realtors (MAAR) reported the median home sale price in the city of Minneapolis at $242,000 for 2017, up 28 percent since 2013. But there can be wide price swings between different parts of the city. The median sale price for homes in Near North was $155,000; in Southwest Minneapolis, it was more than twice as expensive, at $382,500 last year.

Zeroing in on specific neighborhood shows even wider disparities. For 2017, the median home sale price in the Folwell neighborhood of North Minneapolis was just $126,000. The median sale price in Kenwood topped the list at $920,000. In the Linden Hills area of Southwest Minneapolis, the median sale price was $524,100. David Arbit, MAAR’s director of research and economics, says that in the current climate, homes under $260,000 are considered affordable.

The FYI on AMI: Guidelines for Affordable Rents

Affordable housing rental rates are based on area median income, which is calculated by the U.S. Department of Housing and Urban Development (HUD). For 2018, the area median income (AMI) in the 16-county metro area for a household of four is $94,300. A family of four can qualify for affordable housing with a median income of $71,900. Rent levels are based on the percentage of AMI that a household earns. Developers that use tax credits are required to abide by the AMI formulas for setting affordable rental rates.

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