Mixed-income housing: Developers and city officials see requirements differently

There is, of course, a difference of opinion.

On the one hand, to hear some Twin Cities developers talk, the growing popularity of mixed-income housing requirements is a sign that city governments simply don’t get the economics of housing.

Requirements make residential projects much less profitable, driving away investors and slowing down new construction, several developers told the Minneapolis Fed.

“People say that we have an affordable-housing crisis, but what we really have is an affordable-housing financing crisis,” said one.

On the other hand, to hear housing officials from area cities talk about mixed-income requirements—also known as “inclusionary zoning”—such requirements are normal in many states facing a shortage of affordable housing. And investors know that.

The officials, some of whom have had mixed-income policies for several years, said they continue to see new residential projects being built.

These conversations were arranged and encouraged by the Minneapolis Fed in two separate roundtable meetings in late 2019, one for the housing industry and one for city officials. Industry representatives were granted anonymity to encourage frank discussion.

Despite the lack of agreement on the solution, there is widespread agreement on the problem. The Twin Cities needs more housing affordable to households with low to moderate incomes, both those traditionally served by subsidized housing and those who earn a bit too much to qualify.

Market intervention

Developers argued that the solution to a housing shortage is more housing, which, they said, will drive down rent.

The underlying assumption of mixed-income policies is that this supply response is either not working or working too slowly. The market favors apartments and condos aimed at upper-income households, leaving lower-income households underserved, mixed-income housing advocates argue. In theory, profits from the high-end apartments would be enough to subsidize housing that lower-income families can afford.

Mixing different income groups is meant to reduce economic and racial segregation. According to the U.S. Department of Housing and Urban Development, the concentration of poverty in low-income housing projects is associated with social problems, such as high crime and higher numbers of school dropouts. Embedding low-income families in areas with higher-income families offers them access to more opportunities, such as better schools, and to more stable social networks.

Minneapolis, which revamped its mixed-income requirements in December 2019, requires 8 percent of units in a market-rate development to be affordable to households earning 60 percent or less of the area median income, or AMI, for 20 years. The federal government defines 80 percent as low income.

Other cities in the Twin Cities metro have similar policies. Bloomington requires 9 percent of its units to be affordable at 60 percent of AMI for 20 years. Edina requires 20 percent at 60 percent of AMI for 20 years, and Minnetonka requires 5 percent at 50 percent of AMI and more for 30 years, though its policies mostly affect developments requiring city incentives.

Chasing profits

Developers said cities need to understand that most residential projects are financed not by developers themselves but by investors and bankers. If they don’t see a certain profit level, they’ll move their money somewhere else.

Twin Cities projects already see a declining yield, according to developers. If city governments make it more costly to build, financing will dry up, less housing will be built, and rent will go up as demand outpaces supply, they warned.

One developer said he’s been fielding calls from investors seeking to buy existing housing in anticipation of rising rent. They’ve seen it happen in other cities with mixed-income requirements, he said.

Developers also complained that once affordable housing is built, it is more complex to manage, and many of them lack the expertise to navigate the regulations involved.

Off-setting cost

To overcome these kinds of challenges, they said cities need to offer financial incentives, such as waiving fees and cutting taxes. One developer estimated each affordable unit required adds $100,000 to $150,000 in cost.

Developers were particularly unhappy with Minneapolis’ new mixed-income policy because, to them, it seemed as if the city wants something for nothing. At least cities such as Bloomington and Edina acknowledge that they can’t force affordable housing to be built for “free,” one developer said.

Those two cities offer incentives, such as relief from certain development requirements—for example, the number of parking stalls needed or the maximum number of units allowed per acre. Bloomington and Edina allow developers to pay a fee in lieu of building affordable units. Financial incentives such as tax-increment financing, or TIF, are also available, but developers have to go beyond minimum requirements to attain that.

Minneapolis has some of these incentives, too, such as in-lieu fees and TIF districts, but it’s harder to qualify. City officials have said their development requirements are already less strict than those of other cities.

Andrea Brennan, Minneapolis’ housing director, argued that taxpayers have spent a lot on transit, parks, and other public works, which makes people want to live in the city, and developers get to take advantage of this demand. “We hear a lot about the taxes on development,” she said, “but we don’t hear about the public investments that are benefitting development.”

Standing firm

City officials said some developers figure out how to work with mixed-income requirements, some don’t, and some bluster so they don’t have to.

Julie Wischnack, Minnetonka’s community development director, said she spent months going back and forth with a developer who complained that the city’s mixed-income requirements are too hard to meet. “He ended up doing it,” she said.

Bloomington’s community development director, Eric Johnson, said the requirements in Twin Cities communities are “relatively easy” compared with other cities where he’s worked, but local developers just aren’t used to them. “When they say they can’t do this, then we have to discount all the other cities around the country that are actually doing it,” he said.

None of the city officials expressed discomfort moving forward with mixed-income housing policies. A lot of market research had gone into those policies, with both economic experts and developers.

As part of their research, Johnson said his staff had spoken with “every major developer in the region” and tailored the city’s policies accordingly—“which was strange. Their response was, ‘Nobody ever asked us before.’”