Why does it cost six figures to subsidize one affordable-housing unit? High land and construction costs, low rent and, some say, too little private money. Others say the price is well worth it in the long run.
Housing developers of affordable multifamily rental projects consider city and public subsidy to be a necessity. But what is "affordable" and how affordable is it to build in Minneapolis?
Some city officials say developers should use more of their own money for projects and quit asking for handouts, while many others in the system say there’s no other way than to subsidize.
So how much does the city spend, per unit, subsidizing affordable multifamily rental housing? Why do many unit costs differ?
The public cost
Using the figures from the Minneapolis Community Development Agency’s affordable-housing annual report from 2001 — as the 2002 report will not come out until later this year — a single unit of affordable multifamily rental housing requires roughly $158,828 in subsidy.
After comparing various projects throughout the city, it’s apparent that many things determine an affordable unit’s cost.
The first and most obvious component is the unit size. A one-bedroom will cost less than a two bedroom to build.
Another factor is level of affordability.
According to Cynthia Lee, the MCDA’s manager for multifamily housing developments, the city deems a unit affordable if someone making 50 percent or less of the area’s median income can pay 30 percent of their income or less to rent it. The city uses the U.S. Deprartment of Housing and Urban Development’s Metropolitian Median Income data (MMI).
According to HUD, the 2003 MMI for a family of four is $75,300. A four-person family making 50 percent of MMI — $37,650 — could spend no more than $941 a month on what would be considered an affordable apartment.
Some affordability standards are more aggressive, some more lax. Minneapolis insists on the "50 percent MMI" rule, but Lee said some funders use 60 percent or 80 percent as their "affordable housing" standard. To meet the 80 percent standard, the family of four could make $60,240 a year and spend $1,506 a month in rent. At 30 percent MMI — a stricter affordable-housing standard — the four-person family could make $22,590 annually and spend no more than $564.75 a month on housing.
Is subsidy necessary for new affordable housing developments?
Taxpayers pay more to subsidize more-affordable units, and developers say they pay, too. "There’s nothing cheap about affordable housing," said local developer and former Southwest City Councilmember Steve Minn.
He said the city’s 50 percent affordability standard makes developing new affordable housing difficult, largely due to land prices.
In third-ring suburbs, Minn said, the cost is $2 to $3 per foot; for second ring suburbs it’s $5 to $10 — but for Minneapolis land it’s $20 to $25 per foot.
Minn said the City Council and housing advocates push for 30 percent affordability that would require Minneapolis land to be at approximately 70 cents per foot. "We’re still struggling to find adequate subsidy to do 50 percent," he said.
Minn said Minneapolis becomes more expensive because it has few vacant lots. That means new construction usually means demolishing an existing structure or cleaning up a polluted site. That adds more to the cost.
The MCDA’s Lee said land cost varies drastically in different parts of the city. She said what’s on the land also affects the cost, whether a blighted building that needs to be removed, or tainted ground.
Lee said affordable-housing funding, which has increased in recent years, probably wouldn’t continue with state and federal deficits and the city’s budget crisis. And despite recent reports citywide of higher apartment vacancies, Lee said the city is still short on "affordable" units.
Minn said construction costs are another factor making it impossible to develop affordable rental housing without subsidies.
For example, Minn said, new market-rate construction costs are $110,000-$115,000 for a 1,000-square-foot unit. He said the rent would have to be set at $1.15 to $1.25 per foot per month to pay back the construction cost, meaning a monthly rent of $1,150 — far above the $941 the family of four could pay using the city’s 50 percent MMI standard. The figure is nearly double what a family making 30 percent MMI could pay.
"That’s when affordable gets unaffordable," Minn said, "If you want to provide new housing, you have to breech construction costs."
Hennepin County Commissioner Gail Dorfman, who represents Southwest Minneapolis, said another reason that developers need a subsidy is because of tax-law changes.
Dorfman said that in 1986, developers stopped being able to write off building losses and depreciation from their taxes. That cut developers’ profits. "That made it impossible to do it without public subsidy," Dorfman said.
Prospective Southwest developer Lisa Kugler said about affordable-housing development, "There’s no free lunch here. If you didn’t subsidize affordable housing, there would be fewer affordable-housing units and more homeless."
Kugler is trying to build more affordable housing in Southwest, which has fewer units because of higher land costs, with her Boulevard project, 5320 Lyndale Ave. S. The Boulevard project would include 24 units — 15 affordable units ranging in affordability from 30 to 50 percent MMI — in a mixed-use, multi-family rental development in the Lynnhurst neighborhood.
Despite a public clamor for more affordable housing, Kugler and other developers have had a bumpy road solidifying subsidies to get the project off the ground.
Rooting out the bucks for a project in Southwest?
Boulevard developers set up a financing plan for the project, including the affordable housing. The only uncertain piece was $425,000 in so-called "tax-increment financing" from the city.
TIF, as it’s known, funnels higher property taxes from a new development into public costs — sidewalks, lights, sometimes land acquisition — if the property is deemed blighted and couldn’t be developed without the subsidies.
Councilmember Barrett Lane (13th Ward), who represents the area, said the Boulevard project fails the blight test. "I don’t see any distinguishing blight for that property," he said, "It’s an inappropriate use of the tool."
The MCDA’s Lee said the property passed her agency’s blight test, but a majority of councilmembers shot down the Boulevard’s request in November. (The Council serves as the MCDA’s governing board; technically, the agency is independent of city government.)
Lane said the Boulevard’s developers have qualified for huge amounts of public subsidy that exceeds the value that the city would get from the development.
"I think they can find the money elsewhere," he said.
To replace city TIF funds, the Boulevard’s developers got the county to increase their original $350,000 subsidy to $600,000. According to Lee, they also pledged to put in $117,000 of their own money towards the project.
Sometimes, affordable housing developers are criticized for how little of their own money they put into a project compared to the public subsidy. That charge dogged the Boulevard’s principals.
In September during a conversation about Boulevard tax credits with a Southwest Journal reporter, Councilmember Lisa Goodman (7th Ward) complained about the lack of private money in the project.
"They’re double-dipping all over the place," Goodman said. "They get their legal fees back and they get their architect fees back, since their lawyer and their architect are part of their development team. So they’re basically creating a project for which they get the fees, and then they get a developer fee, without any private equity in the project."
Goodman went on to say that, besides the mortgage, everything else to fund the Boulevard project is public money.
Craig Miller, who has owned rental property in Minneapolis, says the amount of public subsidy given to developers such those with the Boulevard Project is outrageous.
"Minneapolis is the sugar candy capital of the world," he said.
Miller believes developers or owners should be required to pay 20 to 30 percent of a project’s cost — as is required for many homeowners.
Minn was also critical. "The Boulevard Project has subsidy coming out the wazoo," he said, adding that he was surprised at the "gall" of the Boulevard Project developers in asking for TIF without (at that time) having any of their own money in the project.
The Boulevard’s Kugler maintained that she and her partners contributed more money than the developers of some other city housing projects. However, she did not return calls asking for specifics.
Is subsidizing affordable-housing projects money well-spent?
Dorfman said she knows whether affordable-housing subsidies are a good use of tax money because the county asks, "What does it cost us if we don’t subsidize affordable housing?"
She used Portland Village, 1817 Portland Ave., to show how stable affordable housing can cut social-service costs.
Portland Village, Dorfman said, contains 26 affordable units that cost $114,545 per unit in total public financing. She said the county spent $7,000 per family in social services before those families moved into Portland Village, compared $2,500 per family the year after they had moved in. "We’re saving money," Dorfman said, "We know it’s cheaper to support a family in affordable housing than when they are cycling through the system."
Social-service savings are balanced against construction subsidies. By saving $4,500 a year on Portland Village’s 26 families, county taxpayers save $117,000 a year in social spending. That’s about the $114,545 construction subsidy for one Portland Village unit.
Bob Odman, housing development officer for the Minneapolis Housing Finance Agency, said affordable subsidies are a good use of public money, because they buy 30 years of affordable housing and help people on public assistance gain stability, allowing them to better sustain themselves.
Odman said the Boulevard Project is a good taxpayer investment because it helps low-income people get better jobs. "Our goal is to try and economically integrate low income households where there are good job opportunities," Odman said.
And because the affordable housing is near a job-rich area, other public costs are reduced, such as subsidized mass transit or building new stores and amenities.
Some experts, including Art Rolnick of the Minneapolis Federal Reserve, have argued that subsidizing renters’ rent — not building more housing — is the best use of public money.
Dean Carlson, housing development coordinator for the Minneapolis Public Housing Authority, said subsidizing rental units through a program known as Section 8 is good because it’s an efficient way to increase affordable housing.
The Section 8 program subsidizes rental tenant’s rent for a minimum of 10 years using vouchers or certificates. Vouchers are tied to a building’s designated Section 8 units — for example, the Boulevard Project has six designated units — while certificates let tenants take their rent subsidies to private landlords who participate in the program. "This way the actual subsidy is going to the tenant," he said.
Carlson said Section 8 works for the owner, because it guarantees market-rate rent. However, the program’s funding depends on federal and state government, not the city.
Councilmember Lane said that government subsidies should be limited and only used when there’s a market failure resulting in not enough housing. He said he questions whether certain city subsidies, such as TIF, are a good use of scarce affordable-housing money. The process, Lane said, needs to be revamped to better evaluate the return the city is getting on their subsidy investment.
Minn said he’s hopeful that’s what the city’s new tools will do. He said the new 20 percent density bonuses — that let developers build more units in the same space if they commit to affordable housing — would produce more units without added public cost.