In with the old, in with the new

Inclusionary zoning, preserving old housing key to affordability strategy

building on the 2700 block of Humboldt Avenue
A building on the 2700 block of Humboldt Avenue is participating in the 4D Housing Program. The landlord received an energy-efficiency grant that paid for 90% of a new boiler and insulation for the building as part of the program. Photo by Andrew Hazzard

Minneapolis officials want 2020 to be a landmark year for housing affordability, with new zoning codes allowing more types of housing in more places paired with ordinances requiring new developments to incorporate low-cost units. While much of the focus citywide has been on shaping the future of housing with the Minneapolis 2040 Plan, maintaining the existing stock of low-cost housing is key to accomplishing affordability.

“Land use policy is necessary but not sufficient to ensuring affordability,” said Andrea Brennan, Minneapolis’ director of housing policy and development.

The city is employing seven strategies to promote affordability, Brennan said: Increasing supply, investing in new affordable housing, preserving existing affordable housing, improving access to homeownership, supporting renters, preventing homelessness and maximizing the sale of public land.

“We’re really attacking our affordability problem from a lot of different angles,” City Council President Lisa Bender said.

Inclusionary Zoning

Bender led the initiative for inclusionary zoning, an ordinance requiring any new development with more than 20 units to make a percentage of dwellings affordable, which the City Council approved in December. With the 2040 Plan allowing for more developments, she saw inclusionary zoning as a necessary tool to ensure lower-income residents wouldn’t be left out of the growth.

“I don’t think any of us believe just solving the supply problem is enough,” Bender said.

The inclusionary zoning ordinance is designed to make sure that new housing will include affordable units. All new developments with more than 20 units are required to make either 8% of dwellings affordable to households earning 60% or less of the Area Median Income (AMI) or 4% of units priced for households earning 30% of the AMI or less. If they receive city financial help, projects are required to make 20% of units affordable to households at 50% of the AMI or less.

Some developers have said they won’t build in Minneapolis under inclusionary zoning, arguing the policy’s economics won’t work. “The gap between the amount of cost the 60% AMI rent can support and the cost of developing the market rate apartment is between $150,000 and $200,000 per unit,” Kelly Doran of Doran Companies wrote in a Star Tribune op-ed. “Thus, if a developer decides to build a 100-unit market rate apartment building in Minneapolis, the developer is in essence agreeing to pay an affordable housing tax of between $1.2 million and $1.6 million.”

But Bender said she hasn’t noticed any decrease in developers contacting her office interested in Ward 10 sites.

“I’m still hearing plans for housing, but we’ll see,” she said.

Developers who don’t want to include low-cost units in new projects can avoid the ordinance by paying a fee to the city or by preserving or producing affordable housing nearby. 

“I think that’s important when we start to talk about preservation,” Bender said.

Preservation

New developments can often replace older, cheaper dwellings, which is why city officials are working to preserve what is known as naturally occurring affordable housing (NOAH): generally older homes, duplexes and apartment buildings that have lower rents without Section 8 vouchers or other subsidies. One third of low-income renters in Minneapolis receive no housing subsidy, Brennan said. 

City staff are currently studying a renter’s-right-to-purchase ordinance that would allow tenants to collectively make a bid on residential buildings put up for sale, but an existing preservation program, which takes a different approach by offering incentives to landlords, is having early success. 

The 4D Affordable Housing Incentive Program, launched in 2018, is a key and growing component to preserving affordable housing in Minneapolis. The program gives landlords a property tax break for keeping their rents affordable for at least 10 years. The more units of a building are enrolled, the greater the discount, up to a 40% savings on a property tax bill if all units are included, according to Minneapolis housing stability specialist Dean Porter-Nelson. Those property owners also have access to energy-efficiency grants, which can save them money on immediate upgrades and down the road in lower utility costs. One Southwest landlord had 90% of costs covered to install a new boiler and insulation at their property on the 2700 block of Humboldt Avenue. 

“The benefit of having an energy-efficiency grant on your property can be very significant,” Porter-Nelson said. 

Average rental rates within the 4D program are about 20% lower than 60% AMI rents, with a median one-bedroom rate of $845 per month. Participating landlords are required 

to cap rent increases for existing tenants at 6% annually. 

In the first year, 770 units with 1,062 bedrooms were enrolled in the 4D program. More than 100 of those units were preserved in Ward 10, according to program data. 

“This is one of the most successful ways we are preserving existing affordable housing,” Bender said. 

Whittier has had more than 60 units enrolled, and the neighborhood has taken notice. The Whittier Alliance hosted a 4D informational session for landlords in December, attended by about 15 property owners considering enrolling in the program. 

Dan Largen, operations manager for Mint Properties, told the group signing up for 4D was a no-brainer. Mint Properties, which owns a large portfolio of rental housing in Stevens Square and Whittier, signed up 55 units across three buildings for the program, which brought the company $32,000 in property tax savings in 2019. He said the company will look to enroll more units in the future.

Largen said the company realized their rents typically met 4D standards for affordability already, and the company had the same maximum rent increase as the program requires, 6% annually.

“If you have stuff in this neighborhood, most likely you’re a good fit,” Largen told the gathered property owners.

Owners of NOAH housing are often under pressure from developers to sell, Brennan said, so the city wanted to incentivize them to keep their properties. Landlords entering the 4D program are required to make a 10-year commitment. Some property owners at the Whittier meeting said they were nervous to make a decade-long commitment, but Bender is concerned that might not be long enough. 

Median rents in Minneapolis decreased from 2018 to 2019, according to a Housing Link report, and more affordable units became available. The median rate of a two-bedroom unit fell from $1,765 in 2018 to $1,400 in 2019, according to the report. 

It’s too early to make judgments about the relationship between falling rental prices and Minneapolis’ affordability policies, but as the housing market changes, Bender knows the city may have to tweak its strategies and programs to effectively promote affordability. 

“All of this stuff around preservation of affordable housing is us trying to participate in the housing market as a government entity, which we’re not really set up to do well,” Bender said. “But cities all over the country are trying to do this.”