Local real estate developer Steve Minn believes encouraging creative incentives will solve the affordable housing crisis in the Twin Cities region.
"We are in the eighth or ninth inning of the market rate housing expansion and most projects still on paper will probably have to wait for the next cycle," Minn told Minnesota Business Daily. "At the same time, construction, material and labor costs are skyrocketing."
Minn is the vice president and chief financial manager of Lupe Development Partners.
Minn said the combination of higher costs and tighter money is only going to make housing shortages more acute.
"Banks are pulling in on capital and shifting more of the debt away from projected value, and toward more cash flow restriction," he said.
Minn said this is going to constrain new production.
"At the same time, local government wants more affordable housing," Minn said. "If policymakers are willing to embrace market forces, the affordable housing supply problem can be solved. The solution for our metro core is to increase supply with incentives that embrace what investors want - yield."
Minn said the educated workforce and high metro median income are attractive to investors chasing yield.
"The most important driver to our development landscape is the ready stock of multifamily housing desperately in need of reinvestment," Minn said. "Unfortunately, this reinvestment has come at the loss of existing affordable housing. I have heard advocates bemoan the loss of 'naturally occurring affordable housing,' as investors buy and repurpose older housing stock to market-rate rents."
Minn said relative to the cost of new construction, reinvestment in older properties is a good market decision for investors because it can be easily financed.
"High-interest rates, a change in federal tax policy, high property taxes and low housing support payments drove disinvestment from multifamily housing stock in Minnesota from 1987 to 2008," Minn said. "Property owners could only make a profit by deferring maintenance. As we come out of the recession, multiple bidders are driving up unit prices on older buildings because older buildings with good locations can be repurposed for less and achieve rent returns faster than new construction."
Minn said St. Paul and Minneapolis can improve the supply of affordable housing by giving existing affordable property owners incentives to keep older properties affordable.
"First, utilize the Low-Income Rental Classification (LIRC); Minnesota cities can enter into contracts with existing owners to keep rents and income restrictions below 60 percent area median income, effectively decreasing their taxable rate by 40 percent," Minn said. "The small collected tax loss is a fraction of the cost of replacing a lost affordable unit."
Minn said secondly, the cities could pay private landlords competitive rents when making Housing Choice Voucher (Section 8) payments.
"These incentives would encourage a property owner to keep an older building and make some improvements while holding rents steady," Minn said.
On the new construction side, Minn said a motivating bonus density could help drive affordable housing.
"Both St. Paul and Minneapolis have density bonuses in their zoning code that offer on average 20 percent in density for adding on average 20 percent affordability," Minn said. "These bonuses are rarely taken because the cost of the affordable units is more than the profit that could come from the increased density."
Minn said offering a 50 percent density bonus in exchange for including 20 percent affordable units in a market-rate project would drive real interest by investors—and would generate additional tax revenue for the city.
"Rent control, inclusionary zoning, or other mechanisms that force developers to operate with unnatural market forces always have unintended consequences," Minn said. "Studies from New York, Seattle, Portland and Cambridge, Massachusetts, have shown that suppressing yield for housing investors only discourages investment," Minn said. "Rent control creates a black market, while inclusionary zoning is a tax on new development paid by higher rents."
Minn said neither approach has solved the affordable housing crisis in markets where these policies have been adopted.
"A better solution is to respond to the market with creative incentives," Minn said. "It will cost a lot less than replacing each lost unit and take a lot less time."