Four years ago I began working with the McKnight Foundation's Region and Communities Program to better understand some of the barriers and best practices emerging in the in the Minneapolis-Saint Paul metro area (affectionately referred to as the Twin Cities) to create more vibrant and inclusive communities along new transit corridors. An impetus for this work came from McKnight’s focus on market orientation and the need to better align public and private investments to achieve greater community and environmental benefits. Through this work, we’ve learned a lot and are encouraged to see signs of greater experimentation by cities in addition to more honest discussions of the barriers faced in providing fair housing across the region.

2700 University is one of 3 case studies featured in the recent MZ Strategies, LLC policy brief on Mixed Income Housing in the Twin Cities, funded by the McKnight Foundation (photo: courtesy of Flaherty and Collins)

During this time, I cannot help but notice the transformation that is happening in the Twin Cities regional built environment with the expanding transit and bike network, new stadiums in both downtowns (go Vikings!), and a rebirth of businesses and housing in places like downtown Hopkins, University Avenue, and hopefully soon at the Ford Plant in Saint Paul and Rice Creek Commons in Arden Hills. Yet recent protests also expose the need to do much more to confront racial justice. Linked is the growing recognition that the region must do a better job of providing housing options affordable to households at a range of incomes.

Suburban and central city communities are struggling, yet also innovating, to meet the housing needs of a growing and changing population. It is projected that through 2040, the metro area will increase from 2.85 million to 3.67 million residents, with dramatic increases in the number of minority and senior residents. Regional voices such as Greater MSP see the importance of housing affordability to attracting and retaining workers. The Metropolitan Council’s 2040 Housing Plan identifies the need for a greater mix of housing choices in affluent outer suburbs and also in racially concentrated areas of poverty within the urban core. And recent policy shifts by Edina and St. Louis Park support of more affordable housing in new development projects in traditionally affluent communities.

A 2014 report published by McKnight (The Tension in Affordable Housing: Are Current ‘Best Practices’ Enough) noted the growing regional affordable housing gap resulting from a number of barriers that were raising the cost of affordable housing production. The report found that on average, annual metropolitan production and preservation is roughly 2,000 units with a projected unmet metropolitan need of 150,000 units. In response, the McKnight Foundation and Minnesota Housing launched the MN Challenge to foster partnerships between providers and investors of affordable housing.

Federal funding for affordable housing continues to decline, requiring the state and local communities to find new ways to finance projects. The notion of mixed-income housing can be attractive to cities that see it as a way to provide some affordable housing within a market-rate project and potentially even having the developer help to pay some of the cost. In reality, mixed income projects are much more complex, with increases in capital reserve requirements and higher up-front costs. The reduced availability of private capital forces developers to explore a wider range of public sources of debt capital, equity capital, cash, and credit. These disparate sources of financing often have extensive requirements, which add complication, time, and associated legal costs to a project.

“Among the policy and production mismatches is the desire by local communities to have more mixed-income housing, yet developers often face regulatory, market or investor hurdles that do not allow these projects to pencil out without direct public support. ”

— ~ Twin Cities Mixed-Income Housing Policy Brief by MZ Strategies, LLC

Given these challenges, there is a perceived trade-off for affordable housing investors, advocates and policy makers: whether to invest scarce resources in mixed-income housing to help de-concentrate poverty or provide affordable housing in otherwise prohibitive markets; or to build more units in projects that are all affordable. Given the growing unmet demand and strengthened federal guidance to Affirmatively Further Fair Housing, mixed-income housing should be seen as one of many tools in the affordable housing toolkit. Regardless, policy makers must recognize that wishing or mandating mixed-income housing does not make it happen. Financial, staff and policy resources are required.

To help inform this debate, MZ Strategies, LLC authored a Policy Brief describing the policy context surrounding mixed-income housing in the Twin Cities region. In this instance, mixed-income housing refers specifically to development that has a deliberate mix of affordable and market rate units as a “fundamental part” of its financial and operating plans. The Policy Brief offers key findings informed by case studies of three recent mixed-income projects:

The 2700 University Avenue project being developed by Flaherty & Collins includes 248 apartments — 20 percent of them affordable — together with commercial space near a Green Line light rail stop in St. Paul;
The Five15 on the Park project recently developed by Fine Associates, LLC near Cedar Riverside in Minneapolis includes 259 units, of which half are affordable; and,
The Ridge project, built by Duffy Development in 2014, includes 64 units in Minnetonka off I-394, of which 20% are market rate.

Among the primary challenges developers face is that investors that buy low-income housing tax credits typically prefer large quantities for projects that are almost exclusively affordable housing. These projects have been shown to lease quickly whereas market-rate units entail more rental risk. Early commitment of public sector resources can make a critical difference to a project’s success. Each of the three case studies found that whether or not the City committed early to the project influenced their ability to secure private finance. Tax Increment Financing (TIF) is a critical funding tool but timing and flexibility are critical. Beyond funding commitments, cities can advance projects through other supportive actions including providing frequent, on-going and transparent information to the public, the developer and to local officials.[1] They can help facilitate city approvals and engage other public sector partners at the county or state levels. All of this creates a synergy that is attractive to other lenders.

Another important finding is that scale matters. The two large projects in Minneapolis and St. Paul both take advantage of increased density to help spread total development costs across units. It is notable that the cost per affordable unit at 2700 University was lower than other 100% affordable projects along the University corridor. Further, a relatively small percentage (20%) of units that are affordable within a large project is comparable to the number of units created in other fully affordable projects. Introducing mixed-income housing into a strong market such as that currently found near 2700 University allows low-income residents greater access to nearby economic, educational and social opportunities.

Despite the challenges noted, particularly the lack of a specific mixed-income finance tool, developers and cities are finding ways to build mixed-income projects. Last year Finance & Commerce’s Twin Cities Apartment Development Tracker listed 14 projects proposed or under construction that have a mix of affordable and market-rate units. Common ingredients to success include strong local leadership, a dedicated team committed to making the project happen, early funding commitments and creative thinking on how to finance different elements of a project. In short, creating mixed-income communities requires more than rhetoric. When cities, developers and investors are willing to partner, take acceptable risks, and put their money where their mouth is, we do see such projects happen in cities and suburbs.

[1] The ULI-Minnesota “(Re)Development-Ready Guide” is a great resource for outlining the steps that local governments can take to attract more private investment: http://minnesota.uli.org/wp-content/uploads/sites/31/2012/04/ULI-MN-ReDevelopment-Ready-Guide-May-2012.pdf