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Making Affordable Opportunities for Homeownership Work at 205 Park Avenue South

By Joan Bennett

The City’s request for development proposals (RFP) for 205 Park Avenue South outlines a set of development priorities for the final developable parcel in the heart of the Mill District. If condos or apartments are proposed, the RFP states a preference for the inclusion of some permanent affordable housing. The question of how the project could integrate permanent affordable housing and condos into single development, a priority among surveyed downtown community members, has been at the forefront of many conversations about the RFP.  

There are mechanisms that would allow a developer to create a predominantly market rate condo development and also offer affordable opportunities for homeownership such as the land trust housing model, government subsidies and home buyer assistance programs. As there is no subsidy on the table or known commitment from a land trust, the City may be hoping that the attractiveness of the site compels developers to provide affordable housing without the promise of financial assistance.

In the absence of a financial commitment from the City or explicit requirement for affordable housing, the window of opportunity for affordable owner-occupied housing at 205 Park Avenue S. may be slight at best or have passed us by given the fast approaching deadline to submit proposals (June 10th). Market conditions beyond the City’s control, limited affordable housing dollars, and no immediate policy levers outside of the RFP selection process through which the City could incentivize or compel affordable housing require tempered expectations. However, the potential is certainly there.

Cards Stacked Against Owner-Occupied Housing Despite a Strong Mill District Condo Market

Though the RFP does not prioritize rental housing over owner-occupied housing, there are a few market conditions that tip the scales towards rental housing. As such, the concern that no developer will propose an owner-occupied project, despite the pent-up demand for condos in the Mill District, is valid.  Banks are hesitant to finance condo construction. The 10-year window of liability for construction defects, as required by state law, weighed against the high-returns on rental properties, makes developers and their investors wary of condos. For these reasons, it is little surprise that the only condo projects we have seen of late have come from Jim Stanton, a rare developer who funds his project primarily through cash.

Affordable Homeownership 101

Affordable homeownership programs target moderate income households who would have the capacity to assume a mortgage if provided with some support. These programs tend to cover households that fall within the 80% to 115% of Area Median Income (as increased home prices continue to outpace wage growth, some argue that upper income limit should be higher).

Without committing dollars to a project, Minneapolis’ ability to compel or encourage affordable housing is limited. In cities that do not have inclusionary zoning policies (laws that require developers to include affordable housing or offer incentives such as a density), such as Minneapolis, affordable housing is almost exclusively achieved through government subsidies of various forms.

The State of Minnesota and the City of Minneapolis have programs that remove barriers to homeownership through direct support to moderate income buyers, such as down payment assistances and mortgages with lower-rates and more lenient under-writing criteria. A host of programs provide post-purchase support to help buyers weather financial setbacks and navigate the challenges that accompany homeownership.

A Call for Creativity --- Affordability Without a Government Subsidy

The City has made its preferences known, but, in the end, has charged developers with proposing their vision for highest and best, financially-viable, use of the site. The City has also made no commitment to subsidize affordable housing on the site (this is not to say they could not do so after a developer has been selected, though dollars are tight and officials have given no indication that they will provide assistance).  Therefore, the onus is on the developers to find a financially viable way to integrate affordable housing. 

With the investment opportunity presented by 205 Park Avenue S., perhaps it is possible that a developer could propose a financially viable project that integrates opportunities for affordable home-ownership without a committed subsidy.  

Though certainly not an apple to apples comparison to 205 Park Avenue S., we can look to an example a few blocks away of a developer attempting to redistribute the benefits of a hot location to create moderate income housing options. First Covenant, Ryan Co. & Community Housing Development Corp, have a workforce housing rental project across from U.S. Bank Stadium in the works that might be able provide below-market rents without an upfront government subsidy (excluding non-profit tax breaks). They are in talks with a group that could give them a fat enough fee to rent the building during the 2018 Super Bowl to make the numbers work.

City of Lakes Community Land Trust

The City of Lakes Community Land Trust  (CLCLT) appears to have the most shovel-ready approach for integrating opportunities for affordable homeownership within market-rate condo buildings. Under CLCLT’s model, home buyers purchase a home in partnership with the land trust. The land trust subsidizes the cost of the home and retains an ownership stake.  In the case of a condo, a deed restriction accompanies the home to guarantee future affordability (for single family homes, the land trust retains ownership of the actual land). To ensure the success of its homebuyers and stability of its properties, CLCLT provides on-going support services.

When the initial owner resells the condo, the next buyer must fall within income guidelines and the price is capped at a below market price. The land trust and seller then share the profit (the same conditions apply to all subsequent buyers).

Arts Quarters Lofts condos on 26th Street S. & Nicollet Avenue (above the Bad Waitress) is a CLCLT project that most closely resembles a development we might find in the Mill District. This upscale building on a vibrant corner includes two CLCLT land trust units (the County required the developer to partner the CLCLT to set aside these units). From the outside and common area, these units are indistinguishable.

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Direct Government Subsidies

Direct subsidies for developers to build affordable home ownership opportunities are limited, as Federal and local housing funding tends to favor rental projects (though competition for rental project funding is still fierce and availability falls far short of the need). However, such subsidies exist. Green Homes North is a current, very successful example of a subsidy program that allows developers to sell homes at below cost. As developers must invest more than a house could fetch in the North Minneapolis Market, a value gap subsidy is applied. Homes are then sold to income-eligible buyers. A similar tool could be applied to multi-family buildings.  

In a stronger market, a subsidy could make up the difference between what a moderate income family could afford and the fair market rate or cost of the unit. Though no such programs currently exist in the local market, theoretically a restriction could be placed on the units with such a subsidy to ensure long-term affordability (we can look to our peers in Chicago as an example, who have implemented Affordable Requirements Ordinance for downtown projects).

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Affordable Homeownership in a High End Condo Market?

From a financial-risk and efficiency perspective, is it wise to attempt affordable homeownership in a high-end market? If we can assume that taxes and HOA will remain higher and rise faster than in less competitive neighborhoods, are we setting moderate-income owners up for failure? Some advocates argue that if you plan for that reality upfront, the answer is no.

To ensure affordability, the upfront unit subsidy (whether provided by the developer or another source) will need to factor-in the total cost of condo ownership (mortgage, HOA fee, taxes) to ensure that the monthly payments remain affordable. Therefore, developers would need to design common areas and amenities with an eye towards maintaining lean HOA fees and low shared property taxes (to provide oversight, the land trust granted veto power or the ability to opt out of luxury amenities).

Given the high cost of land and anticipated sale price, this subsidy would have to be much higher than typically required for a project in Minneapolis. Is this efficient? It would still be less than with the subsidy required in markets like San Francisco or Chicago. If one were to take the long view, the answer is yes. The upfront subsidy, as it remains attached to the unit, is spread over all of the households that assume ownership of that condo over the life of the building. 

Is it risky? Though homeownership in inherently risky, there is the argument that purchasing a condo in the Mill District is a better bet than in other neighborhoods. Purchasing a condo in a less competitive market means a condo owner may find themselves under water or unable to sell the unit. With stable values and high demand in the Mill District, affordable homeownership at 205 Park Avenue S. would give moderate income individuals, who may be less able to weather a market downturn, a chance to invest in an arguably safer market.

The cost of the more affordable units could be kept down by providing alternate finishes or making up the difference through additional density, the latter of which is not popular with neighbors.

In the end, someone will need to assume the cost of providing affordable home ownership opportunities in the Mill District. Will the City’s RFP process compel a developer to do so? Is there political will to provide a government subsidy?  As homeownership is a primary way moderate income people can build wealth and provide a safety net for future generations, is 205 Park Avenue S. a referendum on the City of Minneapolis’s commitment to equity?  Or are there other projects that could more effectively advance housing equity in downtown?  Stay tuned.

Joan Bennett can be reached at

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