Kelly Doran, a prominent Minneapolis housing developer, argued in a recent op/ed that with the current economic shutdown, the city’s “inclusionary housing” regulations that require market rate developments to include a percentage of affordable units should be eliminated. He says that such requirements, along with the difficulty in cobbling together various sources of funding for affordable housing, are too onerous during the fall-out from the economic shutdown.
Doran explains that there are two main ways to develop affordable housing. One way is for non-profits to develop an entire building of affordable units, the costs of which are subsidized by up to ten sources of financing because rents do not cover the costs.
He states that the most common source of such subsidies are government-granted tax credits. Governments sell these tax credits mainly to corporations and banks (which use them to offset their state or federal taxes) and fund affordable housing efforts with the resulting revenue. But, according to Doran, because banks and corporations will see lower profitability with the current shutdown, they will have less interest in buying such tax credits and thus funding will dry up for 100% affordable projects.
The second way to develop affordable housing, according to Doran, is through projects that mix affordable and market rate units. He says that these mixed projects struggle to get the financing that 100% affordable projects obtain so cities provide assistance through, primarily, tax increment financing. Minneapolis, though, has mandated that developers cover the affordability costs with no financial assistance.
Doran says that he objected to this mandate before the shutdown because it stymies development and reduces the supply of housing across all categories. But, under the current economic circumstances, he says, it will be nearly impossible to obtain equity and loans for any kind of housing development. This is because banks will assume any proposed projects will be of reduced value and thus loan less and require the developer to provide more equity for the projects. Many developers won’t be able to increase their equity accordingly and institutional investors will also be unlikely increase their investments. According to Doran, everything in a project would have to be perfect in order to secure investors and any affordable housing mandates would make the projects wholly unfeasible.
Doran’s analysis is lacking in a number of ways. First, while studies are mixed on whether inclusionary housing requirements reduce overall development, there is no question that land speculation reduces development because, by definition, speculation entails holding building sites out of use until a sufficient premium is offered by builders. Why not mention this barrier to housing development?
Second, Doran talks about the need to cover costs but he does not identify the costs involved. There are two basic costs involved in housing development: 1) the construction costs of the structure (i.e. the labor and material costs) and 2) the cost of the land upon which the structure is built. Land, of course, has no labor and material costs because it is a gift nature. It’s cost – meaning what it will sell or rent for – is based strictly on “what the market will bear,” i.e. what buyers or renters are willing/able to pay for it based on their incomes. With the current shutdown lowering incomes, land costs would be reduced if land speculation was eliminated.
Finally, Doran does not take into account the development possibilities of holding land on a rental basis from the community. If developers rented their land from the community, they would only have to finance the structure cost of development and thus could borrow less from banks and ask investors for less funding.
A more thorough analysis suggests that this may be an opportunity to scrap the current convoluted housing system that Doran describes for something much simpler and more effective:
1. Stop taxing buildings so they’re cheaper to build, improve and maintain
2. Tax land at its full rental rate (6%) so speculators don’t demand premiums for it from builders and so developers only have to finance structure costs because they would be then holding their land on a rental basis from the community (See this explanation of why a full land value tax equates to renting land from the community).
3. Give everyone in the city an equal resident credit of several thousand dollars annually so all households can more easily afford housing and other basic needs, similar to the $1600 per resident Alaska dividend .
Sometimes simpler really is better. Today’s economic challenges may provide a chance to take this simpler and more effective route.
