Targeted Taxes Pose Challenges to Equity, Economic Growth
By Liz Farmer, January 23, 2020
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Cities that feel hamstrung by property tax caps are increasingly using alternative approaches to taxing real estate, with the goal of eking out more revenue and, in some cases, changing behavior. But rather than helping city coffers, experts warn, such moves may be more likely to disrupt economic growth, raise equity concerns, and insert instability into the otherwise fairly predictable property tax revenue stream.
In some instances, cities and states are raising so-called “mansion taxes”—transfer taxes on high-value residential real estate—as a way of cashing in on a booming real estate market. Connecticut, which is losing population, even structured its tax to discourage wealthy people from leaving the state. This fall, Boston approved a higher transfer tax rate on residential and commercial property sales over a certain market value. If approved by the state legislature this session, the shift would allow the city to add a local transfer tax of up to 2 percent on sales of $2 million or more. Chicago is considering a similar move, as are several other smaller cities. In other cases, local governments are taxing vacant properties at a premium as a way to nudge owners to lease, develop, or sell.
Opponents of these alternative taxes say they will discourage the very investment that has benefited the real estate market. Greg Vasil, CEO and president of the Greater Boston Real Estate Board, has warned that increasing the cost of doing business in the city could ultimately backfire by pushing up the cost of rent. Proponents in Boston pitched the recently adopted tax as an issue of fairness: Boston’s booming real estate market has left some behind and made it more difficult to find reasonably priced housing, they say. A high-end transfer tax could raise more than $150 million in any given year that would go toward affordable housing, more than doubling the city’s current funding stream for affordable housing.
“We want to make sure that everybody in the city can grow with the developers, can grow with people who are building homes,” the bill’s lead sponsor, City Councilor Lydia Edwards, said at the bill signing last year.
But any time taxes are narrowed to specific populations, whether it be smokers, gamblers, or the rich, it is likely that the revenue from that tax will be volatile. The best tax policies—in terms of fairness and revenue stability—tend to be ones that have a broad base and are both limited in exemptions and progressive in nature, says Ron Rakow, a Lincoln Institute fellow and Boston’s former assessing commissioner. Increasing mansion taxes runs counter to that.
“What happens when the market dips?” he said. “Unlike the property tax . . . transfer tax revenue can be really volatile. It’s not unusual to see it drop by half in any given year.”
Targeted taxes also tend to invite taxpayers to game the system or find loopholes, which also lessens their long-term effect. For example, New York state has long had a higher transfer tax rate on properties sold for $1 million or more. But in 2019, the legislature approved an even higher rate for New York City. Before the new rate went into effect that July, Manhattan saw a closing frenzy. According to a report from Douglas Elliman Real Estate, sales from April through June 2019 were up 12.5 percent compared to the same period in 2018, surging by a full 37 percent in the $2 million to $5 million price range. The following quarter, the city’s inventory increased, and sale prices dropped by 12 percent.
In Connecticut, lawmakers added an unusual provision to not only curb evasion, but also encourage these presumably wealthy sellers to make their next home purchase inside state lines: Those who retain their in-state residency for at least three years after a sale become eligible to claim a tax credit against their mansion tax. Whether the lure works remains to be seen—it goes into effect July 2020—but those in the high-end real estate market have still criticized the tax hike, calling it punitive.
Vacancy taxes have drawn similar criticism. Washington, DC, and Vancouver, Canada, already have such taxes, and San Francisco and Oakland, California, and New York City are all considering following suit.
DC’s tax was created in 2011, and included a tier for vacant properties, taxed at $5 per $100 of assessed value, as well as a higher “blighted” tier taxed at $10 per $100. The blighted tax rate is more than ten times the city’s ordinary property tax rate. The idea was to force absentee landowners into doing something with properties they were neglecting.
But Lincoln Senior Fellow Joan Youngman notes that there can be many reasons for commercial vacancies, depending on market conditions and the owner’s situation. In some cases, landlords may be seeking creditworthy tenants and long-term guarantees; in others, changing retail patterns may affect the desirability of the location to traditional tenants. Residential vacancies present a different set of issues. “The first step is to understand the market conditions that lead to a pattern of vacancies, and to tailor the most effective response, which might not be through a tax instrument,” Youngman said.
Hartford, Connecticut, a small city dotted with vacant lots, also considered making it more expensive for property owners to hold unused land. But in 2017, Mayor Luke Bronin killed a proposed vacant property tax due to concerns that it would hurt development even more.
Two years later, Bronin was among a group of officials who pushed the state to pass two pieces of legislation that took a more holistic approach to blight for all Connecticut cities. The first targets absentee landlords and speeds up the process of turning vacant properties over to a receiver. The other bill allows cities to establish a land bank to help revitalize properties.
Of course, in the short term, it’s politically easier for officials to pick out one thing they don’t want to happen, and then use taxes to discourage it. And in some places, it’s easier to tax the rich—or at least try to. But Rakow points out that Boston’s property tax structure already is progressive because homeowners are exempt from paying on the first $200,000 in value. That is a significantly greater discount for the average homeowner, compared with wealthy owners of multimillion-dollar homes.
Many cities already have the tools they need to raise property tax revenue without creating a new layer, Rakow adds. Boston, for example, can go to voters and ask them to approve additional revenue above the city’s cap that would be dedicated to affordable housing, or to buffer the general fund budget against instability.
At a minimum, Youngman and Rakow advise proceeding with caution and acknowledging that any revenue impacts from targeting certain property taxpayers are, at best, unpredictable. As Youngman put it, “it’s important not to assume that a new tax is the best way to deal with a land market problem.”
Liz Farmer is a fiscal policy expert and journalist whose areas of expertise include budgets, fiscal distress, and tax policy. She is currently a research fellow at the Rockefeller Institute’s Future of Labor Research Center.
Photograph: Implementing targeted taxes such as transfer fees on high-end real estate can be alluring to municipalities, but experts warn that these moves can backfire. Credit: www.aag.com via Flickr CC BY 2.0.
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2020 C. Lowell Harriss Dissertation Fellowship Program
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The Lincoln Institute's C. Lowell Harriss Dissertation Fellowship Program assists Ph.D. students, primarily at U.S. universities, whose research complements the Institute's interests in land and tax policy. The program provides an important link between the Institute's educational mission and its research objectives by supporting scholars early in their careers.
With the arrival of 2020, Minneapolis becomes the first major U.S. city to implement a ban on single-family zoning in every neighborhood. For decades, single-family zoning had locked up nearly three-quarters of the city’s urban land in low-density housing and had contributed directly to lasting racial inequities. The historic and controversial policy shift—which comes with the formal adoption of the Minneapolis 2040 comprehensive plan and follows years of research, planning, and political maneuvering—will allow duplexes and triplexes citywide. It has been hailed as a significant and replicable step toward more effective and equitable use of urban land, and has inspired or helped inform similar shifts across the country.
From an economic and planning perspective, undoing single-family zoning is “a momentous idea,” says William Fischel, emeritus economics professor at Dartmouth College, a zoning board member in Hanover, New Hampshire, and author of the Lincoln Institute of Land Policy book Zoning Rules! The Economics of Land Use Regulation (Fischel 2015). “I heartily approve of what Minneapolis is doing.”
The movement toward exclusively single-family neighborhoods in the United States began in the 1910s and 1920s, says Fischel. “Advocates of zoning were unabashedly in favor of the single-family house” for many reasons, including public health; such structures were seen as improvements to crowded and unsanitary urban neighborhoods. The turning point that made single-family zoning so desirable across the nation came in the 1970s, when inflation made housing a very attractive equation for building personal wealth, he says. Beginning in the 1980s and 1990s, with the rising value of homes, people found that they could stop development in their single-family neighborhoods through zoning. “That’s been a clear goal all over the country, to protect single-family-zoned housing,” mostly from incursions of industry or denser and more affordable housing, says Fischel.
Single-family zoning is a barrier to home ownership for those who can’t afford to purchase a home, effectively locking up certain neighborhoods. During the Minneapolis 2040 process, its champions—including a progressive mayor and city council, along with the city’s Community Planning and Economic Development (CPED) department—presented the comprehensive plan as part of the solution to addressing the enduring effects of policies that intentionally and systematically discriminated against communities of color. The resulting disparities, the plan says, were “rooted in overt and institutionalized racism that has shaped the opportunities available to multiple generations of Minneapolis residents.” As the plan notes, Minneapolis has both the nation’s lowest home ownership rate among black households and the widest unemployment gap between black and white residents.
“Equity drove this in a big way,” says Caren Dewar, executive director of the Minneapolis-based Urban Land Institute (ULI) Minnesota, whose members include large multifamily and affordable housing developers, urban planners, architects, and others. “It was a bold move, and it was hard. City council members ran on a very progressive platform, supported by a group of savvy and engaged advocates who supported overcoming racist history and providing more housing.”
As Minneapolis begins its history-making policy implementation, other cities and states have begun to implement shifts that encourage density, equity, and affordability, from allowing accessory dwelling units (ADUs) in parts of Washington, DC, to passing statewide legislation in Oregon that legalizes certain types of multifamily properties in cities of 10,000 or more. Others are watching to determine how dismantling single-family zoning will not only provide more places to live, but also change the physical, economic, and social landscape of cities.
Housing Woes in a Growing City
Between 2010 and 2016, Minneapolis added more than 37,000 residents and 12,000 homes, increasing its population 11 percent to 425,000, according to estimates from the Metropolitan Council (Met Council), the policy and planning agency for the Twin Cities metropolitan region. This growth is part of a rebound from the decades of decline that had occurred since the city’s population peaked at nearly 522,000 in 1950—changes related to the loss of industry, “white flight,” and the construction of new suburbs. The Minneapolis metro region’s population is expected to grow as much as 10 percent per decade, to 3.7 million by 2040, according to the Met Council. To meet existing and future housing demand, the region needs to add more than 14,000 homes each year for the next two decades.
Now boasting one of the lowest vacancy rates in the U.S., 19 Fortune 500 companies, and steady economic and population growth, the Minneapolis-St. Paul area is ranked first in the Midwest for real estate investments, especially in rental properties (PwC 2019). But it also ranks first in a more dubious arena: Minneapolis has the nation’s lowest black home ownership rate, according to a 2018 analysis of 128 U.S. cities conducted by the APM Research Lab, a sister company of Minnesota Public Radio News. The study showed more than 70 percent of white households in these cities, but only 40 percent of black households, owned their home. In Minneapolis, the gap was more pronounced: 78 percent of white households, and only 19.8 percent of black households, were homeowners (APM 2019).
Minneapolis is also grappling with an affordable housing crisis amplified by a lack of housing options, particularly smaller residences suitable for first-time buyers and those looking to downsize. These “missing middle” properties include duplexes, triplexes, cottage courts, and small apartment buildings. Such multifamily buildings were a valued part of the city’s urban fabric until the 1940s, when single-family zoning began to take hold. Many were grandfathered into the single-family zones, which now encompass 70 percent of the city’s 54 square miles.
In the past decade, rising home prices and the lack of housing types have boosted the percentage of renters from 49 percent to a 52 percent majority. The cost of single-family homes has been rising steadily in recent years, and the median home price hit $290,000 in June 2019, a 7.2 percent increase over June 2018, according to the Minneapolis Area Realtors, while homes in the wealthier single-family neighborhoods can sell for several million dollars. Median rent was $1,695 in the first quarter of 2019, up 3.6 percent over the previous year, compared to the U.S. median monthly rent of $1,530 (Clark 2019). Financial pressure on renters has been compounded by decreasing wages: since 2000, the median income of Minneapolis renters has declined 14 percent as median rent increased 11 percent. The plan notes that the city’s economic gaps by race are significant: black households earn a median income of $20,871, less than a third of the $65,000 earned by white households, and 45 percent live below the poverty line. These disparities are at least in part the outcome of exclusionary zoning, research suggests.
Mapping Prejudice
In 2016, an interdisciplinary team of community activists, students, and scholars from the University of Minnesota began a project called Mapping Prejudice. The goal of the project was to make structural racism visible by identifying and mapping the property contracts that made many neighborhoods racially exclusive during the 20th century. Although this practice was not limited to Minneapolis (see sidebar), their effort was the first comprehensive visualization of racial covenants for an American city.
The team’s intent was to work with residents, activists, and policy makers to understand how contemporary inequities were rooted in historic injustices. Using GIS and with help from volunteers, the team has been reviewing more than 1.4 million digital scans of warranty deeds in Hennepin County from 1900 through 1960, and has uncovered more than 20,000 covenants for private homes that specifically excluded people on the basis of race or ethnicity. These findings demonstrate that structural barriers stopped many people of color from buying property and building wealth for most of the last century.
When the city’s first racially restrictive deed was written in 1910, Minneapolis was not particularly segregated, but covenants “changed the landscape of the city,” notes the Mapping Prejudice website. For example, a 1919 advertisement in the Minneapolis Tribune offered “restricted” housing sites overlooking one of the city’s lakes that could not be sold, mortgaged, or leased to anyone of African, Asian, or Jewish descent. The Mapping Prejudice research revealed that most deeds were crafted mainly to exclude blacks, who were pushed into small areas of North Minneapolis as racially restrictive deeds increased—even as the number of black households also grew.
In the 1930s, federal housing administrators endorsed these documents, requiring them for projects that used federally backed financing. Lenders followed suit, accepting the rationale that covenants provided the essential insurance of stable investments in residential property. Banks routinely “redlined” or denied loans for properties in racially mixed neighborhoods, and increasing sections of the city became entirely white, laying the groundwork for patterns of residential segregation that still exist today. Though the laws would change—the U.S. Supreme Court made covenants unenforceable in 1948, the Minnesota Legislature prohibited their use in 1953, and the U.S. Congress banned racial restrictions as part of the Fair Housing Act of 1968—the effects of covenants and predatory lending practices would endure in Minneapolis and elsewhere.
Partnering with the Mapping Prejudice team, city planners compared zoning maps and demographic data with redlined areas and found they had nearly identical boundaries. They documented that even after redlining was abolished, people of color had been excluded from most of the single-family neighborhoods in the city, and thus had been prevented from owning homes, accumulating wealth, and having access to the better jobs, transit, educational opportunities, parks and open space, and other benefits available to residents of more affluent white neighborhoods.
The areas that were covenanted are largely white and among the wealthier parts of the city today, while the areas engineered to be largely black remain that way and are among the city’s poorest neighborhoods. Where shifts are occurring—in some areas of North Minneapolis, for example—they follow patterns of gentrification, as white residents priced out of other areas “discover” mostly black neighborhoods with lower-priced housing.
The Mapping Prejudice project proved that “Minneapolis had a direct link from racially biased zoning to single-family zoning,” says Heather Worthington, CPED’s long-range planning director. When it came time to design the comprehensive plan, “the linkage between the racially biased housing and lending practices and covenants was really the important policy underlayment, as these informed the development of single-family zoning,” Worthington says. “That was the first reason we had to address the city’s single-family zones.” The second: “We heard from Minneapolis residents that, as they aged, they couldn’t access other types of housing, as so much of it was single-family, one-size-fits-all kind of housing. They wanted more choice, and places to downsize. We had a huge racial disparity and [we also had] a large segment of the population that said, ‘We want more options.’”
Residential Segregation and Exclusionary Zoning
Minneapolis was the first large city in the country to enact a fair housing ordinance, and Minnesota was one of the first states to pass a civil rights law outlawing housing discrimination, says Myron Orfield, a professor at the University of Minnesota Law School and director of the Institute on Metropolitan Opportunity (Orfield 2017). But residential segregation endures in this city and in communities across the country—the result of “a century of social engineering on the part of federal, state, and local governments that enacted policies to keep African Americans separate and subordinate,” notes Richard Rothstein in The Color of Law (Rothstein 2017).
While the federal Fair Housing Act prohibits housing discrimination based on race, color, national origin, religion, sex, ability, and familial status, it does not prohibit class-based, or economic, discrimination—a legal loophole that permits continued discrimination against communities of color, which tend to be lower-income due to historical barring from home ownership and educational opportunities (DeNinno 2019). Housing segregated by income level is increasing due to exclusionary zoning policies that municipalities or individual neighborhoods use to reduce affordable housing options through restrictions against apartments, townhomes, and other forms of multifamily housing, and such policies are still legal under current federal law, writes Richard Kahlenberg, senior fellow at the Century Foundation, in The New York Times: “Rising class segregation by residence is partly related to rising income inequality, but it is also the result of an expansion of exclusionary zoning.” In extremely wealthy neighborhoods with very large lot requirements, he notes, “policies can effectively exclude virtually all families not in the top one percent by income and wealth” (Kahlenberg 2017).
Kahlenberg argues for a new economic fair housing act to curtail government zoning policies that discriminate based on economic status. Such a law could ban exclusionary zoning at the local level or impose a penalty on municipalities that maintain discriminatory zoning, either by withholding infrastructure funds or by limiting the tax deduction homeowners can take for mortgage interest.
Laying the Groundwork for Change
In April 2017, a previous city council unanimously adopted 2040 comprehensive plan goals that addressed key areas including racial disparities, housing and transit, and climate resilience. Later that year, the election of an especially progressive city council slate brought new mandates to Minneapolis. Elected to a second term and as president of the council was Lisa Bender, a cycling advocate and urban planner with a master’s degree in city and regional planning from the University of California, Berkeley, who had introduced a successful ADU ordinance in 2014. Andrea Jenkins, the first black, transgender woman to hold public office in the country, won a seat on the council after campaigning on a platform that included raising the minimum wage and increasing affordable housing supplies. She is now vice president of the council. Jacob Frey, a civil rights attorney and community activist, was elected mayor, and also ran on a platform of expanding housing.
The zoning changes Bender, Jenkins, Frey, and others promoted through Minneapolis 2040 faced fierce opposition; “Don’t Bulldoze Our Neighborhoods” lawn signs appeared around town, mostly in whiter, wealthier neighborhoods. Many in Minneapolis say the eventual success of the plan was attributed to a concerted effort to engage in community outreach by city officials and various local Yes in My Backyard (YIMBY) activist groups.
The community engagement process underpinning Minneapolis 2040 spanned more than two years and 200 meetings, garnering over 18,000 public comments. The breadth and depth of the community outreach was unprecedented for the city, says Worthington, including community workshops and dialogues, artist-supported events, and online engagement. Planners were very intentional in seeking out communities that were typically underrepresented in planning efforts, such as renters, people of color, the disability community, and seniors, she says. “We tried to meet people where they were, have more visual presentations, and use innovative tactics. We went to many festivals and programs and jumped on buses and light rail to talk to people.” They also worked to achieve a much greater level of transparency than previous planning efforts.
Part of the process was educating residents by partnering with the Mapping Prejudice team, who presented findings and participated in discussions. “Minneapolis has a lot of what I call ‘progressive dissonance’—people who describe themselves as liberal and progressive but don’t understand the bias going back 100 years,” Worthington says.
For the first few months of the planning process, planners were often booed at meetings and received abusive emails. By the final months, she says, people wanted to learn more. It became “we’re all in this together and need to work together” to solve housing and equity issues, she says, rather than a Not in My Backyard (NIMBY) concern about preserving neighborhood character.
Duplexes and Triplexes
To be clear, the new zoning in Minneapolis does not prohibit construction of single-family homes. It simply says that no neighborhoods in the city can have only single-family homes. New duplexes and triplexes must be built within the existing building envelope, and up to two units can be added within that footprint to owner-occupied homes. Indeed, one doesn’t have to look far to find examples of how duplexes and triplexes could work in single-family neighborhoods.
“Our city originally developed along streetcar lines, so we have many neighborhoods that have a rich diversity of housing types and land uses, including duplexes, triplexes, and smaller multifamily buildings,” Bender has said (Grabar 2018). “So we were able to keep pointing back at those neighborhoods and say, ‘This is a pretty incremental change.’”
By inserting ADUs, duplexes and triplexes, and other housing types, “we’re undoing things that have been done for a long time,” said Bender in an interview for Land Matters, the Lincoln Institute podcast (Flint 2019). The comprehensive plan process raised questions such as, how do we redefine what is the status quo, what isn’t working for people today, who gets to live here, and what are people’s aspirations for this city, she says. “We’re at a crossroads in terms of people being able to live in our city and in terms of climate change, and we have to make some good moves” and meaningful investments.
Addressing concerns that more duplexes and triplexes will change neighborhood character and overtax the city’s infrastructure, supporters of the plan point to the fact that the city had an additional 100,000 residents decades ago—mostly more people in each home—and has plenty of street, transit, and other infrastructure capacity, says CPED Director David Frank.
An early draft of the comprehensive plan allowed for fourplexes on single-family lots. But organized opposition and a staff analysis, including architect-designed models, convinced planners to limit the density. To provide perspective, Worthington notes, a typical city lot is 40 feet wide by 120 feet deep, and the maximum home size is 3,000 square feet. “Three units gets us more density on the lot but is a lot more livable” than trying to fit four in the same footprint. Three-unit developments can also use residential financing, whereas a four-unit configuration triggers commercial financing and building regulations. A triplex also doesn’t require ADA accommodations and is easier to lay out, she adds. Duplexes and triplexes “will be a relatively small change in terms of impact on neighborhoods, but can be a big opportunity for people who historically have had limited access to neighborhoods that have the best transit, grocery stores, parks, and other amenities.”
Will the new zoning cause developers to demolish single-family homes en masse and redevelop adjacent lots into multifamily buildings, as opponents have warned? Worthington responds that the economics of tearing down an existing home and building a duplex or triplex are unlikely to pencil out for larger-scale developers; a homeowner with equity who can afford to build an ADU or convert part of the home to make a duplex, she says, “is probably a better prospect.”
Worthington also points to other potential players, including two land trusts in the area that buy property and help fund affordable housing development. Eddie Landenberger, vice president and senior project manager for the Twin Cities Land Bank—a local nonprofit organization that in the past decade has helped leverage land purchases for over 1,500 single-family and multifamily homes, including many that have been rehabbed in North Minneapolis—says interest in taking advantage of the new zoning regulations is on the rise.
“We don’t have clarity yet on how many duplexes and triplexes could be built in the next year or 10 years, but we do have more single-family and smaller developers now seeing duplex and triplex as an incremental step into building multifamily buildings,” says Landenberger. The land bank has been doing deals through the city’s Missing Middle program, which provides gap financing and grants as part of the city’s multipronged approach to developing more affordable housing (see sidebar).
“The zoning change provides more opportunities for a landlord to have a couple units, and we’re starting to see smaller developers jumping into these projects,” says Landenberger. “The new zoning is already helping us with our work, as we’re now seeing entitlement processes referring to these future zoning changes.”
Minneapolis Affordable Housing Efforts
In the city of Minneapolis, 50 percent of renters and 74 percent of low-income renters are cost-burdened, according to Minneapolis 2040. Since 2000, the city has produced or preserved 8,900 housing units considered affordable for residents earning 50 percent of the area median income (AMI), which is $100,000 for a family of four in 2019. But the city also lost approximately 15,000 homes that were affordable to households at this economic level; the homes generally still exist, but they are cost-prohibitive to own or rent.
The city’s 2019 budget addressed the four pillars of Minneapolis’ affordable housing agenda— production of new affordable housing, preservation of existing affordable housing, protection of renter rights, and increases in affordable home ownership opportunities—with an historic $40 million, more than three times the city’s previous record. State and federal funds bring that total to $50 million. This investment includes the Affordable Housing Trust Fund, which was increased by $14 million in 2019 to $21.6 million. The fund provides gap financing to preserve and produce affordable rental housing for households earning less than 50 percent of AMI, with a priority for units affordable to households earning less than 30 percent of AMI.
The city also allocated $500,000 for the new Missing Middle Housing Pilot Program, which aims to develop affordable residential housing projects with between three and 20 rental or ownership units on vacant land along transit corridors. Minimum criteria for rental projects include 20 percent affordable units for households at or below 50 percent of AMI, maintained for a minimum of 30 years. Program financing for ownership projects requires at least 10 percent of units to be affordable to households at or below 80 percent of AMI. The city will finance up to $95,000 for each eligible affordable unit.
In addition to the Missing Middle pilot program, multiple interrelated efforts are underway to add more diverse and affordable housing options and a more equitable distribution of housing.
Accessory Dwelling Units (ADUs): One of the city’s goals in passing an ADU ordinance in 2014 was to provide age-in-place housing options. Planners developed design and regulatory standards for units to retain the character and context of the city’s low-density residential areas. The city eased development costs by waiving the two largest fees tied to adding a dwelling unit, a sewer availability charge and a parkland dedication fee, which together save homeowners about $4,000. The city had issued 137 permits for ADUs as of January 2019.
Inclusionary Housing: City council approved an interim inclusionary housing ordinance in December 2018 and voted to increase affordability requirements and impact fees for new upzoned development. A permanent inclusionary housing policy and ordinance proposal has been under consideration for 2020, pending city council approval. The proposed policy being considered would give developers of new rental housing with more than 20 units several options for providing affordable units on-site. These options range from requiring 4 percent of units to be affordable to those earning 30 percent of AMI to requiring 20 percent of units to be affordable at 50 percent AMI. The latter option includes tax increment financing assistance from the city. Developers could also build affordable units elsewhere or pay in-lieu. Ownership projects must have at least 10 percent of units priced as affordable for households earning 80 percent of AMI.
Affordable Housing Preservation: The city’s 2019 budget includes $3.4 million to preserve and stabilize naturally occurring affordable housing (NOAH). Launched in 2018, the 4d Program—named for the state tax classification for such properties—helps apartment building owners obtain property tax reductions of up to 40 percent if they commit to keeping 20 percent or more of their units affordable. In 2018, over 750 units with affordable rents were preserved with a 10-year affordability commitment.
Minneapolis Homes: Funded at $5 million in 2019, this program offers loans for down payment assistance and has enabled the purchase of hundreds of city-owned vacant lots and houses, including many in North Minneapolis. Under the program, the city assisted with 74 homes in 2018, and 57 were purchased by a person of color or indigenous person.
Measuring Progress
According to fair housing laws, the city can’t restrict home sales to any particular groups or individuals, but the city is searching for the regulatory lever it can use to help people move into formerly single-family neighborhoods, says Worthington. “You can do things as a private citizen, like build an ADU and rent it to a person eligible for subsidized housing,” she says. “There’s a strong thread of that kind of community activism that runs through the city.”
The comprehensive plan is “part of an ecosystem of changes in policy at the city level on regulating land use, how we incentivize housing, how we invest in areas of the city that have been disinvested in over time.” She says Minneapolis is not pinning hopes just on duplexes and triplexes, which are likely to be built gradually over time and won’t provide the volume of housing needed. Upzoning along transit corridors with newly allowed four- to 10-story mixed-use buildings, another key component of the plan, is likely to spur more homes. She says the city is working with partners to identify a set of metrics to measure progress toward affordable housing, land use, and equity goals.
Still, uncertainty lingers, among opponents of the plan and supporters alike. One lakeside single-family neighborhood near a future light-rail station is applying for a never-used local conservation district designation in an effort to forestall development there. And advocates including City Council Vice President Jenkins say effective implementation will be key.
“I have some concerns around who will be able to take advantage of these opportunities,” says Jenkins, who is participating in a 10-city Policy Link initiative to develop strategies related to displacement. She says Minneapolis has helped low-income residents buy single-family homes and has built large affordable housing complexes, but she’d like to see the city expand the homeownership program and technical assistance program “to build a pipeline for home ownership, to allow black residents to become small developers, live in owner-occupied duplexes and triplexes, stabilize their communities, and build wealth for their families.
“The new Missing Middle pilot program has a lot of potential,” says Jenkins. “That missing middle is where we can have the most success for low-income communities of color, particularly for black people.” She says the city owns hundreds of vacant lots, and “we have to be smart, creative, and intentional about these opportunities. The majority who have benefitted so far have not been people of color.” She says the city needs to “lean into” more targeted outreach and support for community development groups and mortgage education and training, and ensure that the ongoing discussion around these issues includes all communities.
Testing Incremental Change
As eliminating single-family zoning becomes more common, or at least more commonly considered, are we witnessing the end of an era? Only time will tell, says zoning expert Fischel. “Minneapolis is a very progressive city,” he says, and its zoning changes could be a special case that might not see widespread adoption across the nation. A city with a majority of renter households might have an easier time building public support for eliminating single-family zoning than a majority homeowner city. Introducing Minneapolis-inspired policy changes to cities where homeowners are a distinct majority could be one test of wider applicability. Another test could be whether such a change would be overturned by a less-progressive city council in the future.
Fischel’s recommendations for urban planners and public officials in other cities parallel what Minneapolis has just done: educate the public about exclusionary zoning and emphasize the benefits of compact urban development and density. Avoid the “NIMBYs are evil and YIMBYs are good” argument, he suggests, and explain that higher density is good for social and economic diversity and for climate resilience. “Invert the ‘make no little plans’ concept to ‘make lots of little plans,’” says Fischel. “Undo single-family zoning in one city or one neighborhood at a time and see if it works. Try incrementalism.”
References
APM (APM Research Lab). 2019. “Divided Decade: How the Housing Market Has Changed Over the Past Decade.” Data visualization. February 12. https://www.apmresearchlab.org/housingcost.
Rothstein, Richard. 2017. The Color of Law: A Forgotten History of How Our Government Segregated America. New York, NY: Liveright Publishing Corp/W. W. Norton.
Kathleen McCormick, principal of Fountainhead Communications in Boulder, Colorado, writes frequently about healthy, sustainable, and resilient communities.
Photographs (in order of appearance):
In conjunction with the comprehensive planning process that resulted in a citywide ban on single-family zoning in Minneapolis, architecture students at the local Dunwoody College of Technology collaborated with city officials to study historical housing patterns and future needs. They also designed concepts for multifamily structures that could blend in with current neighborhoods, including “Cyclist-Centered Triplex” by Laura Stene. Credit: Designing for Minneapolis 2040, courtesy of Dunwoody College of Technology.
An interdisciplinary team based at the University of Minnesota is studying the connections between contemporary inequities and historic injustices. The researchers have found archival materials including this 1919 advertisement from the Minneapolis Tribune, which restricts real estate purchases based on ethnicity. Credit: Mapping Prejudice.
Capital Ideas
Washington, DC's Ambitious Plan to Distribute Affordable Housing More Equitably
By Liz Farmer, January 15, 2020
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When Washington, DC, officials unveiled a major report on housing equity last fall, they did so at an unassuming, one-story bike shop located in the city’s posh Tenleytown neighborhood. This quiet district of single-family homes lies seven miles northwest of the Capitol, and the location was meant to send a message: the shop was all that was left of a plan proposed several years ago that would have added much-needed housing to the neighborhood. After fierce opposition from nearby residents, the developer scratched the mixed-use development.
Tenleytown and the other wealthy neighborhoods that make up Rock Creek West are home to the fewest affordable homes and apartments in the city—by far. Of the nearly 52,000 affordable housing units citywide, just 470 are in Rock Creek West, the city’s report found. Conversely, roughly half of the affordable housing stock (more than 25,000 units) is located in the city’s poorest neighborhoods, across the Anacostia River.
The point of the report, says Office of Planning Director Andrew Trueblood, is to lay out the current landscape for housing so that future construction doesn’t simply continue to concentrate affordable housing in lower-income neighborhoods.
“There is a reason we are where we are” when it comes to the location of affordable housing, he says. “Some of that has been through reactions to opposition, some of it has been through policy. The reasons why we’re here today haven’t gone away. But what we’re trying to do is change the discussion.”
The report sets a goal of adding 12,000 affordable homes and apartments citywide by 2025, with the largest share—nearly 2,000 units—going in Rock Creek West. Capitol Hill, another high-cost neighborhood, is targeted for 1,400 affordable units. The city plans to meet its goal by enabling new construction, preserving affordable housing set to soon expire, and converting market-rate homes and apartments into permanently affordable housing.
Mayor Muriel Bowser has set an overall housing goal of 36,000 new units within the city by 2025. Those numbers are based on an analysis by the Metropolitan Washington Council of Governments, which found the metro area (which includes suburban areas of Maryland and Virginia) needs 320,000 housing units by 2030 to keep up with population demands. As if that weren’t ambitious enough, the council called for 75 percent of the units to be affordable to middle- and low-income families.
Like many hot-market cities, Washington is struggling with a housing affordability crisis. The region is expected to gain about 413,000 new jobs between 2020 and 2030—but only 245,000 new housing units over the same period. A recent study found that 220,000 families across the region could be forced to leave their homes in the coming years as housing costs rise. At play are zoning density restrictions, gentrification, and transit connectivity needs that combine to either concentrate poverty in smaller areas or simply price low- and middle-income families out altogether.
As cities like Washington, DC, seek to create affordable housing, they are increasingly mindful that where they build matters as much as the number of new homes. For decades, government affordable housing programs focused on creating as many affordable homes as possible. That often meant selecting lower-income neighborhoods, which tended to have fewer regulatory barriers to development and less organized opposition from residents.
“One of the biggest mistakes the field made was when they went to build affordable housing, they did it in cheap areas,” says Lincoln Institute of Land Policy Senior Policy Analyst Jessie Grogan. “It ended up further concentrating poverty.”
In an effort to reverse that process, the Obama administration created a new rule in 2015 requiring cities that receive federal housing funds to take active steps to reverse longstanding patterns of segregation. The rule, called Affirmatively Furthering Fair Housing (AFFH), built on 1960s civil rights legislation that bars overt discrimination in the housing industry (which is still a problem today). The new rule is now in limbo, and a dozen states and cities—including Washington, DC—are fighting to reinstate it. But DC’s plan to combat segregation shows that governments can still embrace the rule’s principles even in the absence of federal backing.
The District’s method of setting specific housing goals by neighborhood is one such approach. Philadelphia is studying an eviction crisis that has plagued lower-income neighborhoods; during 2017, one in 14 renters faced eviction. Kansas City wants to distribute Section 8 vouchers more evenly, with the goal of breaking up concentrations of poverty in the region.
But studies and reports are ultimately the first step in what will be a difficult process. It’s one thing to say that housing in a city is unfair, as 60 percent of residents in Washington, DC’s most affluent ward did in a citywide survey last year. But it’s another thing to support a project in the neighborhood. In 2016, for example, Los Angeles voters overwhelmingly approved a tax increase to provide $1.2 billion for 10,000 units of new housing for the homeless. But development stalled for years because of a requirement that developers receive a letter of support from the local city council member. Now the project is running behind and is more expensive than expected.
DC’s goals are soft targets. Trueblood says they are designed to get the city on a “trajectory” of more equitable affordable housing distribution by 2050, as outlined in the Council of Governments report.
“It’s a lot to overcome, but the city seems to have come to a point of ‘enough is enough,’” says Alex Baca, housing program organizer for the economic development nonprofit Greater Greater Washington. But adding affordability to a part of the city where home prices regularly top $1 million is an expensive proposition. It all comes down to whether the administration is able to find political backing for the cost.
“I’m heartened to see the Bowser administration taking this seriously,” Baca adds. “But actually doing it is going to mean reducing funding for other things, and that’s where the mayor is going to have to use her power.”
Looking ahead, Trueblood says the funding and cost estimates for the program are still being worked out, but the city expects to include it in next year’s budget. The administration also plans to use planning and zoning incentives to encourage the development of affordably priced units in the city’s most expensive neighborhoods. One of those tools, an expansion of the city’s inclusionary zoning policy, will increase the density allowed in a development if the developer builds more affordable units.
Currently, the district requires 8 to 10 percent of the residential floor area be set aside for affordable rental or for-sale units, but the new policy is expected to include additional incentives for developers willing to go up to 20 percent, says Trueblood.
To him, the case for housing equity can be summed up in one stark statistic via the city’s most recent health equity report: the difference in life expectancy between the city’s richest and poorest residents is 15 years.
“It might mean hard conversations with residents who want their neighborhoods protected,” he says. “But we’ve seen how our housing policy and resident outcomes have worked so far—and we need to think in a structurally different way.”
Liz Farmer is a fiscal policy expert and journalist whose areas of expertise include budgets, fiscal distress, and tax policy. She is currently a research fellow at the Rockefeller Institute’s Future of Labor Research Center.
Photograph: Rendering of a proposed mixed-use development in Rock Creek West, a wealthy area of Washington, DC. Credit: Valor Development.