It’s 2016 and everywhere you go there are hot takes to be had. Twitter. Comment sections. Planning Commission meetings. You get the picture. Sometimes, serious topics really do deserve these flaming hot takes to call attention to the magnitude of problems. I’m inclined to agree that the recent renovation of over 700 apartments in Richfield, along with a swanky name change from Crossroads to Concierge, falls into this category. If you’re not aware, here are some legitimate news stories to get you up to speed. One could make the case that this high-profile renovation was the impetus for Hennepin County’s new $3 million fund to keep more housing complexes from seeing the same fate. I’d like this post to be a bit more mellow – a lukewarm-take on the situation – even if it is a very serious one.
At its core is your typical tale of gentrification (or, at least what I understand to be the most commonly-held definition): an existing housing complex is bought, tenants relocated or evicted to allow for renovation to upscale amenities, rents are raised, and temporarily displaced tenants become permanently displaced ones.
In the case of the Concierge, many (though not all) former tenants were low-income, with a portion of their rent coming from Social Security and/or Section 8 vouchers. This is especially sad since the complex was filled with not only single adults, but families. As the Star Tribune reported, despite there being only two 2-bedroom units out of 700, Crossroads housed over 2,000 people. This means there were many families of two to four people averaging out the singles living alone. Being evicted or simply displaced by price, even short term, can have real consequences for people, especially families.
Who’s to Blame?
This is where things get tricky. The easy hot take is to blame greedy developers or landlords. And I’m not going to lie, that’s definitely a part of it. The new owner, Jim Soderberg, made many public claims about his investments. Here’s what we know:
- The entire complex sold for a cool $41 million, or about $58,500 per unit.
- The new owner estimated permit-required updates at about $1.8 million, or $2,500 per unit.
This was obtained by searching the City of Richfield’s permit database for the six addresses of the complex. The bulk of the upgrades were in the common space – pool updates, remodeling spaces, etc. But there is definitely a non-zero amount of this cost that was health and safety type stuff. Things like updated electrical, fire code compliance, and new mechanicals. You can read through the permit information post-sale here. But, any way you slice it, $2,500 a unit isn’t much.
- The property may have been a bit run-down, but any claims that maintenance and upkeep weren’t being done aren’t 100% true. You can surf the pulled permits for the apartment buildings prior to late-2015 and see the type of work that had been done.
- There was additional investment beyond the things listed in the permits. New flooring, counter-tops, and new appliances are some examples of things that don’t need a permit and can be installed, but cost money. We know they exist, and they’re a big part of the reason people are willing to spend a bit more to live there (images taken from Concierge listing on ApartmentGuide.com):
If I’m being generous, I’d estimate those updates at maybe $10,000 per unit. So, we’re talking a cost to the new owner of maybe $70,000 per unit. This is way below construction costs for new development – even the parking- and amenity-lite Motiv came in at just over $100,000 per unit per Minneapolis permit data (see page 20), which likely doesn’t include the purchase price for the land or demolition costs of the two homes on that site. Not a stretch to say traditional 1 bedroom units can’t be built for under $100k a unit in 2016 America. Maybe I’m wrong.
- We know from multiple sources that a 1 bedroom unit at Crossroads rented for roughly $750/month
- Soderberg claimed post-renovation rents would be “around $900.”
- Listings online show 1-bedroom units are actually more in the $1,000-1,200/month range
So, the rents are higher than they were, higher than projected by Soderberg, but certainly much lower than the rents people complain about at other #luxury developments going up, where a 1-bedroom can easily run $2,000 a month for similar square footage.
It’s easy to see the math here: purchase old apartments, spend another 20% to give it some new shine, and charge rents 30-60% higher than they used to be to cover your financing and renovation costs plus any added operating costs compared to the old owners due to new amenities. Sounds greedy. But, there are other factors at play that make this transaction possible. Among them…
Even for a person who zooms around Google Satellite View quite often, I was surprised how these apartments under-utilize the land they sit on.
This complex is in Richfield’s highest residential density zone, MR-3. The parcel is about 936,000 square feet in size, and there are already 700 units and about 860 parking spaces on-site. Here are some requirement highlights:
- Maximum lot coverage for principal structures: 30%
- Minimum outdoor open space per unit: 300 square feet for each 1-2 BR (minimum 210,000 square feet)
- Minimum parking for structures with >10 units (at city council’s discretion): 1.25 per unit (875 required).
- Setbacks of 30-40 feet
Let’s say this investor wanted to add a couple hundred units to the site. Maybe these new units could be the luxury ones while keeping a steady cash-flow from the existing ones. Problem is, there’s no practical way to do it. Any new units would trigger site plan reviews that would scrutinize lot coverage, outdoor open space, parking ratios, all of which are basically maxed out right now. Even if a plan was workable with the city, it would likely draw the ire of neighbors.
I won’t say that Soderberg, or any other investor, would absolutely have squeezed more units onto that site. Or that they’d have even kept some existing units at a cheaper rent as a result. But we’re not even giving them that option! Given market demands for housing, moving units up the scale is the easiest option because it faces no regulatory hurdles. That is, as long as you don’t have competition from….
Richfield is pretty small. Basically every corner of it is in the same school district, has equal access to three regional highways, has pretty decent local and express bus service, and one could even access jobs and shopping by foot or bike relatively easily. This particular site is right near the planned Orange Line as well as thousands of jobs at the greater Southdale area, the Best Buy headquarters, and offices across I-494.
If you were to pick an area that could have grown more intense over the last 40-50 years, the area bound by Xerxes Ave, I-35W, I-494, and MN-62 would definitely be it. Problem is, zoning doesn’t allow for it:
That brown blob in the bottom left is the Concierge site. I’m not picking on Richfield – it’s got a lot going for it in terms of dense nodes full of apartments and condos. But, it’s still easily 90% zoned for single family homes (shown in white on the map). We can argue whether or not the areas zoned for density matched the market for it over the last few decades. You can probably guess which side of that I’d be on.
I can’t tell you for sure exactly where, or when, or the size, but I am fairly confident that if more of the land west of 35W were zoned multi-family, we’d have seen random apartment buildings built over the past few decades. Apartments that would have become less desirable and less expensive over time (just like Crossroads did!), maybe by a couple percentage points a year. I won’t say with certainty how many total units would have been built, or how many vacant ones would be available right now, but there would be more apartments in the $900-1,200 range soaking up demand that drove the renovations, as well as maybe more units in the $750 range in the same neighborhood as anyone displaced. With more competition, maybe the old Crossroads owner could have foregone the pool renovation, golf simulator, and granite countertops and spent a couple hundred grand updating the units at a modest bump in rent to tenants.
This is not an argument that new apartment construction today would have prevented every single displacement that followed the Crossroads renovations. As I outlined earlier, at best, new apartments in place of Richfield single family homes (which go for low-$200,000s near this site) would cost over $120,000 per unit, and rent for $1,500 per 1-bedroom. To be sure, some of the new Concierge tenants may be people with a housing budget well in excess of their $1,200 rent – people who may have been willing to spend $1,500 at an actually brand-new apartment building just up the street if it were built tomorrow.
This is an argument that we mucked up the housing market to protect single family home owners for so long, and it’s partially to blame for these problems that keep cropping up. We could be allowing more today, and should have been allowing it for decades. We wouldn’t have solved the problem outright, but likely greatly mitigated it. But we’d still be faced with….
Landlords Not Accepting Section 8 Vouchers
There are obviously many issues in housing discrimination. While much of it is illegal on paper, it still happens. A lot. But as that Star Tribune article discusses, it’s not a requirement that landlords accept Section 8 voucher tenants:
“I’ve been in the business a long time,” Soderberg said. “People will find new places to live easier than everyone realizes.” He said when he started in the apartment business more than 30 years ago, he specialized in taking Section 8 tenants.
“At first, that’s all I took,” he said. “For various reasons I don’t really want to get into, I’m not really thrilled with the program. It’s a voluntary program and we’ve decided not to volunteer.” In fact, a 2010 decision by the Minnesota Court of Appeals explicitly upheld landlords’ rights to decline participation in Section 8 housing.
Not every Crossroads tenant could have afforded to stay post-renovation if Soderberg had allowed Section 8 vouchers. But I’m willing to bet some of them would have found a way, even if it were just long enough to find a new place nearby more in their price range.
I’ve never managed a large rental property, and I’m not going to discount Soderberg’s (or any other landlord’s) perception of Section 8 vouchers out of hand. But allowing this type of discrimination has real impacts. It’s the type of thing where the costs to low income, minorities, and historically disadvantaged populations justify regulating landlords a bit more.
Suggestions Moving Forward
It’s a little sad that we’re demonizing singles or couples making $40-50,000 a year (people spending ~30% of their gross income on rent at Concierge) against people with slightly lower incomes or retirees. These are all solidly middle-or-lower class people here – not landed gentry building million dollar condos or anything. We need a range of policies and funding streams (at all levels of government) to help mitigate these situations so that everyone can afford a place to live. Among them:
- Upzone single family home zones in core cities and first-ring suburbs. These places have transit, decent walkability, and are in high-demand. Nobody’s talking about high-rises here, just 4ish-story apartments.
- Remove unnecessary requirements in those zoning codes. Parking minimums need not be so high, setbacks can be reduced, etc. Make it easier to build more per parcel. Especially apartments with acres of asphalt parking lots.
- Continue expanding the funds that help non-profits and government agencies purchase low-rent properties at a fraction of the price of building new.
- Expand funding sources for landlords to maintain their units to building code, with caps on subsequent rent increases. This should make keeping a property more attractive than cashing out with a lump sum.
- State or federal legislation making it easier for people with vouchers to find housing. This will likely look like restrictions on landlords’ ability to turn away applicants.
- Require investors upgrading properties to provide more assistance or options to current tenants. Minimum extension of leases, on-site relocation, or a sum of money if they’re forced out. Evictions are bad.
What other suggestions do readers have to help mitigate these issues across the Twin Cities?
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