Editor’s note: This is part 2 of a two-part series by Zak Yudhishthu on inclusionary zoning.
The first entry of this two-part series on inclusionary zoning (IZ) — a housing policy requiring that new housing developments include a certain quantity of affordable housing — reviewed the unavoidable costs of such regulation. Renting brand-new housing units at affordable prices has a cost, and someone must pay it. Depending on policy design, that cost falls on developers (who can pass their costs onto renters), public subsidies, or the value of providing relief from restrictive land use policies.
The second part of this series will apply this analytical framework to the IZ policy passed by Minneapolis in 2019. Minneapolis has received extensive praise – it practically gets a monthly national media feature – for successfully reforming its zoning rules to allow for more housing and keep rental prices affordable.
However, for all the adulation that journalists and policy analysts give to Minneapolis’ efforts at reducing zoning constraints, the city’s IZ policy is rarely discussed. This absence from the discourse is somewhat surprising, considering that inclusionary zoning could easily act against the goal of building more housing.
How have IZ policies influenced housing affordability in Minneapolis? How have they interacted with other zoning reform initiatives?
In Minneapolis, IZ has produced a decent amount of moderately affordable units, without obviously distorting the local housing market. While these units likely don’t cost developers a ton of money, they also provide only a moderate public benefit. And, of course, great zoning policy has made it all work better.
How IZ Works in Minneapolis
In Minneapolis, IZ requires affordable units in buildings with at least 20 residences. Developers can fulfill this requirement with different approaches, varying by the proportion of affordable units and the degree of affordability for those units. For example, they can designate 8% of units to be affordable at 60% of the area median income (AMI), or 4% at 30% AMI. The city does not provide any subsidy for developers that comply with these “standard” IZ affordability levels.
Minneapolis does offer subsidies for developers that provide a higher level of affordability: a minimum of 20% of units at 50% AMI (as we’ll see later, almost no one has pursued this option). Rather than renting affordable units in new buildings, developers can also pay a fee, rent the affordable units elsewhere, or donate land to the city.
Understanding IZ requires a detour into interpreting AMI levels for affordable housing in Minnesota. Set by the U.S. Department of Housing and Urban Development (HUD), these designations precisely define the price of “affordable” housing based on median household incomes in a given urban area.
For the Twin Cities, AMI for a family of four is $124,200; 60% of AMI is $74,520; 30% AMI is $37,250 and so forth. See the below table from the Metropolitan Council to see the rental prices that correspond to these income levels.
Relative to other cities with IZ policy, Minneapolis mandates a small amount of affordable housing — but the city mostly does not provide any offsetting financial incentives.
For example, Minneapolis’ IZ is relatively mild among policies from its peers in the Twin Cities metro, as a 2019 comparison of these policies created by the Federal Reserve Bank of Minneapolis shows. St. Louis Park, Edina and Richfield all have IZ policies more than twice as restrictive as Minneapolis, requiring moderate affordability for 20% of housing units in new buildings, instead of Minneapolis’ 8%.
Compared to other major U.S. cities, Minneapolis’ IZ policy falls within the standard range of IZ policies, but on the more moderate side: Portland, Oregon’s IZ requirements are similar, while Boston, Chicago and Los Angeles require higher proportions of units at 60%. More broadly, 38% of cities with IZ in the U.S. require affordability for at least 20% of units in new buildings, a regulation more than twice as demanding as Minneapolis. These comparisons come with the caveat that direct comparisons of IZ policies across different cities are tricky and imprecise, as local policy context and market conditions create immense variation.
First-Order Results: Affordable Units
Minneapolis city staff deserve serious credit for creating an outstanding inclusionary zoning dashboard to track the results of Minneapolis’ IZ. Many cities do not do nearly as well to collect and display informative data on policy initiatives!
Beginning with the headline numbers, under IZ:
- 616 affordable housing units have been created in Minneapolis.
- 478 of these units are moderately affordable, at 60% AMI.
- Only four units are affordable at 30% AMI, or for households at extremely low incomes.
- Half of all affordable IZ units have been student bedrooms, mostly near the University of Minnesota.
This represents a significant amount of affordable housing, but it’s not transformative. From 2021 to 2023, IZ policy has contributed over a third of the 680 affordable rental units permitted in Minneapolis (this figure, given by the City of Minneapolis, excludes student housing).
However, because their rents are almost all set at 60% AMI, the benefits of these new affordable units are somewhat limited. While 60% AMI housing is priced lower than typical units in a brand new building, it is also a level of affordability already broadly available across the Minneapolis housing market. According to data from the local nonprofit HousingLink, 55% of all rental units in Minneapolis are affordable to renters at 60% AMI. Even plenty of recently built housing rents at this cost; research from Salim Furth finds that 37% of housing units built since 2010 in the Twin Cities area are affordable at 60% AMI.
Only for renters at lower income levels does affordable housing become severely scarce. The fact that developers have overwhelmingly complied with IZ by building 60% AMI units shows that the mix of incentives in Minneapolis’s policy is not addressing this deeper affordability need.
The data from one of Housing Link’s recent monthly reports on the Minneapolis rental market, presented in the above graph, show solid availability of housing at moderate incomes but a lack of housing for very low-income people.
That doesn’t mean that 60% AMI units are meaningless. At the individual level, tenants of 60% AMI units benefit from the availability of brand new housing rented at lower costs. Though many market-rate buildings rent for similar prices, rent prices are not locked in for market-rate buildings, while rents for IZ units are restricted.
Additionally, moderate-cost, market-rate rentals in Minneapolis are not evenly distributed across the city — some neighborhoods have less housing attainable to households at 60% AMI. IZ might have have a positive impact on integration in Minneapolis by putting income-restricted housing in higher-cost neighborhoods. As some supportive evidence for this idea, a recent study of New York City’s IZ policy found that the program typically placed affordable units in considerably higher-income and higher-cost neighborhoods than other affordable housing programs.
Overall, however, the bulk of Minneapolis’s IZ’s output is 60% AMI units, which likely provide fairly small affordability discounts for renters.
The Secondary Impacts of IZ
Because IZ requires housing units to be rented at below-market prices, the policy has a cost that someone must pay. Under Minneapolis’ IZ policy, developers are almost never using government subsidies to help cover the cost of inclusionary zoning. What might be secondary impacts of the policy?
In an implicit recognition of these costs, Minneapolis policymakers recently exempted office-to-residential conversions from IZ to encourage such redevelopments.
Yet although unfunded IZ inevitably has some costs that discourage housing development on the margin, nothing suggests these costs have had major negative impacts on Minneapolis housing development. Overall, housing development has been strong in the city, including among the larger buildings to which the IZ regulations apply. This strong development has two root causes:
First: The costs of Minneapolis’ inclusionary zoning are not that high.
A primary reason for the weak secondary impacts of IZ policy is that in Minneapolis, the policy is simply not that costly. Because 60% AMI housing is already where much of the city’s housing market sits, developers aren’t necessarily taking a huge revenue cut by including some 60% AMI units in their new developments.
This reality of the housing market reflects the central challenge of calibrating an IZ policy: for Minneapolis, IZ has small secondary impacts because it is not very costly. But because it is not very costly, it does relatively little to assist residents who are most in need (residents below 50% AMI).
IZ regulation faces a challenging tradeoff in getting more deeply affordable housing. Minneapolis’ policy could require that all new developments include housing at 30% AMI, but the costs of IZ would rise accordingly. Without increasing subsidies, a higher mandate for affordability would discourage overall housing production, potentially driving up market-wide rents by restricting supply. At the extreme, requiring very high levels of affordable housing would lead to a net decrease in affordable units created by IZ, because complying with the policy would be financially infeasible.
Second: Good zoning makes IZ work better.
Of course, IZ is just one piece of a very active policy space in Minneapolis. Although IZ risks discouraging new housing, in recent years Minneapolis has taken many other measures to make it easier to build new housing. The Minneapolis 2040 comprehensive plan, which the city passed in 2018, instituted numerous policies to make housing development easier in the city, including:
- Rezoning a majority of the city to support denser development.
- Limiting minimum parking requirements for new buildings.
- Clarifying zoning codes, thereby allowing developers to rely less on unpredictable variance approvals.
As urban planner and writer Alex Schieferdecker has said, it’s really all indicative of a broader pro-housing attitude in Minneapolis. Given these circumstances, it’s little surprise that Minneapolis’ overall housing production was not obviously hurt by IZ.
Consider the recently-built 52-unit apartment building (above) on Nicollet Avenue in Lyndale. Like most developers in Minneapolis, the developer complied with IZ by including 5 units (8% rounded up) at 60% AMI.
The building also included only 18 parking spots for 52 units, because Minneapolis has no minimum parking requirements. This flexibility translates to a large reduction in development costs.
This example shows how regulatory reform can “pay” for the costs of inclusionary zoning, instead of relying on developers to take a cut or the government to provide subsidies. There is no free lunch here; below-market rate units come at a cost, and IZ policy could still reduce housing supply relative to a world with great zoning and no IZ. However, introducing other pro-housing policies alongside IZ can ensures a city still sees housing growth.
Takeaways
A close look at Minneapolis’ IZ reinforces the main point of this two-part series: affordable housing has a cost, and under IZ that cost can be paid for by the developer, with public subsidy, or with regulatory relief. With Minneapolis’ rental market and policy structure, IZ’s cost is not big, and with complementary pro-housing policies implemented alongside IZ, the city has been able to avoid substantial downside consequences. However, the moderate affordability requirements also translate into small benefits for the residents most in need. It would be difficult to produce deeper affordability from IZ, without either providing more subsidies or harming the housing market.
Any city considering creating IZ policy, or refining an existing one, should take two lessons from this case study of Minneapolis.
First, strong zoning and land use policy, as Minneapolis has modeled, can always make an IZ program better than it would be otherwise. And second, IZ has meaningful cost tradeoffs between the depth of affordability provided and the overall feasibility of the program. While IZ can contribute to our affordable housing stock, it is unlikely to be a transformative solution to our housing problems.
Photo at top via Openverse Creative Commons