The fact that Minnesota, and especially the metropolitan region of St. Paul/Minneapolis, is experiencing a severe affordable housing crisis is not disputed. The Metropolitan Council recently released data documenting that the metro region of Minnesota is growing substantially but that the supply of new housing, affordable across a broad range of housing types, is lagging. Within this dire circumstance, the supply of affordable rental housing is especially acute and apt to get worse. Published reports indicate that vacancy rates for rental housing of all types in the metro region is at approximately two percent. The repercussions of this fact are two-fold: rental rates across the board are rising, outstripping the growth of wages; and the supply of rental housing defined as “affordable” based on federal housing standards continues to shrink.
Ironically, rather than pursue policies to increase the supply of all types of housing, especially for those most in need of entry-level or “work force” housing, local governments are increasingly adopting policies that likely will impede the supply of such housing. We’ve recently documented the trend of cities in the metro region to adopt policies which compel builders of new housing units (multi-family and, in some cases, single family) to set aside some percentage of the constructed units (typically 10 percent) for sale or rental to individuals whose income falls below established affordability thresholds. This policy will make it harder to justify the investment in new rental (and some single-family) housing. Let’s assume a builder proposes to build 100 market rate apartment units. Under these policies (as an example), 10 of the units must be reserved and priced to be affordable to eligible renters. Let’s assume that the affordable rental rate is set at 70 percent of the presumed market rate for such apartment units. The rent differential tied to the reserved affordable units must be reallocated to the remaining 90 market units, pricing them at a higher rental rate than previously planned. There are several problems that arise: first, will the more expensive market rental units be competitive in the targeted market area; how will a lender underwrite that added risk? Closely related what if, for some reason, the new “affordable” units are not affordable enough to meet the need? There is a risk that some of these rent-restricted units will not be fully utilized even if the broader market for apartments remains strong. It is too early to know for sure how developers and builders will react to these policies especially if surrounding jurisdictions do not impose similar “affordability” policies.
The most recent contribution to this discussion is Minneapolis’ proposal to restrict the screening process used by landlords in determining suitable tenants for their buildings. Under its most recent proposal landlords will be burdened with new restrictions on considering the criminal background, financial capacity or rental history of a prospective tenant. Let’s agree that there is a valid public policy behind an effort to promote the availability of housing of all types. But the target of this latest policy proposal is the owner of a private apartment building of no particular size, whose private capital (likely with financing) is at risk; for some it’s their sole source of income or future retirement. Minnesota is already a very expensive state in which to do business; policies like that being proposed in Minneapolis will make it more so.
The unvarnished objective of this new policy is to compel landlords to assume more financial risk when renting their units to a new tenant with an uncertain background. Large ownership groups may be able to establish the systems to manage the highly intrusive requirements of the city’s tenant screening restrictions (and pass along that added cost to renters), but smaller landlords will be stepping into bureaucratic quicksand, leaving them exposed to expensive claims that the new screening policies are being improperly applied. To add insult to injury, a related ordinance proposal would compel landlords who require payment of the last month’s rent as a form of security deposit at the outset of the lease term, to accept payment of that deposit for up to three months after the commencement of the lease. Many landlords use the “last month’s rent deposit” as a simple test of a tenant’s financial capacity to make regular rent payments. Unfortunately, under this policy change, the tenant will legally be in possession of the apartment by the time the landlord learns that the tenant is not able to pay the required security deposit. This puts the landlord in the position of accepting the financial risk based on demonstrated non-performance or initiate an action to evict the tenant. Neither prospect is appealing.
Those with capital invested in existing multi-family properties in Minneapolis may be stuck with complying with these new tenant screening policies absent a successful challenge to their adoption. But others considering where to invest their capital will have plenty of other, less restrictive jurisdictions to choose from rather than investing in Minneapolis.