By Jason Aarsvold and Keith Dahl
Many communities across Minnesota are seeking ways to provide housing options for residents — options the private market either can’t or isn’t always willing to deliver. Affordable housing is the most common example, but there are certainly others as well.
These other options include housing to attract new workforce members, senior housing, or even market-rate housing. In many of these examples, the private market elects not to build for one simple reason — developers can’t make a reasonable return on their investment.
But lack of adequate financial returns aside, tremendous need or strong demand for housing often exists in our communities. Developers know this, which is why they sometimes approach local government officials with requests for financial assistance to help make housing projects financially feasible.
Faced with any request for financial assistance, local leaders must understand the most prudent way to respond in a fiscally responsible manner while still driving needed housing initiatives forward. Following three basic steps can best help ensure your housing projects generate optimal benefits for your community. They include:
- Developing a strategic plan and policy for housing initiatives, preferably before receiving a request for assistance.
- Analyzing developers’ requests for assistance with a keen eye toward protecting local resources.
- Identifying available and appropriate funding sources to meet specific project needs.
Investing some time and effort up front in a strategic planning exercise will generally be the most productive way to focus your efforts and advance your local housing goals. This work does not need to be complex or involve a lengthy process, but should answer some basic questions, such as:
- What are the specific housing needs in your community?
- Where should you concentrate your limited resources?
- What local financing tools are you willing to consider?
Establishing policies and procedures around requests for financial assistance flows naturally from the strategic planning process. Sound policies guide staff and inform potential developers about the ways your community wants to participate in housing development. They clearly define requirements for potential partners.
Analyzing requests for assistance
Your strategic planning and policy development efforts can help establish an application process that defines and standardizes the steps your community will follow for evaluating each request. When your community receives an application for public assistance, it should be thoroughly evaluated and analyzed.
Developers asking for local assistance should be “open book” with their requests, meaning they deliver detailed financial projections for the project as part of their application. Using these projections, city staff, your independent municipal advisors, and city officials can accurately and appropriately size the amount of any local assistance. They can ensure it’s enough to make the project feasible without unduly enriching the developer.
Your policies and application process should also include a “developer-paid fee” to cover any professional costs you may incur during the review, analysis, and negotiation phases of the housing project.
Identifying funding sources
After the city and a developer agree on an appropriate amount of local assistance, your city leaders must decide what types of financial resources they want to use for the housing initiative. Developers generally maximize available private and other public resources, but verifying this during the evaluation process is a good practice.
Once other options are exhausted, the most common local financing tools include tax increment financing, tax abatement, local fee waivers, local housing trust funds, public land contributions, and incentives like density bonuses and reduced parking requirements.
There are pros and cons associated with the use of any public financing tool and there are very specific rules around how each of these tools may be applied. For these reasons, selecting specific funding sources often comes down to local choice. Public leaders should work with their staff and advisory team to determine which of these financial tools may be the best options for their housing initiative.
While a shortage of affordable or other types of housing may exist in your community, you have the tools to help achieve your city’s vision. Follow the simple steps outlined above to help ensure you can deliver vibrant, sustainable, and equitable housing for years to come — while exhibiting strong stewardship of public resources in the process.