Apartment developers surprised by proposed downtown affordable housing mandate

Say projects will require subsidies

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Last updated on May 15th, 2019 at 04:54 pm

Developers say a proposal to require new apartment developments in and around downtown Milwaukee to include affordable housing could result in fewer projects and will require subsides to make future projects viable.

The proposed ordinance would require apartment developments downtown or near downtown that are creating at least 20 new apartment units to rent at least 10 percent of those units at below-market rents.

If the project is receiving a subsidy from the city the developers would be required to lease 20 percent of the units at below market rents.

Tim Gokhman, director of Milwaukee-based New Land Enterprises, which has done several apartment developments in the city, said the proposal could have the unintended consequence of driving up lease rates for market-rate apartments downtown.

“We understand affordable housing, and its critical importance to Milwaukee’s success,” he said. “This legislation, however, would actually lead to higher rents by reducing the number of new developments, and increasing regulatory compliance costs.”

Several other developers contacted by BizTimes said they were surprised to learn about the proposal on Tuesday and declined to speak about it on the record.

“I believe affordable housing is needed, but to mandate it in every (apartment) project (downtown), that is going to hurt development,” one developer said. “I don’t know how it doesn’t. That’s a huge change for any project’s feasibility.”

Another developer said his firm was “totally blind-sided” by the proposal and called it a “massive unfunded mandate.”

“You can’t tell somebody to build something at one price point and then rent it at a lower price point just because you want to,” he said.

Under the proposed ordinance, the affordable housing units must be rented to residents making less than 60 percent of the area’s median income of $54,336, which is $32,601.

Developers who don’t want to comply could instead contribute $125,000 per required affordable unit to the city’s Housing Trust Fund, according to the proposal, which is sponsored by Alderman Robert Bauman and has support from seven other aldermen.

The proposal covers new developments and substantial rehabilitation in downtown the Lower East Side, the Third Ward and Walker’s Point neighborhoods.

Yet another developer, who did not want to be named, said doing business in the city of Milwaukee, is already more difficult than many other municipalities, because of the city’s higher taxes, layers of fees and additional costs to neighborhood associations.

In recent years most of the new apartment developments in and near downtown Milwaukee have been built without subsidies from the city. But some developers said the affordable housing mandate would make it necessary for them to seek a subsidy for new apartment buildings downtown, which would trigger the requirement in the ordinance for 20 percent of the units to be leased a below-market rates.

“Market-rate (apartment development) is hard enough,” one developer said. “If you are going to do affordable housing without any funding attached to it, I don’t know if that is even possible.”

Downtown Milwaukee has attracted so many new apartment developments in recent years that some developers say the market is now saturated. Many apartments are offering two months of free rent for a 14-month lease, one developer said. That makes the timing of the affordable housing ordinance surprising to some developers.

“It’s the most bewildering legislation given where we are in the market cycle,” one said.

Meanwhile, apartment developers are also closely watching the Republican’s tax reform bill. The House bill eliminates the tax-exempt private activity bonds (PABs), which are issued by state or local governments and loaned to private companies to finance qualified projects. These bonds fund about half of all affordable housing development. The Senate bill retains the PABs.

“We need more affordable housing, but we need it across the state,” one developer said.

Not everyone is opposed to the city’s proposed affordable housing ordinance.

Chris Corley, who specializes in selling luxury condominiums, said the proposal could be a good option to increase diversity in downtown Milwaukee, while giving people in the service industry more high quality housing options.

The ordinance applies to rental housing development, not development of owner-occupied condos.

Before moving to Milwaukee, Corley lived in Section 8 housing in downtown Minneapolis.

“Because Minneapolis had a program similar to what is being proposed, I was able to live in a really nice building while working retail and making very little money,” Corley said. “This might make development more expensive, and it could also cause higher rents for other people and cause the apartment boom to slow down, but that could be a good thing.”

Inclusionary housing programs exist in 27 states and the District of Columbia, according to InclusionaryHousing.Org, a group created by the Portland, Oregon-based Grounded Solutions Network and the National Housing Conference.  Of the 507 programs, 36 percent are located in New Jersey and 29 percent are located in California.

Since 2015, when Chicago’s affordable housing requirements were changed, the city has seen 536 units incorporated into new buildings and developers have paid $18.5 million in fees to avoid putting the units into their buildings, according to the Chicago Tribune.

In August, Chicago Mayor Rahm Emanuel and two aldermen sponsored a three-year pilot program to further increase affordable housing in three Chicago neighborhoods experiencing gentrification.

Many developers fear affordable housing requirements will be set too high, causing them to either not build or move to another community, according to InclusionaryHousing.org.

If that happens, land owners would have two choices: lower prices or not sell, leading to a decrease in housing production.

“While there is not much evidence of this outcome occurring at any significant level in real programs, this is an appropriate concern that plays a central role in the debate whenever any community considers the right level of affordable housing requirements,” the group found.

Milwaukee’s Zoning, Neighborhoods and Development Committee will review the proposal on Nov. 21.

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Andrew is the editor of BizTimes Milwaukee. He joined BizTimes in 2003, serving as managing editor and real estate reporter for 11 years. A University of Wisconsin-Madison graduate, he is a lifelong resident of the state. He lives in Muskego with his wife, Seng, their son, Zach, and their dog, Hokey. He is an avid sports fan and is a member of the Muskego Athletic Association board of directors.

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