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A developer who is converting a downtown St. Paul office building into apartments made a deal with the city: If the project is subject to rent control, the city will give millions more in subsidies.

The first-of-its-kind agreement between the city and Sherman Associates was approved late last year by the City Council. The vote was unanimous, receiving support even from the council's two biggest backers of rent control, Mitra Jalali and Nelsie Yang.

Rent control advocates accused Mayor Melvin Carter of betraying the will of voters when he exempted new construction from the 3% cap on rent hikes approved as a ballot initiative in 2021. But the deal with Sherman Associates is an acknowledgement by city leaders that some developers will walk away from projects if they lose the power to raise rents.

"Other projects are not yet having to explore this type of accommodation, and I think that it is the appropriate way to adjust for whatever amount of risk people are experiencing," Jalali said at the Oct. 25 Housing and Redevelopment Authority meeting, when the agreement was approved. "There is no such thing as risk-free development."

The city is already committing $12 million in tax-increment financing to Sherman Associates' $97 million project to build 187 market rate apartments in the Landmark Towers at 345 St. Peter St. As new construction, those apartments won't be subject to rent control for 20 years.

If the new council, a progressive majority that has indicated support for rent control, were to repeal the exemption, the tax subsidy for the Landmark project goes up substantially.

"But at the end of the day, whether it's $1 million or $2 million or $3 million, it's only going to be a partial offset of the significant loss of value that we would face if rent control became more restrictive," Sherman President Chris Sherman said.

Rent control scaled back

After voters passed rent control in the fall of 2021, developers halted their projects in St. Paul, saying the policy caused costs to rise and investors and lenders to back out.

Carter convened a task force to recommend changes to the law. The council then voted in fall 2022 to exempt new construction and income-restricted units from rent control. Jalali and Yang voted against the changes, siding with rent control advocates who accused developers of using scare tactics.

Conversations about rent control cooled down until last fall, when all seven St. Paul council seats were on the ballot. As candidates fielded questions about the policy, some developers grew concerned that the new leaders would revert the law to the original, more restrictive version approved by voters.

Carter said in an interview that he does not expect any imminent, significant changes to rent control. With Sherman Associates, the mayor said it became important for the city "to find mechanisms to find a level of assurance for them — and for their backers — that we intend to hold our end of the bargain."

The city has not received similar risk-mitigation requests, and Carter said any that arise would have to be considered on a case-by-case basis.

By developing Landmark Towers, Sherman Associates is "still taking a big risk," said Nicolle Goodman, St. Paul's planning and economic development director.

If the new construction exemption is repealed, the city will assess the impact on the property's value and give the developer up to an additional 5% of the tax increment generated by the project. There is also a provision that says if the project yields a significantly higher return than expected, the city could receive a payment from Sherman Associates.

"We were able to, frankly, save this deal — even with the perceived threat of the loss of the new construction exemption — because this deal had room," Goodman said. "But it's very likely that many deals would just fall apart."

Jalali, the new council president, said she supported the agreement with Sherman Associates because the project is uniquely complex and aligns with a number of the city's goals for downtown by removing blight, repurposing vacant office space, adding housing and preserving a historic structure.

"We worked with the project team and got to a better place on it, in a way that I feel honors our commitment and obligation to voters to make policy in a comprehensive way and also honors that we need to look at all resources in helping projects happen," Jalali said.

Yang declined a request for an interview.

Jalali says more tenant protections needed

While Jalali is not advocating for "wholesale repealing" St. Paul's new construction exemption, she said the current rent control policy is unfair as long as tenants in exempted buildings lack other protections from displacement, such as advanced notice of sale requirements or guaranteed relocation assistance.

"The answer always, from the other side, tends to be, 'We need more supply,' " Jalali said. "Yes, we do need more supply. We also need more supply at all levels. None of those people are coming forth with a proposal to help people immediately at the bottom of the housing market, who are the most susceptible to sudden spikes in rent that cause displacement."

Construction on the Landmark Towers started late last year, and Sherman said the developer is aiming to have apartments ready for move-in by summer 2025. The company is also the lead housing developer for more than 1,000 units planned for the Heights, a $550 million redevelopment of the Hillcrest Golf Course on St. Paul's East Side.

Sherman expects the firm's equity and financial partners to require similar TIF agreements for that development. Even with the new construction exemption, housing projects require more public subsidies due to rent control, he said.

In the meantime, Sherman said his team looks forward to building relationships with St. Paul's new council members to discuss the city's housing policies and goals — and make the case that rent control should be completely rolled back.

"We have tremendous alignment with advocates and policymakers that are looking to deliver long-term affordability and quality housing," he said. "Rent control is a very ineffective way to deliver affordable housing, deliver quality housing and deliver a healthy tax base."

Carter welcomed that sort of engagement from developers, saying he wants to convene a "citywide conversation" on all housing-related issues, policies and programs in St. Paul.

"I think it's important for us right now to give the rent stabilization policy that we've got in place some space and time," he said.