The Renewed Debate on Inclusionary Zoning

Stephen Smith and I co-wrote this post. In case you haven’t been following Stephen elsewhere, he’s also been writing at The Atlantic Cities and Bloomberg View.

 

This year, some of the first apartments and condos subject to inclusionary zoning laws in DC are hitting the market, stoking debate over development laws that the city adopted in 2007. The inclusionary zoning requirement is currently stalling the city’s West End Library renovation with Ralph Nader leading efforts to include an affordable housing aspect with the library project. Inclusionary zoning advocates often base their support on the desirability of mixed-income neighborhoods, while challengers argue that inclusionary zoning is an inefficient way to deliver housing with unintended consequences.

Heather Schwartz, who studies education and housing policies at the RAND Institute, says that one important feature of this policy tool is that it gives low-income families access to high-income neighborhoods while at the same time limiting the number of low-income residents in a neighborhood. She said, “Since IZ is a place-based strategy that tends to only apply to high-cost housing markets, it can offer access to lower-poverty places than housing vouchers and other forms of subsidized housing have historically done.”

David Alpert, editor-in-chief of Greater Greater Washington, a local urban planning blog, offers another argument in favor of inclusionary zoning, “a policy that builds support for both greater density and affordable housing,” he said in an email. “Much of the opposition to greater density involves a feeling that it is just a ‘giveaway’ to developers who make the profit and impose some collateral burden on a neighborhood, but many people are more supportive of the density if it serves an affordable housing goal.”

While inclusionary zoning proponents may see its ability to introduce just a few low-income residents to a higher income neighborhood as an asset, it does not typically meet an area’s demand for affordable housing. Montgomery County, MD, outside of Washington, DC has one of the nation’s most established inclusionary zoning problems. In over 30 years, inclusionary zoning has created fewer than 13,000 housing units in the county, which area developer AJ Jackson with EYA describes as “a drop in the bucket of housing demand.”

Jackson explains that the requirement to take a loss on some units leads developers to build only higher end housing, where they can make up the losses they take on the affordable units, making the remaining market-rate units still more expensive. Jackson suggests that the only viable solution to the problem of a lack of affordable housing is to increase allowable densities broadly. He points to several neighborhoods in DC and surrounding counties are currently zoned for commercial or light industrial uses, but that profitable residential development could succeed with zoning changes.

However, he points out the political obstacles to this type of development. He said, “For these jurisdictions, office density and jobs are great. But residents take more than they give in tax revenues,” so city officials may oppose residential development for budget purposes. An even greater obstacle may be current residents’ opposition, a well-documented setback to all sorts of DC-area projects from residential to restaurants.

The political incentives that confront politicians when they do decide to embrace more development complicate the density bonus calculus. The pro-density argument for inclusionary zoning is that the bonuses allow developers to build where they otherwise could not, but when an area is being targeted for development anyway, anti-density activists can easily anticipate bonuses when base zoning allowances are being hashed out and factor them in to their maximum tolerated building envelope. If those who oppose development in and of itself have enough clout, the “bonus” that developers can be reduced just a technicality.

For example, during the rezoning process for Manhattan’s West Chelsea neighborhood in 2005, New York City Assemblyman Richard N. Gottfried wrote in a statement that the city should follow the lead of the Hudson Yards rezoning, where the affordable housing programs were made “effectively, if not technically, mandatory,” which he attributed to “the leadership of Councilmember Christine Quinn,” now frontrunner to succeed Bloomberg as mayor.

The city did eventually take steps to increase the amount of affordable housing built by Hudson Yards developers by tweaking the “bonus” formula so that the rezoning yielded more affordable housing without more bulk than the administration’s proposal. Some below-market units were carved out of the proposed development, while others were pushed off-site – the affordable housing “will not generate additional bulk in the neighborhood through an inclusionary bonus,” as Chelsea Now wrote in 2009. The affordable apartments will be built on city-owned plots 15 blocks north, which given their location, were destined for development soon anyway.

And for those who support inclusionary zoning programs because of the extra density they can bring to neighborhoods, Assemblymember Gottfried’s suggestion for West Chelsea should be especially troublesome: “The Commission should look for places to lower the base FAR to allow the area available for affordable housing to increase.

Indeed that seems to be what happened. “Building density in the entire [West Chelsea] district has been reduced from the previous plan,” The Villager wrote the next month, “in order to provide more incentives for developers to apply for higher density under the inclusionary housing program.”

And New York City is not the only place that affordable housing groups have fought as-of-right density in the name of bonus incentive programs. Last year in California, some housing advocates were hostile to legislation, supported by developers and environmentalists, that would have forbidden municipalities in the state from requiring more than one parking space per unit in neighborhoods adjacent to frequent transit corridors.

As Lisa Payne, policy director at the Southern California Association of Nonprofit Housing, told the California Planning & Development Report in regards to their opposition to Assembly Bill 710, “We have 30 years of history with density bonus law, that recognizes the value of trading a planning concession, whether it be height, density, or parking for supplying the mix of incomes in a project. This bill would have removed that tool.” Affordable housing groups withheld their criticism of the 2012 iteration of the parking reform bill, but it has yet to pass.

While inclusionary zoning provides significant benefits to residents who are lucky enough to live in allotted affordable units, it does not provide sufficient housing units to address many cities’ housing affordability challenges, and in some cases can even breed alliances between affordable housing advocates and anti-density constituents. As Jackson explains, permitting more and denser development is the only viable path to this goal.

Selling the Rights to Greater Density

At Next American City, Mark Bergen has an interesting long-form piece on municipal infrastructure financing. He argues that the property owners who benefit from public policies, such as infrastructure investment, should be required to fund these policies. He suggests infrastructure improvements should be paid for with Tax Increment Finance or value capture (PDF). I don’t necessarily agree with his infrastructure funding prescriptions, and may take these up in a future post. What I found even more interesting, though, is his suggestion that developers should pay for zoning changes.

The basis for this proposal comes from the Georgist land tax. Because in urban settings, land’s value largely comes from the amenities surrounding it, landowners do not have the exclusive rights to this value, according to Henry George. The suggestion that developers should pay for the rights to build on the land they own is based, Mark explains, on a policy from São Paulo, called Certificates of Additional Construction Potential (CEPAC). These bonds, representing rights to build, are transferable and are publicly traded. He quotes Gregory K. Ingram of Lincoln Institute of Land Policy:

“They’re essentially selling zoning changes,” explained Ingram. Crucially, the building fees have not eaten away at developers’ profits. By some accounts, the rates of return for real estate in the districts increase.

[…]

The notes, sold by municipalities, are one of the world’s most innovative public financing techniques. Across many sections of São Paulo, if a developer hopes to build or do nearly anything with her property — adjust its uses, expand outward or upward — she must first buy a CEPAC.

On a fairness level, selling zoning changes seems wrong to me. Current zoning policies are an arbitrary starting point, so it doesn’t make sense that developers should have to pay for permission to change a policy that is limiting their rights. Additionally, the overarching objective of value capture, as Mark explains, is to facilitate progress toward Smart Growth objectives. To the extent that these objectives include affordable housing, walkability, and permitting denser development, great progress can be made toward these goals with upzoning alone without significant public investments.

On the residential side, increasing the housing supply is the only feasible path toward large numbers of affordable homes. On the commercial side, walkable neighborhoods cannot be achieved without permitting more mixed-use, dense development. From this angle,  São Paulo’s CEPAC policy would act as a tax on Smart Growth.

From a political perspective, it seems that the CEPAC policy would be subject to abuse. Those who oppose density on the conservative side would lobby for the issuance of few CEPAC bonds. Those on the progressive side who support increased public revenue for their favorite causes may also support the issuance of few bonds, requiring developers to pay high prices for the rights to build.

Despite these problems, though, as Mark points out in Brazil the program has led to increased developers’ profits indicating the program has not had these detrimental effects. I was not familiar with the program before reading Mark’s article, and I don’t know much about how CEPACs have played out politically in Brazil. However, I can imagine that paying for the rights to build would be an improvement for many U.S. developers, even though they act as a tax on density.

Currently, to achieve the zoning changes necessary for increasing density and market-rate affordable housing, developers have to spend significant resources of time and money to go through an uncertain political process. In some cities, as-of-right development is so limited that  the rule of law does not extend to urban development. Given this status quo, CEPAC bonds could benefit developers by removing some of the uncertainty surrounding zoning variances. Rather than spending money on lobbying for property rights they may never achieve, developers could simply buy these rights on the open market. This might also benefit small-business development if buying the needed bonds is cheaper than investing in a lobbying arm.

While I think many market urbanists would prefer to see more housing and walkable development allowed as-of-right, perhaps selling these rights is a second-best solution. Additionally, by compensating taxpayers for the damages to their light and air, CEPAC bonds could reduce the validity of NIMBY arguments. Is anyone more familiar with how the CEPAC program has changed land use rights in Brazil or other ways in which value capture has changed land use policy?

Market urbanism vs. market suburbanism smackdown at Cato: “The Death and Life of Affordable Housing”

The debate you’ve been waiting for! Randal O’Toole, Matt Yglesias, Ryan Avent, and Adam Gordon participated yesterday in a discussion at the Cato Institute moderated by Diana Lind from Next American City/Forefront. (How had this never happened before??)

Randal O’Toole did not disappoint, arriving in top form in his shoestring necktie and armed with a surprisingly interesting Powerpoint, but I think New Jersey-based attorney Adam Gordon stole the show with his discussion of inclusionary zoning and the Mt. Laurel doctrine (probably because he was on the only one on stage who hasn’t already spewed hundreds of thousands of words on the subject).

You can download the 90-minute discussion as an MP3 from Cato (much easier to scroll through), or watch the video streaming:

Affordable housing for the rich and the failure of zoning bonuses

In the past I have not been kind to affordable housing programs. I have a lot of deeper problems with them that I’ll get to in a minute, but I think the extraordinarily high upper income limits on some of the projects are indicative of the broader problem of the essentially arbitrary and random (literally – they’re usually decided by lottery!) nature in which they’re doled out. In a way, even when the beneficiaries are blatantly undeserving, everybody wins – politicians get votes, and affordable housing advocates get paid. Everybody, that is, except market-rate renters, but when’s the last time they ever voted somebody out of power for sabotaging their interests?

Even with an upper income limit of $192k for the affordable units, they still can't sell 'em

Anyway, your latest affordable housing outrage story comes from New York City (where else?) – specifically 138th Street in Harlem, where the 73 units at Beacon Towers are almost all under contract, and Curbed claims that most of the remaining units are income-restricted “up to $192,000″!!! Oh yeah, and they can’t even find enough people who qualify.

Which brings me to another point: the Beacon Towers are not towers, and are certainly not any kind of beacon. They’re eight stories tall, and considering we’re talking about new construction in Manhattan, I’m going to take a wild guess and say they built right up to the zoning envelope. The immediate neighborhood is a mix of turn-of-the-century five- and six-story walkups (but little in the way of even cornice lines), some post-war towers-in-a-park-style buildings that reach up to 15 (!!) stories, along with a smattering of parking lots and other woefully underused lots. As Robert Fogelson wrote in Downtown, the New Yorkers of 1900 fully expected that by 2000, the whole island of Manhattan would be a river-to-river block of commercial skyscrapers. Perhaps that was unrealistic even if there had been no zoning code, but I bet they’d be shocked to know that a hundred years into the future and we’re still building 8-story buildings in Manhattan.

To be sure, bad zoning laws and not affordable housing mandates are to blame for the fact that taller buildings aren’t allowed in America’s most desirable city. But wasn’t this something that affordable housing was supposed to alleviate? Urbanist boosters of the mandates often tout “density bonuses,” or allowing developers to build a little more in exchange for subsidized units, as a way of eking out a little more density from the zoning code. Clearly that didn’t work in this case.

In fact, back during the 2005 Chelsea rezoning, affordable housing advocates were actually successful in getting the district’s allowed density reduced, “in order to provide more incentives for developers to apply for higher density under the inclusionary housing program.” In other wards, completely subverting the original voluntary “density bonus” idea. I suppose it was inevitable – the “density bonus” concept was forged by planners as a way of achieving their goals by enlisting the support of affordable housing activists, but they failed to recognize that the whole scheme is really just an incentive for affordable housing activists to push for downzonings. After all, they are ideologically disinclined to trust in market mechanisms, and certainly don’t care about increasing the market-rate housing supply, which often comes in the form of new luxury construction.

Anyone else know of other instances of this happening? Is it systemic, or are most affordable housing advocates not that cynical? (…or do the zoning committees stop them?)

When “affordable housing” is just a random middle class housing subsidy

Affordable housing and inclusionary zoning are complicated subjects and it’s hard to sum up all my thoughts and objections to the schemes in one post, so I’m going to take the death-by-a-thousand-cuts approach. Today’s installment: income eligibility levels.

Now, the stated intent of affordable housing set-asides has always been a bit unclear to me. The cynic in me thinks it’s just a way for politicians to buy votes with public money by essentially randomly redistributing from the many (market-rate renters and buyers) to the few (the lucky handful to win the lotteries for coveted subsidized units). The stated motivation, though, seems to range anywhere from a combination of helping the poor find housing to having a little bit of housing diversity, even if that “diversity” means upper-middle class alongside upper class.

In my experience, though, the programs end up overwhelmingly fulfilling the latter goal. The latest example I’ve come upon, which doesn’t seem too out of the ordinary, is from a project called Tivoli Square in the Columbia Heights neighborhood of  DC, which looks like it’s associated with the big development corporation-driven DCUSA project (As an aside, DCUSA was basically a huge urban mall in what was an obviously gentrifying neighborhood. The city ended up spending a large amount of money on a parking garage that now mostly sits empty, and they’ve been having trouble renting the retail spaces set aside for local businesses. It’s also architecturally pretty ugly, and houses way more national chains than the rest of the neighborhood. Politicians hail it as a success, but in my opinion it’s the worst thing to happen to Columbia Heights since urban renewal.)

Anyway, the zipcode’s median household income in 2009 was $57,393, and the project had a 20% set-aside for some combination of low- and medium-income. The upper limit for “low income” ranges from $50,000 for a household of one to $71,450 for a household of four, and the upper limit for “medium income” ranges from $68,750 for a household of one to $98,250 for a household of four. Oh yeah, and those limits were from 2005 and are probably a few thousand dollars higher now. And on top of that, public employees, who have better-than-average job security, medical benefits, and retirement plans, often get first dibs (along with local residents) on these sorts of things.

I guess it could be worse – in New York City you can keep your rent-stabilized/controlled apartment until you make $175,000/year and the rent on your apartment reaches $2,000/month (that’s the reduced price, not the market one!). The State Assembly just passed a bill to extend the limits to $300,000/year and $3,000/month, which absolutely astounds me. The Republican-controlled Senate won’t let it go that far, but rumor is they’re willing to let it rise a bit in exchange for property tax caps in the suburbs and upstate.

A question for the blogosphere: How much affordable housing is enough?

The developer will be losing money on 540 out of 1,240 units in "Gotham West"

The developer will be losing money on 540 out of 1,240 units in "Gotham West"

Reading about a new ultra-luxury Far West Side rental project going up where over 40% of the apartments are going to have controlled rents (“affordable housing”), I’d like to pose a question to supporters of affordable housing mandates in the planning blogosphere (which includes pretty much the whole planning blogosphere): How high is too high?

I’d also be interested to know why exactly the developers included so much affordable housing. I’m pretty sure there’s no program that requires that much affordable housing (the 80/20 state program obviously only requires 20%), but I think commenter Alon Levy is probably right when he suggests that various subjective review processes pressure developers into including more subsidized units than the government officially asks for.

Tom Duane, a State Senator, has some testimony up on his website about the project that gives us a look into the mind of what seems to be a typical (at least for New York City) affordable housing-type NIMBY. Back in 2009, when he gave the testimony, the plan was for 50% of the 1,200 units to be kept at below-market rents “permanently,” but even that wasn’t enough for Duane. He was upset that “only” 40% of those units will have two or more bedrooms, and also wanted the amount of commercial space scaled back from two floors (i.e., an FAR of 2.0) to just one (1.0 FAR). Oh yeah, and he doesn’t like the 31-story tower and he wants the developer to really promise not to transfer the unused development rights elsewhere.

Obviously, I oppose setting aside this much of new developments for affordable housing. People tend to think of different segments of the real estate market as distinct – how on earth could limiting the number of rich people on Far West Side make prices rise in Bed-Stuy? – but they are inextricably linked. You might not shed a tear for the 20-something banker who won’t get his Hudson River view, but when he then decides to buy in, say, Brooklyn Heights, the higher housing prices are going to have a ripple effect throughout the borough, pushing the envelope of gentrification further and further, until finally the knock-on effects reach places that the Far West Side 2o-something banker who got priced out of the Far West Side would never dream of living.

I know most of the planning blogosphere disagrees with my analysis, so my challenge to you is this: How high can you go with affordable housing mandates until the effect they have on market-rate rentals is no longer worth it? Does this 40%+ project seem like too much to you, or do you think NYC should go even higher? And do you think the city should set a limit and stick with it, or is it right to let whoever reviews these projects to use their discretionary power to nudge developers into including more than is required by statute?

(Also interesting to note: The 10th Ave. & 41st St. 7 train stop nearby, which was cancelled, was estimated to cost $500 million. The net present value of the hit that the developers are taking on these of these subsidized units must be close to $1 million each. At 540 subsidized apartments, it seems that the money spent on affordable housing in this one project could have covered the entire cost of the extra station at 10th Ave., or at least a significant chunk of it.)

What favelas can teach us about America

Anthony Ling, an excellent Brazilian blogger who also happens to be an avowed market urbanism, gives us an interesting look at the politics and economics of low-income housing in Brazil:

In Brazil there is a vast regulation defining what are the minimum requirements to have a building approved by local authorities. The most common example is probably the Building Codes set by each city, but specific details imposed by planning, environmental and building departments of each city are added to the equation. The recently created Performance Standard also follows this same path, being enforced nationally.

The explanation given to establish this regulation is the legal guarantee that every citizen will have a minimum quality of living. However, those who study public policy understand that the passing of a law does not miraculously create high standard buildings accessible to all and, like many other laws, produces effects opposite to those desired. The lower standard building prohibition does just that: tough regulation prevents entrepreneurs from building accessible housing for the poor. This results in government spreading the idea that entrepreneurs think only about attending the high class, and transforms itself as the hero that will build millions of popular houses, as [Brazilian Pres. Dilma Rousseff] did with the Minha Casa, Minha Vida [My House, My Life] program.

I think this has a very close parallel in modern American cities with inclusionary zoning and affordable housing mandates. In Brazil, the government creates a housing shortage by having unrealistical building safety standards (which ironically, as Anthony explains, encourage slums that are completely unregulated) and then swoops in and acts plays the savior with its own housing projects. In America, the government creates the shortage through sprawl-forcing zoning codes.

But unlike Brazil’s public housing, our politicians instead use rent control (rebranded as “inclusionary zoning” or “affordable housing”) to supposedly bring down the high prices that they unknowingly created. This is great for the lucky few who manage to get apartments (often middle-class public employees), but it acts as a further constraint on supply for the vast majority of renters and homebuyers, who have to buy market-rate housing, and sends prices even higher. The voters, who are just as economically illiterate as their elected representatives, then clamor for even more affordable housing, and the cycle repeats itself, resulting in ever higher housing prices.

The American planning profession has mostly learned its lesson about parking minimums and low-density zoning (at least in theory), but they remain stubbornly in favor of the density taxes known as affordable housing. Come to think of it, I can’t think of any progressive urbanists who have come out against inclusionary zoning and affordable housing mandates (with the exception of Matt Yglesias). Can you?