Owen Pickford (OP): Are you familiar with what Seattle is going through right now with inclusionary zoning?

Victorial Basolo (VB): I’m not. I don’t know the specifics of what Seattle is doing.

OP: Do you want a quick background on what Seattle is doing and how we got here?

VB: Yes, please.

OP: Almost five years ago they implemented an incentive zoning program in one, small neighborhood in the city. It wasn’t used very much and it didn’t produce very many units. So over the last four years they started looking at doing something different. Initially they were looking at a program called linkage fees. There was a huge amount of push back. They convened a huge group of stakeholders and over the course of two years they developed 65 recommendations. The center piece is mandatory inclusionary upzones. They’re going to implement inclusionary zoning with an upzone in many different parts of the city that are called urban centers. These are basically areas of the city with capacity to grow.

VB: I don’t know the particulars but if you upzone a property the current owner gains in that upzoning, upzoning typically increases the value of the property. If a developer has to buy that property it just makes it more expensive to them. If a developer owns the property and you say, “Hey we’re going to let you upzone. We’ve just given you something.” That’s the best time for cities to negotiate for inclusionary units. It really matters to developers the cost of the land is really important. If a developer purchases the property before it is an upzone, the property will likely be more valuable after the upzone, it is a regulatory induced windfall. However, if the upzone occurs prior to the purchase by the developer, it does not have this effect because the land value is already embedded or capitalized in the price of the land.

OP: Yep. So the plan is, and they’re probably going to start doing this at the end of the year, they will actually do the upzones and the inclusion at the exact same time. It will be part of the planning process where they draw little lines around neighborhoods and say this neighborhood is going from x to y and while it’s happening it’s going to be required that 10% of your units built are affordable or something like that.

VB: So the market effect on the land of the increase is theoretically absorbed in down-pricing it because of the inclusionary. Is that the idea?

OP: That’s the intention I think, yes.

VB: This approach should work depending on the percentage of set-aside units required in the development. Ten percent will likely result in a win for the developer in terms of gain from upzoning compared to cost of including a small percentage of affordable units. Of course, if the percentage (or number) of affordable units is too small, then the policy will not serve many households. Still, inclusionary approaches should never be considered THE policy, but rather one tool in a hefty toolbox.

OP: Ok, so that’s what Seattle is looking at. It’s going to depend, and a lot of this still has to be negotiated but they are looking at 3-10% inclusion at 30-80% of AMI, depending on the area I believe and the number of units. There’s going to be a sliding scale I believe. Ok, does that sort of all make sense?

VB: Yeah. You said 3-10% on 40 units or higher?

OP: Uh no, sorry. 3-10% have to be below market. The subsidy is going to be targeted at people that are between 30 and 80% of AMI. I think the amount of units will be relative to the depth of the subsidy. So if you have 30% of AMI being served you have fewer units you need to do but if you have 60% you have to do more units.

VB: Ok, got it. Again, it sounds like a modest program for the production of affordable units, but some are better than none.

OP: Ok, so that’s where we are at. The reason I’m talking to inclusionary zoning experts is because there’s a lot of debate about the policy here. Just generally throughout the entire country, this is a little controversial. In different areas, the debate will focus around different things. But in Seattle specifically, this has been my experience, the biggest debate is about whether the inclusionary requirement will reduce the production of market rate units. I’m sure you’re familiar with that objection.

VB: Yes, that’s one of the objections. Yeah.

OP: So, what I’m trying to talk through with different people, there’s definitely some speculation and some research, but I’m trying to understand their personal opinions about the impact of a well crafted IZ program. Does a well crafted IZ program affect the market supply of units?

VB: It’s a straight-forward question but it’s not a straight-forward answer unless you simplify a lot of things. When you say well-crafted it has to be well-crafted to context. What we found about inclusionary housing programs across the country through research on different markets were sometimes they had a really great effect and were really positive. Other times they had no effect or a negative effect. Ideally if you had a well-crafted program for the context, it would work exactly towards the goals it intends, which is to bring affordable housing to communities that don’t have enough for their workforce. The decision-maker has to look at the whole story. Possibly fearing change, a developer might say, “Wait, this is going to cost me.” I think this is a reactionary statement that assumes personal loss. The developer probably isn’t thinking about the long-term consequences to the community of a lack of affordable housing. They’re only thinking about their short-term gain. A public decision-maker should be looking at a community as a long-term prospect, not a short-term concern. The long-term prospect is that if you don’t have affordable housing in the community, someday there will be no need to develop for-profit housing because there won’t be anybody to fill the jobs serving the people that would buy market housing. The truth of the matter is that a well-crafted policy, if you are thinking about the community as a long-term entity as opposed to what happens today or in the next couple years, you would come up with a different answer than someone looking at a long-term view. I’m a planner by definition. We look at the long-term view because we know a community doesn’t automatically turn around in five seconds. It takes years. You hopefully have a set of integrated goals that will lead you to what you want that community to be. I know that isn’t an easy answer. It’s very contextual. It depends on what criteria you use to evaluate.

OP: One of the complaints that is frequently raised; I’m trying to represent these complaints as best I can even though I don’t buy them, how can we depend on our bureaucracy to craft a well-crafted IZ program? There’s a myth about the incompetent bureaucracy which people play on. One of the questions I’ve asked a lot of different people is, do you believe it’s possible for cities to developer well-crafted inclusionary zoning programs that work?

VB: Oh, I absolutely think cities can craft a good IZ policy. If I were a decision-maker in a larger or mid-size city, I would bring together a panel of people that represent different viewpoints to craft that policy. I’d definitely include some people that have an understanding of the research that’s been done on these policies. There are so many options, so many little things you can put in an inclusionary housing policy or IZ regulatory framework that will change how it performs. You really need to understand each element of it. Which means you need someone who has looked at this extensively. There are people in the country who understand the variations in IZ policies and understand what the research says and why it really needs to be context specific. I would include the views of the building industry because they bring information about development costs and what the trade-offs might be. From my experience, building industry people reject inclusionary housing out of hand. But with an open dialogue and if they’re in the community for the long-term, developers will recognize the importance of having housing for all income levels and work to find a way to do their part. They’ll start talking about it saying, “Ok if we did it this way what would off-set?” That’s what you need to know, what would offset costs, but not create added profits, in this context. You need everyone at the table. Yes, an excellent policy can be crafted but it has to crafted with knowledge from different perspectives. Ultimately there has to be a decision-maker saying, “I’m looking at the long-term view.” So if the thing that comes in isn’t really doing that because people just gave up and gave in to people, then they need to go back to the table and fix it. IZ policy has certainly been effective in places.

OP: Ok. This is the next point of debate I think about these policies. I honestly believe that there’s not a cut and dry answer to this question. I’m asking in both a general and speculative way to talk through the nuances of this. There are three theories about how the cost of inclusionary housing is handled. You have your first theory which is that developers are making their required margins right now and if you increase the cost without giving any benefits, like a density bonus or something like that, it will make their projects not pencil out. They’ll go to other municipalities. They’ll take their capital elsewhere. Less market-rate housing will be built and will ultimately increase prices. There’s a second theory. Markets have slack with rents. An IZ policy that’s implemented in a place that has slack in rents, the developers will cross-subsidize the units so the below-market units will be paid for with higher rents in the market-rate units. Then I think there’s a third view of the mechanisms. Developers will see this policy coming and they will bid less on land in order to make up the cost they have from the units that earn less revenue. It seems like a lot of people I’ve talked to have said it’s not just one of those things. It’s a mix and it depends how you implement the policy.

VB: The truth is, if a developer can make money in a market. It doesn’t matter if there’s a lot of regulations. If they’ve figured out they can make sufficient money, they’re going to go ahead and navigate the regulatory environment to develop land and build dwelling units. That’s why I’m saying a developer has to be at the table.  Developers aim to reduce risk and make a profit. However, the margin of profit should be fair and no more after an IZ policy than before. Policies should be written so that risk is not increased for the developer and, at the same time, policy should not create added profit by providing incentives beyond what is necessary to offset costs associated with including affordable units in a development. Once an inclusionary policy has been adopted in a community, developers can factor it into their plans, reducing uncertainty. That’s why those trade-offs, like upzoning for affordable units, are really important to developers.

OP: Yes, I think so.

VB: Your three points are intertwined in some ways. It’s really more about understanding everybody in the process and what their motivations are. Don’t make someone the loser. At the same time, it’s part of the contribution developers make to the community. And I’ve always said this and it always sounds like some radical thing. Developers extract their profits from a community. Sometimes they don’t stay in that community. They go to the next community and then the next community. But, if they did invest a little in the community, by doing what they do best, build housing units including affordable units, then they share a larger responsibility with the community they helped build–as a community member I would appreciate and encourage developers who make this commitment.

OP: That makes a lot of sense to me. I think my question is, generally speaking, do you think the way that cost is off-set is through rents or land costs.

VB: Developer costs can be offset in numerous ways. If they receive a density bonus or upzone, then the value of the land increases because more units may be built there then when the land was purchased. Under this policy, cross subsidization of rents is unnecessary because the affordable units have already been offset through an increase in density. However, IZ policies can include other incentives such as public provided infrastructure, priority/fast tracking of project permitting, modifications of certain requirements (e.g., parking). There is no universal best approach to IZ because it should be co-produced with multiple parties representing an array of viewpoints and consideration of the particular context or community in mind.

OP: I definitely get that. Can I summarize really quickly what I think you’re saying and you can tell me if I understand? There’s two things you want to avoid with developers. One, you want to make sure that the community is getting something back from the development. That all the profit from the development isn’t just going to the developer. But two you want to make sure that you aren’t extracting so much from the developer that they leave the market. Am I understanding that correctly?

VB: Yes. The first point is more about creating a culture of understanding in a community that a developer who profits from a community should share responsibility for that community. Developers can really help, they can make a meaningful contribution, by working with inclusionary housing policy not against it.  Everyone should avoid or reject knee-jerk responses, “We don’t want inclusionary housing.” And the advocacy side, “We want inclusionary housing.” It’s an adversarial process that often leads to inadequate policies. So this is where leadership is really important. How do we bring together these groups that historically are on opposite sides? How do we bring them together to develop a context specific program that is going to work? Strong leadership can bring together disparate groups and find solutions.

OP: Ok, the point that I’m trying to get at, and it might not be a cut and dry answer, which is why I’m not sure exactly how you are answering this, but when you have a these subsidized units, the cost of that, someone is paying it. The question I’m asking is who is paying that cost? Or do you have an opinion on who is paying that cost?

VB: My response would depend on the proposed offsets in an IZ policy. If there were no offsets, then the developer would pay, but these types of IZ policies are no longer viable. If the city contributes infrastructure, then the residents of the city are paying because city revenue is being used. If the city chooses density bonus or upzoning, then no one pays in a material sense; ideally, it would be a perfect trade off. However, some residents of the city may consider higher densities a cost, then in this case, those residents pay, but other residents valuing affordable housing might see it as a benefit. Ultimately, these policies are aimed at ensuring additional housing is available for households with low- and moderate-incomes and the cost of not having this housing needs to be weighed against the cost of getting it built.

OP: Generally speaking, the reason this is being considered in Seattle is because there is pretty much a consensus for the need to have workforce housing and mixed-income and that sort of things. All of that is pretty positively received. The real debate is, this subsidy is coming from somewhere. This value that is going into subsidized units is coming from somewhere. Where is it coming from? What I’m hearing from you is that if the community upzoned an area and they didn’t have inclusionary zoning, the developer would have higher profits. But if they upzone it and they include the inclusionary zoning, the community gets something back in affordable housing but the developer doesn’t have as high as profits as they might have had if the inclusionary zoning wasn’t included. What I hear, when I hear that, is that the developer is paying for those units out their potential revenue they would’ve had, rather than out of their bid for land.

VB: Again, if the developer owns the property, whoever owns the property, you make that property more valuable through upzoning. The asset is more valuable–each additional unit allowed increases value. This increased value allows the developer to build affordable units and some added market units to offset the cost of the affordable units.

OP: So just what you said there. You said, “If it’s upzoned and they have inclusionary zoning, the person who owns it, they” You used the word ‘they.’ I wasn’t sure if you meant ‘they,’ as in the developer isn’t going to make as much profit when they buy it. Or ‘they’ as in the developer is going to bid less on land and the landowner isn’t going to make as much money as if the inclusionary housing hadn’t been implemented.

VB: Ok, so let me back up a little. Here’s a piece of land, let’s say I own it. It gets upzoned. Now I have more valuable land. If a developer wants to develop that, I want the price that I know it’s worth. It’s now worth more because it’s upzoned. If the market is strong, and by the way Seattle has quite a strong market because it has a booming job industry, the developer is going to buy that land for the more expensive price because they’re going to make money off it since they have a huge market demand. But it would be better if it wasn’t upzoned until a developer got control of it and they get the benefit from the upzone in exchange for building the units. In other words, IZ policy ideally would allow increased density only on developments that provide affordable units.

OP: That may produce less units or worse units or that sort of thing.

VB: Yeah, and a lot of bad feelings that ripple through the leadership of the local government. It’s just a mess. I believe we’re better than that quite honestly but we’ve just fallen into this trap of being adversarial.

OP: So one of the things I’ve been asking folks, people have various opinions on how inclusionary zoning works and whether or not they support it. I’m curious if you have colleagues whose opinions you respect and have disagreements with you on inclusionary zoning.

VB: You know it’s interesting because as a planning academic I operate in a world of ideas and possibilities. Most of the housing people I know think that inclusionary housing or inclusionary zoning, however you want to phrase it, is one of many tools to achieve affordable housing. They think it can be quite a good tool. I do have colleagues in the building industry that do not think as highly of inclusionary housing. But to be honest I’m seeing movement because Orange County is one of the most expensive places to live in the country. We have a tech industry here too and we’re losing companies and young professionals because we don’t have enough affordable housing. Seattle is doing great now but the truth is, the issue of affordable housing will need to be addressed in the area. It sounds like Seattle is working to address an important issue in the community and inclusionary housing can help do this. But IZ is only one tool. It’s not going to solve the problem, but it will help. Other approaches will continue to be necessary to avoid unhoused or ill-housed residents.

OP: You think that a city that does its due diligence and crafts a good policy can avoid the whole stalling of supply. At the end of the day, inclusionary zoning is dependent on private developers building market-rate units in addition to regular units. You think a good policy can avoid the problem of scaring away developers.

VB: I think a good policy in a strong market is not going to scare away developers. In a market that isn’t very strong, because they can’t make much there, of course, they’re going to go somewhere else. But if the market is strong and you have rents that have escalated, IZ works very well in general. San Francisco is an example. It’s not like all of a sudden the market is going to fall out tomorrow because you have inclusionary housing. It’s ridiculous. Developers are still going to develop if they can make money there but maybe they can’t make money in Flint Michigan.

OP: I was sort of thinking about this in Seattle and what I was thinking was that we have sub-markets in the city that command lower rents than other markets. So if we did a city-wide policy where you have an inclusionary requirement. You have to meet certain levels of rents but it’s the same throughout the city. What’s the impact going to be on these sub-markets that command lower rents? On the one hand, they can’t make it up as much in the market-rate rents, but on the other hand the subsidized units are closer to the market rate so they have less money they need to make up. That’s kind of the way I was thinking about it and I don’t know if that’s a common way to think about it.

VB: I’m not sure I quite understand that logic. I must’ve missed a step in the thinking. Let’s say you’re in a poor neighborhood so you command less rents. You’re going to have a lower quality of housing services and it’s going to be cheaper. The land itself and the area itself isn’t as attractive. It’s true. The land is worth less, so they’re not paying as much for the land. Developers are only going to build a product that warrants that land price. They’re not going to pay twice for that land because they’re not going to get that value out. But again if you said, “Ok, you can build 100 units but we’ll upzone you so you can build x increase.” They might do it because they’re still getting a benefit off the increase in density on the land. Whether they pay 100 or a 1000 they’re only going to develop to that amount.

OP: Just one more question. I have talked to a lot of different people. The consensus seems to be that people who study this think that inclusionary zoning is a critical tool. It’s not the only tool but it is one important tool and they are generally supportive of inclusionary zoning. After all the research you’ve read, do you put yourself in the camp that you think this should be a housing affordability priority and you’re generally supportive of inclusionary zoning programs.

VB: I am. I am supportive of them.

OP: Could you quickly outline the top two reasons you’re generally supportive of them?

VB: Ok sure. So you probably know I’m a housing researcher. But I was also a practitioner for many years in city and county government. It is very difficult to get affordable housing built in a lot of markets. It’s got all sorts of barriers. Inclusionary housing is a clear and distinct way that affordable housing can be done. We know that the market is not going to produce as many units at the affordable level to the incomes in the community that are needed. Affordability is a function of incomes and housing prices (the latter a function of supply and demand). In general, the ratio of housing cost to income is very high for many households because there is not enough affordable housing. Inclusionary housing is one way that can be very effective to get real units built that are affordable in the communities. That’s one of the reasons I support it is because it gets affordable units built. One of the approaches to IZ policy is to allow developers to pay an in-lieu (of building the units) fee to a city housing fund. I don’t really like in-lieu fees because these fees are set much lower than the cost of developing some affordable units. I prefer to allow the developers to use their expertise but have something off-setting so that anything that would cut into their profit would be made up by this off-set. Many local economies will falter without adequate affordable housing and more slums with people doubling, tripling, or quadrupling up will occur because it is the only option some households have. There’s certainly a pragmatic side and an ethical side to debates around affordable housing and inclusionary housing is one of the policies that factors into these debates.

Victoria Basolo, Ph.D., AICP, is a professor in the Department of Planning, Policy, and Design at the University of California, Irvine (UCI), a faculty affiliate of the UCI Blum Center for Poverty Alleviation and a faculty fellow of the UCI center of Real Estate in the Merage School of Business. She has both professional and academic experience with housing and land use policy. You can read more about her here. 

The post Let’s Talk Inclusionary Zoning: An Interview With Victoria Basolo first appeared on The Urbanist.

Owen Pickford (OP): Last year, they were looking at a linkage fee policy and through a long drawn out process they are now looking at an inclusionary zoning policy. They are probably going to implement an inclusionary zoning policy that requires between 3-10% of units to be subsidized or below market rate. They are going to implement it in areas they are calling urban centers or urban villages. These are areas the planning department has designated as areas of growth. They are probably going to couple that with an upzone. They’re going to add height to commercial mid-rise areas and they’re going to upzone some single-family areas that are basically detached single-family homes right now. When they do the upzone, they’re going to implement the inclusionary zoning so it’s going to happen at the same time. The inclusionary part is going to be applied to the entire structure not just the upzone part. That’s the policy we’re looking at.

OP: I’ve done quite a bit of reading including reading your piece of research you did. I’ve had a ton of conversations here with people about the politics of this. Generally speaking, I would say, within the circles I speak with, the biggest controversial part is whether or not the inclusionary requirement will cause a reduction in housing supply. I’ve read the papers and as far as I know there are two papers that suggest that’s how things work. One is kind of bunk. It’s the Powell and Stringham paper. Are you familiar with that?

Gerrit Knaap (GK): No it doesn’t ring a bell.

OP: Ok, it was published by the reason foundation and they looked at California. They came to the conclusion that inclusionary zoning reduced the production of housing by tens of thousands of units or something like that but it wasn’t peer reviewed. And then there’s a paper out of the Furman Real Estate Center in New York. Are you familiar with that one?

GK: I’m sort of familiar with the Furman Center. I’ve probably seen this paper but I’m not remembering at the moment.

OP: They looked at three municipalities, Washington DC, Boston and San Francisco. They found a small, minor affect in Boston. They didn’t find an affect in San Francisco and they couldn’t come to a conclusion in DC.

GK: That sounds familiar.

OP: So those are the ones that found a negative affect. And then I think there are three papers that I didn’t think found any connection. So there’s your paper. Is it fair to summarize your paper as not finding a decrease in supply of housing? Or would you not summarize it that way.

GK: I don’t think so. We found a small decrease I believe in the supply in single-family housing. There was some shift from single-family to multi-family. As I recall, there was not an overall deduction in the total supply. I’d have to go back and double check that. What I think we found was that there was slight decrease in single-family housing growth, not a decline in supply obviously. And a slight increase in price depending on the housing market.

OP: Yeah, I do remember that as well. An increase in the price, was it single-family housing or overall?

GK: I believe it was single-family.

OP: Then there’s also this paper from UCLA, I believe, by Vinit Mukhija. I’m not sure if you’re familiar with that.

GK: Doesn’t ring a bell.

OP: Ok, and then there’s a paper by David Rosen as well. Those are the three I’m thinking of. The David Rosen paper didn’t find an effect on housing supply and the paper that Vinit did also did not. There’s the empirical research and then there’s some speculation and opinion. I’m kind of curious, if you were to speculate, one do you think a well crafted inclusionary zoning policy can avoid affect affecting supply?

GK: Holding other things constant, I’m trained as an economist, so an inclusionary zoning policy does impose additional burdens on housing producers. If you do nothing to mitigate that, I think there can be adverse effects. And it depends on how you define adverse of course. But I’m trained to believe that if you make something more costly to produce, there’s going to be less of it and it’s going to cost more.

OP: Yep, so I think that if you read the David Rosen paper, and I’ve had this conversation with a few other people, the debate about that is how that costs get handled. That’s the crux of the debate and there’s three theories. The paper out of the Reason Foundation made the argument that it’ll make project not pencil and it will reduce supply. And then I’ve talked with a few different people and another argument I’ve heard is that developers are going to go out and increase the price of the non-subsidized units, the market rate units, to make up for their loss on the subsidized units. I don’t know how reasonable that is. The criticism of that argument I’ve heard from other people is that developers are going to charge whatever the market can bear, regardless. People who think it won’t reduce supply, is that the developers will bid less on the land they purchase. Those are kind of the three different mechanics that are possible. Is that a fair summary?

GK: Yeah, I would agree with that analysis. The answer if you dug further, then it depends on the elasticity of supply and demand. Developers will push it forward if the market allows it to be pushed forward and they’ll push it back if you’re in a position where people can readily go somewhere else and not willing to pay higher prices and they’ll just offer less for the land.

OP: Why would developers not be able to offer less for land? When I’m thinking through the mechanics of how the project is built, that’s the first opportunity they have to affect their costs. They can’t really affect their costs through higher rents until after a project is built. So in my head the first thing they’re going to do is try to build less on land based on current rents. Why would they not doing that?

GK: Let me turn the question around. Why would they not increase the price? And the answer is they’ll increase the price if the market allows them to increase the price. And if they increase the price they don’t have to reduce the bids for the lands. If they’re unable to push the price forward to consumers and increase the price of the product, then they’ll bid less for the land. Another thing I’ll say is that a lot of developments, and I’m not sure about the nature of the land market in Seattle, but the land is already in the pipeline for development for the ability to negotiate on land prices may be past, so the timing is important.

OP: Yep, one of the solutions that people have suggested is the importance of phasing this in over a long period of time. The land it will affect, the future bids will be priced in because they know it’s coming. With most of our permits, you’re requirements are grandfathered in. If you already have your permit in and an inclusionary zoning requirement comes, you don’t have to do that. The requirement at the time you put the permit in is fine. But if you own the land and you haven’t done anything with it and you’re just holding on to the land, then yeah, they’ve already purchased it in that case.

GK: The other mitigating effect, which I’m sure you know, is that if everything gets upzoned then the supply affects are going to be much smaller.

OP: That’s another thing I’ve found confusing too. Inclusionary zoning is always a percentage of the total units in the building, so it’s going to be 3% or 10% or whatever. there’s probably going to be cliffs where you can add a certain number of market rate units without having to add another subsidized unit. But generally speaking, it wouldn’t really matter what the zoning is because the percent you’re paying is always the same.

GK: That depends on the program. It sounded like what you were saying was that everything is going to be upzoned and you’re going to have a mandatory inclusionary zoning requirement. The other way people sometimes do it is that you get an upzone if you include the inclusionary units. The percent that it’s upzoned depends on the percent of inclusionary units.

GK: The other thing I would say is that these details matter. Is it mandatory? Is it voluntary? Is there a density bonus? What percent? All that stuff matters.

OP: So generally speaking, you think that markets may or may not pass the cost on to other rents or they may or may not pass it on to land depending on the circumstances in the housing market?

GK: That’s correct. That would be an accurate statement, reflecting my opinion exactly.

OP: Can you explain a hypothetical housing market where a developer would be able to pass it on to their renters? In my head I’m thinking that a developer is always going to charge the most they can for units. It’s not going to change the amount they charge based on the fact that a new policy is implemented.

GK: If you raise the rent, people are going to be inclined to look for other places to rent. If there are readily available substitutes at a lower price, just across the border for example… This is the City of Seattle you’re talking about? It has the potential to make renting in Seattle more expensive relative to renting outside the city, somewhere else in King County. The extent to which people are willing to make that move influences the degree to which that spillover occurs. If Seattle is an extremely competitive market and it must compete with the rest of King County, or the Puget Sound Area, and the rents can’t increase because there are cheap rents elsewhere, then you can’t push it on to renters. If on the other hand people are determined and willing to pay a premium for living in Seattle then it’s possible for the developers to push those costs forward to the renters.

OP: In my head I think of housing markets as regional. Your job and family are in a region so you might choose different housing options in that region. So you’re kind of saying that if there’s an area in the region that doesn’t have that cost, people might choose to live in that area rather than the area in the region with that costs?

GK: Yep, or choose to build there, sure.

OP: That’s the circumstance of it being passed on to renters. What’s your hypothetical scenario in which the costs are passed on to landowners?

GK: Let’s say there is in fact a regional market in which there’s extensive mobility and substitutability across the region, if then the city adopts this policy, developers try to push rents up and they won’t go up because people simply leave. There are more affordable rental units elsewhere so vacancies rise and they can’t increase the rents. In that case it has to get pushed back down to the landowner.

OP: Both times you’ve explained this, the way I’m hearing this is that the first thing the developer will do is try to increase rents. Do you think that’s true? Or is that just a quirk of how you’re explaining it?

GK: It’s more the way I’m explaining it. These things all happen somewhat simultaneously, in theory. In fact, it happens unpredictably.

OP: Ok, so generally speaking do you think inclusionary zoning policies can be crafted in most places in a way that minimizes that harm?

GK: Yeah, I tend to be supportive of these policies for two reasons. One, it’s a way to increase the affordable housing supply. It’s a complicated way. The other point I would make is that these programs get complicated. A lot of the details matter and it needs to be embedded in the approval process, the zoning process and the developers understanding. It tends to be a complicated way to increase the affordable housing supply but it does that. The other, and I think stronger argument for inclusionary zoning, is that it results in a mixing of incomes in different parts of the region. I think that’s really important.

OP: That kind of answers my next question but I’ll ask it anyways in case you have anything else to add. If you were the dictator of a city and you had to choose between the policies that you were going to prioritize, what would be the first affordable housing policy that you would go after? I’m trying to understand if there’s other policies out there that serve the same needs that inclusionary zoning serves.

GK: I’m sure you know the range of affordable housing strategies. One is you subsidize the construction with tax credits and things like that. The other is you subsidize renters, you provide housing vouchers and so forth. The third general category is inclusionary zoning policies that through regulatory requirements to increase the housing supply. If you’re asking me which one I would choose, I think you minimize market disruption by doing them all.

OP: There’s kind of two other policies that may fall into those categories that might be a little different. One is social housing, publicly owned housing. The other is rent control. Rent control could be seen as a subsidy for renters and public housing could be seen as subsidized construction. Any thoughts? Do you think those are viable alternatives?

GK: I think they are viable but less preferable. You don’t want concentrated poverty which most public housing tends to do but there are now more progressive public housing policies. And rent control, I’m not a big fan of rent control.

OP: The other question I wanted to ask was of your colleagues, of the people you know that pay any attention to this, are there people who you have disagreements with on inclusionary zoning policy? Can you articulate those disagreements in a representative or legitimate way of what people who disagree with you might think?

GK: The people I tend to disagree with are people who believe there are no opportunity costs, that you can impose these policies with no impacts. I think there are impacts. I think they can be mitigated. I think sometimes those impacts are worth it because of the objectives you are trying to achieve. But I often have disagreements with people who believe there will be no impacts.

OP: Why would someone think there’s no impacts?

GK: I have no idea. I thought you already described people who had that belief?

OP: My thought is that might be people who think the cost is eaten by the landowner but I would assume that would be an impact as well right?

GK: Yep, alright, that’s true. My sense is that everybody pays a little bit. Assuming it all goes one direction is usually not a safe assumption.

OP: Is that actually a well represented view? Do you think that’s a legitimate thing other people think?

GK: I’m not sure what you’re asking?

OP: Have you had conversations with people who think that? That there’s not an impact or something like that?

GK: There are people who believe that. Most of the housing advocates for example.

OP: Ok, the last thing, if you’re telling a city what they should pay attention to, or what they should focus on when they’re implementing a policy like this, what would you tell them?

GK: I would focus on the details and try to make the process as efficient as possible. Gradually working this in. These policies tend to change over time. How you evolve to make this policy effective is important.

OP: Are there good examples of places that have done that that come to your mind right away.

GK: Yeah, Montgomery County.

OP: Ok, do you think they’re kind of the gold standard?

GK: Yeah but one of the things you’ll see that’s in one of the papers we sent you is that I’ve noted  that the Montgomery County Plan has really changed over time.

Gerrit-Jan Knaap, executive director of the National Center for Smart Growth Research and Education, is an economist and professor of Urban Studies and Planning in the University of Maryland’s School of Architecture, Planning and Preservation. You can read more about him here. 

The post Let’s Talk Inclusionary Zoning: An Interview With Gerrit Knaap first appeared on The Urbanist.

Owen Pickford (OP): For a while Seattle was thinking about doing this linkage fee policy and it slowly shifted after a lot of political wrangling into an inclusionary zoning policy. What they are looking at doing is considering legislation in the fall of this year that will implement inclusionary zoning with upzones. The planning department is calling it mandatory housing affordability. They’ve mapped out neighborhoods where they are going to upzone areas and when they do the upzone all the units built, any new construction, will be subject to the inclusionary requirement. Are you familiar with Seattle’s legislation at all and where we are at politically?

Rick Jacobus (RJ): That’s about the level of my familiarity right there. I haven’t followed it very closely since I was working there.

OP: I think you are pretty familiar with inclusionary zoning fights generally, the politics of those and you probably could guess that one of the biggest, there are really two controversial things but probably the biggest one is that they are looking at upzoning single-family zones. They’re going to take some single-family zones and make them low-rise probably. The second most controversial thing is the requirement on developers. Is the inclusionary zoning policy actually going to make our city more affordable because it’s going to lead to fewer units being built overall? That’s kind of the argument that’s being made. You’re pretty familiar with those arguments right?

RJ: Oh yeah. I spend a lot of my time in those arguments.

OP: Ok. From my understanding there’s only a handful of inclusionary zoning research that looked at empirical research. It’s probably less than six papers total. I get that it’s probably a really hard thing to measure empirically. So a lot of these papers acknowledge there’s a lot of nuances and it’s a difficult thing to have a black and white answer about, the fact that whether or not it affects supply by adding additional cost. When I’ve looked at the papers there are really two papers that have suggested there could be effects on supply. One is bunk. It wasn’t peer reviewed. It was put out by The Reason foundation. The Powell and Stringham paper. You’re familiar with that?

RJ: Yep.

OP: Then the other one is out of The Furman Center for Real Estate in New York. That one found impacts on single-family housing production in suburban Boston. Are you familiar with that one?

RJ: Exactly, yes.

OP: I’m curious, are there other papers that have attempted to find this connection between housing supply and inclusionary zoning and have actually found a negative impact?

RJ: Leaving out the question negative, I think those are the only two papers that I’m familiar with that have done original empirical research in an ambitious way. There are quite a few student papers that exist. Someone looked at too small of a data set to draw any meaningful conclusions. Those are the two papers that get cited in this conversation. I’m not aware of another good study out there. What I’m going to send you though is a literature review that Cornerstone Partnership did that includes references to a lot of the other studies that are out there. There’s half-a-dozen papers that assert one thing or another without original research. They try to summarize the research that exists or that kind of thing. But those are the two where there is a data set that someone analyzed in detail. There are a couple southern California papers that I think are interesting. And Powell and his co-author did a couple different regional studies as part of that same project. All of their studies found exactly the same thing. I’m not aware of another good study.

OP: On the flip side, my understanding is that there are few pieces of original research that have found what you might summarize as virtually no impact on supply. Some found other impacts that were not related to supply but not a negative impact on supply. The papers that I’m thinking of are the ones by Gerrit Knaap as well as Arnab and Bento and another I think. I’m not sure I’m remembering correctly. It looked at a ton of municipalities in California. Some in southern California and some in San Francisco. Do you know the paper I’m referring to.

RJ: I recognize the name Bento and feel like I’ve looked at that paper. I’m not remembering the specifics of it. I’m pulling up the literature review. There’s also a UCLA study, a group of students did a study, but I forget the name off the top of my head but I forget the authors of that study.

OP: Then there’s another study that I know of, Vinit Mukhija who also did not find an impact on supply. And there’s the David Rosen study that I’m familiar with. The Furman Center also didn’t find an impact in San Francisco. So that paper also made the argument as well that there might not be an impact in certain circumstances.

RJ: They were looking at the whole Bay Area, not just San Francisco and the whole Boston Region.

OP: The Furman Center Study? Is that your memory?

RJ: Yes, that’s right.

OP: Ok, so that’s kind of the list of studies that I know of that had empirical research. One of the things I’ve been trying to dig up is if there is other stuff out there I haven’t found that is worth reading. I think I’ve seen your literature review. I’m almost positive I’ve seen that because I’ve read a lot of the Cornerstone stuff already. If you send it to me I’ll look at it to confirm.

RJ: Cornerstone had a grad student do a more thorough literature review early last year but I just sent you the link. There’s actually four different papers that she wrote. One of them is effects on production. One is affects on prices. [These papers can be found here and here.] Two others are off your topic.

OP: Ok. So that’s kind of where I’m starting from and I’m going out to the authors of these studies. I’m going to try to make sure that I summarize them correctly by asking them, “Do you agree this is what you found when you did this study?” Then the next question I’m asking them is, “What are the mechanics that made that happen?” This is a little speculative. They’ve looked at the empirical research. They said, “Here’s what we found.” But I’m curious why the market behaved that way. Powell and Stringham, that’s obvious. They think that the additional cost is going to reduce the amount of housing that’s built because stuff isn’t going to pencil out. With almost everyone else it’s a bit more complicated discussion. There’s a few different arguments that I’ve been hearing.

RJ: Can I interrupt? Before we get into that. I wanted to back up a step and suggest, if you’re talking to the authors of the Furman study, one of the questions that I always have trouble with is the magnitude of the effect they found. They found an effect on production in the Boston region. They refer to it as very small. They give the numbers for it but the numbers are percentages. What I think what would be really helpful is if you could get them to characterize in plain language how big of an affect they thought it was. How it compared to other effects on pricing or production.

OP: That’s a good idea. I will do that.

RJ: Sometimes I see people describe their research as finding an insignificant or trivial effect and I don’t think that’s really exactly what they found but it’s also not a very big effect. What’s the right way to characterize how much of an affect they thought it had. It’s a change in the relative change so it’s hard to wrap your head around their actual numbers.

OP: Ok. My memory of that is that I thought it was a small affect. I also thought it was only on single-family homes. So the study was limited to not look at multi-family residential stuff. I thought that was kind of a weakness of the study.

RJ: Yeah, the other thing that I don’t think is totally obvious just from reading the study is how small some of the jurisdictions in suburban Boston are. I don’t know how much that affects that outcome. I don’t have a particular theory about why it would affect it one way or the other. It’s really different to talk about some of those communities versus the communities in the Bay Area which are much bigger.

OP: Yeah, so I was kind of getting to this a little bit. People are finding an effect or not finding an effect. They kind of have to speculate why that is happening. One of the things that I thought was actually bizarre about the Furman Center study was that they didn’t find an affect in San Francisco but they did find an effect in Boston. So clearly those jurisdictions have something different about them that’s causing something different to happen. That’s the only thing we know for sure. So when I ask people why there might be an effect or why there might not be an effect, the conversation begins with, “Can the developer rent this apartment at a higher rate to provide a cross-subsidy to the people that are getting the inclusionary zoning units?” It’s kind of interesting to me that’s how the conversation begins because it sort of skips over whether or not the developers are going to bid less for the land or handle it some other way.

RJ: Yeah, I don’t really experience the conversation starting that way when I have it. I think that’s possibly idiosyncratic in terms of who you’ve talked to. I think that even the economists who are concerned about inclusionary tend not to think that there is a direct cross-subsidy within the project in a dollar for dollar sense. My memory of what they said in the Furman study was that their explanation was that there was more flexibility and incentive in the Bay Area than in the Boston area. That made a difference in terms of developers being able to figure out a way to make their project pencil in spite of the additional cost of compliance.

OP: Ok.

RJ: And certainly if it’s incentives, that’s a no brainer. I think anecdotally that the policies in the Bay Area aren’t of the type where that the incentives would entirely off-set the cost of compliance. But you don’t even have to worry about the economics except whatever is left over after you account for the incentives.

OP: I’m not sure I understand exactly where you are going.

RJ: Let’s say it cost a certain amount to provide an affordable unit but you get a certain benefit from the density bonus or the permit waivers or whatever. It’s only the net effect that you have to worry about showing up in housing prices. So if jurisdictions were more generous with incentives you would expect less of an effect on prices right off the bat.

OP: This is the interesting question a couple people have raised. You might see no affect from a regional perspective, or high level perspective, but you might see project by project affect where some projects have a higher rent than they would’ve otherwise.

RJ: I’ve heard developers argue that and I’m not a developer so I don’t really know how that would be. The question I always want them to answer and I’ve never felt a satisfactory answer to, if the market is going to bear that higher rent, why is it that they weren’t planning to charge that to begin with.

OP: Yep, and that’s the counter I’ve heard as well.

RJ: I’m not even saying there’s not an answer to that, I just don’t know what it is. Often when the developers say to me is that what they’re going to do is increase the cost on the other units. I translate that in my head. I think that developers are appropriately focused on their project. I think what they are thinking is that sometimes if they can’t increase that rent then they’re not going to build. What they are thinking is that the inclusionary requirements are going to filter which projects get built and it’s only going to be the ones where they can recapture enough to make up for the inclusionary requirement. Which I think gets you back to the more ‘economist’ view. Unless there’s some other mechanism where they can suddenly charge more for units that have low-income housing next door to them, I don’t know what that would be.

OP: This is kind of a harder question, I think. Are there people that you know who disagree with your perspective about how inclusionary zoning works? Do you think they reasonably could be right and we don’t know enough yet? Are you able to characterize where you disagree with them?

RJ: Sure yes. I just had a really interesting experience the other night in which a friend invited myself and several housing advocates over for drinks one afternoon with a lawyer who represents the development community in Oakland and someone who manages a construction firm. They were concerned about the economics of a linkage fee in Oakland. We had a really interesting conversation along the lines of the questions you are asking. But we had enough time and it was outside of the political spotlight. We had enough time to really talk through where there were differences in opinion. They felt like they could figure out a way to raise the prices on the other units and that somehow that’s what they would do. I think that the main point of contention is always what is the degree to which land values are really flexible enough to absorb the cost. For people who follow the economic thinking, they say, “Ok, we’re not going increase the prices but we’re going to reduce production and that’s going to ultimately increase prices.” The issue is really, if we have this fee or cost, can land prices really decline or can they rise more slowly to capture the cost of providing the inclusionary units. I think everybody agrees that there is some limit and there’s no data on what that limit is. People have different gut reactions to whether that limit is high or low.

OP: I agree, that’s one of the biggest controversies. I’ve asked if there’s research and everybody has said that there’s not. People don’t really know. There is research though on impact fees and their affects on land costs. Why do people not think that is a sufficient proxy?

RJ: Because in the traditional impact fee, the property owner is receiving a benefit and paying a fee for that benefit. In the mock-up of the inclusionary requirement, you would assume the property owner receives no benefit from the inclusionary requirement. So the impact on land value is going to be different from when there is a park or fire impact fee. I think that other literature encourages me to feel like there’s a lot of ability for land prices to absorb fees. But it’s not a direct correlation. You can’t just cite it and say: “They showed that.” They actually showed that prices when up proportional to the benefit not the fee. Does that make sense?

Rick Jacobus a national expert in inclusionary housing and affordable homeownership. He is also is the principal of Street Level Urban Impact Advisors. Rick helped with Seattle’s linkage fee studies. You can read more about him here.

The post Let’s Talk Inclusionary Zoning: An Interview With Rick Jacobus first appeared on The Urbanist.

Owen Pickford (OP): To get started, can I ask you if you’re at all with Seattle’s inclusionary zoning policy and what we’re doing up here?

Bill Witte (BW): Not specifically. I don’t know the exact policy.

OP: Would it be helpful for me to give you a quick overview of what we’re looking at? We spent about two years looking at the previous incentive zoning policy and it was kind of a weak policy because it wasn’t creating enough units for the city to be happy. They brought together stakeholders, 25 stakeholders from a bunch of different backgrounds to draft a more comprehensive affordability policy. They came up with 65 recommendations. Two of which might be called the centerpiece, inclusionary upzones. They’re going to upzone all the urban villages and implement inclusionary zoning when they do the upzones. The urban villages are the areas in the city that have been designated for growth. They account for the most development capacity and in the past years they’ve accounted for about 85% of total development. The inclusionary requirement will probably be between 3-10% and it will depend on the urban village that is being upzoned.

BW: Would it be 3 to 10% on site with no in-lieu fee or off-site option?

OP: There is going to be an in-lieu option. They have not discussed an off-site option. That’s kind of the background. I’m personally pretty familiar with the debates that go on around this. I wrote a longer piece about it. I generally find myself to be somewhat supportive of the policies. I think if they’re implemented, well, I’m supportive of them. I’m familiar with about five different pieces of research that looked at empirical data and tried to answer the question I’ve heard the most often; does inclusionary zoning affect the supply of housing? I got connected to you through David Rosen because I asked him, “you’re supportive of these policies. You have these opinions. Are there people whose opinions you respect, who know a lot about this, who might disagree with you about some of the specifics?” And he put me in touch with you. What I’m curious about is where your views might differ from David Rosen’s and you’re thinking about Inclusionary Zoning.

BW: Do you mean generally or specific to Seattle’s policy?

OP: Generally, that’s my preference.

BW: I have a middle of the road view about inclusionary, which sometimes pisses off both sides. If you have a master planned community, it could be urban, suburban or exurban, you’re creating entitlements, or density, by discretionary approvals, you absolutely should have inclusionary zoning. There’s no excuse not to, even if you’re quote, “a free market type.” I mean you’re creating value. Why wouldn’t you ask for 15% or something be set aside as affordable on-site? On the other extreme, I’m sometimes leery of policies that are say city-wide for every building over 10 units and it’s building by building. First of all, with the possible exception of a city like San Francisco, there are different neighborhoods in the city, there are different submarkets and it might work in some but not in others. Or if you have an area of disinvestment that’s seeking investment, if you’re trying to encourage development in area that’s largely-low income, why would you make it harder? So I don’t have a single view.

BW: The other point I would tend to make, and again San Francisco seems to be somewhat of an exception to this and maybe parts of Seattle, these work best, or cleanest, if you will, if there’s a quid pro quo, just like I mentioned in the master planned community. We’re going to upzone an area, I think this is somewhat the approach the DeBlasio administration is taking in New York, we’re going to allow you more height or more something and in return you’re going to set aside X percent as affordable units. That way you’re not just taking. The challenge with that in coastal California is that cities can’t always deliver the density politically. So it’s fine to say that but where it works best, and San Francisco has kind of done this, you take an urban village or growth area, maybe it’s not proximate to some established single-family neighborhood or something and you apply it there, you can usually accomplish that. I mean this isn’t China. The government can’t just say ‘that’s it, it’s happening.’ But there’s a better chance of accomplishing that. In general, in growth areas, of which Seattle would be one, where these programs tend to work. It’s not completely linear in the sense that advocates will say, “well if you just require more affordability, sellers of land will just get less for their land.” At some level, I suppose over time that would work but you can’t always count on that. In other words, “Mr. Developer don’t worry because you’ll just pay less for land.”

OP: Can you expand on your logic about that and describe the mechanics or logistics.

BW: I think first of all the main issue on the developer side is timing. San Francisco is about to double its inclusionary requirement and they seemed to have resolved grandfathering. In other words, if you have already submitted all your plans and everything, you already have optioned or bought land, then to simply double that is not fair. It’s a question of when such a requirement would kick in. If you know in advance, you’re a developer and you’re looking for land and that’s the policy it can work. It’s funny, developers like rules. They may complain about them but if there are clear rules you deal with them and you adjust. It’s when there aren’t rules and things change late in the game that it’s more problematic. I think it’s better for all sides, including community groups and advocates and everyone. What are the rules? What’s the deal here? With respect to the land argument, on a prospective basis that can work. Just like you can increase land value by upzoning, you can control it by constraints. Adding a requirement in a residentially zoned area for affordability will reduce residual land value. That said, I know it’s more complicated that.

OP: This might be a point of disagreement you might have with David Rosen. My impression from talking with him was that land values adjust dramatically and quickly to when things happen. You’re taking a more measured view.

BW: I don’t think that’s always the case and here’s why. If you’re in a city like San Francisco and you don’t have to sell, there’s evidence that land sellers will just wait. Just like in 2009, you own a condo and values are down. Why would you sell? You don’t have to. You’d wait. Since these requirements change over time, there is evidence that at least some sellers won’t sell or they’ll hold out for their price. The other issue that comes up is it’s not always the case that land is zoned for one use. So if you have enough of an inclusionary requirement, maybe a commercial use has a greater value. Unless a city precludes that, and in some cases they might, it could have a higher value for a different use. I think what he’s saying sometimes works but like a lot of these things, it’s very hard to apply these principles across the board. So it depends. Over time, assuming a consistent policy, values will adjust. But it is naïve to think that land sellers will adjust their expectations overnight.

OP: There’s question that I’ve thought about which I haven’t heard from a lot of people. One of the assumptions about developers offering less for land because they can’t make as much or whatever, is that they would still be able to get financing if they offered less for land. I’m wondering if you’re in a market where the normal price for land is X and this policy passes. You know you have to offer less for land. You go to a bank and you show them you’re plan, do you have an experience or knowledge about whether or not that would make it difficult to get financing because the bank would look at that and say, “that’s not a reasonable offer for land.”

BW: No. The bank won’t care. If it seems like it’s a below market offer, the bank will be happy. The bank will think there’s a “land lift” here because it appraises at a higher value. The bank certainly won’t care, just the seller. It’s when you pay too much that the bank cares.

OP: That’s the inverse of this. I’ve talked to a number of people and they’ve said, “When you are in a market that has slack for rents, maybe a really hot market where people are moving in with high incomes that didn’t used to live there, developers might still be figuring out what the rents are that people may pay. Rather than passing costs on to landowners they’ll increase their rents on people moving into the neighborhood.”

BW: It’s strictly a market dynamic. When a developer plans an apartment building, they’ll underwrite a certain rent. Today’s rent is X, and depending on where you believe you are in the cycle, you might trend rents a percent or something until you open. But the way it works in practice is that it’s not linear. For example, rents dropped 15 or 20% down here between 2008 and 2010. Then in 2011 they started coming up. Then in 2013 they went up something like 25%. In other words, it’s not gradual. They go all the way up really quickly and then they flatten out. You really have to gauge where you are in the cycle. It may be that the average over a five or ten year period is 3% increases a year but it doesn’t happen 3% per year. It might go up 5% then down 7%. It’s uneven.

OP: So if you’re a developer, this is related to the last question I had, you’re kind of guessing what rents might be but you might use that trend line. How does a typical bank look at that? Would they accept a 3% trend line?

BW: They’ll do their own underwriting. They’ll do their own analysis. They’ll have an appraisal and do their own analysis based on comparables in the market. I mean everybody has access to the same data so the projections are always a bit of a finger in the air, even if it’s so-called “experts” making them. And rental housing is all about job growth. Job growth and supply. What appears to have happened, I say from afar, in Seattle, which I think is a good thing, is despite all the job growth in Seattle, rent growth is flattening because the city has been pretty good about allowing supply. With new construction, construction costs go way up in a hot market because contractors and sub-contractors are busy, and all the competition tends to be at the high end because that’s what you have to charge to justify these costs. Land costs go up and construction costs go up.

BW: In San Francisco, I think rents are flattening even though there’s good job growth. And there’s still huge unmet demand, but 90% of the unment demand is a little below the highest rent levels and nobody can afford to charge that on new construction. I think that’s already happened from what I can tell in Seattle and is beginning to happen in San Francisco. Back to the inclusionary thing. It’s fairly easy to monetize this. It’s all about projections of net operating income and you can calculate the affect of 3% or 10% at various income restrictions. What’s the reduction in net operating income? That part is easy to do.

BW: For example you could say that most of us look at return on costs, which is net operating income divided by total development costs. In a very low capitalization rate environment, people or investors will do deals for 5 or 5.5% returns on costs because properties will sell for under a 4% cap rate. In Seattle, it’s probably a little bit higher. Let’s say you were underwriting a 6% return on costs, you now impose an inclusionary requirement and maybe it costs you 20 basis points so the 6% becomes 5.8%. That’s probably ok. So you mentioned a 3% inclusionary requirement, and I say this as a developer, that’s not going to make much difference. Only in a depressed market or a struggling area, a blue collar place, perhaps Federal Way, would somebody be able to say, “gee, I don’t know if I’ll be able to get financing now.” If you’re around Amazon or something, it’s really not going to make much difference. 10% depending on the income level you’re targeting, that’s going to make a difference.

OP: But potentially not enough to make a difference?

BW: Let me put it this way, San Francisco since 2010 has had a 12% inclusionary requirement and there are off-site and in-lieu fee options. And for developers of condominiums where the hit is much greater because there’s such a spread between an affordable condo and the market condo, they almost all take the in-lieu fee option. For rental, they mostly do it on-site. And today, because rents have gotten so high, 12% is fine. They’re proposing to double it to 25% for new projects. That won’t work. I can tell you right now. Not at anything close to today’s land prices. I hate to put it this way but I’ve seen it in San Francisco for years. The progressive community rises up and proposes very constraining development measures after the horse is already out of the barn. What’s happening in San Francisco is there’s a lot product. We’re nearing the end of this cycle for a variety of reasons. So development would probably slow in any event because of natural market reasons and now this will make sure that it ends. The other thing you have to look at, and I don’t know about Seattle, is that San Francisco has all sorts of fees, like a child care fee and and transit impact fee and they keep increasing them. It’s not just the inclusionary reduction in income, it’s the cumulative effect of other mitigations. You have to look at everything that constrains income or increases costs.

OP: The vibe I’m getting from this conversation is that you think a well-crafted inclusionary zoning policy is good policy.

BW: Yes.

OP: But it’s easy to not do that.

BW: Most places have been fairly modest in their requirements because it’s politically hard to get. For developers, the biggest issue is not the scope of the requirement but when it’s imposed, “I’m already in the pipeline. How can you do this?” If you do it with enough notice, then I think things tend to adjust and people can make informed business decisions.

OP: That reminds me. One of the other questions I wanted to ask you about is, people have said in previous conversations about developers that own land but don’t have permits in, Seattle always grandfathers in permits. At the time you put your permit in, the laws on the books are what apply to that permit. If you’re a landowner and you haven’t put in the permit, you’re a developer sitting on land, you might very well be affected negatively. In my mind, there’s two sides to that. One, yes you might end up not getting the return you expected but my guess is that before the policy is implemented you’ll see a rush of permits.

BW: Yes, that is true. Developers are like lemmings. Yes, that would absolutely happen.

OP: I also find myself being a little unsympathetic to developers that are sitting on land and might not get the return they expect. My intuition is that they’re being a little speculative with the land. I’m curious what your take is?

BW: Yes, I think that’s true. I think if you have clear rules and enough warning, I’m not very sympathetic to just free market criticisms. Seattle I think is almost a better example than San Francisco. Where I am sympathetic is where cities make it very difficult and lengthy to build and then impose these requirements. Then you might have cycle risks. You have to take so long to get approved, no wonder there’s a shortage of supply and then you add all this other stuff. Seattle from what I can gather appears to have been fairly good at spurring supply, almost to the point that the market is working and rents are flattening. In other words, if the city is being responsible in its land use policy, then I think these are completely fair. If the city on the one hand is saying, “You’ve got to do this, you’ve got to do that and it’s going to take you four years to get approved.” That’s bad. That’s not good for anybody and that’s the California experience.

OP: So developers here definitely complain about the timeframe but I think the department has released numbers that I think say it’s 3-6 months.

BW: Well let me just make one more comment and then I have to run. California has something called the California Environmental Quality Act, CEQA. What it does is it, unfortunately, can drag out approvals. It allows almost anyone to sue over a permit at no risk or cost to them which is a delaying tactic. Therein lies a lot of the problem in California. Washington I’m sure has it’s own controls but nothing like that. I would just leave you with the thought, if cities are concerned about supply and affordability, then you have to address both within your land use policies. Encourage supply either through upzoning or fast tracking or whatever. In San Francisco, for example, they at least claim that if you agree to 20% affordability they’ll move you faster. I’m not sure if that’s true but that’s what they’ll tell you. In other words, don’t punish people, encourage them, if that’s what you want. If it’s both a supply problem and an affordability problem, then encourage both. Then I have no problem with the impositions.

Bill Witte has an extensive background in housing. He currently works as the Chairman and Chief Executive Officer of Related California. You can read more about him here. 

The post Let’s Talk Inclusionary Zoning: An Interview With Bill Witte first appeared on The Urbanist.

Owen Pickford (OP): I want to make sure that when I’m summarizing the articles that I do it accurately. So that first question that I asked, that your paper didn’t find a big impact, or any impact on the supply of housing, do you feel comfortable with me summarizing it that way? You can send me an email later or something if you want to confirm.

Arnab Chakraborty (AC): I actually just looked at it again and that sounds fair. We, to quote from the paper, we did not find a significant reduction in the rate of single-family housing stock. This sort of reflects the general fear that if you start this sort of program that developers will just go elsewhere. To give you a little background you might be familiar with already, multi-family zoning programs work as a cross-subsidy. I think the Seattle current proposal, to add 5-7% of inclusionary zoning. Is that correct?

OP: Yes, it’s not finalized yet, but it will probably be somewhere between 3% and 10%, with 5% and 7% being the most likely outcome.

AC: And do you know whether this 3% to 10% would be a bonus on top of what the existing zoning allows by right or whether this would be within the requirements that the existing zoning allows.

OP: Yep, so the idea is that it will affect all existing zoning. It doesn’t just apply to new construction over what’s already allowed. It’s not just an incentive. It will apply to all construction, but the reason why this is going to take a little while and it won’t happen until later this fall is that they’re going to couple all the inclusionary requirements with upzones. The idea is that when an area is zoned for inclusionary zoning, at that time they’re also going to upzone the area. They might add another two stories to the commercial stuff. The most controversial part is that they’re going to be looking at upzoning single-family zoned areas. So there’s about 6% of the area in the city that’s zoned for detached single-family housing and will be upzoned. And when it’s upzoned it will be required to be inclusionary zoning.

AC: Ok, so this is sort of a compromise so to speak. When a new regulation is enacted there will be a little bit of relaxation on the zoning constraint of that land to give the developers a little bit more development capacity than the existing zoning would allow. However, with that development capacity comes a requirement to make 3-10% of the housing inclusionary.

OP: Right, that’s the idea.

AC: Ok, one of the fears that we were testing when doing that California study, the study that you’re talking about, was whether this policy was causing developers to go elsewhere. For example, do developers take their development to a neighboring municipality which does not have an inclusionary zoning requirement. This is not something that I’ve studied that specifically but other studies have found that inclusionary zoning policies are more effective when they are reasonably coordinated, when there’s not an incentive for developers to go to a surrounding area. I don’t know if this is the case in Bellevue or other parts around Seattle or the Tacoma area. Are there other cities that are considering this or is the policy just for the city of Seattle at this point?

OP: There are other cities that require inclusionary zoning already but I feel dumb not knowing which cities they are off the top of my head. Seattle certainly runs that risk, no doubt about that. I think that was part of the consideration when they were thinking about setting the level. A lot of people here complain about the level being lower than it is in other cities. But it’s not a fair comparison.

OP: So just to clarify, your paper didn’t find much of an impact on the supply of single family housing or any noticeable impact I should say. Do you remember off the top of your head the logic or logistics of why there wasn’t an impact? One of the common criticisms is that this is going to reduce the return that developers are going to get on their property. They’re going to have to subsidize units essentially. How are they going to make up that return? And I’m little curious what your experience explains how that happens. I’ve heard a couple explanations from different people and I’m curious if you have your own reasoning.

AC: The finding that it did not have a measurable impact on the supply of single-family housing, we did find that it did increase the supply of multi-family housing. We also did find that some of the market rate housing was a little bit more expensive. So even though the numbers did not change, the prices did go up. In California, we were looking at a variety of programs. That’s a caveat here. These programs could be put in three kinds of buckets. One is a flat out requirement with the existing land use controls or zoning allowances. In other cases, it was sort of an incentive-based program. If you develop X amount of inclusionary housing, you get a certain amount of incentive units or development bonus. And often times there was a threshold you had to meet before the requirement kicked in and that varied from community to community. When we look across municipalities in California we were not controlling for some of these internal variations in all the models. When I say overall, there was no measurable effect on single-family housing, these general underlying controls were not there.

AC: Going back to your question, why we did not see a measurable impact, part of my answer is that some of these differences might be getting washed out among these models. On the other hand, it’s partly a matter of how much supply there is of land. If you’re talking about a small city without land to grow. The small city is already built out. These policies would have an affect on the redevelopment of already existing areas, that get redeveloped to higher density if the zoning constraint allows it. That might follow a different path than a larger municipality in terms of area, not population, with plenty of land to grow with different regional dynamics with other communities in the vicinity that people could go to live.

OP: You think the biggest risk is that a municipality might push development to other areas within the region. Is that the biggest risk you see with a policy like this?

AC: That is one risk. I think that the returns outweigh those risks if the policy is designed properly. I think the other consideration one may take when thinking about how to design these policies effectively would be to see what sort of capacity currently exists in the market. If demand exists, there’s a lot of demand for single-family priced units, but not enough demand for affordable units and you try to push more affordable units on the market, that would cram the single-family side and vice versa. You have to find that percentage, 3% or 10% but that’s politics and why you start low. But if there is enough land that developers are not getting pushed out. If the market supports the cross subsidy, let’s say they believe there is a market for the affordable housing that will be generated as part of this policy. And there is a market for slightly more expensive market priced housing that will continue to be there despite this policy, then everybody wins. You create more affordable units for those that need it and you still create ample market priced units for those who want it and can afford it.

OP: The description you’re making there goes like this: I’m a developer trying to decide what to do with my property. I see that I can recover the costs of the subsidized units for charging a little more for the market rate unit, it’s a win-win?

AC: As long as there remains a market for the market rate units. That was the last missing piece. If people will still buy the market rate unit, yes. And I think many people will buy a slightly more expensive or slightly smaller unit, that has become more expensive or smaller because of the cross-subsidy, rather than move 30 miles away, or 50 miles away.

OP: So you describe this as a cross-subsidy basically. I’ve talked to quite a few people about this and different people see this different ways. The most negative perception I’ve seen about this policy is that it does actually reduce the supply of housing. So the cross-subsidy doesn’t even happen. The developer doesn’t see it as feasible anymore and they don’t build it. So that’s kind of what the argument you see, I don’t know if you remember this at all, in the Powell Stringham study that was done by the Reason foundation. That’s basically what they were trying to show. And then the second argument is basically what you’re saying, if the market is right and the inclusionary zoning policy is not terribly crafted, you can see cross-subsidies where there are more expensive units in a building to subsidize the lower cost units. The last argument I’ve heard from people is that the developers will bid less on land ultimately. That will actually be part of it at some point. So rather than having it subsidized with their market rate units, they end up lowering the cost of land or keeping the cost of land steady where it’s rising. Is that something that you think is a reasonable outcome or is that something you disagree with and you think the cross-subsidy is more likely to happen? Or are you speculating a little?

AC: I think you’ve framed these three arguments quite well. I would not speak too closely with this cross-subsidy argument. I think that’s part of it, probably a big part of it, the cost got transferred from the affordable units to the market rate units. That’s essentially what our paper found. More generally though I think it depends on how you design the policy. Those two are not the only players. There’s also the developer. A cross-subsidy between an affordable homebuyer and a market rate homebuyer is framing it as if the developer has no additional costs and no additional benefits. I think the other two arguments think about it from the other angle. The third argument thinks more from the developer perspective. If the developer finds it too expensive, they’ll either bid less on the land or move away. That’s where the specifics matter on how you design a policy that is acting as some cross-subsidy but also incentivizing developers to do it so you create the affordable housing. If all you are doing by creating this policy is deflecting developers, then it doesn’t help. You need the developers to develop the affordable housing and it’s not just cross-subsidy. It’s useful to think of it as a marginal cross-subsidy. There’s significant benefit for the affordable home buyer as well as a significant incentive for the developer. If the cost to the market rate unit can be kept as low as possible. The benefit to the developer should be kept visible and reasonable, which are the incentives. And you create a significant supply of affordable housing, that’s the win-win solution and that’s sort of the challenge of setting up a policy like this.

AC: There are other factors that have to be mediated. One of those is the size of the municipality. Is it a small place in a large region that ends up deflecting development or is it a large place or dominant municipality that has a booming market and there’s not a lot of deflection? The other thing is maybe starting low. 3-10% keeps it politically viable. The other factor I think is how the housing market is. Is it really busting at the seams? Then the consumers are able to handle increase in prices. It’s really intolerable for the affordable homebuyers. There’s really an imperative to have a policy like that. Another thing that doesn’t get talked about often is, ‘What do you mean by affordable housing?’ If you look at some programs, say Montgomery County Maryland, where they have this long-running program called ‘moderately priced living units,’ well moderately priced living units have gone for almost close to a quarter million dollars or more. So they’re moderately priced from the perspective of what’s around them, yeah, when everything else is half a million or more, then they’re moderately priced. But they’re still not affordable really. So the 3-10% is not the only parameter of the policy. It’s generally set at 60% of area median income or something like that. Whatever the variable is, that’s going to matter.

OP: This is a good segue into my next question. What I’m trying to tease out from people who have studied this, given a well crafted policy, do you think cities should be pursuing this? If not what policy should they be pursuing because ultimately the city is going to try to do something to solve this problem. The inclusionary zoning problem is two types of problems. It’s not just can we get enough affordable housing units. It’s also where are those units going to be? Are our communities going to be inclusive? It seems like a lot of people I’ve talked to say they are pretty positive about the policy. They think cities should be pursuing it. A few people I’ve talked to are more skeptical and I ask what they should be pursuing instead and housing vouchers come up a lot. I’m curious where you might fall on that spectrum? If you’re the dictator of Seattle, which policy would you pursue first?

AC: That’s a good question. I think some of things you said are applicable more generally. It’s not just creating affordable housing but where it’s being created. You don’t want affordable housing created in some remote corner where people who live there don’t have access to transit and things like that. Some of the places I’ve looked at, these policies work more broadly over the entire municipal jurisdiction. Where people take this on, is a different question. Sometimes the neighbors want to push affordable development to the edges. That goes into how inclusive the community is and there are different kinds of experiences in different parts of the country or even within a metro area.

AC: Going back to your question about housing vouchers, I think these target different income segments. If you’re talking about federal programs like Section 8 or other housing vouchers, I see them targeting a lower section of the income group than affordable housing. At least the way some of the programs are designed. When you are talking about affordable housing as part of a new development, you’re not talking about the same market as a Section 8 voucher. Of course we’d like everyone to have access to quality housing but the market reality is difficult. Affordable housing is going to a household making 50, 60 or $80,000, depending on your metro area. Section 8 would be much lower. So it depends on what sort of distribution your housing stock currently has and what sort of demand distribution you’re currently facing. If you have much greater demand in a lower income segment, then you’ll target your resources towards creating more opportunities for Section 8 housing. But if your demand is more in the middle income category, where people are earning a median income or slightly above it but can’t live in the community they work and go three counties away, this policy is for that segment.

OP: What you might call workforce housing.

AC: Yep.

OP: You probably know people who study this. You’ve probably worked on this awhile now. I’m curious if there are people who genuinely disagree with and you understand their points of disagreement and you can represent what that is and where they’re coming from when it comes to inclusionary zoning policies?

AC: To over simplify it, it’s sort of economists versus planning kind of argument. Free market economists might say your intervention is a problem. Planning is creating this problem. And they would argue that inclusionary zoning is just more planning. Some of the criticisms are certainly valid. I think there has been a lot of poorly crafted legislation. However, if their solution is to let the free market prevail in creating affordable housing, the realities are not going to support it. Am I getting at the question you’re asking?

OP: That’s a good example. I’ve talked to other people and they’ve said something similar, that there tends to be a divide between people who come from a planning perspective and people who come from an economics background. The way they sort of articulate is that divide is attributable to the end goals these people are thinking about. That sounds like what you’re saying.

AC: Yes, and not all economists are free market enthusiasts and not all planners are inclusive. I would argue a lot of planning has been from the perspective of protecting housing values and character of the community and all the accommodations that come with it. But there’s a lot of diversity within these groups. There isn’t just a generic planning perspective but there is a problem. We have a lot of communities where living is out of reach for a lot of people who work there. How do you create housing in that community? It’s not going to happen if you just remove all the legislation that’s in place. First of all, that’s not practical. It’s not zoning that’s stopping developers from developing multi-family housing. It’s a lot of other realities, attitudes, markets, and having a requirement to create more affordable housing in these areas might help.

Arnab Chakraborty is an associate professor of urban and regional planning at the University of Illinois at Urbana Champaign. He has a background of research in planning and housing with specific research on inclusionary zoning. You can read more about him here. 

The post Let’s Talk Inclusionary Zoning: An Interview With Arnab Chakraborty first appeared on The Urbanist.

Owen Pickford (OP): The first question I have is are you paying much attention to the politics of inclusionary zoning around the country and are you at all familiar with Seattle’s policies they are looking at adopting

Vinit Mukhija (VM): No, not that much. I have been looking a little bit. I’m more focused on the California debate, a little bit on New York, not much on Seattle. I have done some research on Seattle and I will bother you at some time in the future to get your insights on backyard cottages. But I don’t know much about your progress on inclusionary zoning.

OP: So it looks like probably this fall they’re going to be adopting policy, or voting on policy around it. They are looking at a 3-10% inclusionary requiring and they’re going to couple it with upzones. The places that get upzones, they’re going to do the inclusionary requirement. The places that they are looking at are what the city calls urban villages or urban centers. Which are just really the areas in the city that they zoned to have enough development capacity to take growth. They have areas where they don’t really zone any development capacity and other areas where they do. It’s areas where they’ve zoned development capacity that they’re looking at enacting this.

VM: Sounds good. And then, Owen, I think my understanding is that you have state legislation that enables cities to put inclusionary zoning when they upzone.

OP: There is controversy around the legal requirement. There was some belief that the state law might see an inclusionary requirement that was not coupled with an upzone as a taking. And so that’s kind of where this comes from, the dual policy. It’s also a political choice. The idea is to get developers on board with it. They wanted to create a larger coalition so they’re adding the upzones in with an inclusionary requirement.

VM: Ok.

OP: So with that background, this is what I know right now. There are a few papers that have been published. At least two which have negative repercussions on housing supply from inclusionary zoning. The two I’m familiar with are the piece out of the Furman Center for Real Estate which found a negative impact in Boston. And then the Stringham and Powell piece which was not peer reviewed and taken pretty critically by most people who know a lot about it. Are you familiar with any other papers that have found a negative impact on supply from inclusionary zoning?

VM: I’m trying to remember. I think the Furman one is the best piece available. There may have been another one from Maryland…

OP: Gerrit Knaap?

VM: Yes, Gerrit Knaap’s group. So I think there might have been one that he and his colleagues did that also like the Furman paper, found a slight impact on supply. A small impact. And as you know the Powell and Stringham piece was not done nicely in terms of controlling for and seeing how supply or prices had changed in the jurisdictions.

OP: Yep. Ok, so beyond those studies that may have found a negative impact. The other research I’m familiar with has basically not found a negative impact. For the most part it’s found in some cases there may be an increase in rents, found in some situations. But for the most part, no negative impact on the total number of units of supplied. And the other studies that I was thinking of was, one, the Gerrit Knaap study which you’re familiar with, your study, which is the reason I reached out to you. The study you did with three other people. And the David Rosen study. And there might have been one more. Are you familiar with any other studies that take an empirical view of this, collecting data, not just modelling, and don’t find an impact on supply?

VM: You know, I think these are the ones, Owen. I’m trying to remember. You noted that we had this other paper, follow up paper, on the trade-offs. I’m trying to see if we added one or two more studies in there. But when we did the initial research, these were the ones we came across. The ones you already mentioned.

OP: Ok, just generally from your perspective, do you think impacts on supply can be avoided with a well crafted policy?

VM: Yes, definitely. And I think additional density is the key to that.

OP: Can you expand on that, what you mean by additional density?

VM: I think that there may be a tradeoff. There is a cost, so to speak, of the additional units and the question is where does the cost go? If the landowners are bearing the cost, then I think there is no effect on future supply or prices of units. But if the developer is bearing the cost, then it is likely that some of that costs gets transferred to buyers. And the best way to avoid that is through additional density that allows the developer to make up for the lost revenue of inclusionary units. In a way the cost may go elsewhere. This is controversial, but the cost may go to increased congestion at the street level. The neighborhood absorbs the cost.

OP: Uh huh, because there’s more people is what you are saying?

VM: Exactly.

OP: I’m not a planner by trade. I’m an amateur. It’s just a topic that fascinates me. I’m not an economist by trade either. Can you explain, as clearly and simply as possibly, how a cost that a developer would bear… Let’s say you’re a developer. You have an inclusionary zoning policy that’s enacted. It applies as a percentage of your units to the entire project. Can you explain how adding additional density, let’s say you add floors, would make up that cost to them? In my head, I’m thinking that every single floor you add, you’re also adding more inclusionary units that you need to build, right. So adding more floors, in my head, doesn’t necessarily mean the developer has more revenue, right?

VM: No, you’re right. But here’s what’s happening. If you start out with a development in which you had, let’s say it was twenty units, and of those twenty units, we use the Seattle example 10% inclusionary, you would say, “We would want to have 2 affordable units.” Essentially what you are doing is telling the developer, “We’ll take 2 affordable units but instead of building twenty, we’ll let you build 10% more, so 22.” Or whatever extra upzone you end up doing. If you follow some other places, you might upzone more than 10%. The developer is not making a loss there because it’s in addition to what they would’ve built without the upzoning.

OP: Ok. In my head, I’m thinking, “Yeah, if you add two more units and you don’t have to add any more inclusionary units, then that makes sense. But if it’s a ratio and every single time you add units you also have to add some inclusionary units.” Then it seems like it wouldn’t really matter what it was zoned at. It would just always be a percentage of the total cost, the same percentage anyways. This is the most controversial part in Seattle about this. There is a large political coalition of people that think adding more housing is a really important part, private market housing, is a really important part to affecting supply. So they have this fear that if we do inclusionary zoning, we’re actually going to negatively affect supply. And the argument boils down to who’s eating the cost. Is it the landowner or the developer? If it’s the developer they’re afraid that we’ll reduce supply. If you think that a well-crafted policy won’t reduce supply, can you tell me, does that well-crafted policy work because the landowner eats it? Or does it also work because even if the developer pays it, they can make it up in other ways? Or is it both?

VM: It’s more of the latter. If the landowner eats it over the long-term, it doesn’t make a difference. It gets reflected in prices. But what you’re worried about is if the developer is owning the land and then this policy comes or is planning to buy the land and the price of land hasn’t changed. Then how do you make sure that the developer is still attracted to these projects? By allowing a density bonus, you assure the developer that their profits are marginally affected.

OP: Ok. So you’re thinking, in the short run, that’s a big problem. You need to make sure that the developer can still profit in the short run?

VM: Yes, that’s usually the concern. That’s basically the concern my empirical study tried to examine, whether supply falls because of these requirements.

OP: Ok, then in the long run, where would you put yourself at? Do you think the land ultimately adjusts? The land prices ultimately adjust in the long run?

VM: That’s what economic theory would suggest, that in the long run it doesn’t make a difference. The prices will adjust. So it shouldn’t. But no one quite looks at it over the long periods. But it shouldn’t make any difference. I think even the strongest critics of inclusionary zoning would acknowledge that.

OP: Ok. So you say ‘economic theory,’ and when I hear that it sounds like you don’t have a study that might show that or attempted to answer that question.

VM: That’s a good point. I don’t think anyone has because honestly nobody knows, I believe, but I’m not a land economist, but I think nobody knows what that long term horizon should be. Is it five years, ten years, twelve?

OP: Ok, and that has a little elasticity of land costs, right?

VM: Probably. And demand.

OP: Ok, but you’re not familiar with studies that attempt to show that?

VM: I’m not. No.

OP: I’ve read studies that attempt to do that with impact fees. Are you familiar with any of those studies?

VM: Yes I am. Again, I think Gerrit Knaap has a few. Or his folks at The University of Maryland.

OP: Just out of curiosity, do you think that’s a fair comparison? If you were trying to extrapolate the impacts of inclusionary zoning and you did a study on impact fees, do you think that would be a fair way to extrapolate those impacts?

VM: I think that is possible. Again, the  big thing that makes inclusionary zoning in practice different from all other fees, is that usually it’s always accompanied by these density bonuses. So that’s what makes it different from any other kind of exaction. If there were no density bonuses and it was just a requirement without that, then I think it would more closely approximate those fees.

OP: Ok. So there’s also some other criticisms of inclusionary zoning. One common one is that it doesn’t produce enough units. Each of those criticisms can be answered with various other benefits and that’s sort of thing. One of the things that’s most compelling to me about the criticisms of inclusionary zoning, is that it’s not that’s bad but it’s the wrong thing to be focused on. If you imagine a world where politicians can only spend so much time on things and you have to prioritize your political capital, people argue we should really be focused on something. While I think that’s a valid concern, one of the things that I think is troubling about saying that is that I’m not familiar with other policies that specifically try to address economic integration in neighborhoods. So I’m kind of curious, for someone that’s studied this, if you know of other policies or if you were the dictator of a city, if you would focus on other policies first before inclusionary zoning. That might housing vouchers or liberalizing the zoning code or various other things.

VM: I think the criticism that the production of affordable units through inclusionary zoning is limited has some merit. To take your Seattle example, particularly if it’s going to be 3-10%, that is going to be more limited. But I look at New York and what they’re trying to do, it seems like they are looking at much more aggressively, I think it’s 20-30%. In that case it starts adding up significantly more. I also think that when we did our Southern California study, we found that the numbers were limited but we also found that those numbers didn’t quite include the in-lieu fees that were being collected and leveraged to produce other affordable units. There’s a little under counting. I think we also know that this is such a complex issue, provision of affordable housing, that from a policy perspective I think there is not a single silver bullet. And certainly inclusionary zoning is not a silver bullet. But it can, in my mind, be a part of a slew of options. But again to get at what you were sort of saying, I think it would be advisable to be cautious about expecting too much from inclusionary zoning.

OP: Yep. I think Seattle has a goal of 6,000 units across their policies and it might only be 2,000 from inclusionary zoning. I can’t remember off the top of my head. But it’s not a huge number. And that’s over ten years. So one of the things I was trying to get at, if you’re ranking a priority of solutions to housing affordability, would you put inclusionary zoning near the top? Or would you put it at number one? Or would you pick something else first?

VM: If you gave me the option that we could build a lot more public housing, I would pick that. But that just doesn’t seem to be an option that’s afforded to us. Then it becomes a function of trying to alternatives, all of which have their flaws in many ways. Then you’re right. These are political battles. One has to see what’s feasible in a certain context. But if inclusionary zoning can be done with density bonuses in a way that you have some political consensus, then I think it is worth doing.

OP: Ok, yeah. I have one more question really. I’m curious if you have colleagues who you respect and you think they have valid points, but you don’t agree with them about inclusionary zoning? I’m curious if you’re able to represent what they think and what your  disagreement is?

VM: I think one disagreement might be… When we did the study looking at supply, we didn’t really look at potential effects on prices. We thought we would look at supply, that’s the key, that’s the criticism. Some of the subsequent research that I have seen does show a slight effect on prices. Some of the market rate housing is slightly more expensive. I might personally think that’s not a big deal but I could see an argument saying that is important and that’s why it’s not a good policy. The other criticism I think you pointed out. The numbers are really, very small in terms of what has been produced. Except for Maryland. Everyone would point to Maryland as the exception.

OP: Yeah, it’s like 17,000 units or something like that, right?

VM: Right. So that’s sort of makes me think, “Then it can be done!” The other criticism I have heard from others, and I think it has some merit, is tracking the affordability of the set aside units, making sure they’re fairly allocated. Who does that? How? I think that system is not very well developed.

OP: Yeah, ok that’s an interesting point. Would you advise cities that are looking into inclusionary zoning to have some sort of enforcement or regulatory teeth about how the units are built and rented?

VM: I think so. I think it has to be, and I haven’t studied this, but I think it probably has to be the housing department that looks into affordable units that are outside nonprofits, that stay affordable or rent controlled and stay rent-stabilized. Someone has to be responsible in ensuring these affordable units are properly allocated and stay affordable. Again Maryland might be a good example to study the institutional system there.

OP: Ok, one last question. Sorry, I know said that last question would be last but I’m just thinking about this now. Would you think a policy like what Seattle is proposing where they’re looking at 3-10% affordability and an upzone coupled with it, is a reasonable policy? Given that amount of information you might support it?

VM: I think 3% seems very low to me. What does that mean? What is the minimum threshold at which this kicks in? Is it only for projects above 30 units.

OP: I think they were initially talking about projects above 10. But 3% at ten, I don’t think it would kick in until you had 20 or so.

VM: So 3%… I think you would have to hit 33 units to even get one unit out of it.

OP: Yeah, depending on how they do the rounding and stuff.

VM: So 3%… These details are important in structuring these policies. Usually when we talk about subsidies… The density bonus in a way is a subsidy to the developer. So I think the design of that subsidy has to be, as they say, fair, adequate, and not excessive. I think they have to look at these calculations a little more carefully so that they ensure the right amount of affordable units are being required.

OP: You’re in LA, right?

VM: Yes.

OP: So let’s say you have a city with a wage structure similar to LA. What do you think is the ceiling in LA for an inclusionary requirement? Is it 30% do you think? If you had to give a ballpark figure?

VM: You mean, what is the maximum you could require?

OP: Yeah, without having negative repercussions?

VM: I’m really not sure. All I can tell you is that the ones we looked at in Southern California were on an average of about 15%, from about 10-20%.

OP: The laws were…

VM: And I can tell you that they worked. They didn’t have negative effects. But I’m not sure how much would be too much.

OP: Yeah, and you’re not familiar with research that’s tested the upper bounds of that?

VM: No, not really. I don’t think so. As the New York evidence becomes more clear, we’ll have something. I think Maryland is around 15%. So we know that’s a reasonable expectation 10-20%. But I don’t think we know how things change after that.

Vinit Mukhija is a Professor and Vice Chair of Urban Planning in the Luskin School of Public Affairs at the University of California, Los Angeles (UCLA). He’s personally done empirical research on the inclusionary housing programs. You can read more about him here.

The post Let’s Talk Inclusionary Zoning: An Interview With Vinit Mukhija first appeared on The Urbanist.

Owen Pickford (OP): Seattle is going to implement a 3-10% requirement, depending on a couple different factors and how the legislation plays out. In areas called urban centers or urban villages; the city of Seattle has areas that are zoned for growth. They’re basically zoned for development capacity and they’re where they’re trying to direct their growth. Those areas will have an inclusionary requirement. At the same time they’re going to implement the inclusionary requirement they’re going to do an upzone. Places that are medium zoned will have maybe two more storeys or so. There’s about quite a lot of areas that are zoned for single-family detached housing right and that will probably changed to lowrise or commercial zoning.

Nico Calavita (NC): I’ll make a comment later but you can go on with your questions….It seems to me that with an upzoning 3-10% is a very small amount. If upzoning is involved it should be higher than that.

OP: That’s your initial thought?

NC: My initial reaction, yes. I don’t know if you have seen two reports that were released in the last couple years. One is called ‘benefit zoning’ and the other is called ‘value capture.’ When we finish, I will send them to you.

OP: Yes, please do. This actually gets to the meat of my questions. I’ve spent quite a lot of time following this issue for about two years. I’ve read a lot of the research that’s been done. I might get the number wrong now, but there’s about four or five studies that have done empirical research, specifically trying to answer the question of the effect of inclusionary zoning on housing supply. One of those studies is probably bunk and I think you were one of the authors that wrote crticism of it. It’s the Powell and Stringham study. And then the only other study that I know of that found a negative affect on housing supply was the one out of the Furman Real Estate Center. It found a negative affect only in Boston. It looked at Boston, DC, and San Francisco, and it found a negative affect in Boston.

NC: I think it was a slight negative affect.

OP: Right, yep. So my first question is, are there any other studies to your knowledge that have found an negative affect from inclusionary zoning, or is that it?

NC: That’s it.

OP: In addition to that, it’s my understanding that there’s at least three studies that found no affect. And even in some studies they found an increase in some types of housing production, like multi-family. Does that match your understanding?

NC: Yes.

OP: I’m curious, have you personally done empirical research on that question specifically? The affect on the private market housing supply.

NC: No, I have not.

OP: So generally speaking there’s a few theories about what happens with inclusionary zoning, why we’re seeing these results I should say. Powell and Stringham are basically saying, it’s a cost on developers so they’re not going to develop. The Furman Center study is, and almost everyone else I’ve talked to, I’ve talked to quite a few people, think it’s more complicated. It’s a little bit more nuanced. There’s a few different things developers can do. What a lot of people think developers do though, is a cross-subsidy, where the units in the building they’re constructing end up with higher rents to subsidize the inclusionary units. It seems to me that in my conversations with people that’s where they’ve landed, rather than the third option, which is developers bid less for land. Do you have an idea about how your colleagues opinions break down?

NC: So by cross-subsidy do you mean that they would charge more for the market  units?

OP: Yeah. Let me give you a little background on why people are saying that. I’ve asked this question, if it doesn’t reduce supply, what is actually happening? The answers I’ve received have varied a little bit but one of the answers I received was exactly what you just said. They charge more for the units that are private market units. And I’ve asked, “what makes you think that rather than thinking the developer bids less for the land?” And the answer that I’ve received is basically, “have you ever looked at a developer’s pro-forma? I’ve seen a lot of pro-formas from developers and that’s how they represent their project.” What’s your reaction to that? Have you heard that before? Do you think that’s a reasonable take?

NC: No, this is actually the first time I’ve heard that a developer would charge more for sale or for rentals. What the response to that usually is, “Any rational developer would be charging the maximum the market can bear.” The market isn’t just the market for new construction. It is the whole market, the existing supply of housing, which is much larger. So the developer would charge what the market can bear at a particular time. To me that answer does not make any sense at all, “some units are inclusionary, therefore I’ll charge more for the market rate units.” You would be charging the maximum you can. Otherwise you are not a rational developer.

OP: So with that view, it sounds to me like you think the cost comes out of the land, out of the bid for the project.

NC: That is a strong possibility. I have talked to developers myself in presentations and the response has been, “well of course. If now my costs increase, I would bid less for the land. I would negotiate for a lower price of land.” I knew an economic consultant that was doing studies for a commercial linkage fee increase in San Diego a couple years ago and he went as far to say that this increase would be absorbed in three years after the enactment of the increase. The other side of that which is not good, the landowners might not agree to a lower price for land. The argument could be made that in some cases the developer will wait for higher prices. It might stop development that way.

OP: So what do you think? Do you think that happens?

NC: I don’t have any empirical evidence but I think that’s something that could happen. A city passes an inclusionary 20%. That increases the cost. The developer is negotiating for a piece of land. He says, “You have to come down 10%.” And the landowner says, “that’s really what I want for my land, take it or leave it.” That might kill the project.

OP: Do you think that an inclusionary requirement with an upzone is a pretty good way to handle that problem?

NC: Absolutely, absolutely. I assume economic studies have been done, to set the value of the increase. I’m surprised that is 3% but it depends on how much of an increase it is. Just 3% of inclusionary seems to me that it is favoring the developers. Given the heat of the market in Seattle, they’re probably going to make more money with the upzone

OP: They’ve conducted a nexus study. That nexus study included basically an estimate of what the developer could handle. The maximum the developer could handle is definitely higher than that. There’s a few reasons why they are not doing that and it depends on who you talk to. I think it’s a political decision. But there’s people who I respect and are being honest about this who are saying, “we need to get IZ implemented first and we need to not screw it up.” They don’t want to implement it in such a way that it kills development and makes it a failed policy.

NC: Ah, yes I know. These people are being paranoid. It’s all related to the health of the market. If the market is booming, there is no way that with an upzoning a 3-10% inclusionary is going to stop development. No way.

OP: Ok. So one of the questions I’ve had that I’ve been asking people is, are there people who disagree with you about inclusionary zoning that you respect? Can you explain why they disagree with you? What are the legitimate points of disagreement?

NC: I’ve been in the context of first San Diego and now in the Bay Area. In San Francisco, inclusionary is going to be put on the ballot to increase it from 12% to 30%. The costs are such that this is not seen as such a terrible thing. I will send you an editorial I wrote for the San Francisco Chronicle, in which I propose to phase in this increase, on the basis of the land market’s need to adjust to this increase. There should be a period of years, two, three four years, in which this increase is phased in for the market to adjust to the reality of the land market.

OP: To clarify, that process of adjustment, your thinking is that it sends the right signals to landowners.

NC: Right. So if a developer was negotiating for a piece of land at the time…Let’s say inclusionary is a new thing, or the time when San Diego approved inclusionary in 2002. When the in lieu fee was very low, that is really not going to hurt the developer. He might gain some discount from the landowner. But the phase in would allow the developer and the landowner to understand what the market is and how it’s going to be the next year and the following year. That was done in San Diego and that was my proposal in San Francisco as well. You shouldn’t increase all of a sudden because it will hurt some developers who bought the land three months ago or before this was approved by council. Again, the idea is that you need the market to adjust to these additional regulations. I will also send you an article that I wrote with a co-author of the book on inclusionary zoning with an international perspective. The article was a proposal to have a two-tier inclusionary. One is an inclusionary that applies to the existing layer of zoning and then to have a higher inclusionary which is tied to upzonings which increases the value of the land. I will send you that too. More for you to read.

OP: There’s a bunch I’ve read already.

NC: Sure, but these writings emphasize value capture and give examples in San Francisco and San Diego and Santa Monica.

OP: Ok. One of the other criticisms I hear about inclusionary zoning a lot is that cities should be focused on something else. It’s not a good enough policy that cities should be focusing on it. There’s generally a few reasons for that. A lot of economists think housing vouchers are a better solution. The other is that inclusionary zoning just doesn’t create enough units.

NC: Absolutely true. This is all true. But the answer I think is that we need everything possible to address the housing crisis. I think you have a crisis in Seattle and the same is true in San Diego and the Bay Area and so on. Low-income housing tax credits produce much more housing than inclusionary does. And that addresses a lower income of the AMI scale. Inclusionary does a pretty good job for just below 80% of AMI. And in San Francisco where the prices are where they are, one of the goals of inclusionary is for it to address between 80 and 120% AMI. So inclusionary is not a panacea that will solve the housing problem. It is a local response. It produces, in the case of in lieu fees, local funds that can be leveraged with federal and state funds. Especially in California there is a very active non-profit sector. There is a big debate about whether inclusionary should generate money or units. I don’t know what is being proposed in Seattle. Here there is disagreement among us in terms of have the developer build the units or have the developer pay money and nonprofits can use the money to leverage and build even more housing.

OP: Ok. I definitely get that it’s going to take multiple policies. Cities have restrictions because it really needs a larger response than just a local response. But let’s say you’re the dictator of a city and you can craft a policy. What do you think is the root problem that needs to be addressed and what policy would focus on that?

NC: Housing affordability is related to wages. We’re seeing a decrease of low-income households in the Bay Area, with people moving to the fringe of the metropolitan area in search of chaper housing. The other problem is related to the maintenance of existing affordable housing. Many times we focus on building but don’t fund the maintenance of naturally occurring affordable housing. The scope of the problem is so large that a city can not address that by itself. It really needs to happen in state houses and the federal governement. Cities are getting into commerical linkage fees and inclusionary zoning because the state and federal government are not doing enough.

OP: Ok, so the way the debate is happening in Seattle right now is focused on how much could this problem be solved by the private market, if we just liberalized our zoning codes. Any time there’s a policy that interferes with the private market, there’s a lot of push back for that reason. There’s a ton of support across coalitions for policies that give tax breaks and things like that. But a policy that adds cost or regulations to private developers gets a ton of push back. I’m just kind of curious how much energy should be focused on liberalizing the private market zoning codes. Should that be a priority?

NC: It’s an issue of planning versus affordability. I’m both a planner and an affordable housing advocate. In the state of California there’s a state density bonus law that basically allows any developer to come into a neighborhood where planners have determined the appropriate densities and the developer is allowed to increase densities 25%. So what does that do to the planning  process? It’s a question of how far do you want to go in terms of densifying the city without harming other aspects. You have to set a balance between increasing densities and harming quality of life. For example, what about traffic? In San Francisco BART is breaking down. Who is going to pay for the increase in demand on mass transit? It is the development that is increasing and creating demand for mass transit. The developers are benefiting from this increase, especially the land owners. It’s an issue of balancing transit reliance issues and creating more affordable housing. But my feeling is that the maximum 10% might sound radical but 10% inclusionary is nowhere near the value the developers are getting. If indeed the economic analysis has shown that they’re going to benefit more than what they are giving in terms of inclusionary, then a higher inclusionary requirement would be commensurate with the benefit they get from upzoning.

OP: When you’re using your intuition on this and you say that 10% seems low or 3% seems low, where’s that intuition coming from?

NC: Well for example, I’ll send you a graph of what inclusionary housing production has been in San Diego since inclusionary housing was passed in 2002. You’ll see that when the economy was booming, the amount of dollars increased proportionally. So does inclusionary without density bonuses fail? No, it was very successful. It succeeded without density bonuses.

OP: So you’ve seen enough cities and you’ve seen enough programs, that it seems completely reasonable to have a higher amount. One of the questions that people have posed to me is that, the debate that people have is, what are the limits of the ability of land to absorb this cost?

NC: And that’s why you should always call for a financial economic analysis. That gives you the base and then you have a political decisions. But you need that knowledge in order to have a political discussion.

OP: Ok. You feel that if you did a survey of your colleagues, that would probably describe where there’s debate? The ability of land to absorb costs? That’s really the big question?

NC: Not really, not at the point that I think would be healthy. I think that’s because in this country the land issue is not as important as it might be in Europe or South America, where this issue is huge. It’s part of the culture of planners to understand the issues. In England it’s called betterment. We have no such word in this country because the issue of land values and taxes in not important. It’s not taught here. I’ve been trying the past few years to make American planners aware of this issue. It’s happening and value capture is being utilized more and more. Still it’s something that’s not part of the American culture. I think that it’s not something that is being discussed. If you know, Rick Jacobus did an inclusionary housing matrix or calculator. Are you aware of that.

OP: No, I’ve spoken with him but he hasn’t mentioned that to me. I’ve met him because he helped craft Seattle’s policy.

NC: He’s come up with a calculator where you increase the percentage of inclusionary and that affects the profitability of the developer. You increase the AMI and that affects the profitability of the developer. He’s been unable to insert in this calculator the value of the land because it’s much more difficult. For example, the effect of inclusionary on land prices will take a few years to show. You can not immediately calculate how that will affect the project. What I’m trying to demonstrate is that land value is not really part of the discussion the way it would be in other countries. In this particular calculator, the land value is not a factor.

OP: The political conversations that I have a lot focus around free-market versus government intervention. There’s been a tremendous popular, cultural movement to liberalize zoning codes. This has been picked up by mainstream journalists, Matt Yglesias. Ed Glaeser’s book was a New York Times best seller and he’s a big proponent of liberalizing zoning codes. It seems necessary to me as well but also comes in conflict with things like inclusionary zoning policies.

NC: As I mentioned a few minutes ago, it’s in concert with planning. Why do we have urban planning? Why there’s a long history of zoning regulations and development planning, community plans? What we plan should change with the times. We have to be careful though in this search for higher density, urban living, smart growth, and so on, that we do not fall in a position in which the quality of life in our cities is not as high as it should be.

OP: Do you have examples of cities that are particularly good examples of poorly planned cities?

NC: No, I don’t. Houston and Phoenix and so on are used as examples but I don’t know them well enough. I’m more familiar with cities like Vancouver, Portland, and San Francisco.

OP: Is there anything else you want leave me with? We’re going to be covering this pretty closely on our website. Are there any guiding points that you think would be important to leave us with that I haven’t thought of already?

NC: I’m really impressed with all the work you’ve done. In a way, I sense a particular political culture in difference cities. I’ve sensed that the political discourse on development in Seattle is really very much in the hands of developers. For a city to contemplate plan changes and higher densities, and at the same time consider inclusionary of 3-10%, when in a city as conservative as San Diego there is an inclusionary of 10% without density upzonings just tells me that it’s not in the place that I expect it to be. The discussion and the narrative seems to be dominated by developers or density people without the other side having enough power to counteract their narrative discourse.

OP: That’s an interesting observation. It was a big deal that inclusionary zoning is even being considered from most people’s perspective here. The people that I’ve talked to that have been advocating for this for a long time were shocked that the Mayor came out with it, in the sense that they’ve been working on it for so long they couldn’t believe it’s finally happening.

NC: It’s a city that seems to be progressive but I don’t know much about it, I’m talking about Los Angeles, where they have pretty progressive mayors. I think that is the only big city left, with Seattle, that doesn’t have inclusionary zoning in the country. That is surprising in a way.

Nico Calavita is an emeritus professor at San Diego State University. He has deep experience with planning, land use, and housing issues both in academia and in public. He’s currently working with the East Bay Housing Organizations. You can read more about him here.

The post Let’s Talk Inclusionary Zoning: An Interview With Nico Calavita first appeared on The Urbanist.

Owen Pickford (OP): To get started, how familiar are you with Seattle’s inclusionary zoning policy, if at all? Have you even heard they are considering one.

Rachel Meltzer (RM): No, I first heard from you, from your email when you mentioned it. I was not aware they were considering it. It doesn’t surprise me I guess, given the context I know very loosely about the Seattle market and the city there. But I did not know they were officially considering it. It’s been written and what? It’s under review?

OP: They haven’t actually proposed the first draft of what it would look like but they had a long, two year period of political wrangling where they set some guiding principles of what the legislation will look like. And it’s likely the legislation will come out of the planning department in the next couple of months and voted on, or begin to be voted on probably in the fall. It will be a series of votes and probably go through the end of next year.

RM: Ok.

OP: So the basics of the policy, the guiding principles that they sort of agreed to so far, are that they are looking at a 3-10% requirement of below market units. Those units will probably be between 30-60% AMI, I think is what they are aiming for. They are only going to implement it in areas where they are doing upzones. They are going to do the inclusionary requirement and the upzone at the same time. That’s why it’s going to take them a year to do it because they’re going to do the upzones incrementally.

RM: Right.

OP: And they are only doing upzones in areas of Seattle that are called urban villages or urban centers which are planning designations of areas where they created extra development capacity to allow growth. So they are trying to funnel growth into areas that are transit rich or amenity rich.

RM: Ok. Are these areas that are otherwise experiencing, I don’t know, gentrification? Or are they areas that are primarily inhabited by lower income people.

OP: There’s both really. The areas were really only designated because of their amenities. There are areas that are lower-income that have hardly seen any development yet, that are urban villages or urban centers. Then the hottest markets in Seattle are a few gentrifying urban centers. But there’s like 32 urban centers in Seattle. There’s some variety.

RM: They’re going to target all of them or just some of them?

OP: All of them. Yep.  So the reason I wanted to get in touch with you is because you helped with a paper I’ve read, although I apologize if I get any of the details wrong. I’m not classically trained as an economist or planner. It’s an amateur interest. But part of the reason I wanted to call and talk with various authors, you’re one of many I’m talking with, was to make sure I understand your paper correctly. And if I quote it, to make sure I get it right. So you did this paper with the Furman Center of Real Estate. Right?

RM: Yeah, which paper are you talking about, what’s the name of it? Which one?

OP: Oh, the name… It’s the one where you looked at three different municipalities and you wrote a summary of it. Do you know what I’m talking about it?

RM: Yep, yeah. There were a few. They were all drawing from the same data in different ways. But that one, yeah, was 31 flavors of inclusionary zoning.

OP: So, I’ve read through that. There’s a lot of great reasons to do inclusionary zoning. Most of them are not controversial. Most people in Seattle are actually pro low-income housing in their neighborhood. Those things are not as big of fights in Seattle. In our political context though, the biggest fight is the supply argument. If we have this additional cost, we’re going to reduce the amount of housing that’s produced. That’s an argument that’s being made most loudly by the development community, unsurprising probably. The affordable housing community thinks it’s kind of bunk, that the effects they’re imagining are way over-exaggerated if there’s going to be any effects at all. SO there’s that debate. Your paper looked at three cities, my memory is DC, Boston, and San Francisco. It found some effects in Boston on the construction of new housing. It did not find an effect… or I think effect is maybe not the right word, a correlation in Boston. It did not find a correlation in San Francisco. If my memory serves me correctly, you couldn’t come to a conclusion in the DC area.

RM: Right, because we didn’t really have the data.

OP: Yep, ok. Is that a fair summary of your memory of it.

RM: Yeah, I don’t actually have it in front of me. In that paper we looked at production. And you’re right to call it a correlation. That paper was very descriptive. We were just looking at the different design components of the IZ programs and put them up against which places tend to produce more. There was another paper where we just looked at the Boston suburban area and San Francisco, which is not the paper I think you are referencing, where we did more directly test the impacts of IZ on prices and housing production. That was a different paper. I don’t know if you’re referring to that one. We didn’t look at the DC area in that one though. You’re right.

RM: The thing about the effect of IZ on the production of units and prices, the big finding, and again it doesn’t sound like that’s the paper you were looking at, but it really depends on the market. Right? It’s very market specific so it’s hard for us to say IZ will never impact supply or never impact prices because every market, even within a single city, sub-markets can be very different in how they respond to a program like that. I think if I had to draw a general conclusion from all the work I’ve done, that’s definitely a consistent one, that it all depends on the markets. But what we do find is in stronger markets, and generally markets that are appreciating, you are more likely to have some of these negative side affects, whether it’s pushing prices up or reducing supply, the latter of which is very small or non-existent. Because there’s just enough energy or tightness in the market to require inclusionary zoning, developers can pass some of its cost onto market buyers in these kinds of “hot” markets. Therefore, even with that requirement it still pencils out for the developer. It’s still worthwhile for them.

OP: Yep, ok. I understand fully that this is going to be a little bit of speculation for you. I’m just curious what your intuition tells you. I’m not trying to pin you down on an opinion where there’s not any data. That’s not my purpose. So this is my understanding. There’s three theories about how the market is going to handle an IZ requirement. And this is probably why you say it depends on the market because they might do different things depending on the state of the market. But my understanding is that either you can get something like a cross subsidy where units in a building subsidize the below market rate units without affecting supply. Or you can get a reduction in supply that increases costs in the market. Or the developers bid less on land and the landowners eat the costs. Is that a fair assumption of the three different views of what can happen? Or would you describe some other views? What are your thoughts?

RM: I’ll be honest, and this is not something I’ve empirically tested, I’ve worked a lot on inclusionary zoning beyond the papers you’ve seen. I’ve been involved a little with what they’re doing in New York City. I’ve done some more work in Washington DC. Right, so I think the best case scenario is where you have market rents that are high enough, that demand enough of a premium, that when you pair it up with IZ, you have market rate units and 10% are going to be required to be affordable below market at whatever level. Obviously the developers are losing income there. Because in the alternative scenario where there’s no IZ, they could grab market rents. I think it’s unrealistic to say the developer is necessarily going to be in the same place he or she would be without IZ because of the fact that you’re requiring affordable units, the income stream of the project is going down (assuming market rents are not increasing proportionately, which is unlikely in most cases). The real question is, is that reduction in income big enough that it’s actually going to stall development. In cases where market rents are really high.

RM: I’m not as familiar with the Seattle context, but we always use here in New York City Manhattan. Manhattan, essentially the middle part of Manhattan, there you can get really high rents. There we’re not really concerned that development is going to stall as much as other places because the high rents you’re going to get are going to be able to pretty easily cross subsidize the affordable units you’re requiring. So that’s one scenario. The other scenario that’s pretty likely to happen in markets or sub-markets that have more slack, don’t have as much demand, don’t have the premium in rents or prices, there’s really a risk. It can be risky to say, “Look we’re requiring this share of affordable units.” For the project to be self-sustaining you need the upside. You need those market rents to be able to cross-subsidize. And yes, I don’t know what the threshold is. It’s different for every city. It changes every year. That’s what makes IZ tough, that threshold after which the projects become infeasible. That would be the other scenario where the requirements of the program are so burdensome compared to what the market can achieve in terms of supporting it that you could get no development. Or you could see… I don’t know. Is there a minimum size that they’re proposing?

OP: There will be, yes.

RM: So sometimes a lot of places say, “This applies to buildings of ten units or more.” What you could also see is a lot of developers building right below that threshold. So you could see a lot of nine units buildings. That could be financially more feasible than doing IZ for fifteen or twenty units.

OP: There could be a cliff where it makes sense, yeah. So do you not buy the argument that developers build less on land when they know they have an IZ requirement?

RM: Well, ok, that could happen. Sure, if they don’t own the land yet. This gets tricky because if you’re upzoning it’s hard to say what the comparison is. Less than would’ve been bid before? I don’t know. Because you can build bigger now so I’m not sure what you would compare it to. The argument about land adjustments could happen but to be honest it takes time. That’s, in my mind, not going to happen right away.

OP: When you talk about cross-subsidies or does the market have slack, you’re talking about the short-term repercussions of IZ probably. But in the long run do you think it is something that gets bid into land? And what’s the long run? Is five, ten years? Three years?

RM: This is going to be mandatory right?

OP: Yeah, it’s going to be mandatory.

RM: Yeah. It will get bid into the land. I mean this is a tax in some ways. You can only build so big. You’re income in the project is constrained. So it’s like a tax. I view that as it’s reducing the potential income of the property. So yeah, sure, over time that should be reflected in land prices. But I don’t know. It’s very dynamic. As you said, it’s an upzoning so there’s a new maximum right to build that’s now in place. Sure, the land prices will be lower than if you didn’t have this IZ requirement and if you upzoned.

OP: But that’s over the long run and what’s your thinking?

RM: But if IZ is there, there’s still value in this upzoning and how long this will take, I don’t know. It depends on what’s happening in the market. If other things happen to shock the market. I would think it should take at least a few years to see some projects go up. To see how the program rolls out. We like zoning because it makes things predictable but if it’s a new program it’s still somewhat unpredictable so it’s not clear that land prices are going to settle down that quickly. I think people are going to want to see how this plays out a little before it reaches an equilibrium per se.

OP: The landowners will be paying attention basically to what happens.

RM: Oh yeah. So the question is will you sell it now or wait until the law passes. My hunch is that i would wait until the law passes because of the upzoning. Even if some of those units go to affordable units. I would think even on net the market rate units you are getting are going to be more than what you are getting now. If they do the math right. I think legally too, there’s also a real legal vulnerability a city assumes when they do because they don’t want to be accused of regulatory takings. They have to be careful in how they write the law, in terms of the loopholes they put in there and the safety valve but also how much they can really extract from the landowner and the developer.

OP: So the reason I’m asking that is that in my mind, the ideal situation is the cost comes out of the land. That’s the best case scenario. If that’s what a city is aiming for, what sort of timeline should they telegraph with the IZ requirement. Seattle’s been talking about it now for almost a year and half, almost two years. I feel like maybe that’s enough telegraphing to the market, “This is what we’re doing. We’re going down this route.” It might be helping in that way but I’m kind of curious if there’s a best practice.

RM: I don’t know. I think until it’s written and passed into law it’s very hard to convince people that this is something they can rely on. We saw it here in New York City. It goes through various approval processes. There was a moment, maybe a months or two ago, where it didn’t look like it’s going to pass. No one was going to bank on it at that point until it was signed into law. Anything could change. I think the other piece that has come up a lot in New York, we have extremely high land costs obviously, so a lot of arguments have been made. There’s also a very popular tax abatement program that expired that has been instrumental to the production of affordable housing here and has been embedded to land prices. It was kind of a baseline assumption. So a lot of people are saying, “Well land prices will adjust.” But there’s been at the Furman Center, where I’m still affiliated, they did some research that suggests but I don’t know if this is the case in Seattle, that beyond land costs there’s also construction costs.

RM: So even if you say, “Ok this is going to be absorbed by the landowner and they’re going to get the hit. So they have to sell it for less money.” The developer still has to assume the construction costs. There are cases, and again this is why it’s abstract in terms of Seattle because I haven’t seen any numbers, I don’t know how much it costs to build there. Even if you could say that the land prices will adjust if you still have a labor costs that are prohibitive, pushing prices up too, that is something that has to be considered. And that could be lowering the profits for the developer too. You obviously need the development community on board because that’s how you’re going to build affordable housing through inclusionary zoning. I think it’s very hard to make the case that their going to be earning the same returns they would’ve if IZ hadn’t been in place with that upzoning. That’s part of the deal.

OP: In the short term and the long term?

RM: Yeah, in the long term. Again if you rezoned and didn’t impose inclusionary zoning and gave an upzoning, you gave them more density, they can that all market. But if you put inclusionary in there, part of it has to be affordable. Is it going to be permanently affordable? Is that what they’re talking about.

OP: Yeah.

RM: Yeah, so that permanently adjusts the potential of return or income of that property down.

OP: Do you want to take a wild stab in the dark about how much, with a well-crafted policy, how much of the cost of IZ goes to developers and how much goes to landowners.

RM: You mean costs like the hit? Reduction in income?

OP: Yep.

RM: Oh I have no idea. I mean it depends on the elasticity of the supply of land. It depends on construction costs. It depends on the efficiency of how the program is run. In a lot of my research the success of IZ is not just in the design but how it’s actually run. A lot of projects and developers kind of get hit just because the program is not necessarily run well. So that’s another cost for the developer. This increased process of compliance and oversight. That’s a cost. I don’t know. I have no idea who would come out. At least the landowner is out in a sense. If there’s risk in the ongoing unpredictability of being involved in the project, the developer assumes it. Developers take risks. That’s why I’ve always said it’s ridiculous to expect they shouldn’t get a profit or return. They are taking a risk when they develop a project. Whether they should get a windfall is a different story. That argument could be made for the landowner too. They sat on a piece of land that is now getting upzoned. Do they deserve that windfall? Should some of that be recaptured by the city? Which is what they are doing with IZ. It’s a form of recapture.

OP: I know you only have a little bit of time left if we’re going to make thirty minutes. I just had a couple more questions if that’s ok.

RM: Sure.

OP: So generally speaking with an IZ program that you think is well-crafted… Well one, do you think it’s possible for municipalities to do well-crafted IZ. And then if that is possible, are you generally supportive of well-crafted IZ policies.

RM: Yes, I think it’s definitely possible. And I think IZ is a very important tool that local municipalities have. I think it’s important because it’s something that’s entirely under their control. They don’t have to go to the state for authority. It’s under their local zoning power which is important. It’s also appealing because they don’t have to put out money, at least not directly. It’s all through their power of zoning. I think that’s a really neat way to leverage affordable housing. So I think theoretically it makes sense and I’ve seen it done well, more so in stronger markets. It can be, dangerous might be a strong word. It can be tricky in markets that aren’t really strong.

OP: What’s the gold standard that you’ve seen for IZ policy.

RM: I think the one thing I’ll qualify. The thing about IZ is that it should be one of many things that cities are doing to provide affordable housing. I’ve never seen it produce hundreds of thousands of units, except over multiple decades. Montgomery County in Maryland has a very long, well established program that’s done very well and I’d definitely name it as one of the successful ones. It’s been around for a long time. They’ve produced quite a large number of units but I’m blanking on the exact number. But over multiple decades. And the it’s also a different setting there. It’s suburban. They’re dealing with probably a more homogeneous population than many of the cities that have tried to implement it. San Francisco I think is a good example of a place that’s implemented an effective inclusionary zoning program. And one that seems to have adjusted over time as the needs of the city and the market have changed over time. I often point those two out. And here in New York, it hasn’t happened yet, my argument has been that New York City is probably one of the best places to have a mandatory inclusionary zoning program because the market is so tight here.

RM: If it should work anywhere it should work in a place like New York City. I don’t know of all of Seattle but from what I understand of what’s happening there probably at least neighborhoods, parts of the city, that are really ripe to benefit. They could really leverage a program like this. It’s definitely possible. It shouldn’t be the only tool that a city is using. It’s really hard for IZ to get at very poor households because your relying on this cross-subsidy mechanism. You need other sources to really target very, very low income but I think it can do a pretty ok job of getting the middle to low incomes. Like here and Seattle, you’re talking about under 10%. I don’t know how tall they’re talking about going, how big. But that’s not a lot in absolute numbers. So it just gives you a sense of the scale of IZ. It’s not one of your biggest affordable housing programs. In my mind you do all you can. It certainly should be one of the tools you’re using if you have a market that can sustain it.

OP: I don’t know if you saw but Seattle put together a huge report, 65 recommendations for improving housing affordability in the city. It’s a really good report. I was really impressed to be honest with what they put together. And yeah, IZ is just one of the pieces but it’s sort of the center piece of what they’re doing right now, along with an increased levy for housing and some other things. Just out of curiosity, do you have colleagues, people who study this or people you work with and you respect, who disagree with you about aspects of inclusionary zoning? You respect their opinion though. And what is the disagreement if you’re able to articulate it?

RM: Let me think. That’s a good question. I’m probably going to sound so silly if I say no. But I think that’s true because a lot of the people I’ve worked with on this, we’ve done the research together and we’ve kind of come to similar conclusions. I’ll be honest, again, this comes out from my recent experience in New York City, a lot of the people who have done research on IZ, and I can’t claim to have spoken to all of them, seem to be on the same page, in terms of what I’m talking about. Understanding more about what it takes for it to work and what it’s intended to do. And the fact that having a flexibly designed program, which was one of the big take-aways from that paper you first mentioned, is really important. I’m not trying to lump everyone together but I think the group in the conversation in New York City that has really pushed against inclusionary zoning has actually been more the advocacy coalitions and communities that are rightfully putting out a voice for the lower income members of the community that are going to be subject to the rezoning and potentially vulnerable to overall prices going up as the areas become more developed.

RM: They were really concerned that the program targeted and included units that were accessible to very low income people. That seemed to be the strongest voice against IZ. I interpret it as not necessarily, and I don’t know if they would agrees, as they were against IZ. I think they wanted affordable housing. They just wanted deeper subsidies. My response, and I’ve met a lot of people who agree with me who have researched IZ or are in affordable housing production, who say, “In theory that’s great. But there are limits to what IZ can do and reach.” Because again you are relying on the private market, this cross-subsidy. You can only go so deep. The idea is really what this is going to do is produce units in the middle to low range and hopefully allow the city to save it’s money to spend on very low incomes. It’s a way to get existing money put to more use, to spread it out more.

Rachel Meltzer is an Assistant Professor of Urban Policy at the Milano School of International Affairs, Management, and Urban Policy. She has done empirical research on inclusionary zoning. You can read more about her here. You can read the full interview here.

The post Let’s Talk Inclusionary Zoning: An Interview With Rachel Meltzer first appeared on The Urbanist.