Zoning Practice — October 2004

Ask the Author

Here are reader questions answered by Nicholas J. Brunick, author of the September 2004 Zoning Practice article "The Inclusionary Housing Debate."

Question from Mayor Joy Cooper, City of Hallandale Beach, Florida:

My city is struggling right now with both inclusionary zoning and the issue of how to preserve current future housing stock that is affordable through a trust fund. Do you has any suggestions, regulations, or profiles that may help?

Answer from author Nicholas Brunick:

There are many good profiles of communities from around the country that have successfully tailored inclusionary housing programs to meet their needs for affordable housing. Many of these communities also have a local housing trust fund, which collects revenues (often these revenues include fee in lieu payments from an inclusionary housing program) and then use those revenues to address a wide array of housing needs (rental support, rehab, gap financing, etc.). Good profiles exist in suburban communities (like Montgomery County, Maryland; Fairfax County, Virginia; Newton, Massachusetts; and Lafayette and Longmont, Colorado, etc.); large cities (like San Diego, Denver, and Boston) and mid-sized cities (like Cambridge, Massachusetts; Madison, Wisconsin; and Santa Fe, New Mexico).

The inclusionary housing publication from my organization (Business and Professional People for the Public Interest (BPI)), Opening the Door to Inclusionary Housing, includes case studies and ordinances and regulations. You may order the publication here: www.bpichicago.org/rah/pubs/open_door_orderform.pdf.

Question from Kathleen E. Walsh, AICP, President, The Stamford Partnership, Inc., Stamford, Connecticut:

Can you comment on the effectiveness of payments in lieu of providing units? At what rate, over what time lag have units been produced using the payment pools, etc.?

Answer from author Nicholas Brunick:

This is a very good question. Unfortunately, I don't have any hard data to answer your specific question about the time lag between the collections of fees in lieu and the use of those fees to produce hard units. This kind of analysis should be done and what be very useful to elected officials and planners alike. As you might imagine, the effectiveness of the fee in lieu tool is highly dependent upon the specific community and the ability and creativity of the local staff to use funds once they are collected.

As a general matter, communities that do not have much developable land left and wish to address their affordable housing problems as quickly as possible would be well-advised to craft an inclusionary housing program that encourages developers to build the affordable housing units instead of paying the fee. This can be accomplished in a number of ways: (1) making it very clear in an "intent" section of the ordinance that the intent is to produce affordable homes and apartments on site; (2) setting the fee in lieu level as close as possible to the level needed to make a market-rate housing unit affordable; and (3) requiring developers to apply for the right to use the "fee in lieu" option. In many communities, developers can only pay the "fee in lieu" if they can show some form of hardship (e.g. that it is impossible or economically infeasible" to build the affordable units on the development site) or if they can show that the community would benefit more from obtaining the fee in lieu (e.g. that the community could use the fee to create 2x the number of affordable units elsewhere in the community). If a community's top priorities are to produce hard units and to integrate affordable housing within the broader market-rate housing stock, then the fee in lieu option should be secondary, not primary. It should serve as a flexible option that allows developers to comply with the law in an alternative fashion when it is difficult or impossible to actually build the affordable units or when there are other policy reasons for allowing alternative compliance.

That being said, a creative community can make excellent use of the fee in lieu option to address a range of housing issues. Inclusionary housing is but one tool. It will most likely produce new housing for working-class households. But, many communities face a diverse array of housing needs. By collecting a fee in lieu, a community can build up a local housing trust fund and use those funds in a flexible manner to do many things. The community could create a locally-run rental support program where subsidies are provided directly to landlords in order to make apartments more affordable to low-income families. The City of Chicago has a very successful program (popular with both landlords and extremely low-income tenants alike) that is serving as the model for proposed statewide legislation in Illinois. The community could use the fee in lieu money to acquire land for future affordable development or to "write-down" the cost of existing housing in order to make it affordable. Or, it could be used as an additional incentive to make inclusionary housing units affordable to lower income levels. Or, the fee in lieu money could be used to rehab and improve aging housing stock. The possibilities are endless. But all of these possibilities become potential realities with a flexible pot of money like a trust fund with the fee in lieu payment as a primary source.

Click here to see a simple chart that looks at the characteristics of a few "fee in lieu" payments from communities around the country. I hope this is helpful. I'm sorry that I don't have something more comprehensive. Your question may spur some good future research.

Question from Sheryl Stolzenberg, Planner III, City of Fort Lauderdale, Florida:

The City of Fort Lauderdale City Commission very much wants to require affordable housing as part of new construction in its revitalizing downtown, but the Legal Department is advising the Planning Department that we need a study to demonstrate a "rational nexus" between the downtown development, and the need for affordable housing. The lawyers say this is the case even though the city is not trying to levy an impact fee, just institute a requirement that a percentage of housing in the downtown must be affordable. Can you direct us to a study of this sort or advise us of a basis for arguing that a study is not needed? Thanks for any info!

Answer from author Nicholas Brunick:

As a practical matter, communities require the inclusion of affordable units in new developments all the time without any formal showing of a nexus between the new development and the need for affordable housing. It is important to remember that hundreds of communities now use some form of inclusionary housing — either a voluntary or mandatory ordinance or an informal policy that is applied to some or all of the development in the community. Only two communities in the country that I know of have formal nexus studies.

If you are negotiating with developers in these downtown redevelopments over zoning changes or variances or if you happen to use a form of "Planned Use Development" in the downtown redevelopments, where lots of negotiating and "horse trading" is already occurring, then you can negotiate for and require developers to include affordable housing without passing any formal nexus study. And certainly, if city land or money is involved in any way, you can require affordable housing without any problem.

As an example, in Chapel Hill, North Carolina, the staff and city council informally "require" all developers to include at least 15 percent affordable housing in all new private developments of a certain size. There is no formal ordinance, no cost offsets provided to developers, no formal nexus study; the staff and elected officials just require developers to do it. And developers do it because they want to develop in Chapel Hill. Countless other communities do the exact same thing.

There is a basis for arguing that a "nexus" need not be shown for a broadly applied policy. The first basis (a more practical one) is that if the developers do not have "as of right zoning," then the community can certainly negotiate with them over the inclusion of affordable housing just as they negotiate over other issues. The second, more formal basis stems from a California court decision. In the Napa case, the court clearly ruled that an inclusionary zoning ordinance that applies across the board to all development is general economic legislation and not a potential regulatory taking like an impact fee or extraction.

Here are the major reasons why an inclusionary zoning requirement is NOT like an impact fee and why a rational nexus does not need to be established for IZ:

One, the private owner is not required to turn over land or money for public use — the affordable housing requirement is thus not an extraction of private property, but rather a limitation on the use of private property and thus no different from any other generally applicable zoning regulation. After all, the private owner does not have to turn the housing over to the public — he just has to sell it to eligible households below a certain price. The housing stays in private hands subject to sensible zoning restrictions (these based on affordability) that serve the public health, safety, and welfare.

Two, under the IZ ordinance in Napa, the developer received some form of compensation through density bonuses, an expedited permit process, etc. (this is different from a situation like an impact fee where a developer must pay and receives nothing in return). This is important. If your policy provided some benefits to developers, it would not look at all like a land dedication or impact fee scenario that usually warrants the nexus analysis.

Three, under the IZ ordinance in Napa, all developers were subject to the requirement and not just one. Where only one private owner is subject to a public requirement, the court's suspicion rises because the potential for abuse is greater and thus the more exacting requirement of a nexus is often used. Thus, the more general and broadly applied the policy for requiring affordable housing, the better. However, this doesn't mean that a community couldn't limit the IZ policy to a downtown area by setting a higher unit threshold for covered developments (e.g. 20 units of housing). If the policy or ordinance is written for broad applicability to apply to ALL downtown developers, then the concerns would not be the same. Many unchallenged policies around the country have higher thresholds and have operated successfully without challenge.

However, courts very well could examine an inclusionary zoning requirement on a particular piece of land or a zoning ordinance like an impact fee. In fact, if the affordable housing requirement is applicable only to one or a limited number of properties and does not apply citywide, then the court would be more inclined to examine the affordable housing requirement as if it were an impact fee. The reason, as stated above, is because the court is concerned that the local government is using their zoning power in an arbitrary manner to force one individual to provide affordable housing or land or money and because the developer receives no compensation. Thus, it is still not a bad idea to show the connection or rationale for why new development creates a need for more affordable housing.

Fairly detailed nexus studies were completed for Santa Fe and Cambridge, two communities that now both have inclusionary housing programs. Neither town has faced a legal challenge.

However, as stated above, most communities do not have a nexus study. Most communities do however conduct a basic study of the need for affordable housing and whether the affordable housing problem has worsened over the past 5-10 years. In addition, they study whether new development is helping to meet any of this need or whether the problem seems to be getting worse even as lots of new development occurs. Because new development increases property and land values and makes the community more expensive, because new development itself does not produce new affordable homes, and because all communities face a diminishing amount of developable land, there is a rational basis for requiring new development to include some affordable housing in communities where the affordable housing problem is getting worse. As you can probably imagine, in large cities experiencing lots of new development and more affluent and growing suburbs, the affordable housing problem is worsening even as new development booms. Communities document all of this. Then, in the preamble to their ordinances and in a separate document, they lay out this argument which goes basically as follows:

1) The city faces a shortage of affordable housing for households with low and moderate incomes, including key members of the local workforce.

2) Over the past x years, this shortage has increased as evidenced by a multitude of stats (% of people paying more than 30 percent of income for housing increased; overcrowding increased; median home sales price no longer affordable to those earning median income, etc.).

3) The city expends local, state and federal dollars to address the need for affordable housing, but these efforts fall far short of meeting the need.

4) Based on a number of reports and analyses of MLS data, it is clear that new development is not affordable to low and moderate income households unless federal or state housing dollars are involved in order to subsidize the creation of such housing.

5) Based on x data, it is clear that new development does not serve low and moderate income households. In fact, the high cost of new construction and rising property values throughout the community are making it more difficult for moderately priced housing to be produced.

6) Without immediate action to require new development of a certain size to contain some % of affordable housing, housing values will continue to rise and the city's affordability problem will worsen, leading to deleterious effects on the health, safety and welfare of the community (as more families spend more money on housing, as seniors are forced to leave, and as employers find it more difficult to find employees, etc.).

7) Since the remaining available land for development in the community is limited, it is prudent to require that some percentage of all new development be priced affordably for low and moderate income households.

This is of course a rough version, but it should give you a sense of the general argument. Most ordinances contain this kind of argument in the preamble (see Highland Park, Illinois, and Denver for general examples). This argument does not approach the formality and extensiveness of the nexus studies completed in Cambridge and Santa Fe, but it helps to provide a reasonable rationale for the requirement.

Question from an anonymous reader:

I am a planner in a suburban area of the country. Like other parts of the country, land and housing costs are very high and affordable or workforce housing has become a hot issue. I understand that property owners and developers want, and have, the right to maximize their profits by providing as many market rate units as possible on a property. I also know that whenever municipalities attempt to pass an ordinance requiring a mandatory affordable housing set aside requirement or a reasonable restriction to total lot yield (e.g., due to constrained development sites), the developers complain that they just can't make the numbers work. In a booming seller's housing market and very high sales and rental prices, is it really that they cannot afford to construct affordable housing or is just that they will make less profit?

In one particular situation that I am aware of, the developer had purchased the land at least 10 years earlier and the value of that land overtime certainly has skyrocketed. I have searched high and low for literature that discusses, let alone demonstrates, that developers cannot make a profit when providing affordable workforce housing. I also cannot find anything that explains the important economic considerations that must be reviewed to come to a fact-based conclusion about costs and profits and where to set mandatory set aside requirements.

Can you provide additional information?

Answer from author Nicholas Brunick:

Your question goes straight to the heart of the major issue faced daily by planners concerned about affordable housing and interested in inclusionary zoning. The short answer to your question is that developers can and do make a profit on developments that include affordable workforce housing. Over 200 communities around the country use some form of voluntary or mandatory inclusionary zoning program. In these communities, developers have continued to build housing and to make money (despite concerns from the housing industry about profitability under affordability requirements). However, the most effective programs do a good job at working to ensure that developers face clear and predictable requirements and receive some "offsets" to help them pay for the cost of producing the affordable homes.

Of course, it is important to acknowledge that whether an inclusionary zoning ordinance restricts or impedes a developer's ability to make a profit is dependent on the facts and circumstances of each particular case. For example, if a clear and predictable requirement to include a certain percentage of affordable housing in a new development exists in a local zoning code, then developers should be able to take that requirement into consideration before they purchase land for a new development (just like they take other zoning and community requirements such as height, density, parking, open space, etc. into consideration). In these situations, the developer will "run the numbers" and bargain for the price of the land accordingly. In short, he or she will be willing to pay less for the land than if no affordable component were required. Thus, the "cost" of the affordable units is paid for through a modest reduction in land prices over time. If a developer has not yet purchased land and the inclusionary housing requirement is clear, then the developer should not have difficulty meeting the requirement and making a profit because he or she will figure the affordable housing component into the price that they are willing to pay for land.

If a developer already owns the land and the requirement is imposed after the fact, then the analysis changes a bit. You are right to assert that in a hot market, a developer may be able to pay for the cost of providing the affordable housing by modestly raising the market rate prices in the development or by taking a little bit less profit or through some combination of those two measures. In desirable locations, developers are often willing to earn a bit less in profit on a particular development if they know that they can build in that desirable location. In short, the inclusionary housing requirement becomes a cost of doing business in a desirable spot just like any other requirement that a desirable community might impose on a developer (additional architectural requirements, more open space, wrought-iron fencing requirements, etc.).
However, even if a developer has already purchased the land, through the use of effective "cost offsets", communities can effectively reduce much of the developer's burden in producing the affordable homes (to the point where the developer may not raise market rate prices or reduce profits). Density bonuses, parking reductions, fee waivers, expedited permit processes, and other offsets can all serve to allow a developer to "break even" or in some cases to "make money" on the affordable units. In fact, some developers from Montgomery County, Maryland, assert that they do make money on the affordable units in certain developments due to the density bonus provided through the county's inclusionary zoning ordinance.

There is a considerable body of literature that looks at this issue of "who pays" in the case of inclusionary housing requirements. Below are some examples of this literature. Most of the literature indicates that developers can and do make a profit when they build developments that include affordable housing. Indeed, the communities with inclusionary housing programs stand as excellent proof that developers can and do make a profit. If they didn't, they would not be building in those communities and the programs would not be producing affordable housing. They are building and the programs are producing.

In your specific example, if the developer purchased the land a long time ago and the value of the land has increased considerably over time, it is certainly conceivable that the developer could sell market-rate units at a high enough level to offset the cost of producing the affordable homes (even if the local community failed to provide anything significant in the way of cost offsets). One would want to produce a pro-forma that looks at the cost of construction for the proposed development (most planning staffs can get their hands on fairly good, ballpark numbers for the cost of construction in the community) on that parcel of land (as currently allowed for the in the city's zoning code), compare those costs to the market-rate prices that the developer could obtain in the community and the affordable prices that the developer would have to charge to meet the community's needs, and then determine whether the developer has earned a return.

A number of communities have gone through the process of looking at "the numbers" and how they work out when different levels of affordability requirements on placed on different types of new development. These "feasibility studies" were conducted in order to help determine whether the community should pass an inclusionary housing program. The City of San Diego did a study that looked at these issues. In fact, the San Diego study, completed shortly after 2000 by the Plan Commission helped to convince skeptical developers that a citywide program (without any cost offsets) should be enacted. David Paul Rosen and Associates completed an extensive analysis for the City of Los Angeles.

In addition, Bay Area Economics (BAE) completed a feasibility study for Salinas, California. In it, they examined how different kinds of inclusionary requirements (e.g. 10 percent, 15 percent, 20 percent, etc.) would impact different types of development (e.g. condo, townhome, single-family home, etc.) and whether developers could still earn a profit on those developments. Denver, Colorado and Madison, Wisconsin also went through extensive processes recently to examine the effect of different proposed programs on development before passing their ordinances in 2002 and 2003. In fact, the "cost offsets" in both communities were generated largely as a result of those processes.

For more specific information on how to analyze or determine whether a developer is truly burdened by a local requirement and prevented from making a profit, I would suggest contacting staff members in the locations mentioned above and in locations like Cambridge, Massachusetts; Montgomery County, Maryland; and Fairfax County, Virginia (there are other possible locations as well).

These three communities are all suburbs and deal with a variety of suburban-type development (Cambridge deals with more high-density and Montgomery County and Fairfax County deal with more subdivision-style development). Their programs are all fairly long-standing and their staffs have extensive experience in working with developers. In addition, the Innovative Housing Institute (IHI), a nonprofit based in Washington, D.C., also has a lot of experience in looking at these specific issues. They could also be a tremendous resource to you. If you are interested, I would be happy to provide you with specific names and contact information for any or all of the groups that I mentioned above. I think the staff people in these communities (as well as others) and at IHI would be well-suited to share with you how they answer developer claims that "they can't make money" when building workforce housing.

In my own city, Chicago, certain local aldermen in Chicago's gentrifying North Side neighborhoods are requiring developers to include affordable housing in new developments anytime a zoning change is needed. In some of these situations, the developers receive no "cost offsets" whatsoever. And yet, developers continue to build. If they weren't making money, they would go elsewhere. Similarly, in San Francisco, San Diego, and Boston, this same pattern has been repeated. Developers in these large cities receive little to nothing in the way of "cost offsets" from these programs and yet they continue to building with the affordability requirements.

Building workforce housing can be done profitably. Do some analysis of your own local market to determine what's feasible and which cost offsets (density, parking, etc.) might be most appropriate and most useful to developers. Then, engage the developers in a discussion about how to do what definitely can be done.

Literature:

Center for Housing Policy. 2000. "Inclusionary Zoning: The Developers' Perspective," in Inclusionary Zoning: A Viable Solution to the Affordable Housing Crisis? New Century Housing, Vol. 1, Issue 2. Washington, D.C.: Center for Housing Policy, pp. 30-32.

Nico Calavita and Kenneth Grimes. 1998. "Inclusionary Housing in California: The Experience of Two Decades." Journal of the American Planning Association. Vol. 64, No.2, Spring. Chicago, IL: American Planning Association (APA), pp. 150-170.

Dr. Robert W. Burchell and Catherine C. Galley. 2003. "Inclusionary Zoning: Pros and Cons," in Inclusionary Zoning: A Viable Solution to the Affordable Housing Crisis? New Century Housing, Vol. 1, Issue 2. Washington, D.C.: The Center for Housing Policy, p.7.

George Galster and Jerome Rothenberg. 1991. "Filtering in Urban Housing." Journal of Planning Education and Research Vol. 11, pp. 37-50.;

Jerome Rothenberg, George Galster, and J.R. Pitkin. 1991. The Maze of Urban Housing Markets: Theory, Evidence, and Policy. Chicago: University of Chicago Press.

Alan Mallach. 1984. Inclusionary Housing Programs: Policies and Practices. New Brunswick, NJ: Center for Urban Policy Research, Rutgers University.

Donald Hagman. 1982. "Taking Care of One's Own Through Inclusionary Zoning: Bootstrapping Low-and Moderate-Income Housing by Local Government." Urban Law and Policy Vol. 5, pp. 169-187.

Robert Ellickson. 1985. "Inclusionary Zoning: Who Pays?" Planning Vol. 51(8), pp. 18-20.

Arthur Nelson and Mitch Moody. 2003. "Paying for Prosperity: Impact Fees and Job Growth." Cities and Suburbs Report. Washington: The Brookings Institution.

Bay Area Economics (BAE). 2003. City of Salinas Inclusionary Housing Program Feasibility Study. Berkeley, Cal.: Bay Area Economics.

David Paul Rosen and Associates. 2002. City of Los Angeles Inclusionary Housing Study: Final Report. Los Angeles: Prepared by David Paul Rosen and Associates for the Los Angeles Housing Department.

Question from Greg Loy, Planning Director, Kill Devil Hills, North Carolina:

Would it be possible to forward web addresses for good inclusionary housing ordinances and development fee methodology?

Answer from author Nicholas Brunick:

Listed below is a list of web addresses for inclusionary zoning ordinances:

Lafayette, Colorado

Madison, Wisconsin

Burlington, Vermont

Pleasanton, California

San Diego, California

Walnut Creek, California

San Leandro, California

Tallahassee, Florida

Pasadena, California

Dublin, California

Hayward, California

San Luis Obispo, California

Boulder, Colorado

Denver, Colorado

Cambridge, Massachusetts

Davis, California

Fairfax County, Virginia

Irvine, California

Longmont, Colorado

Montgomery County, Maryland

Newton, Massachusetts

Sacramento, California