Greater Greater Washington

Posts about Inclusionary Zoning

Development


DC considers making Inclusionary Zoning more affordable

DC's Inclusionary Zoning (IZ) policy requires developers to set aside units in new construction for low- and moderate-income households. But zoning commissioners say the units may be priced too high for those families who truly need affordable housing.


Photo by Mr. T in DC on Flickr.

During a discussion Wednesday night on the zoning code rewrite, DC Zoning Commissioners said that they are ready to revisit the income requirements for IZ units, which are priced for households making 50% or 80% of the Area Median Income (AMI). For a family of 3, that equals about $50,000 and $78,000, respectively.

If $78,000 for a family of 3 sounds high to you, that's because it is. The DC Fiscal Policy Institute has often pointed out that the biggest need for affordable housing is at the 50% AMI level and below. And commissioners agree that an 80% AMI target is too high to address the needs of most families who find themselves priced out of DC's rising market.

IZ units begin to enter the market

After adopting the policy in 2006, the Fenty administration delayed its implementation until 2009, following the housing market crash. By then, many already-approved projects had stalled. As the housing market recovered, these grandfathered projects, which didn't have inclusionary zoning units, moved through the construction pipeline.

One of those projects is The Louis at 14th and U streets NW, where a new Trader Joe's is slated to open soon. The original design for the project included IZ units, but they were eliminated due to the delay in implementation. Meanwhile, across the street is another sizable residential project that will also be completed soon, but since it was approved later, it has IZ units.

Only now are significant numbers of IZ units entering the market. According to the DC Office of Planning, as of July there were 265 IZ units on the market or about to be. That's about 11% of a total 2,404 units subject to the IZ law. Over the next several years, the pipeline is likely to contain about 1,000 IZ units.

Of the 265 IZ units the DC Office of Planning (OP) is tracking, 85% will be affordable for households making 80% of the Area Median Income (AMI), while the remaining 15% will be affordable for households making 50% AMI.

Housing market has changed since IZ began

At Wednesday's hearing, Zoning Commissioner Michael Turnbull asked OP if it would be feasible to require a larger set aside than the current 8-10%. Planning Director Harriet Tregoning indicated that they could look at it, and that the policy might be able to offer additional bonus density. And Office of Planning Deputy Director Jennifer Steingasser said that her agency is planning to introduce a separate discussion on revisions to IZ regulations in January to address concerns about income targeting and other issues.

DC's real estate values are higher than they were before the housing bust, when the Zoning Commission adopted the IZ policy. This means there's more value in the bonus density that IZ gives a development as compensation for the cost of units rented or sold below market rate.

Not only does the current policy require builders to set aside IZ units based on income level, but it also distinguishes between high-rise and low-rise development. For high-rise buildings, which are more costly to construct and are generally 6 stories or higher, developers only have to set aside 8% of their units, and price them for households at the 80% AMI level.

But for low-rise construction with typically 5 or fewer stories, the set aside requirement is 10%, and the income targets are split between 50% and 80% AMI. Commissioner Peter May asked OP if this distinction gives developers an incentive to seek high-rise designation for projects that could also qualify as low-rise construction, and Steingasser said it does.

Housing prices in DC continue to rise. Despite a number of administrative problems that the city is still working to manage, IZ can offer an important source of new affordable homes and help preserve mixed-income neighborhoods.

Architecture


Topic of the week: DC's height limit

As part of a new weekly series on Greater Greater Washington, we'll take a topic that is relevant in the week's news and allow our contributors to briefly weigh in on it. This week: proposed changes to DC's height limit.


Photo by NCinDC on Flickr.

Dan Malouff had a great post on the topic and there have been several stories featured in the Breakfast Links recently on the subject. Should DC keep its height limit, tweak it, or get rid of it all together? Are there possible consequences people aren't considering? Two of our contributors weigh in:

Canaan Merchant: I think the original reasons for it are outdated and the current arguments insufficient. That doesn't mean I think we will start digging foundations for skyscrapers on the Mall anytime soon. I think we can protect the things we like about the height limit by changing the argument from "why should we let this building be tall?" to "why shouldn't we let this building be tall?"

In his original post, Dan Malouff compares DC's height limit debate to Paris'. I would like to point out the lessons we can learn from London. London has a special neighborhood for high-rises at Canary Wharf, similar to Paris' La Defense or our own Rosslyn. But it has started building very tall buildings in central London as well because there is still a lot of demand there. In DC, demand will remain high for downtown office space as well, even if we do allow much taller buildings in areas like Friendship Heights or Poplar Point.

London hasn't stopped protecting its views either, like King Henry's Mound, a hill that is 10 miles away from St. Paul's Cathedral. In DC, we can do the same thing from some of our most famous viewing points while still allowing taller buildings in many other places as well.

Eric Fidler: One point that was largely absent from last Monday's DC Council hearing is that new housing exceeding the 130-foot height limit will produce more affordable housing thanks to DC's Inclusionary Zoning laws.

Critics often refute the supply-and-demand argument for greater heights by noting that all the new tall apartment buildings are expensive. That is true because new apartment buildings, like new clothes and new cars, can command a price premium over their older counterparts. Today's pricey, new buildings become tomorrow's discounted, "lived-in" buildings.

However, DC's Inclusionary Zoning law requires that new residential projects with more than 9 units set aside 8% or 10% of units for affordable housing.

Assuming Congress relaxes the Height Act, then DC amends the Comprehensive Plan, then the Zoning Commission amends the zoning text and map to create taller zones with higher height and FAR limits, these new, taller buildings will produce more Inclusionary Units. Think of it another way: 10% of a 22-story building is greater than 10% of a 13-story building.

What do you think? Leave your thoughts in the comments.

Development


Inclusionary Zoning making slow progress

After a rocky start, DC's new affordable housing program, Inclusionary Zoning (IZ), is getting on track. It's one of many policies needed to address DC's growing affordability gap. In many affluent parts of town, it may be the only new affordable housing available.


Photo by dan reed! on Flickr.

IZ requires developers to set aside 8 to 10% of new housing in projects with more than 10 units for households making between 50 and 80% of the area median income (AMI), or incomes of $42,778 and $69,530 for a household of two. One-bedroom apartments in the program rent for between $1,006 and $1,610 a month, while similar condos sell for between $116,600 and $220,100. It's similar to Montgomery County's Moderately Priced Dwelling Unit program, which began in 1974.

Of 28 available units, one for-sale unit had been sold and 14 rentals had leased by July. According to the Office of Planning, another 262 IZ units are in the pipeline as part of 24 different projects, and more than 1,000 IZ units may enter the market in coming years.

How it works

Inclusionary Zoning, a national best practice, uses a zoning bonus to pay for additional affordable units in new residential developments. The subsidy for the affordable units is created through a density bonus, allowing more units than could otherwise be built there. This compensates the developer while saving the city money.

IZ also integrates below-market-rate homes into a larger, market-rate development as a matter of course. Mixed-income housing has long been recognized as having many advantages over exclusively affordable developments. Mixed-income housing in high-demand areas offer lower-income residents access to a higher level of services and amenities than is usually available in areas where affordable housing is concentrated.

It offers an important tool for creating and sustaining economically integrated neighborhoods. It helps ensure some level of diversity of housing choices in areas where demand is strong and growing, such as close to Metro stations, major bus or streetcar corridors, areas with good public schools, or close to downtown DC. The policy is designed to create below-market rate units wherever new housing is being built and keeps them affordable for the life of the building.

Unlike many other affordable housing programs, where low income housing tends to cluster in high poverty areas, IZ units around the country are predominately located in low-poverty neighborhoods. In DC's Ward 8, home to many low-income residents, as much as 90% of the housing in some census tracts is subsidized. But a 2012 study of Montgomery County demonstrates that IZ enables children from low-income families to live in more affluent neighborhoods and have access to high-performing schools.

Barriers to implementation

For all its benefits, DC has struggled to implement IZ since units began coming onto the market two years ago. The program's rigid implementation regulations made it cumbersome for the Department of Housing and Community Development (DHCD) to administer, and the program was severely understaffed as well. In addition, more restrictive Federal Housing Administration (FHA) lending standards made it next to impossible for buyers to obtain mortgages for affordable housing. The first two units to come on the market didn't sell after sitting on the market, and the developer responded by suing the city.

But today, the city is making progress. DC has changed the standard covenant in mortgages for IZ units that release any price constraints in the event of a foreclosure, as required by the FHA. DHCD is considering measures to recoup the public subsidy in the unit that would be consistent with FHA rules.

The city is also making the process for marketing and awarding IZ units to buyers and renters more flexible. Today, DHCD awards units through a lottery, which the agency has struggled to implement, finding it to be a time-consuming process, and has failed to build a sufficient list of eligible and interested applicants. Under the new regulations, developers can use the lottery or create their own DHCD-approved marketing plan to find and select applicants for IZ units.

Finally, the city is moving to address the program's staffing issues by getting additional assistance from nonprofits. DHCD plans to add capacity from experienced nonprofits to give low-income home buyers more help during the buying or renting process as well as long-term stewardship of the units. DHCD hopes to have new nonprofit assistance in place by October 1.

The construction pipeline is swelling with residential projects subject to IZ requirements, and IZ units are starting to enter the market in large numbers. We have proof that private residential projects with IZ units can get financed, and that IZ units can be leased and sold. While the program still faces many challenges, we can learn how to make it perform better and deliver more mixed-income housing opportunities throughout the city.

Looking ahead

Like other IZ programs across the country, DC's faces many challenges. Montgomery County's nearly 40 years of experience shows that programs need adjusting and refining over time. One of the key concerns for future action in DC is getting more deeply affordable housing.

In the current pipeline, just 15% of IZ units will be set aside for households making less than 50% of AMI, far short of the 50% housing advocates had originally hoped for. Once the program is running smoothly, the Zoning Commission should consider ways to create more "very affordable" units.

Some of the program's challenges don't have easy fixes, but DC can find reasonable solutions. Addressing these challenges will take the hard work and good will of activists, developers, and public officials. Given the benefits of mixed income housing in walkable, bikeable neighborhoods close to transit, and the growing need for more affordable housing choices, making IZ in DC work is worth the effort.

Development


A few steps can fix Inclusionary Zoning

DC's Inclusionary Zoning (IZ) affordable housing program has suffered from serious administrative problems in its start-up phase. As a policy, however, it is still sound, and is the right policy for DC's future.


Photo from 2910 Georgia Ave.

A handful of IZ units are on the market, along with over 900 units in the pipeline. There are also 1,000 units that came through the Zoning Commission's Planned Unit Development (PUDs) process since 2000, using the same policy standards as IZ.

Unfortunately, 2 early IZ units sat on the market for more than a year, and the developer has sued the city to get out of the IZ requirement. This doesn't reflect a fundamental flaw in IZ; rather, it arises from understaffing at the DC government and rigid local and federal regulations. There's not much time to fix the sputtering implementation of this important affordable housing policy tool.

IZ brings many benefits

IZ sets aside 8-10% of new housing construction for households earning 50-80% of Area Median Income (a 50% AMI household of 3 earns $49,250 per year, a 80% AMI household earns $78,221 per year). IZ is worth fixing because we have plenty of evidence that this kind of program can produce results beyond what other housing programs can. IZ provides affordable housing in mixed-income and wealthier neighborhoods throughout a jurisdiction rather than concentrating it in a few neighborhoods.

This benefit of economic integration has been documented. Low-income children in programs like IZ perform better in school than their peers, because they live in low-poverty neighborhoods and attend local low-poverty schools. Another other advantage of IZ is that it does not require a direct subsidy from the government to construct the affordable unit, but rather lets the developer to build extra market-rate units, and uses that value to pay for the below-market ones.

Other than a nominal administrative cost, IZ is a very cost-effective way to sustain the city's production of new moderately-priced homes. There are many successful similar programs throughout the country, including Montgomery County's long-running IZ program, Moderately-Priced Dwelling Units (MPDUs).

DC IZ also has a sister program which creates affordable dwelling units through PUDs and public land deals. (Confusingly, these are often called ADUs, which is the same acronym, but not the same thing, as Accessory Dwelling Units, market-rate basement or garage units inside someone's house). This program does not appear to have problems filling units at the same income levels. That success shows that IZ can also overcome its challenges with some concerted attention.

Three problems have stalled IZ

Three debilitating problems with the program's administration can be fairly easily corrected and get it back on track: severe understaffing, rigid regulations, and rigid FHA lending rules.

Severe understaffing: Only 1-2 people administer the program inside DC's Department of Housing and Community Development (DHCD). Without a few more staff people, IZ and the sister affordable dwelling units (ADUs) cannot be administered effectively. The Mayor and DC Council need to provide a few more staff positions to manage these programs.

An alternative to administering the program entirely inside the DC government would be to give responsibility for the for-sale units to a nonprofit experienced in managing permanently affordable homeownership programs. CityFirst Homes is already doing a similar job with the District's first major housing land trust. Evidence suggests that more hands-on assistance from a non-profit like CityFirst Homes can drastically cut foreclosure rates and yield more successful homeowners.

The other component that requires sustained support is the housing counseling agencies who educate applicants and help them through the process. Ensuring the city's budget provides for this is another key ingredient to success. In all, these administrative costs amount to a modest budget item and are a fraction of what it costs to subsidize new affordable housing construction.

Rigid IZ regulations: DHCD manages a process for connecting a person who qualifies for affordable housing to available units. This involves a centralized application and lotteries. Details of that process have proven too rigid to accommodate the realities of matching housing seekers and available units.

The city is in the process of revising the regulations to give the program necessary flexibility. This revision should be in effect in a few months.

An alternative to the current lottery system would be to let the developers market the units to qualified households, and simply have the District housing agency certify the applicants as qualified and provide general oversight. This is already the process for the PUD and public land "ADUs."

With sufficient support from housing counseling agencies, residents in search of an affordable home should be able to get enough help to conduct that search, especially with the city's useful website, dchousingsearch.org.

Rigid FHA lending rules: The Federal Housing Administration has emerged as the predominant mortgage backer in the post-2008 affordable homeownership world. Nationwide, most local housing programs have encountered a critical conflict with FHA rules where local programs (like IZ and ADUs) often require that the affordability provisions survive foreclosure. FHA does not allow for this.

The only way to deal with FHA mortgage lending standards that conflict with local program requirements is to change the program to conform to FHA's standards, and get FHA to sign off on the changes. DC is acting to change its standards to comply with FHA. The timeline for receiving FHA's approval is uncertain but the city hopes it will happen shortly, we hope in the next month or so.

If a unit goes into foreclosure and then sells on the market, the city would lose its investment in an affordable home. There are other safeguards the city could put in place that do not conflict with FHA. They would at least allow the city to recover the value of the affordability of the unit, should a foreclosure occur and the unit sell on the market.

With these three administrative fixes in place, DC should be ready to smoothly operate a program to place the right applicant in the right unit as 900 more IZ units come online.

Mend it, don't end it

IZ's growing pains have led to some calls to more fundamentally modify or scrap the IZ program. We should consider and debate these suggestions only once DC fixes the immediate problems and the program administration is running smoothly.

Some opponents continue to question the policy itself, but experience across the country points to IZ as a valuable and effective tool to create moderately-priced housing in strong markets with virtually no direct cost other than a small budget for staffing the program.

Development


Inclusionary zoning will soon be making a difference in DC

Nearly 3 years after regulations were finalized, DC's inclusionary zoning (IZ) program is beginning to have a positive effect on affordable housing stock in the city.


1919 14th Street, a project with IZ units. Image from Level2 Development

While the program has suffered a slow start up because of grandfathering and the recession's effect on residential development, the program's 3rd annual report suggests that IZ in DC will follow the success of neighboring Montgomery County.

Inclusionary zoning is an affordable housing policy which mandates that new rental or condo buildings over 10 units include 8-10% of the total number of units as affordable to households earning 50-80 percent of area median income (AMI), in exchange for being allowed to build more units than would otherwise be allowed (a "density bonus").

IZ policies have been widely practiced around the country for decades, and very successfully in Montgomery County. Beginning in the early 2000s, the District of Columbia government recognized that it needed more tools to address the growing shortfall of affordable housing for DC residents in a revived housing market. The IZ policy is one of the new tools the city adopted to address its growing affordability problem.

IZ became DC law in 2006, but implementation was delayed until summer 2009, well after the housing market crashed. Thus, the effect of IZ has been minimal because the market has taken time to re-energize, and clear out restarted projects approved before IZ rules were finalized. The city's robust recovery has generated a full pipeline of residential developments, many of which will produce IZ units as part of the larger project.

IZ and affordable housing by the numbers

According to the IZ annual report, as of December 2011, there are 82 projects in the IZ pipeline: 3 under construction, 29 in planning phases, and 50 in conceptual phases, slated to produce a total of 930 IZ units when complete. In addition, there are 120 IZ-exempt residential projects in the pipeline, slated to produce an additional 5,645 affordable units.

StatusIZ applicable projectsIZ exempt projects
ProjectsIZ unitsTotal units%ProjectsAffordable unitsTotal units%
Under const.32323510%361,9488,04424%
Planned293823,23212%542,03916,59412%
Conceptual505255,11710%301,6587,89721%
Total829308,58411%1205,64532,53517%
Source: DC Office of Planning. This shows projects under construction as of December 31, 2011.
Notes: The majority of numbers are estimates and subject to change. Of the 3 IZ projects under construction, only 2 have filed a CIZC. CIZCs are not required until above-grade construction.

There are several reasons residential projects currently in the pipeline might be exempt from IZ requirements. The biggest category of exempt projects are grandfatheredprojects that would have been subject to IZ, but were approved prior to IZ regulations going into effect in late 2009. There's a big list of grandfathered projects because the Fenty administration delayed final regulations during the height of the housing market boom. Those projects are now getting going again.

Approximately 53 projects and 16,000 units in the city's development pipeline were approved before IZ regulations went into effect. This means that upwards of another 1,000 IZ units would also have been produced but for the Fenty Administration delay in issuing regulations by more than two years after the DC Council and Zoning Commission put the IZ policy in place.

While these projects are "exempt" from IZ regulations, many of them will nonetheless provide affordable units through a mechanism other than IZ. In some cases, this means an all-affordable or largely affordable project that exceeds IZ standards. Other projects are exempt because they are providing affordable units similar to IZ through an alternative zoning review process called a "Planned Unit Development" or PUD.

A PUD is a special review process where the Zoning Commission gives a development greater flexibility including more density in exchange for additional public benefits and features. Approximately 5,645 affordable units are in the exempt projects pipeline, yielding 17 percent out of a total 32,535 units. See Table 1 for the tally of IZ and other affordable units in the pipeline, as of 2011.

On a policy level, IZ is working as designed

As of 2011, the DC housing market's strong recovery is in full swing. The third annual report on IZ notes that DC's overall development pipeline is going gangbusters with permits to build 4,726 units issued in 2011, which far exceeds 2010's total of 1454 units, and is nearly double the number of residential building permits issued during the last peak year of 2005. Many of these projects are Planned Unit Developments (PUDs) and will meet IZ requirements, though technically outside the program.

In the future, as IZ takes full affect, the program will cover most residential development outside PUDs and geographically-exempted areas, providing 8 to 10 percent moderate and low cost housing for DC residents in these developments. The city's remarkable acceleration of residential development projects seems to indicate that IZ won't be holding it back as some critics had suggested.

The city's IZ report also tells us that only one project in the pipeline is receiving full relief from IZ regulations under unique circumstances. This is another important early sign that IZ is already generally accepted by the development industry.

In contrast to projects being exempt because they are grandfathered, in an exempt geographic district (e.g. downtown, two historic districts), too small, or are providing the same or greater amounts of affordable units through an alternate process (PUD or affordable housing development), zoning relief means the project is let out of providing any affordability due to extraordinary circumstances.

The one project that has requested and received relief is the West End Library PUD project which is providing a new library and fire station. These new public facilities were recognized as a significant public benefit for the Planned Unit Development that qualified the project for IZ relief. Additionally, the city has also committed to funding a 52-unit building all at 60 percent of area median income (AMI) above the fire station.

One piece of information missing from the brief report is the expected income split between 50 and 80 percent AMI. For 2011, 50 percent AMI was $53,050, and 80 percent AMI was $84,900 for a family of four. DHCD has struggled to provide accurate information on affordable housing unit production, and getting the details on income targeting appears to be even more elusive.

As IZ units come online, we can expect to get specific information about the income split with the IZ law's reporting requirement. The report does tell us that of the 2 for-sale IZ units on the market, one is at 50 percent and one at 80 percent AMI. We expect to see that most future IZ-covered projects will be providing affordable units at the 80 percent AMI level, given most new development is high rise multifamily.

Development


Urbanist economists should cheer inclusionary zoning

Is inclusionary zoning just another inefficient government subsidy? Not at all. It's actually a clever program that creates some permanent affordable housing and also builds political support for more density.


Photo by afagen on Flickr.

Last week, Matt Yglesias expressed reservations about DC's inclusionary zoning law. IZ lets develo­pers of apartment and condo buildings over a certain size build more density than they otherwise could. In exchange, they have to set aside some of the units as affordable.

People must earn less than a certain income level to be eligible for these affordable units. In DC, that level is 80% of area median income (AMI)not that low of an income. People eligible for the units can enter a lottery for them. Someone who rents such an apartment will pay lower-than-market rent in perpetuity. Someone who buys such a condo can resell it later, but at a rate that keeps the unit at a below-market level, while still letting the seller enjoy some gains.

Is this economically inefficient? Yglesias wrote:

But the fundamental issue here is that IZ is an extremely cumbersome way to try to help people. Instead of giving one family a $120,000 discount on a condo and giving another family a $130,000 discount on a condo the city could just hold a lottery. Look at the list of DCPS students eligible for free school lunches, select two of them randomly, and cut each family a check for $125,000.

There'd be little need for paperwork, no need for loans, and the families could decide for themselves how they want to use their bounty. If the city wants to obscure the cost of the lottery, they could simply say that developers of market rate housing projects need to stage the lotteries.

It's true that unlike IZ, my "give lots of money to people in need" initiative would not ensure the existence of economically diverse neighborhoods. But a question people have to ask themselves is what's the purpose of these policies. Are they supposed to help low-income families or are they supposed to make upscale yuppies feel better about their neighborhood?

I think the giveaway is that the lucky inhabitants of these "affordable" units aren't allowed to sell the units at market prices. Imagine a low-income family faced with high medical bills. Luckily for the family, it actually owns an apartment that's pretty expensive. But perversely, no matter how badly they need the money they're not allowed to sell the apartment to raise it.

The encumbered sale is perfectly reasonable

Yglesias' last argument is the simplest to address. Certainly a family owning an IZ unit could sell the apartment. They simply have to sell it at a discount to the current market price, just as they bought it at a discount. That's not really that strange.

We can draw an analogy to a small company. Say you have a business idea but you need to buy some equipment. You could borrow money from the bank, or you could get investors and sell them part of the company. Let's say someone agrees to invest $250,000 in your company for 50% of the equity. Your company is now worth $500,000 and you own half.

You and your employees do a good job and the market opportunity turns out to be a good one, and your company grows in value to $1 million. Your share is worth $500,000. Say you need money for the medical costs in Yglesias' example. You can sell some or all of your share. But you couldn't say that it's not fair you can't sell the whole company for a million; you only own half.

An IZ unit is like a little company where the city owns a share. You get to control the unit itselfthe city has no voting stockbut if you sell, you can only sell your share, to someone else who can come in and assume the same business arrangement you had.

There's nothing intrinsically wrong with this, other than that it's not the way housing has traditionally worked. But the condominium (and before that, the co-op) was unheard-of for a long time, as well, and then it existed, because it met a particular need.

Anyone who doesn't like this kind of arrangement doesn't have to buy such a unit, just as the company owner could borrow money, or put in his or her own money, or try to make the business work with less capital, if they don't want to give an investor such a big share.

Why not give people cash instead of housing?

Yglesias' first point basically asks, instead of subsidizing housing, why not just give some poorer people some cash, and then they can buy housing on the open market?

This is a fairly common economist response to a government program giving something away. If having a free market is generally better than not, then rather than giving people some good, why not give them money and let them make the choice? Maybe they can actually consume less of the good, and this creates an incentive to do that.

This is the argument for a parking cash-out. Rather than giving a bunch of office workers free parking, why not give them money equal to the cost of renting that parking in a garage? Given the money, the office workers have an incentive to take transit or carpool instead, and keep some of the money. The cash option doesn't cost the employer any more, and transportation gets more efficient.

On the other hand, we don't do this with, say, food stamps. The government has a certain interest in making sure people buy food instead of buying booze or drugs and going hungry. Moreover, food is a basic necessity and the food stamp money doesn't go so far that people will end up overconsuming food (unless it's overconsuming junk food, which is excessively cheap thanks to corn subsidies).

The main difference between IZ and the "give them cash" principle is that "give them cash" requires the government to come up with some money, which it might not make back in taxes. IZ takes the cost of some affordable housing out of the producer surplus for the developer. The developer is making some profit on each unit. The bonus density adds additional units and thus additional profit, but IZ restricts those so that much of the profit goes to the homeowner rather than the developer.

As long as the amount the buyer pays for the affordable unit exceeds the incremental construction cost and taxes, the developer will still make money on these additional units, all of which they wouldn't have been able to otherwise build.

The building industry negotiated on the original IZ law to reach levels that didn't wipe out all their producer surplus and turn affordable units into a net cost. They probably pushed for more than necessary, so that some producer surplus remains, giving them some buffer and giving us confidence that the law isn't excessive.

Unlike cash, IZ protects affordable units in perpetuity

Yglesias suggests alternatively having the developer run a lottery to give out the difference between the market-rate and affordable unit. This would take the money out of the producer surplus, and have the same effect as IZ... at first. But unlike cash, this unit has restrictions on salethat "investor" who owns some of your "company."

If I give you $25, it's yours. If I invest $25 in your company, such as by buying some stock in a public offering, you still get the $25 to spend today and can use it toward equipment or hiring or office rent, but I got something of value back in return.

The net result of this policy is that someone gets to live in some housing while shelling out fewer dollars, but the city also keeps some of the value of the transaction for itself in the form of this equity. That serves the social goal of maintaining a stock of affordable housing over time as well. In the end, IZ creates affordable housing but at lower cost to society than by other means.

Some affordable housing organizations don't like this system. They prefer to have a juris­dic­tion create affordable housing, lottery it off to needy families, and then let those families resell in the future at market rates. When the family sells, they have to pay back the subsidy, but they keep most of the appreciation.

The problem with this system is that it doesn't preserve the affordable housing in the long run. People who receive units can flip them after a number of years and pocket at least a large percentage of the difference. Meanwhile, the unit stops being affordable for the next person. In this way, it actually is more like the lottery in Yglesias' hypothetical, or to extend our analogy, it's like financing the company with a loan instead.

Under that kind of system, you create affordable units, but they quickly evaporate out of the city's stock of affordable units. IZ creates a pool of these units that stick around, keeping at least some inventory of less expensive housing for the future.

IZ is a way to get extra density

Inclusionary Zoning is a program that Yglesias and other economically-minded urbanists should actually be very excited about. Yglesias wrote a whole book on how restrictions on supply are holding our cities back. These restrictions stem mainly from resident opposition to added density.

IZ builds political support to do what might otherwise be impossible: allow more density under zoning. The political calculus might not favor such a change on its own. Just upzoning a property gives extra value to the property owner, creating a producer surplus, but little benefit to residents beyond the vague promise of more "eyes on the street" and more shops and restaurants.

But there is some political power behind doing more to create more affordable housing, and a group of people who stand to benefit from such a policy. Add that to the equation, and it becomes possible.

In other words, even if IZ is imperfect, it might be the most politically feasible way to achieve higher density.

Yes, IZ is somewhat imperfect

There are indeed some challenges with IZ. Like any program, has some transaction costs, which the "give them cash" hypothetical alternative largely avoids. There have been some obstacles to getting mortgages for IZ condo units, though this problem is actually easily solved: other jurisdictions simply agree to let the affordability policy expire if the property goes into foreclosure. The city agrees to give up its "call option" in this case to get lenders to buy in.

Some IZ units may be going to people who are just temporarily low income, like recent college graduates who have every ability to soon earn much more than the area median income. Appropriately tuning the law could probably address most of these abuses, and while it does increase administration costs, it shouldn't be a deal-breaker.

IZ also has only limited impact. DC is only creating a small number of IZ units so far, largely because Mayor Fenty delayed the program for years while many new buildings gained permits without IZ. Those buildings are just now being built.

Also, the federal height limit constrains the amount of bonus density that DC can grant. IZ can only let developers build more when local zoning is more restrictive than the height limit, which is the case for most of the District but not in the densest areas with the most growth. Other jurisdictions can grant far more in incentives, as in the White Flint plan.

Is there a free market solution to housing affordability?

It would be much more satisfying to devise an economic system that creates housing choices at all points on the income spectrum inherently, by market forces, rather than through government mandate. I simply don't believe that removing all zoning caps would do this, however.

Buildings cost a lot to construct, and taller buildings cost more per unit than smaller ones because they require more expensive materials. Lenders only want to fund the projects with the highest return, and capital is scarce, especially now. There is enough demand near the top of the income spectrum to consume all of the units that could get financing.

As it is, developers tell me that there is considerable development, already approved, that is just not happening yet because of financing constraints. If things aren't getting built which have no zoning barriers, then removing zoning barriers won't solve all problems.

It's still worthwhile to push to reduce barriers for the long term, and there are plenty of examples where zonng rules or historic preservation limits do indeed take away needed housing opportunities.

But in the meantime, there is indeed value in creating mixed-income communities. It's far more than just a way to "make upscale yuppies feel better about their neighborhood." In a future part, I'll discuss the many advantages to mixed-income neighborhoods, for both wealthier and poorer residents.

Development


Montgomery a prime example of "how housing matters"

It's not often that 2 members of the Presidential Cabinet sit down for a morning chat before a crowd of several hundred spectators. Last week, however, at the National Building Museum's "How Housing Matters" Conference, Secretary Shaun Donovan of HUD and Secretary Kathleen Sebelius of the Health and Human Services did just that.


Photo by evmaiden on Flickr.

The keynote conversation, centered around the impact of the built environment on individuals' well-being and development, set the tone for a productive day of interdisciplinary discussion and debate. Throughout the event, leading experts from around the nation discussed the significance of housing and its role in education, economic development and public health.

The Washington area's own Montgomery County came up as a headliner during the panel on housing and education.

The Maryland county served as the setting for a recent study by Heather Schwartz, of the Rand Corporation, and based on Heather's findings, it may be a model for other areas in search of a new and effective strategy for raising educational standards.

In her study, Heather sought to uncover the impact of economically integrative housing on academic success among elementary-aged students. In short, she was able to track the progress of a cohort of highly disadvantaged elementary students whose families, previously tenants of traditional public housing, had been randomly assigned to low-poverty areas affiliated with low-poverty elementary schools.

Over a period of five to seven years, she was able to track significant improvements in math and reading scores among the transplanted population. Furthermore, not only did the students placed in low-poverty schools outperform their moderate-poverty peer group, but they had also played catch-up to their peers. By the end of elementary school, the resettled population had narrowed the achievement gap with their non-poor peers by one-half for math and one-third for reading.

While it may come as no surprise that placing kids into more stable environments and sending them to wealthier schools has an effect on their academic performance, the rate and consistency of academic improvement among kids in the study is nothing short of impressive.

Given the success and simplicity of the approach, it is astounding how uncommon it is for US cities or counties to implement such a strategy.

I had a chance to sit down with Heather following her presentation, and one of the first things that I asked her was, "Why Montgomery County?"

As it turns out, the DC suburb is currently the single largest community to feature a policy of inclusionary zoning, without which Heather's study could not have been possible.

Inclusionary zoning amounts to a set of laws that require developers to set aside housing for lower income families. In Montgomery's case, the Moderately Priced Dwelling Unit (MPDU) program means that approximately 15% of homes built are to be sold or rented at below-market value. More often than not, the right of first refusal to purchase the home falls to the Housing Authority. Nestled within otherwise affluent communities, these dwellings provide stable, high-quality housing and unrestricted access to community resources for families that would otherwise find themselves in poor public housing developments.

Although, as Heather pointed out, inclusionary zoning has been around since the early 1970's and many studies have indicated the model is highly successful, relatively few communities have embraced it in the same way as Montgomery County.

While there are likely many reasons that this is the case, one concern that may arise is whether integrating schools to include variable poverty levels may actually decrease the performance of students hailing from low-poverty homes. Heather's finding's indicate that no such trend exists, and that the effects of mixing up an elementary school population through inclusionary zoning yields only positive effects for the economically disadvantaged students.

Of course, inclusionary zoning policies are not limited to Montgomery County. Heather is following up on her original research with a new study that will examine 11 cities and over 15,000 addresses.

For the time being, effective and enforced inclusionary zoning is predominantly a highly local movement that lacks widespread popularity. With research initiatives like Heather's and forums like the "How Housing Matters" conference, coupled with growing, bipartisan alarm regarding the state of education and child welfare in the US, perhaps we'll see more interest and more implementation of inclusionary zoning in the future.

Development


Understanding the tools in the affordable housing toolkit

Smart Growth advocates want to make it possible for people of all income levels to benefit fully from living in an urban area. It's helpful to know what we mean when it comes to affordable housing and how America got to where we are today.


Urban renewal on DC's Southwest waterfront. Photo by Mr. T in DC on Flickr.

On a day when we pause to remember a man who dedicated his life to both racial and economic justice, it is appropriate that we understand the background of today's approaches to lifting up the least fortunate.

Two urban planners last week gave an overview of the history of affordable housing policy in the United States at a monthly meeting of Jews United for Justice's Fair Purple Line Campaign.

The campaign supports the Purple Line's construction as light rail, but is working to prevent low-income residents and small businesses in Langley Park from being displaced. There's a significant risk of this, since the area is expected to add many transit-oriented developments once the line opens.

The center of Langley Park is at New Hampshire Avenue and University Boulevard. It straddles the border between Montgomery and Prince George's Counties, and is known for being a very diverse, but lower-income community.

The planners, one of whom is an asset manager at a Bethesda-based nonprofit housing developer, explained that the need for public housing assistance arises from the fact that so many workers aren't paid enough to be able to afford market-rate housing. This is especially severe in high-cost areas like metropolitan Washington.

An often-overlooked remedy to the underlying problem is to increase the minimum wage across the board so that working people can live off of their income without needing other assistance. But this has not been the chosen approach, for the most part, in the United States.

A historical perspective

The first federal housing programs grew out of the Great Depression and the need to house the thousands that the economic crash left on the street. In later years, these programs focused on replacing "slums"many of which were thriving, though poor, neighborhoods.

The resulting development often took the form of high-density apartment buildings in non-urban configurations. Construction of much of the Southwest Waterfront neighborhood is the result of this urban renewal planning.

Public housing was not intended to house families indefinitely, but rather to support them to get back on their feet. The programs that eventually came to be overseen by the U.S. Department of Housing and Urban Development (HUD) were intended not only to house people, but to sustain the economy by encouraging bank lending and to support the housing industry.

In the 1970s, HUD moved from being a financier for the development of traditional public housing projects to using Section 8 of the Housing and Community Development Act of 1974 to create an alternative approach. This new approach took the form of vouchers for private housing.

Policy tools

Section 8 payments are made to landlords on behalf of individuals in need of housing who meet legal residency and income requirements. They may only act as a subsidy to keep prices or rents low, or they may cover most or all of the cost of rent or a mortgage. Generally, income tests mean that households must make no more than a certain percentage of the average median income for their metropolitan area.

Disappointingly, the process for qualifying for a Section 8 voucher has become long and tedious. Over 20,000 District residents currently sit on the waiting list, representing a casework backup of two years or more.

Only 7,000 people nationwide receive vouchers each year. As this 12-minute documentary from the Maine Affordable Housing Coalition illustrates, wait-listed people without stable homes face much greater challenges finding work, healthcare, childcare and other necessities, while many who have gotten vouchers have become productive members of their communities.

Governments also offer tax credits to nonprofit developers of affordable housing. This amounts to a dollar-for-dollar reduction in the developer's tax bill, up to an annual limit of 90% of development costs for ten years.

Nonprofitswhich don't pay corporate income taxes anywaysell these credits to banks, which then give 70 cents for each dollar of tax credit the bank can apply to its own tax bill back to the nonprofit. This helps banks comply with the Community Reinvestment Act of 1977.

More recently, state and local governments (with some HUD assistance) have worked to include minimum affordable housing set-asides in new mixed developments. Hope VI, established in the early 1990s, aimed to replace the most derelict traditional public housing with mixed-use communities. But of the nearly 70,000 public housing residents displaced under Hope VI, only 24% were able to return into the units that replaced their original homes.

Another tool local governments use is inclusionary zoning (IZ): a zoning requirement that a certain percentage of units in developments of certain sizes must be reserved for those of lesser means. In Montgomery County, this means Moderately Priced Dwelling Units (MPDUs). Montgomery had one of the country's first inclusionary zoning ordinances. It was adopted in 1974.

Developers are generally offered enhanced incentives in exchange for their acceptance of IZ. Montgomery County has set a standard for IZ policies [PDF page 19]. A new Montgomery County policy mandates that greater percentages of units within one of the county's nine Metro Station Policy Areas be made affordable than in other parts of the county.

The District enacted an inclusionary zoning policy about two years ago. Unfortunately, however, Prince George's County lacks many of the policy tools that could help the residents of Langley Park stay put.


The heart of Langley Park. Photo by thisisbossi on Flickr.

The sustained level of citizen involvement in the effort to preserve Langley Park's cultural identity while supporting transit improvement and smarter development is encouraging. It should serve as a model for other cases where low-income communities can be disadvantaged by the types of changes that will inevitably increase in our region.

If you support the Fair Purple Line Campaign's goals and want to see it succeed, please learn more about the Campaign.

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