Inclusionary Zoning Catches On

Editor’s note: The following is a transcript of an Editorial Forum held by Hanley Wood, LLC, the publisher of Affordable Housing Finance and Apartment Finance Today magazines, in Washington, D.C., on Sept. 12.

Moderator: NICOLAS RETSINAS, executive director, Harvard Joint Center for Housing Studies

Panelists: RON TERWILLIGER, CEO and National Managing Partner, Trammell Crow Residential

DOUG GUTHRIE, president, Kimball Hill Urban Centers, LLC

EVELYN STIVERS, Inclusionary Housing coordinator, Non-Profit Housing Association of Northern California

ELIZABETH DAVISON, director, Montgomery County Department of Housing and Community Affairs

9/12/06 Inclusionary Zoning Panel discussion

NIC RETSINAS:

Let me start by asking a question for Elizabeth. I recently noted in a publication by the largest trade group in the United States, The National Association of Home Builders, that one of their economists recently labeled inclusionary zoning, “Just a plain bad idea; it should be dumped into the trash bin.”  He further went on to say as any economist would say, “Every time you regulate, you raise the cost of housing.”

Elizabeth, Montgomery County has had inclusionary zoning now for almost 30 years. How has it stayed out of the trash bin in Montgomery County?

ELIZABETH DAVISON: Well, it’s not only not in the trash bin, I think it’s one of the things that the county is best known for and most proud of. There are over 13,000 units that have been created in this program over that period. We know at least 13,000, probably somewhere around 30,000 people that have been served by this who otherwise would not have been able to buy a home, or would have been priced out of the rental market in Montgomery County.

RETSINAS: Evelyn, you’ve been working in California with the home builders [on standards for local inclusionary zoning ordinances]. How have you been able to work together?

EVELYN STIVERS: Well, in California, over 120 jurisdictions now have mandatory inclusionary housing policies on the books. So inclusionary housing is the cost of doing business. And developers want to be able to build, but also comply with the law in a way that makes the most sense.

RETSINAS: Ron, you are an articulate advocate, but sometimes you find some hostility to what you’re saying [in favor of inclusionary zoning]. Why hasn’t everybody hopped on this bandwagon?  What explains the hostility?

TERWILLIGER:

Well, I think the private sector is indifferent toward affordable housing because the private sector, the for-profit private sector, is out to make a profit. Time is money and we’re trying to minimize our risk and maximize our profit. It’s naive to think that the private sector is just going to go out and begin making less money by turning some of their energy to affordable housing unless there is either a requirement or a profit opportunity. It’s got to be one or the other.

We work all over the country, as many of you know, in mixed use housing and multifamily. And on the left coast as I’m inclined to call [California], we have to do inclusionary zoning, and in the northeastern U.S. I’m happy to do that because it’s meeting a social need of mixed-income housing.

RETSINAS: Isn’t it just a cost of doing business?  I mean, that’s the only reason you really do inclusionary zoning because you have to do it, or is there something more?

DOUG GUTHRIE: It is a cost of doing business and I think it will increasingly be part of what has to take place. I think we’re seeing jurisdictions all over the country that are putting together some sort of approach to affordable housing. Whether it’s mandatory inclusionary zoning or voluntary inclusionary zoning, I think that affordable housing has become more of an important issue.

We’re active, for instance, down in Sarasota and Bradenton, Fla., which has seen just rapid escalation of housing prices. If you went to them five years ago, you talk about affordable housing, I believe that the political climate there would have said, “We don’t want affordable housing for the most part.”

Now, it’s just the opposite. It’s “How can we make our housing more affordable?” So I think it’s part of a cost of doing business, but on the other hand, it’s also the right thing to do. And I think if you’ve got Kimball Hill Homes, we have leadership there as a private home builder. We’re one of the largest private home builders in the country.

RETSINAS: Elizabeth, what’s the biggest criticism [of the] Montgomery County inclusionary zoning program?

 DAVISON: What I’ve heard mostly is they’re concerned [that] in some cases they don’t get a bonus density from our planning board, or master plans will limit the density of the given site.

And what they say is, you know, they’re not against affordable housing, they’d like to do it, but there needs to be a little bit more quid pro quo. You know, where they get some incentives that can make up for what they’re losing. I think it’s particularly challenging when you get to high-rise construction. The escalation in construction costs over the past few years [has] made it increasingly difficult. I think in some developments that without a density bonus that could be allowed, there’s a risk that the inclusionary units could make the whole building not pencil out.

So we’ve been trying to address that through property tax abatement, some other mechanisms. One of the changes to our law about a year and half ago was to have a mechanism that if a building was infeasible due to the density, that they could eliminate the height restrictions in that zone. So I think there’s more of a recognition by the public sector by the county council, and certainly from me and my department that we need to find ways to work together.

TERWILLIGER: In Atlanta, I chair a task force that tried very hard to move forward with mandatory inclusionary zoning. And we’re ending up with voluntary inclusionary zoning.

And the carrot is a density bonus. We know that works only on certain sites because sometimes current zoning allows you to maximize what you could practically build, but it was better than nothing.

But what we tried to do, whether it was mandatory or voluntary, is come up with a series of incentives that kind of neutralized as close as possible the economic effect to the private sector, so you wouldn’t have people fighting it because it hurt their bottom line, whether they were land owners or developers.

STIVERS: The one thing that’s really challenging is we have 120 ordinances. They have 120 different requirements, different percentages, different income targeting, different forms of flexibility.            So it’s very difficult for builders that work in multiple communities to have a sense of what the rules are, and just have a, you know, a predictable process.

RETSINAS: Doug, you work in environments where there is inclusionary zoning, but often where there’s not. As a developer, are you more interested with sort of prescriptive guidelines, or is it sometimes better to have a negotiated sort of way of kind of working out this balancing?

GUTHRIE: Well, I’m based out of Chicago and although we don’t have an inclusionary zoning ordinance in place for the city, we do have 50 wards and 50 aldermen, and 50 different forms of so-called voluntary inclusionary zoning. It all depends on the negotiations that you have in each of those individual wards.

But I think inclusionary zoning is something that we shouldn’t be afraid of. As long as you approach it with the right attitude and you work through the political process and the community process, you should be able to arrive at some sort of reasonable solution to proceeding with your development.

RETSINAS: There is affordable housing, and then there’s affordable housing. What level of affordability [should inclusionary zoning target]?

TERWILLIGER: We decided that we wanted to address people from 30 percent of area median income up to 100 percent. We wanted to subsidize both rental and ownership, but we didn’t want to subsidize ownership [for people with] such a low income that we were jeopardizing these people’s ability to stay in their homes. So we decided we would have some minimum incomes for home ownership and some maximum subsidies.

Then we found that in the statutes we could issue a Housing Opportunity bond initially of $75 million, [which] would allow us to help with rental, ownership, land assemblage. In Atlanta only 25 percent of the city employees live in the city. The other 75 percent don’t because they largely can’t afford it. So we’re working on it in those income spectrums, but it’s much broader to us than inclusionary zoning.

RETSINAS: No question, the real housing problems are the very poor. How do you deal with that reality and where does that fit in into the discussion of inclusionary zoning?

DAVISON: There are a couple answers to that. One, this program is one of many programs that we have in the county. Our Housing Authority can buy up to a third of the units that are up for sale, or can lease ones that are for rent. And other nonprofits can also—if our Housing Authority doesn’t buy that many—get up to 40 percent in any given development.

They typically will rent them out to people at low income, so some of them have been basically turned into public housing units.

But I think the major answer is that we have an affordable housing trust fund, and this year it’s $20 million. We get 2.5 percent of the property tax collections in Montgomery County, which as you can imagine is a sizable amount of money. And that money we use for gap financing.

GUTHRIE: We’re working on a couple of very large projects in Chicago on public housing sites—Cabrini Green and Stateway Gardens public housing sites—just over 2,000 units, mixed-income developments.  But it kind of gets to the question of affordability, because affordability is such a broad range of incomes.

Affordability in rental housing we commonly define as everybody knows, as [affordable to households earning up to] 60 percent of median income. And there are structured governmental programs to help produce that in small quantities. It’s not nearly enough to meet the demands that are out there. But there are formal resources to do that.

The problem is getting into that for-sale housing [that’s affordable]. There aren’t any natural public resources to help deal with that.

Getting to the affordable for sale, we range from 80 to 120 percent of median income. And it’s a real challenge, even at 120 percent of median income to do much more than break even on something like that.

So the sweet spot, I think, is workforce housing, which we would target at 80 percent of median income. The question is how you get there. And we’re working very hard in terms of looking at cross subsidies, as well as design elements of the buildings themselves to drive the affordable ownership component down in the range of 80 percent.

RETSINAS: To what extent is inclusionary zoning now facing a headwind, as opposed to a tailwind? Now we have a different economic environment, a different housing market. It’s softened. What impact is that likely to have on these kinds of both the drive for these ordinances, and also these negotiated understandings?

STIVERS: Yes, obviously the housing prices always impact the housing policy. But in California, we saw one of the greatest leaps in the number of inclusionary ordinances during one of the largest downturns in actual housing production, which is because the prices had really stagnated. In California, I don’t see it as making an impact on new ordinances being adopted.

TERWILLIGER: Let me just say that while we are in a cyclical decline in the home sale business, we’re of course in a robust growth in the rental housing industry. I think the more pervasive issue here is this incredible increase in construction costs and land costs, because as incomes have gone up 3.5 percent a year, we’ve seen multiple years of double-digit increases in both land and construction costs, unprecedented in my 35 years as it relates to both.

And I think you’re going to see more and more pressure as a result of that to do something about helping our working people because they have been increasingly priced out of the market. And while we may be at a flattening of prices and maybe in some markets a slight decline, that gap is wider, I think, than it’s ever been now.

GUTHRIE: Well, I liked inclusionary zoning a lot more six months ago than I like it today—it was easier to make work. We’re working on one development, for instance, where we got significant density bonuses, but it’s 80 percent market and 20 percent affordable at 80 percent of median income. But that was very optimistic on the market side.

And even with those density bonuses, it’s become much more of a risky development now than it was six months ago, and so we’re going to slow down in terms of going forward with that. A lot depends on how you’ve structured your affordable housing. If it’s part and parcel of a market-rate development, and with this slowing down environment that we’re in, it’s going to have difficulty.

DAVISON: There are people that are low-to-moderate incomes who have access to schools and jobs and a community that otherwise they wouldn’t have. I think there are a lot of social benefits to this. And I think that as long as the federal government is not doing as much as they once did to provide affordable housing throughout the country, that we’re kind of left to our own devices.

CONRAD EGAN: Conrad Egan, National Housing Conference. I want to underscore Elizabeth’s point about the purchase option and that’s, I think, a very important component. In Fairfax County, for example, we’re using an option to purchase rental homes at lower costs for county employees. That has been a tremendous boost to the political support for the program.

It seems that as you move up the product line ladder, that inclusionary zoning gets harder and harder. Single family detached okay, town homes yes, mid-rise, upper high-rise may be impossible to get to the no-net-loss point. And I’m wondering if the panel can comment on that.

TERWILLIGER: Well, from the work we did in Atlanta and also the housing that we developed, we concluded that above a certain price range, we would have people pay an in-lieu fee because we didn’t feel like putting a family making $40,000 a year in a project where the least costly home was $1 million made any sense.

RETSINAS: What is your experience with fees in lieu of options?

STIVERS: Well, it changes very much depending on the politics of the individual place. What we found in our production research is that generally in cities that charge fees, the fees are the option that most developers do take. And then different jurisdictions have a different track record of spending the fees.

So if you take a large urban area like San Jose, Calif., they have a tremendous track record of actually building affordable housing. They’re very different than a place like Santa Cruz County, who is basically sitting on millions and millions of dollars of fees that they have collected but they have absolutely no sites available for multifamily housing.

So environments that can be hostile to market right development can also be hostile to affordable housing development. And the sign that they have an inclusionary housing agreement may or may not mean that it’s an easy environment to develop affordable housing in.

TOM BOZZUTO: Tom Bozzuto with the Bozzuto Group. One of the complaints that a lot of builders have about the moderately priced dwelling units program in Montgomery County, or the Affordable Dwelling Unit program in Fairfax, is that the land-sellers have already factored in the density benefits. So there’s really no benefit, so the subsidy that is calculated to drive down the rent or the sales price for the assisted units is really coming from the other buyers. And, you know, the question is if the community is that motivated to see affordable housing, why don’t they forgo real estate taxes for that portion of the units?

And I think Montgomery [County] has done it in a few cases, but for the most part I don’t know of anyplace that it’s being done categorically.

RETSINAS: Ron, why don’t you start with that? I mean, now I will ask you to typically focus on Atlanta. Are you seeing the politics changing at all, or what’s going on politically there?

TERWILLIGER: Well, it’s an interesting thing. When we focused on smart growth, we recognize that dependency on the car and the long trips the service people had to make was really causing tremendous commuting [and] congestion problems, and air and water quality deterioration.

Atlanta, where I have lived most of the last 30 years, [is] the poster child of sprawl. So interestingly just recently, the Chamber of Commerce, which is really a powerful chamber lead by a terrific guy, [has] begun focusing on this.

The task force I chair is an outgrowth of the Atlanta committee for progress, which is economic development committee. So now the industry, the business leaders in Atlanta are beginning to realize that the quality of life is being hurt.

The spatial dislocation between where the working people live and where the jobs are is a tremendous problem. So I’m beginning to see more people becoming aware of it.

Now we have a great leader in [Atlanta Mayor] Shirley Franklin. She picked up the mantel and asked me to chair this task force. She kind of waited until the second term, however, to really get behind it, but once she got reelected, I mean, she is really going for it. So I’m encouraged by that.

When we go to buy a piece of land that has a requirement that we set aside, pick a number—15 percent of the units were for people making less than 80 percent of median. We just run the economics whether it’s rent or for sale on the yield that we need to get from that unit. And then we figure out what we can pay for the land.

And to the idea that the market-rate units are subsidizing the others, I don’t really look at it that way. Market-rate units are sold for whatever the market will bear and presumably they won’t be adversely impacted by the set-aside units.

When we’re trying to construct this ordinance in Atlanta, we had to try to come up with enough incentives waiving impact fees, tax abatement, expedited processing, whatever, but mostly density bonus, so that the land value didn’t get depreciated too much because the developer had to build some units at less than market.

ANDRE SHASHATY: I wanted to see if we could get our panel to kind of prognosticate the future growth of inclusionary zoning, whether it’s formal statutory zoning, or whether it’s informal negotiated inclusionary plans as it is in Chicago.

STIVERS: It’s still growing as a local tool in California. I’m finding that I can spend probably, you know, all of my time going to conferences and talking, visiting with people who want to hear about our program. We get so many hits on our website. We have to put more and more on our website because my staff otherwise would spend all their time responding to people in other jurisdictions.

RETSINAS: Montgomery County has certainly been a template for this for about 30 years. And while there are some critiques of it, generally it’s perceived as working well.

Thirty years later, probably less than 2 percent of all the jurisdictions in the United States [have inclusionary zoning]. What is the future? Is this going to be a wave of inclusionary zoning ordinances to come?

GUTHRIE: I think inclusionary zoning is on the way much more than it has been. Whether it be mandatory or voluntary, I think, it just depends on how the industry responds to the needs of those communities that are out there. I think what has lent itself to much of the more recent urgency is a huge escalation in housing prices the last four or five years.

And communities that never would have talked about affordable housing in the past now find themselves priced out of the market for the people that live there.

Well now, you know, they’ve formed a suburban mayors’ caucus to take a look at how we can get more affordable housing. I think they’re moving past the stigma of the Cabrini Greens of the world and they’re looking at realistic ways to incentivize developers or require developers to provide some sort of affordable housing component.

TERWILLIGER: I would agree. I think basically sticking with my idea that everything comes east from California, that’s a positive. But I believe that just the fundamentals of the cost of housing outpacing incomes is going to force more and more communities to look at this.

The only resolution is not inclusionary zoning. I mean, we’re being very innovative in this housing opportunity bond in Atlanta, and we hope to issue that housing opportunity bond maybe every third year, presuming the general fund can handle it. So there are other ways to do it.

But as a private sector for-profit developer who lives with inclusionary zoning, it is by no means offensive to me. If we can find a way to make the land not get hit too much so that it becomes a taking, it just seems to me that unleashes the private sector for-profit developer in building mixed-income housing, so that people can live across their communities and minimize their commutes. We can have our service workers closer to where they go [to work]. There’s so many positives to it.