By Jennifer Popovec
All eyes seem to be on Philadelphia. There, a newly-enacted inclusionary zoning (IZ) law has some developers worried about their future in the City of Brotherly Love.
Philadelphia’s IZ legislation, which went into effect December 2007, requires developers of any project with more than 20 housing units to designate 10 percent of their units per development site as affordable housing. If they don’t, they must contribute a cash payment to the city in lieu of construction. But the law, unlike legislation in other parts of the country, does not offer builders any incentives, such as expedited permitting. Plus, the ordinance requires that all aff ordable units be built to the same level as nonaffordable
units in the same project (e.g., granite countertops for all), which is not something that most IZ ordinances require, says Sam Sherman, a partner in the local development firm New Urban Ventures and president of the Building Industry Association of Philadelphia.
“This law will squelch needed redevelopment in Philadelphia,” predicts Sherman. “Our fear is that inclusionary zoning will scare away development.”
In an effort to prove the IZ ordinance would hurt rather than help the city of Philadelphia, the Building Industry Association commissioned a study to analyze the law’s impact. The study, conducted by Philadelphia-based research firm Econsult Corp., found that the obligations imposed on developers under the new law effectively eliminate any incentive for developers to build in the city. In fact, the presence of the IZ law would reduce the ROI for new housing construction in the city to 0.28 percent—a drop of 95 percent.
Philadelphia’s debate over inclusionary zoning is happening in cities across the country. While some locales, such as Stamford, Conn., and San Francisco, have had IZ ordinances on the books for years, a number of municipalities have recently passed such legislation or are re-evaluating their local zoning system.
ONGOING BATTLE
Philadelphia and other cities continue to discuss the pros and cons of mandatory IZ legislation. Advocates contend that such ordinances encourage the development of affordable housing. They say IZ laws significantly add to the supply of affordable housing without impacting the supply of market-rate housing.
Opponents, on the other hand, say that such ordinances force developers to subsidize inclusionary zoning by charging more for market-rate homes—thus increasing the cost of housing. Experts point out that it’s difficult to get low-income housing tax credits or tax-exempt bonds for affordable housing because of the
competition for the limited number available. What’s more, the laws also discourage development, which decreases the overall supply of housing and ultimately drives up the prices of existing housing.
But it’s been impossible for either advocates or opponents to prove their case. It’s difficult to measure the impact of inclusionary zoning on a national basis because these ordinances are local initiatives created and managed by cities or counties rather than states.
In the past few months, however, several new studies have attempted to shed light on the topic. In addition to Econsult’s study, the National Association of Home Builders (NAHB) commissioned three reports on inclusionary zoning, while The Independent Institute, a Washington, D.C.-based nonprofi t political economy
organization, sponsored a policy report. In addition, the Center for Housing Policy and New York University’s Furman Center for Real Estate and Urban Policy recently released a joint research report.
Collectively, NAHB’s studies found that inclusionary zoning can act as a tax on housing, as market-rate buyers ultimately have to pay higher costs for their units, and this in turn worsens the affordable housing crisis the IZ system is meant to solve. The association suggests that cities carefully consider the consequences of inclusionary zoning before it is adopted.
“Most of the people who advocate and institute inclusionary zoning don’t consider the consequences of their actions—they’re making decisions based on intentions instead of results,” adds Edward Stringham, a fellow with The Independent Institute and professor of economics at Trinity College in Hartford, Conn.
Stringham, who has conducted and published a number of IZ studies, points to the San Francisco Bay Area as an example. Although the Bay Area is widely considered to be an IZ success story by housing advocates across the nation, Stringham’s studies found that inclusionary zoning historically has fulfilled only 5 percent of the area’s affordable housing needs, with fewer than 15 affordable housing units built under IZ policies annually. Overall, roughly 7,000 IZ units have been built in the Bay Area since the first jurisdictions adopted IZ legislation in 1970. But that’s only a fraction of the 33,697 aff ordable units built in the Bay Area from 1999 to 2006, according to the Association of Bay Area Governments.
MAKING IT WORK
While most of the recent IZ studies have found that legislation hurts cities more than it helps them, the Center for Housing Policy study, which compared construction levels pre- and post-IZ legislation in several cities, refutes the claims that IZ policies cause significant decreases in housing production or increases in housing prices. However, the study also finds that IZ policies produced only a modest number of affordable housing units, which means that inclusionary zoning alone is not a panacea for a community’s affordable housing challenges, says Jeffrey Lubell, the Center’s executive director.
Lubell also says that it’s important for cities to consider off ering incentives to developers. “Our analysis shows that developers need to have compensation to off set the cost of inclusionary zoning,” he explains. “You don’t want to shift the losses from the inclusionary zoning units to middle-income families.”
In Baltimore, the City Council has created a task force of local developers, lawyers, and city officials to hammer out an IZ ordinance that includes a “hold harmless provision.” Th is terminology is intended to ensure that developers won’t lose money because of IZ requirements, says task force member Jon Laria, a
partner in the Baltimore offi ce of law firm Ballard Spahr Andrews & Ingersoll.
Many cities, however, fi nd it difficult to determine what kind of incentives to offer developers. And just because incentives are available doesn’t mean that they’ll always work, experts warn. In many areas, developers are unable to use density bonuses off ered because of neighborhood opposition, local regulatory barriers, or the economics of a given property.
Some cities have bypassed incentives altogether. Developers in Stamford, Conn., are required to set aside 10 percent of their residential units—rental or forsale— for affordable housing, if they build more than 12 units. Although developers can opt to “buy out” of the requirement by paying into the city’s affordable housing fund, they receive no incentives, says Paxton Kinol, president of Stamford, Conn.- based Stillwater Investment Management Corp., which has built seven projects under the city’s IZ ordinance.
Without inclusionary zoning, Kinol says, his company would earn nearly $3 million more for its current project, Eastside Commons, a 108-unit condo building in downtown Stamford with 11 affordable units. For a two-bedroom unit, the market-rate price ranges from 416,000 to $450,000. That same unit, as an affordable one, sells for $185,000.
Still, Kinol says he’s a big believer in inclusionary zoning, suggesting that it’s the land sellers who absorb the cost of the affordable units. During the first year of Stamford’s ordinance, land sales and projects
came to a standstill because developers couldn’t make the economics of the deals work under the new requirements, Kinol says. “It took the market 12 months to adjust, but it did adjust,” he explains. “Now developers just factor the cost of the IZ units into their projects.”
- Jennifer Popovec is a freelance writer living in Fort Worth, Texas.
[ the points ]
Cheat Sheet
Here are three quick lessons about the ins and outs of inclusionary zoning.
■ Lesson 1: Mandatory inclusionary zoning requires developers to sell or rent a certain number of
homes at below-market prices or rental rates.
■ Lesson 2: Few states have mandatory IZ legislation; most such ordinances are local initiatives
created and managed by cities or counties.
■ Lesson 3: In many cases, developers can receive incentives to offset the cost of inclusionary zoning; these include density bonuses, expedited permitting, and property tax abatements.
