Zoning Reform: Why Carrots Work Better Than Sticks

A new spending bill before Congress doesn’t include any incentives to reward inclusionary developments.

Essex Plaza. Image courtesy of Fairstead

Essex Plaza. Image courtesy of Fairstead

The climate, health and tax package making its way through Congress includes $433 billion of spending, mostly for climate and energy provisions. There are few federal funds allotted for housing initiatives other than about $900 million for residential energy efficiency improvements.

One of the programs cut from the original Build Back Better bill was the “Unlocking Possibilities” program that would have made $1.9 billion available in planning grants to local jurisdictions to fight exclusionary zoning and eliminate barriers to increasing the affordable housing stock through zoning reforms.

READ ALSO: Financing Affordable Development—Overcoming the Impossible

President Joe Biden also included $10 billion in his 2023 budget proposal to provide HUD grants to reduce affordable housing barriers. The spending proposal, contained within the president’s housing supply action plan released in May, would reward states and municipalities that have made zoning reforms with additional funding for their new policies and support broader housing activities, including transit-oriented developments.

While this latest bill seems to put federal efforts to further incentivize local and state governments to create more affordable housing on the back burner, multifamily housing industry officials, investors and developers say they prefer any zoning reforms to be voluntary rather than mandatory. Grounded Solutions Network reports there are more than 860 jurisdictions across the United States with inclusionary zoning housing policies. In general, inclusionary zoning mandates or offers incentives for developers to include below-market rent housing units in new developments to increase the supply of affordable units.

“Carrots always work better than sticks. In terms of mandatory inclusionary zoning, we continue to be opposed to it,” Nicole Upano, AVP, housing policy and regulatory affairs at the National Apartment Association, told Multi-Housing News.

“Our real concern is around the mandates that require developers to set aside a percentage of their units with fixed below-market rents as a condition of approval for that new rental housing. Those set asides can certainly be challenging,” she added.

Mandated inclusionary zoning regulations essentially become a tax on developers who are trying to build more housing, Upano remarked. “It puts the pressure on the developers to pencil out that property and has the opposite intended effect,” she said.

While both the NAA and National Multifamily Housing Council applaud the Biden administration for continuing to take steps to address the nation’s critical shortage of affordable housing, Paula Cino, NMHC vice president, construction, development and land use policy, also called out promotion of policies like inclusionary zoning, which she called counterproductive.

“We routinely see inclusionary zoning and rent control proposed as solutions to affordability and they become part of zoning conversations. And that is exactly the wrong approach if you want to get more housing in a community and break down barriers,” Cino told MHN.

A recent NMHC survey conducted with the National Association of Home Builders found 40.6 percent of development costs are directly related to regulatory requirements. About 44 percent of the respondents reported working in jurisdictions that have inclusionary zoning and said covering costs of the lower rents, on average, resulted in a 7.6 percent rent increase. As a result, nearly half of responding developers said they avoided building in a jurisdiction with inclusionary zoning requirements.

Some cities have focused on making adjustments to lot sizes or allowing for duplexes or other multi-unit structures to be constructed on single lots, explained Robert Silverman, a professor of urban and regional planning at University of Buffalo School of Architecture and Planning. Many municipalities also address setbacks to allow a larger unit to be built or deal with environmental concerns.

Noting inclusionary zoning can become a contentious issue, Silverman said he sees more municipalities focusing on voluntary incentives like density bonuses that require variances. He said developers are not as receptive to mandatory inclusionary zoning because they want the flexibility to negotiate and adjust requirements based on specific site characteristics and other project goals. Silverman said mandates work best in cities like New York, where real estate costs are very high and the inclusionary zoning strategy often has a lot of characteristics of a density bonus built into it so it’s increasing density while also requiring affordable units.

There are some disagreements over how successful New York City’s mandatory inclusionary zoning regulation, enacted in 2016 by Mayor Bill de Blasio, has been. According to a July 2020 report by the Manhattan Institute, the housing policy resulted in 2,065 units of affordable housing built by that time. The city’s Mandatory Inclusionary Housing program applies to any development of 10 units or more seeking a zoning change to increase density and offers various options including keeping at least 60 percent of units affordable at 60 percent of the area median income (AMI) and 10 percent affordable at 40 percent AMI. New York City Public Advocate Jumaane Williams criticized the MIH in December for not producing enough units for extremely low-income residents, which is also a common complaint among those opposed to  inclusionary zoning mandates.

One tax incentive for developing affordable housing in New York City, a property tax exemption known as 421a, expired in June and the New York State Legislature failed to renew or replace it. When the tax incentive expired several years ago, it was renewed 16 months later in 2017 with more emphasis on incentivizing affordable rental housing.

“Without it, I think you’ll see a lot of condos or non-residential projects or alternative uses for land where the underwriting is clearer for property taxes,” said real estate attorney Daniel Bernstein with the Rosenberg + Estis law firm in New York City.

He said he does not expect the legislature to take up the issue until next year after the November election.

“The uncertainty paralyzes the industry,” Bernstein said.

Across the Hudson River in Jersey City, N.J., the city adopted mandatory affordable housing mandates in December requiring 10 to 15 percent affordable housing for most new developments and no buyout provisions for developers to opt out. The Inclusionary Zoning Ordinance requires developers with projects over 15 units to follow the provisions when they request more than four additional units for 5,000 square feet of additional residential floor area through a redevelopment plan amendment or variance.

Last month, Jersey City Mayor Steven Fulop proposed an IZO expansion called the Affordable Housing Overlay that would encourage developers to voluntarily create more affordable units by allowing extra density without adding to the building’s footprint. Meanwhile, developers of Bayfront Promenade, the first building in the massive Bayfront redevelopment plan in Jersey City, recently received approval to begin construction of a six-story building with 209 units that will have 35 percent affordable apartments for households earning 60 percent AMI or below.

Investors, Developers Experiences

Avanath Capital Management, an investment firm that acquires, owns, renovates and operates affordable, workforce and value-oriented communities, plans to use a tax abatement on an upcoming multifamily purchase. In many places the tax abatement is equivalent to a 40 percent rent increase, noted Avanath Chairman & CEO Daryl Carter.

“It’s a better economic incentive than buying and then having to displace existing residents and raise rents 40 percent. I’d rather keep them in place and have that economic incentive be in the form of a tax abatement,” Carter told MHN.

On a ground-up development in Detroit, Avanath will be receiving a city tax abatement and other economic incentives negotiated when it acquired the city-owned site to create 30 percent affordable units.

“It’s very difficult with construction costs to build new units that meet 60 percent of AMI without something in the way of incentives,” Carter said.

Brett Meringoff, managing partner, development at Fairstead, a real estate company that creates and preserves affordable housing, said he worries about the challenges facing the industry including inflation, rising interest rates and the ongoing supply issues and those impacts on increasing affordable housing stock.

Fairstead is developing a ground-up multifamily property in Newark, N.J., which has an Inclusionary Zoning Ordinance adopted in 2017 requiring developers of projects with 30 or more units to set aside 20 percent of their units for low- and moderate-income families. An amendment proposed earlier this year by Mayor Ras Baraka will require developments of 15 units or more to be covered and extend rent affordability requirements from 30 to 50 years.

“We are looking at the guidelines very closely to make sure we can not only comply and afford to build the affordable housing units, but to ensure the bonus and incentives provided in the inclusionary zoning in order to build the affordable housing will offset the cost of building the affordable housing units,” he told MHN.

Fairstead is planning to build 241 units at 60 percent AMI in the first of three buildings to be constructed on the parking lot of Essex Place, a 694-unit property the firm bought last year in downtown Newark. The remaining two will be mixed-income buildings.

Kairos Investment Management Co., a real estate investment and asset management company, does not do ground-up development but has been committed to an affordable housing strategy for the past seven years. In early February, KIMC acquired a 238-unit affordable multifamily property in Austell, Ga., which has been renamed Orchard Mills, for $34.6 million. The majority of the units are income and rent restricted at 60 percent AMI, said Jon Needell, KIMC president & CIO.

“As an affordable housing owner, we believe that not only should it be inclusionary, but accessible affordable housing really should be available in every community,” said Needell.

KIMC is based in California, where Gov. Gavin Newsom last year set strict rezoning deadlines for local jurisdictions to provide details on how they will create more housing and remove barriers to new construction, Needell said one of the governor’s more controversial rezoning tools has been the ADU law which allows the construction of accessory development units. Last fall, Newsom also signed a bill that allows development of up to four residential units on single-family lots across the state, essentially eliminating single-family zoning.

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