As local municipalities grapple with growing demand for diverse affordable housing options, the lack of resources and solutions is pulling many market-rate apartment firms into the debate as cities look to controversial solutions like inclusionary zoning and rent control to address the increasing need.
For those most in need, meaning those people earning under 60 percent of area median income (AMI), there are a number of established subsidy programs to address those housing needs. However, for other lower- and middle-income earners-those making between 60 percent and roughly 90 percent of AMI-there are few options.
Municipalities are increasingly turning to policies like inclusionary zoning, which mandate that developers set aside a percentage of units to be rented a below-market rates, as solutions. However, many apartment executives argue that these policies are not only short-sighted but also ineffective, in some cases actually exacerbating the problem.
During a session on affordable housing mandates at the 2016 NMHC Apartment Strategies Conference, Larry Curtis, president and managing partner of WinnDevelopment, said that part of the problem is that municipalities believe that policies like inclusionary zoning are effectively a cost-free solution.
“There’s this perception that developers only build luxury housing because we want to make more money than we would make on workforce housing,” said Curtis. “But we all know that we build luxury housing because the math on workforce housing doesn’t work.”
What’s missing from municipalities’ understanding is that there are hard costs to develop, regardless of whether someone is developing an affordable or market-rate unit. Land, financing, materials and labor costs are set independently of the unit’s end use. Moreover, there are many secondary costs associated with those affordable units that municipalities often ignore or underestimate.
“You pay for it forever,” explained Jonathan Holtzman, chairman and CEO of Village Green. “There are restrictions on utilities and rent increases. The cost to this doesn’t stop being a cost. Tax assessors [also] give you very little credit.”
Cindy Clare, president of Kettler Management, added, “Clearly we understand that we need more workforce housing. But it can’t be just on the backs of developers.”
To that end, many apartment firms facing affordability mandates are working with local jurisdictions to find areas of give and take, where municipalities get the affordable units they want and the financial burden on developers is reduced.
Many executives find bonus densities as an effective tool to reduce costs while other prefer to push to do the affordable units off site, where they can access less expensive land. Others ask for parking requirement variances, reduced impact fees or expedited entitlements.
“I don’t think we’re ever going to get the economics to where it works,” explained Holtzman, “So it’s about reducing the impact.”
However, some remain skeptical of whether inclusionary zoning can even move the needle when it comes to increasingly the supply of affordable housing. Curtis, for one, said that historic preservation tax credits are an underutilized tool, allowing developers to work within a historic building shell while getting 40 percent to 50 percent of the capital costs subsidized by the credit.
Some also fear that as municipalities are confronted with the reality that affordable mandates are a rather ineffective tool for producing affordable housing units, they could become more aggressive.
“Rent control will raise its ugly head in many cities because inclusionary zoning isn’t even making a dent in the problem,” said Curtis.