Housing Prices: Will Incentives and Inclusion Help?

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First of a two part series by Jerrell Whitehead. The posts here on zoning are longer versions of material he completed while at Sightline Institute. His initial interest on this subject came from conversations with A-P Hurd, Vice-President at Touchstone, who gave a number of reasons why housing construction costs are growing in Seattle. All views expressed here are his own.

On September 5th, 2014, in the somewhat quiet confines of Seattle’s City Hall, Councilmember Mike O’Brien loudly pronounced words that anyone looking for a place to rent in this city well comprehends: Seattle has a housing crisis. Seattle, now standing tall as the fastest growing major city in America, must confront the fundamental issue of where to house all these eager newcomers. Councilmember O’Brien is the chair of the Planning, Land Use, and Sustainability Committee, which last met Tuesday, September 16th, to discuss the particular incentives the city uses to encourage the production of affordable housing. On September 23rd, Mayor Ed Murray announced the creation of the Housing Affordability & Livability Advisory Committee, which is to offer recommendations by May 2015. This news makes it clear that housing affordability will be a significant and highly contentious issue in the next 12 months.

Background

Following the dark days of the recent economic downturn, Seattle now ranks alongside New York, San Francisco, and Washington D.C. as the nation’s top markets. Seattle is growing rapidly—even faster than the city envisioned in its decade-old Comprehensive Plan, which is the city’s grand strategy on how to accommodate a far larger population. The plan projected 47,000 new households (as well as 84,000 new jobs) between 2004 and 2024. Ten years into that plan, the city is well ahead of that schedule. As of 2012, there were 312,853 housing units in Seattle. Fully demonstrating that growth figures may need to be revised upwards, there were 29,330 net new housing units added from 2005 to 2012, or roughly 62 percent of the 2024 target. A rapid influx of newcomers often signals a strong economy—and Seattle has been adding jobs at a fast pace. Over March 2013-14, King County (which includes Seattle) was ranked as the fifth county nationally with the largest increases in employment level.

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Seattle Comprehensive Plan by Seattle Department of Planning & Development

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Seattle Comprehensive Plan by Seattle Department of Planning & Development

 

 

Yet amidst a boom in business, acute concerns persist: housing prices and rents are trending upwards in the face of rapid migration. A palpable sense is growing that Seattle is pricing out many of the citizens it once warmly welcomed. Rather than focusing on the entirety of the housing market, both the City Council and Mayor Ed Murray are paying attention to the issue of affordable housing for lower income groups. There is the pervading belief that rents are simply too high and that the best recourse is stronger government intervention. Slowly, and ever louder, the public is starting to clamor for its representatives to do something, anything, which will bring results on this essential issue.

Presently, existing housing incentives for private developers are set to undergo major changes, and a forthcoming series of posts seeks to better inform that debate. Two policy measures are at the heart of Seattle’s development incentive scheme: incentive zoning and the multi-family tax exemption program (MFTE). The latter will be discussed in a future post, but here the focus is on broad analysis of incentive zoning.

Definitions

Incentive zoning is the progeny of inclusionary zoning, and the ultimate purpose of both is to make the creation of affordable housing a key part of a community’s new development. Today, inclusionary or incentive zoning programs come in all shapes and sizes. Some offer developers incentives to build low-rent units. Others require developers to include below-market units in every new housing development. Some give developers a choice between building new units and paying into a municipal housing fund dedicated to building low-rent units. Inclusionary zoning programs differ in the types of development covered, the share of new units required, the required price for new rental units, who can obtain low-cost units, and the length of time that “affordable” units must be offered at below-market rates. Many of these zoning programs mandate that units offered at below-market rates be of similar size and quality as the market-price units, and also spread throughout the project to avoid creating conspicuous public housing or “projects”. However, New York City developers recently have generated national opprobrium by offering affordable units accessible only through “poor doors” separated from main entrances for market-rate units.

Zoning: A VERY Brief History

Zoning of any kind is a relatively new practice in the United States. The nation’s first zoning codes originated in New York City in 1916, spurred by new high-rises opposed by neighbors. The use of zoning quickly spread to other municipalities. In 1926 the United States Supreme Court upheld the practice of zoning, ruling that the zoning laws of Euclid, Ohio passed constitutional muster.

Many (but not all) of these early zoning programs were both racist and classist, as they were principally created to keep “undesirable” people away from higher-income neighborhoods. This was accomplished by restricting both the types of housing that builders could build, and by restricting the kinds of people who could live in them. Over time, municipalities used zoning to reserve large swaths of their total land area for single family houses with ample yards—a particularly expensive form of housing, and one that limited the number of lower-income folks who could afford to live near the well-off.

As a reaction to this sort of “exclusionary” zoning, in the early 1970s US municipalities began to adopt “inclusionary” zoning policies designed to ensure that developers provide low-cost housing to at least some residents. The first inclusionary zoning policy, passed in Fairfax County, Virginia in 1971, mandated that developers of more than 50 units of multi-family housing provide 15 percent of their units at prices that were affordable to residents within 60 to 80 percent of median income. In 1973, the Virginia Supreme Court overturned the ordinance, asserting that it was a “taking” of property rights without fair compensation. (See Fairfax County v. Degroff) Nonetheless, in 1973 nearby Montgomery County, Maryland, passed a “moderately priced dwelling unit” ordinance, which required developers of more than 50 residential units to set aside 12.5 to 15 percent of total units, dispersed throughout the property and available to families with 50 to 80% of the area median income. It is still active as of 2014.

The Montgomery County, Maryland ordinance is the oldest in America. But California, with over one hundred ordinances and 30 years of experience, has the most familiarity with inclusionary zoning. The Bay Area standard bearer is Palo Alto, which first instituted their program in 1973. Today, more than 100 communities in California have similar zoning statutes. Nationally, the ordinances can be found in Colorado, New Jersey, and Oregon, amongst other states.

Controversy

In whatever guise — voluntary or mandatory; with incentives or none at all — the use of inclusionary zoning schemes to procure affordable housing is deeply controversial. Municipal governments love these ordinances because affordable housing units are made, and for-profit developers are forced to pay their fair share. Next, eligible residents lucky enough to live in one of the new units receive a place to call home at a below-market price. Conversely, developers, economists, and pro-growth activists see inclusionary zoning as a straightforward tax on development that adds to construction costs and stunts supply. As total construction falls, the price of market-rate housing increases, and the whole housing market is grossly distorted.

Next in this series, we discuss the argument of each opposing side in this contentious debate.

Jerrell Whitehead is a former Research Fellow of the Sightline Institute. He is a Bill & Melinda Gates Scholar, and earned his Master’s (MPhil) and PhD in economic and social history from the University of Cambridge. Thanks for research assistance must be extended to A-P Hurd of Touchstone Corporation, Kayla Schott-Bresler of the Housing Development Consortium, and Esther Handy, legislative aide to Seattle City Councilmember Mike O’Brien.

More on the Impacts of Proposed Microhousing Legislation

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The letter below was recently sent to Seattle City Councilmembers and is part of an ongoing educational campaign to inform Seattle’s policy makers about the negative impact of Councilmember Mike O’Brien’s microhousing legislation which will be up for a vote on October 6.
 
We’ve been making the point that the legislation and amendments will make most if not all microhousing projects infeasible and more expensive for renters. We are available to answer questions and delve deeper into these numbers before the vote. 
 
The Mayor has already expressed his concerns in a recent letter about the impact of this legislation on the affordability of microhousing. We hope he’ll veto this legislation and urge his Housing Advisory Committee to take up how to support and regulate microhousing in the years ahead so it remains a choice for people moving into our region.  You can find extensive quantitative analysis in the attachments below. 

Dear City Councilmembers:

As you consider CB 118201 relating to the much-needed workforce housing type known as micro-housing and congregate housing, please consider the financial impacts this will have on your customers: the many citizens that rent this housing.  In reviewing the City’s analysis of this legislation, it does not include the impact on future tenants, only the accretive revenue impact (of $210,000-$270,000) to the City’s Department of Planning & Development.  Based on my financial analysis of CB 118201, I estimate that it would bring the monthly microhousing rent from $800 to $1,271, an increase of $471 or 59%!  The amendments as passed by PLUS Committee would add an extra $105 per month, bringing the total to $1,376, which is an increase of $576/month or 72% versus the status quo today!  Your stated goal when this process started was to regulate this housing type, not eliminate it, which is what the current legislation will simply do.

On a related topic, there is much confusion as from where the 120 sf vs 150 sf numbers come from.  They both show up in different places:

120 nsf

SBC 1208.3 requires that ‘every dwelling unit shall have no fewer than one room that shall have not less than 120 sf of net floor area.  Other habitable rooms shall have a net floor area of not less than 70sf’  This section applies to a typical dwelling unit, where you would have one room (typically the living room) that is bigger than the rest.  The 2012 Building Code Commentary for this section reads ‘These minimums reflect the physiological requirements of light and ventilation and also preserve the individual’s perception of space and the elements necessary for a psychological sense of well-being.’

150 nsf

Director’s Rule 6-2004 is the source of the 150nsf floor area ‘a small efficiency dwelling unit shall have a living room of at least 150 net square feet of floor area.  The floor area occupied by bathrooms, cabinets, appliances, structural features, and any closets shall not be included in calculating the net floor area.’  The introduction to the Director’s Rule states ‘Increases in the cost of housing, and the decrease in available low cost housing, are creating a need for more affordable options in Seattle.  This rule allows for smaller efficiency units if other amenities are also provided.’

Based on the conflicting language above, no new minimum language should be included in any new legislation.  There is already a 70 sf minimum sleeping room requirement in the code as well as a 120 nsf for one room in a unit.  If you let the existing language stay – and get rid of the arbitrary Director’s Rule – the smallest sleeping room in a Congregate would be 70 nsf and the smallest in a Small Efficiency Dwelling Unit (SEDU) would be 120 nsf.  Those existing minimums would continue to allow these housing types to be built in an affordable manner.

Let me know if you have any questions.  I would welcome the opportunity to discuss this with you and your staff at any time.

Thanks,

Scott Shapiro

Attachments

CB 118201 impacts 092214

#6_2sinks

#5_AmenityArea

#3_BikeParking

Linkage Fees: Will Seattle Start the San Francisco Death Spiral

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The Seattle City Council is at it again. Councilmember Mike O’Brien wants a “linkage fee” on all new development in Seattle to raise money for subsidized housing. This new tax being discussed today in the Planning, Land Use, and Sustainability (PLUS) Committee is supposed to lower rents. When have adding fees and costs to something that is increasingly scarce suddenly caused its price to drop? Linkage fees are part of a chain reaction effect of complaints about high rents, followed by the declaration of an emergency, policies imposed that will act to raise prices, followed by another round of yelling about rising prices, with more policy that higher prices. This is what I call the San Francisco Death Spiral, a city with rampant housing inflation and where the supply of housing is 100,000 units behind demand and even billions of dollars in subsidies won’t help.

What is Mike O’Brien proposing to solve perceived rent increases? He wants to impose a tax of anywhere from $8 to $22 per square foot for any new construction in Seattle. So a 10,000 square foot development in Capitol Hill, for instance, would pay a fee of $120,000 to $150,000. As we pointed out when we were asking to keep microhousing out of the design review process, all the extra fees just end up getting folded into rents. There is no other way to make up the costs. No, taking less “profit” isn’t an option, because lenders and investors set Net Operating Income (NOI). When the ratio of costs to income goes up, banks and investors expect it to be off set with more income: that means higher rents.

When projects don’t pencil out because the rents get too high (yes, that happens) then projects won’t get built. Some projects just won’t be able to charge rents high enough to offset O’Brien’s tax. That means fewer units, less supply, and, yes, higher prices.

But wait, say housing tax advocates, the fee will lower the value of the land. So if that 10,000 square foot parcel was selling for $1,000,000 the price will go down (boom!) to $850,000. The landowner, according to O’Brien and his paid consultant, will just lower her price exactly the same amount as the fee. Problem solved. She loses the money, the builder can build the same project and the lower land price off sets the fee so rents don’t go up.

Anyone who actually works in real estate chuckles and shakes their head at this idea. Most say, “it just doesn’t work like that.” Owners of land will not just lower their asking price by 12 to 15 percent. Prices for land are like all other prices: negotiable. If it’s too high or low the transaction won’t happen.

But let’s take a trip down the Yellow Brick Road with O’Brien. What if his tax lowers land a values?

First of all, many sellers simply won’t sell. If my property with a parking lot on it just lost 15 percent of it’s value, why not just leave it a parking lot. After all, the income from selling parking is good money. If buyers all demand a discount there’s nothing that O’Brien can do to make me sell. So what could have been a bunch of new housing units just disappeared. That means less supply and, drumroll, higher prices. Rimshot.

And get this, because our state applies taxes to the total value of land in a taxing district, O’Brien’s tax doesn’t just raise rents, put a damper on housing production, but it also raises everyone else’s property taxes, including angry, entitled, single-family home owners fighting growth. You’d think a policy that simultaneously lowered people’s property values and increased their property taxes would have everyone up in arms. But this seems lost on everyone, especially the people suggesting the policy.

Here’s how it works in Washington, where we use a “budget based” system for property tax. If the budget of a taxing district is $100,000 and it’s splitting the property tax it assess among $1,000,000 in value, each dollar of value pays $.10 in taxes. A property worth $5,000 would pay $500 in property taxes.

When O’Brien’s scheme lowers property values an average of 15 percent, it would look more like this: $100,000 tax divided among $850,000 in value, or about 11.8 cents on the dollar of each dollar of value. The property tax for the same property would be $501.50 (this is discounting the original value to $4,250 and applying a new rate of .118 cents on the dollar.

Doesn’t sound like much does it? But that small increment when applied to a more real world value, like an $850,000 craftsman in Wallingford adds up (i.e. $2,500 per year). Is that O’Brien’s goal? To raise everyone’s property taxes? He’d say no, but his argument leads there. And guess where rental properties find the money to offset the higher property taxes impact on their operating costs? Yes, you guessed if, higher rents.

So, taken together, O’Brien’s proposal

  • boosts costs for new housing;
  • raises rents for new housing;
  • raises property tax rates for everyone;
  • raises rents for all renters as property taxes go up;
  • lowers property values which disincentivizes new housing which constrains supply, which means higher rents; and
  • increase risks, costs, rents, and time to market for all housing, which isn’t coal trains or cigarettes, but a good thing.

So there you have it, The San Francisco Death Sprial: more rules, fees, punitive measures against new housing with resulting higher prices, rising demand, lower supply, which leads to higher prices, which increases the calls for more rules, fees, and punitive measures, which raises prices, which means more inflationary rules.

Perhaps we Seattlites can warm our homes this rainy winter in the glow of the inflationary furnace created by these policies while we warm our progressive insides with blame for greedy developers and landlords for “sky rocketing rents.” We can invite the City Council to bring the marshmallows and graham crackers.

DPD: We Didn’t Reduce Housing Capacity, but the Reduction Was Minor

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Last week Smart Growth Seattle had it’s day in court with the City’s Department of Planning and Development (DPD). Well, it wasn’t court exactly, but the Hearing Examiner. The City had tried to throw our appeal of DPD’s and Councilmember Clark’s significant reduction of housing capacity in the city’s low-rise zones (Councilmember Clark continues to maintain that there is “no legislation,” but DPD staff acknowledged that, indeed, there is legislation on the table). But the City’s motion, based on the idea that Smart Growth Seattle is a “creature of the internet” was denied. We made what I think was a compelling case that the City failed to do appropriate quantitative review of the environmental impacts of the reduction in housing capacity in the proposed legislation.

To win, we don’t need to prove what the environmental impacts might be, but that they were dismissed and not properly considered when putting the legislation together.

Our case:

  • The proposed legislation is a significant loss of housing capacity;
  • With less supply, there will be higher prices;
  • New people trying to find housing in the low-rise zones will likely to go elsewhere, and possibly outside the city, for housing;
  • DPD didn’t consider this or conduct appropriate environmental review to account for reduced housing supply and fewer housing choices;
  • DPD and Councilmember Clark were motivated to change the low-rise zones based on neighborhood complaints that new housing was ‘out of scale’ with other buildings;
  • DPD chose to address the building size issue by reducing density;
  • DPD chose their examples of ‘bad’ development from controversial projects selected by angry neighbors; and
  • The City need to complete additional quantitative review of possible impacts before they, with the wave of a hand, say there aren’t any.

The City’s case:

  • DPD never thought there would be as much density in the low-rise zones when they made changes in 2010;
  • DPD expected a density of 1 unit per 1,800 square feet, but got 1 unit per 1,250 square feet;
  • This outcome wasn’t a ‘mistake’ by DPD however;
  • The city can take density back if it wants to, otherwise we’ll get too much
  • The reduction in housing was ‘minor’ and ‘not significant;’
  • There really isn’t a reduction in capacity; and
  • The problem will go away because the legislation simply undoes what happened in 2010, essentially putting density limits where DPD had originally intended them to be.

This last point, that the reduction in housing capacity was small and not worth a quantitative environmental review but also didn’t happen, was the strangest argument offered. Under cross-examination, Geoff Wendtland consistently said the impact was minor, but denied that there was a reduction in housing capacity. When asked repeatedly, “will this result in less capacity in the low-rise for housing,” Wendtland would say things like, “I wouldn’t say that.” And when asked directly, “could there be more capacity after the legislation,” Wendtland said, “yes, if people build more densely.” The City wants it both ways, suggesting it didn’t take housing away, and the housing it did take away wasn’t all that much. And the code controls density, except when it doesn’t.

On it’s face the City’s argument was strained and relied on calling the possible environmental impacts “speculative” and “too difficult to analyze.” But isn’t all environmental impact challenging to review and analyze? The truth is that most environmental review has become boilerplate stuff; no developer or project reviewer would ever do anything that would trigger a finding of environmental impact. In other words, everyone knows what the rules are and just follows them.

Except in this case the City specifically calls out an impact, and then says it’s minor. It’s like a vendor saying he’s going to charge you more money for the hot dog you just ordered, but when asked, “how much more,” the vendor says, “Oh, it will be minor and not significant.”

One last point; what’s also clear is that while the neighborhood made the greatest noise about building height bulk and scale, the legislation does absolutely nothing to change that. In essence, their proposal will simply reduce the number of available units while keeping buildings the same height. So, nobody wins. Angry neighbors will still push for what amounts to a downzone, and DPD staff will continue to comply, saying, “pay no attention to what we passed in 2014, it was denser than it should have been.

In the end, the City has an obligation to be transparent when it carries out the whims of angry neighbors: they’re making it worse for people who want to move to our city to share the great things we have here. We think we made an excellent case.

Microhousing: City Shuts Down Projects in Permitting

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Microhousing developers all over the city got this letter below in response to a Superior Court decision that ruled that microhousing rooms are really units. For purposes of enforcing code requirements, a kitchen counts as a unit. Units trigger extended review under SEPA and also require design review. Part of what makes microhousing work, is it’s innovative use of shared kitchens and the allowance of up to eight unrelated people in a unit. Therefore, a unit can have up to 8 rooms. Each room can have a sink and a countertop, a refrigerator, and a microwave. Typically, these items have not been considered kitchens.

But the letter from Department of Planning and Development head Diane Sugimura was sent to people who already have gone most of the way to getting permits for their projects. Applying the court decision this way is a questionable reading of the law, but it also ensures that many projects now won’t work or will have to go through extended review or revision. The “fix” for DPD: move your sink into the bathroom and lose the refrigerator. We’ll be working on a response, and this decision is likely to mean some legal response. We’ll keep you informed. 

I wanted to let you know about the status of your micro-housing residence project. Approval of another project with a configuration similar to yours was recently challenged in King County Superior Court. Like yours, that project included multiple bedrooms, each with a private bathroom and a counter area, including a sink, which appeared to be suited for food preparation.

In a decision issued August 13 and currently under appeal, the judge ruled that each bedroom was configured for use as a separate dwelling unit, and must be regulated accordingly. We have re-examined other similar projects, including your own, in light of that decision. We have concluded that the individual rooms within your proposed development, project no. 6404485, also must be regulated as separate dwelling units.

If you want us to proceed with review of your project before a decision is reached on the appeal, you must either revise the project to meet code requirements based on the larger number of dwelling units, or else modify the plans so that the bedrooms no longer would be regarded as separate dwelling units.

If you wish to revise the project to reflect a larger number of dwelling units, it will be necessary to add Design Review and SEPA. Development standards based on the number of units, such as requirements for bicycle parking and trash storage areas, and any applicable density requirements, must be met. Alternatively, you may wait and redesign based on standards for small efficiency dwelling units, currently under consideration by the City Council, once those standards have been adopted.

If you wish to modify the plans so that the rooms are no longer counted as separate dwelling units, you must modify the plans so that bathrooms are shared rather than privately associated with individual bedrooms, or else you must eliminate food preparation areas within each room, including sinks outside of bathrooms, cooking or refrigeration equipment and built-in counters and cabinets.

Additional modifications may be required based on Building Code standards for separate dwelling units. If the project has received bonus floor area for provision of affordable housing under Section 23.58A.014, that approval must be reviewed to ensure continued eligibility based on the change in unit count or any changes to the structure.

Please let us know how you wish to proceed. If you have questions or concerns about this letter, please contact Christopher Ndifon, at (206) 233-7938 or christopher.ndifon@seattle.gov.