Let’s Make a Deal? What if the City Wanted to Negotiate on MIZ?

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What if the City decides to listen to us and invites us to talk about the Mayor’s proposed Mandatory Inclusionary Zoning (MIZ) proposal? What principles should we take if we’re asked to negotiate or compromise on the proposal? How do we ensure that whatever emerges from the political process doesn’t do long lasting damage to the production of housing and the wider housing economy? And how can a compromise avoid something that would just push up housing prices and lead to more aggressive intervention in housing production that would lead to a spiral effect of more legislation, higher prices, and more legislation? So far the phone isn’t ringing, but here are some of my (and they’re only mine!) basic starting points for our side.

To begin with, as I pointed out in a previous post, we need a solid intellectual footing in any negotiation. It’s easy to get lost in the minutiae when dealing with the City; it can be fatally distracting. It’s also easy to look at this cycle or the next six months and forget that a policy change is very hard to undo once it is in the code. Is said:

Our intellectual operating system should be programmed to always start up with these points:

  • If it is argued that housing prices are too high we need to ask, “by what measure?”
  • If prices are high by an acceptable metric, then we know that scarcity is the reason and therefore we need more housing.
  • That new housing will sell or rent for more than older existing housing.
  • That’s ok, because that means newer housing can absorb demand from people with more money to spend and they won’t compete with existing tenants of older housing or new arrivals to the city with less money.
  • That new housing, built at private risk and expense, is a public benefit to the whole community.
  • Anything, even things that are vital and necessary like health and safety requirements, that add costs and limit capacity always increases the price.
  • So any regulations or added costs should more than offset the loss of housing and that lost capacity should be replaced.
  • Any value capture scheme to take advantage of increasing or improving housing shouldn’t add time or costs to the production of new housing
  • Numerical targets for housing are by their nature arbitrary and should be revisited in favor of careful tracking of how the market is responding to demand
  • At whatever point the market fails to meet demand, interventions to support people too poor to pay rents to support the cost of land, construction, financing, and operations should be broad based and expect contributions from those most inefficiently using limited land in the city (i.e. Single-family homeowners)

Now when it comes to the details it’s important to remember, remember, the MIZ proposal would require that all new housing include a set aside or rent restricted housing or pay a fee if inclusion is not possible. In exchange for this performance requirement, the City would adjust the code and give developers more square footage by adjusting Floor Area Ratio (FAR) requirements up. The idea is supposed to be that this is a fair trade of value; more FAR means more revenue from space that can be sold or rented, and this would, supposedly, offset the financial impact of additional construction expense and lost rents. Fundamentally, we know this won’t work in every case. We should reject this idea out of hand.

Instead we ought to ask the City, “What are your goals with this program?”

I learned a long time ago not to negotiate for the other side, so I’ll just start with their stated goal of 1500 units of rent restricted housing and some fees paid to the City to send to non-profit developers.

These are my suggested talking points. We can:

  • Commit to working with the City to produce 150 units of rent restricted housing over 10 years beginning in 2018;
  • Agree to some temporary and limited assessment of fees for the express purpose of creating housing subsidies;
  • Agree to contract rezones that would be negotiated over the 10-year period between the City and developers to produce housing set asides in exchange for additional FAR;
  • Support rezones that are true exchanges of value and negotiated based on the conditions of a particular project;
  • An outside assessment and audit of whether the goal is being met and the fees and value exchange are consistent with any agreement.
  • Support possible changes to the Multifamily Tax Exemption (MFTE) program that would help accomplish the City’s unit count objective.

We can’t agree to:

  • A permanent, one size fits all change to the land use code that is tied to increases in FAR, performance, and fees;
  • A new entitlement program that generates a permanent exaction of fees in exchange for mandated increases in FAR;
  • Zone-wide upzones that come with the condition of a permanent, one size fits all, fee schedule and performance requirements;

Other key issues:

  • Consider removing for-sale housing product from the assessment of in lieu fees since there isn’t any scenario likely that would allow performance;
  • Make no final agreement that excludes one typology, zone, product, or form (i.e. Small Efficiency Dwelling Units etc) at the expense of another.

I find the City’s housing goals set by the Mayor, 50,000 units over decades, to be completely arbitrary. And the inclusionary goals are completely unrelated to any data that I have seen that establish housing need by any definition, even the terrible housing cost income ratio that sets the normative standard of housing expenses at 30 percent of gross monthly income.

Notwithstanding the great leap in logic that we “need” 1500 inclusionary units, it’s fine to work with that goal; it’s likely not that hard to meet.

What I have suggested is a starting point. The worst outcome of MIZ is adding costs that boost overall housing prices in the name of “affordability” and then enshrining those in code forever. This would be a disaster, ensuring that for years and decades to come future Mayors and City Councils could simply dial up inclusion rates and fees to “solve” whatever housing or other “crisis” was political hot in the headlines. And each time they would do this simply adding to the momentum of prices that in turn leads to more headlines and bad policy.

I don’t build housing. My personal financial future and that of my family is not tied up in the next 12 to 18 months of the cycle (except indirectly), and so I wouldn’t try to negotiate on behalf of builders or developers. However, these are my thoughts and advice. So far no negotiation like this is going on. If and when it happens, we all ought to keep our eye on avoiding the trap of policy that is self defeating and leads, in the long run, to a perpetual motion machine creating higher prices fueled by politics and bad policy.

Another Fable About Knowledge, Supply, and Demand

King Avacado

A long time ago there was an island Kingdom called Elltaes. There were many wonderful things about the Kingdom. It was beautiful and had many natural resources. The people, on the surface, were warm and welcoming. And the Kingdom had so many wonderful things about that many people wanted to move there from other more drab and boring places.

One person who wanted to move to the Kingdom was a big manufacturer of communicating devices called BigChips. BigChips made things that allowed people to share their ideas, pictures, and random thoughts. It was a huge business. The Manufacturer moved his factory and workers to the Kingdom. The workers were happy, and so, for a time, were the Elltaens, because the workers brought money and bought their goods.

But then the prices of food started to rise. There was not enough food. And everyone had to pay more for avocados, the most important food staple on the island. In fact the symbol of Elltaes was an avocado with a crown. And yet, the prices kept going up. The locals blamed the newcomers.

“They have so much money,” cried the natives. “And the Farmers are greedy and keep making more and more expensive avocados!”

The King didn’t know what to do. Should he talk to the Farmers and ask them what they think? After all they understood farming and how to grow the sweet, tasty avocados everyone loved so much.

“You’ve limited how many avocados we grow,” they told the King. “We run out of stock too quickly, and people keep offering more and more for the next batch we can produce.”

The King thought for a moment that perhaps he should allow the Farmers to grow more.

But an advisor he trusted said that was a bad idea.

“Think of it King,” said the wily advisor. “If you let them grow more fruit, they’ll make even more money. We should let them grow more only if they pay for the right to produce the extra avocados; those Farmers will pay their fair share!”

The advisor even said that the Farmers were to blame for drawing in the Manufacturer, since part of the character of the Kingdom was it’s wonderful avocado crop.

The King was perplexed. He called the advisor and said he wanted to hear from the Farmers. After all, what would happen if they had to pay to produce more? Would they? Would it make things better?”

The Farmers knew better. Paying for extra avocados wouldn’t lower their price. Sure there would be more, but the costs to make them would be higher. The Farmers would have to pass those costs on, so it wouldn’t make any difference. More food, but more costs meant higher prices still.

“Don’t ask them,” said the advisor. “Sure the Farmers know a lot, but they make money at this; they aren’t real people.”

He pointed to some people walking down the street.

“Let’s ask them what they think,” said the advisor. “After all, they eat food and they love avocados; and they don’t make money selling them.”

So a crowd gathered around the King.

“Keep the price low!” they shouted.

“It’s the Farmer’s fault; make them pay!” said another group.

“Make them sell some avocados for less!” yelled some others.

So the King made the Farmers produce more avocados, but charged them to grow the extra avocados. More and more people moved to the island. BigChips was doing really well. The workers paid more and more for the avocados, even though the price was going up. Even some of the Farmers gave up. But it was OK since with every crop they produced they set aside a few hundred avacados for people with less money. Those were gone in an instant, though.

For the poor locals, it wasn’t so good. Most of them gave up eating avocados and had to eat other things. Some were lucky enough now and then to win the lottery for the set aside avocados. But it was always a long shot. It was sad since the green fruit was so much a part of their identity. They hated the new workers and the King. And so the King demanded more avocados and charged the Farmers more. And there were more set aside avocados. And the people still paid more. This kept going and going and going.

And everyone lived unhappily ever after.

Sort of.

The Farmers kept growing avocados. And the high paid workers kept buying avacados. I guess the people who lived unhappily ever after were, well, the people who couldn’t pay for avocados, the ones the King set out to help.

And the moral of the story is…..well, I don’t think I have to tell you do I?

You Probably Won’t Read This Post

read this

Some of you will share this link, but even if you do, most of you won’t read the whole post. That’s according to a Washington Post article, “6 in 10 of you will share this link without reading it, a new, depressing study says.” It’s also my experience. Our world has become saturated in information. Not knowledge, but information. It’s especially fueled by social media. From the Washington Post article:

“People are more willing to share an article than read it,” study co-author Arnaud Legout said in a statement. “This is typical of modern information consumption. People form an opinion based on a summary, or a summary of summaries, without making the effort to go deeper.”

I started writing long enough ago that I’d often have to wait until it hit the newstand to see it. When I wrote opinion articles for the Seattle Times, for example, I would have to walk to a paper box, put in change, pull out a paper, and shuffle through the pages to see my article. There was no way to share it other than calling people up and asking them to read it. We counted on the dominance of the variance media outlets. They shared our thoughts once in a long while.

Now everyone has what amounts to their own media operation with the equivalent of a radio and television studio. We all can create our own content by writing about our lunch or what we did that day, then sharing a series article about a disease, and then a funny story about a cat and dog. That’s what Good Morning America used to be for. Now everyone is their own producer, and we’re all each other’s audience.

Something is certainly gained in all this. It means lots of people who otherwise didn’t get involved in conversations with neighbors and friends do. It means I can peer into the lives of people I never see and get a notion of what’s been going on in their lives. I can share ideas and perspectives from people around the globe and in an instant.

But it has also made the world a bit smaller. We don’t really engage outside our subscribers, people who follow us, or those people who are friends on Facebook. And we share headlines and tweets. These act as a validation  (i.e. “Take that! See the New York Times agrees with me) or provocation (i.e. posting a startling headline about a politician or celebrity) and actually don’t do much more. They may spark an argument and other articles can be cited by posting. Then there’s that moment when some heavyweight, like Mom or Alan Durning, hits like on the post. Ahhh. See.

Well, I’m already past the point that anyone is reading so it’s safe to say that I’m going to try some different things this summer. Typically I have been writing at least three, sometimes four, posts a week on this blog. I’ll keep posting here. But for the summer, say until September, I am going to try posting and writing in different venues — or not posting at all. Maybe I’ll just Tweet, something we haven’t done much of. I’m also happy to have guest posts and would welcome writing that is for or against what we typically advocate for. And if something comes together and I just have to get it out of my mind and into a post I will. It’s an effort to see if changes in format and length and content might help get our message out more effectively.

I’m doing this because the Washington Post article (did you read it?) validated what I had already been feeling: people don’t read things. They look at headlines, post, repost, like, and move on. I know this, for example, because I’ve written and said probably 1000 times that “the HALA recommendations are not the same as the Grand Bargain!” I’ve gotten likes for that and reposts and whatever. But people are still confounding the two things. And it’s not because people re stupid; rather, knowledge is sort of self limiting. We know what we know, and we kind of like to keep it that way. Finding out that things are more complicated is, well, complicated and takes time to figure out.

So today I have a post at Forbes about The Jungle which interests me from a housing perspective but also as an economic case study. Can we learn to see The Jungle, the housing encampment under I-5, as an example of what Hayek called spontaneous order? Yes, it’s a horrible place, but is it an example of innovation and shouldn’t we be figuring out how to help it along instead of squashing it? I think so. The Jungle is a response to housing need just like any other typology or form except that it is a response born of the urgency of the moment. There’s a lot to be learned about ourselves with how we respond or don’t

 

A Builder Weighs in On Mandatory Inclusionary Zoning

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Rob McVicars is a principal and builder at Build Sound, a firm with the mission “to compose inspired, timeless architecture, and green, sustainable projects. He sent this comment in to the Mayor and Seattle City Council about the Mandatory Inclusionary Zoning (MIZ) scheme being proposed by the Mayor and considered by the Seattle City Council. You can send an e-mail to the Mayor and the City Council at our petition page

The idea of adding square footage fees to speculative housing projects in Seattle is simply the wrong path to go down.  The added costs from these fees will not be borne by the developers but rather the end buyer, making a small handful of new home buyers responsible for the costs of subsidizing another small handful of lower income residents.  These buyers are borrowing money and paying interest on that money to purchase their new homes and it seems extraordinarily unjust to have them pay for the needs of others with that money.

This is not a tax, this is a specific effort to take from a handful of people that are perceived to have extra means and distribute it to others.  The simple fact that someone can afford a new house in Seattle does not mean they can afford to pay additional subsidies.  If the City Council is looking for an avenue to subsidize housing in Seattle then a referendum needs to be put on the ballot to tax all citizens in the city, including those that are gaining the most from the proposed fees.

There is another economic factor in this equation: if the developers cannot pass on these added fees to the home buyers due to a slow down in the market, the margins in building will no longer make sense and the building will stop.  This is not an over dramatization, this would be reality.  As builders and developers we put our family’s financial well being on the line every time we sign loan documents.  If the reward for our risk is diminished there would be no sense in taking the risk.  We are all very capable people and have other pathways to making a living and if these fees are added I believe  you will find less building and prices soaring.  At that point it doesn’t matter how many fees you raise, families that are unable to afford buying or renting in today’s market will never be able to afford living in the city with the added fees.  You will price even more people out of the city.  The answer to affordable housing is not to add costs housing.

 

Sincerely,

 

Rob McVicars

manager

Knee Deep in The Big Muddy: Will City Press On with MIZ?

June 20, 2016

Re: Mandatory Inclusionary Zoning Proposal in PLUZ Committee on 6/20/2016

Mayor Murray and Councilmembers,

Attached you will find a three page list of process hang ups, rules, regulations, and code language that each add time and cost to the production of housing in Seattle. Each of these is a solvable challenge and impacts the production of all kinds of housing, both market rate and subsidized, throughout our city.

Taken together, all of these problems are creating what is becoming a crisis in housing production. Yet City staff, the Mayor, and the City Council are putting all their energy and time into the proposal you will consider this today to impose Mandatory Inclusionary Zoning (MIZ), and almost no effort into addressing these serious issues that are resulting in higher housing prices.

Mandatory Inclusionary Zoning does not incentivize housing production, but creates additional costs for construction to take advantage of upzones, and it reduces rent revenues from the required rent restrictions. In lieu fees also push up the price of for sale housing. These increases and losses will make many projects infeasible.

Additionally, because of legislation the Council has passed and the many problems cited in the attached document (e.g. the increase of set backs for power lines from 10 feet to 14 feet), much of the additional Floor Area Ratio (FAR) that is part of the so called “Grand Bargain” is of no value and can’t be used to offset costs and lost revenue created by the MIZ proposal.

More broadly, this proposal will not improve overall housing prices in the city of Seattle. It will do the opposite. Because you are repeatedly taking actions to slow and reduce supply (e.g. last years low-rise legislation, the elimination of microhousing, reduction of single-family housing production in small lot legislation, abutting lot legislation, etc.), make operating buildings more challenging, and failing to address serious issues like the definition of frequent transit service, you have made it more difficult for housing producers to keep up with growing demand. That’s why housing prices go up.

By forcing projects to build more FAR, restrict rents, and assume more costs in additional fees you’ll create some additional rent restricted units. But those units will be paid for by higher rents and prices in the balance of housing produced, not in lost profits. That means higher overall prices. And judging from the City’s past performance on these issues, what will result from any ensuing outcry from the public will not be an elimination of barriers to production but more restrictions, rules, regulations, fees and taxes. You will be putting us on course to be the next San Francisco.

Lastly, the legislation you are considering has serious legal problems. State law is abundantly clear that inclusionary housing programs must be voluntary and that there must be a fair exchange of the value of private benefit with public benefit; MIZ programs cannot make projects infeasible. The City also can’t create what amounts to a tax on housing production nor can it impose what amounts to an impact fee. As a matter of process, we are not a party to your agreement for this legislation (see page 3 which states, “all parties agree to develop and consider options.”), in fact we have been completely and repeatedly ignored in our request for information about the numbers behind this legislation (see attached).

And that leaves us with the fact that this legislation, too, has no numbers. This puts the City at risk of failing to meet proportionality requirements in State law. While the City and some advocates have been congratulating themselves on the innovative nature of this proposal, nobody has even seen the assumptions behind it. You’re considering legislation that is essentially a blank check: “Trust us, we’ll do the math later.”

But it isn’t too late. We are only knee deep in The Big Muddy at this point. We would ask that the Council do nothing until City staff engage the wider development community and demonstrate the fair exchange of value between increases in FAR and fees and rent restrictions. Let’s see some numbers. Unless and until we can see numbers and that the imposition of this proposal won’t result in creating more challenges to housing production that lead to higher prices, we simply can’t support it. And please spend more of your time addressing the real issues that impact and slow housing production and result in higher housing prices.

Thank you,

Roger Valdez
Director