Sightline Corroborates Our Message….Again!

Dan Bertolet at the Sightline Institute has delivered his promised post on the impact of Mandatory Inclusionary Zoning (MIZ) on low-rise zones in the city. The news is what we’ve been saying a million times: MIZ won’t work and will actually make prices for housing in Seattle worse, not better.

Indeed, my previous case studies of mid-rise and high-rise upzones found that MHA as proposed —and now implemented in the University District—is so poorly balanced that it would slash builders’ return on investment and suppress homebuilding. Disappointingly, it’s a similar story for the low-rise apartments I analyze here: the draft low-rise MHA policy is imbalanced and will slow construction and produce less housing—subsidized and market-rate—as a consequence. And less housing means more competition for what’s available, rising rents, and more displacement of low-income families and individuals.

MHA’s financial hit on low-rise homebuilding would be less severe than what my previous analysis indicated for mid-rise and high-rise examples. But most low-rise housing is built by small businesses that have less tolerance for added costs than the larger companies that build mid- and high-rise apartments. MHA as currently proposed would not only undermine Seattle’s goals to build more affordable homes for low-income residents, but also the city’s goals to create a full spectrum of housing choices for all.

Bertolet and his boss Alan Durning have a distracting and annoying practice of habitually saying that “the theory of MHA is sound.” It isn’t and never was. And Bertolet said as much in a very succinct take down of MHA. It is worth quoting that post here: 
Ironically, the conceptual heart of the grand Grand Bargain itself is an impediment to the kind of cultural shift necessary to garner political support for upzones. The problem is that because the bargain sanctions a trade-off between upzones and affordability, it perpetuates the widely held misconception that allowing increased housing density is a necessary evil at best. But the truth couldn’t be any more opposite—the positive effect on affordability in particular, not to mention reduced sprawl and greenhouse gas emissions, along with improved human health and productivity.
And that’s why it isn’t sound. He said it perfectly before going to Sightline. More housing is not a “necessary evil” that needs to be punished with a fee and inclusion. It is, in truth, the solution to higher prices. As I’ve pointed out I think Bertolet has to say the MIZ idea is sound because Sightline goofed and signed on to the concept before they had done the work Bertolet has been doing which leads inexorably to the realizing the this is a bad idea. Or they could have just listened to me. But around here, everyone has to do things the hardest way possible.
In substance, what Bertolet does is go through the feasibility issues I’ve covered before. No surprises there. What happens to the project is that when inclusion or fees are added to the production of housing, many projects won’t make any financial sense. But because he doesn’t use the typical real estate tools to look at financing, he misses an important point — maybe the biggest point. Projects will eventually end up being feasible because the price goes up. In fact in a weak moment, the City actually admits this is how they expect it will work

We used Loan to Value Ratio (LRV) in my analysis of a townhouse project. I think it’s a better way to show the loss of return on investment because it’s what lenders use. You can also use Debt to Credit Ratio (DCR). And, sure, the harm is lost production. But it’s worse than that: higher prices will have to cover the out of balance LRV. When a project can’t promise to deliver at least about 20 cents on the dollar of cash flow, the project won’t get financing. There are ways to fix the ratio.
The City has long ago concluded “the value of land will go down and so will the price,” so don’t worry, they say, prices won’t go up the greedy land seller will take the hit. The problem is that isn’t how real markets work. We’ve seen this land market actually doing the OPPOSITE now, with sellers wanting MORE since their dirt is in a higher zone.
And the other option to get financing past the post is, yes, you can raise the rent or sales price. This is, in fact, will happen slowly in the market to rationalize the fees and inclusion. Prices will continue to go up. And Councilmembers like Tim Burgess will say, “See. You people are still building housing! It was all just whining. You’re still making money and we’re solving the problem.” 
But we’re not. All this has an inflationary effect. It’s disastrous. It is the worst thing we could be doing. And now, even with the brainiac kids as Sightline saying it, I doubt anyone is going to listen anytime soon. Unfortunately, it’s going to take a law suit to stop the insanity. And the Council and the angry neighbors can point to rising prices, caused by the extortion racket set up by the Mayor, City Council, the Housing Development Consortium, and Vulcan as proof positive that developers are laughing all the way to the bank.

Next up? Rent control. Although the Council has been doing that is slow motion.

Taken together with all the other regulatory overreach we are well in our way to being the Bay Area. And this is how we’re “fixing” high prices. I’ve never seen a group of people so determined to do exactly the wrong thing, over, and over, and over again. Sad!

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