Sánchez Proposes Inclusionary Zoning-for-Upzoning Bill. Can Philly's Housing Market Handle That?


(Multifamily buildings would have to set aside 10% of units for people making 50% of Area Median Income)

Before breaking for summer vacation, Councilmember Maria Quiñones-Sánchez introduced a last-minute bill that, if enacted, would create an inclusionary housing requirement for new buildings of 10 units or larger.

Buildings with enough units to unlock this requirement could also access higher density by-right, through additional height, units, and lot occupancy. This isn't really a bonus structure, per se, since it isn't voluntary the way other density bonuses are structured. Projects larger than 10 units would be mandated to offer one-tenth of the units below the market rate, but would be allotted some more expansive development rights for their trouble.

The bill is sure to be hotly debated over the next several months, so it's worth brushing up on some of the issues and concepts involved.

What is inclusionary zoning?

Inclusionary zoning refers to a family of policies aimed at achieving mixed-income neighborhoods. Most commonly it refers to policies that tax new housing to subsidize some below-market-rate units, usually in the same building, but there are also some other variations out there.

The form IZ has taken so far in Philadelphia is density bonuses, where builders can access looser zoning restrictions for including a certain number of below-market units in their project. Builders also have the option to pay into the Housing Trust Fund instead of providing the units.

Linkage fees are another variant of IZ, and are a more direct tax on new housing that's used to subsidize production of below-market-rate units.

Since density bonuses were introduced in the Philly zoning code less than five years ago, only one development project--205 Race Street--have taken advantage of them. Brown Hill was allowed to build 15% more units in that project by making 10% of the 148 units affordable to people making 80% of the Area Median Income. 

PMC's One Water Street also took advantage of a different density bonus for affordable housing that lives in the Central Delaware Overlay. PMC tried briefly to wiggle out of supplying the below-market units, got torched by housing advocates and the media, and eventually ended up paying into the Housing Trust Fund instead.

What is exclusionary zoning?

Inclusionary zoning is a reaction to the practice of exclusionary zoning that local governments have frequently deployed to keep out unwanted land uses and groups of people ever since Euclid v Ambler established local zoning powers in 1926. 

"Exclusionary zoning" is a bit of an odd term, since all zoning is exclusionary zoning. The purpose of zoning, by definition, is to exclude and segregate uses, and by extension, people. And segregate, we have! Local governments have used zoning very creatively over the years to exclude racial minorities from white neighborhoods, primarily through curbs on inexpensive, denser housing varieties. Since wealth is significantly stratified by race in America, policies that make housing scarcer and more expensive tend to have racist impacts. 

Even though zoning was legalized as far back as the 20's, the adoption of local zoning codes really took off across U.S. cities only after the end of Jim Crow, and the de facto segregation that zoning enables is sadly a key factor in its enduring political popularity.

Understanding the specific tools of exclusionary zoning--curbs on dense multifamily or mixed-use housing, large minimum lot sizes and excessive open space rules, minimum parking requirements--is important for the inclusionary zoning conversation, because we can't very well layer inclusivity onto a foundation of exclusion and expect a good outcome. Undoing the exclusionary policies is equally, if not more, important.

What would Councilmember Sanchez's bill do?

Councilmember Quiñones-Sánchez is proposing a mandatory inclusionary zoning policy similar to what cities with very expensive housing markets like San Francisco use. Her bill would require that 10% of units in buildings with 10 or more units be rented or sold at prices affordable to residents making significantly less than the Area Median Income. 

The cap would be set at 50% of Area Median Income for a specific area around greater Center City and University City, and 30% of AMI for the rest of the city. To sweeten the pot, she would upzone several common multifamily zoning categories to allow for more units to help offset the cost of the below-market-rate units.

The AMI cap would be pegged to the Philly metro's median income, not the city median, which makes a big difference. The metro median income is about $65,123, versus $34,207 for the city. Fifty percent of the metro AMI is $32,561, and 30% is $19,536. Of that AMI, only 30% can be spent on rent, so for the below-market units in most of the city, they could only rent for $350 a month for a family of two. 

Landowners would be required to price the units at a below-market rate for 99 years. For context, non-profit developers who build housing with Low Income Housing Tax Credits (the groups most excited about this bill) are allowed to return their properties to market-rate after 15 years, and they do. 

In San Francisco, the inclusionary zoning ordinance requires 25% of units in new buildings larger than 10 units to be affordable to people making 55% of Area Median Income, but this has turned out to be infeasible even in their very expensive housing market, and Supervisors appear likely to reduce it to 18%

In some ways, Philadelphia would go even further than San Francisco's ordinance, with the bill's very low AMI caps at 50% for greater Center City and University City, and 30% of AMI for the rest of the city. In the compromise plan San Francisco is considering, only 10% of the below-market units would be reserved for people making 55% of AMI, and the AMI caps go up from there for the rest of the units. Their AMI is $88,518, vs. $65,123 in Philadelphia.

What are the arguments for inclusionary zoning?

Inclusionary zoning fans tend to have a few goals: they want to increase the supply of below-market-rate housing, promote socio-economically integrated neighborhoods, and raise revenue for non-profit housing development.

Different people put more emphasis on different things. One of the groups that's most excited about this bill is the Philadelphia Coalition of Community Development Corporations (PACDC), whose member organizations stand to gain more funding for non-profit housing development if more developers start having to pay into the city's Housing Trust Fund in lieu of building below-market units.

There's also an interesting economic argument, spelled out in Seattle-based blog The Urbanist, that IZ and linkage fees depress land values and act like a type of land value tax. 

What are the arguments against inclusionary zoning?

The main arguments against IZ are that increasing the cost of development will depress overall housing construction, resulting in fewer homes than we'd have otherwise. And the cost of the cross-subsidy will result in higher costs for the market-rate units, making the affordability picture no better on net, and possibly worse. 

For the definitive Philadelphia-specific case against mandatory inclusionary zoning, read economist Kevin Gillen's report for the BIA from 2008, which was the last time an inclusionary zoning bill was proposed. That bill was more modest than the current one, but Gillen found it would have reduced the net return on building new housing by 95%, greatly reducing the incentive to build. (Additionally, the way the linkage fee was designed, it was almost universally a less attractive option than directly supplying the below-market units.)

While the report was written nearly ten years ago, it's important to note that city housing prices have only recently recovered from the Great Recession, and total sales volume is still well below the pre-recession peak. The housing market of 2017 isn't radically different from when Gillen looked at this in 2008.

The affordability impact is counterintuitive, but if a developer is losing money on one out of ten units, the other nine units need to be priced higher in order to cover the difference. The price shift in the remaining units could perversely end up raising average home prices in these buildings, in order to produce a relatively paltry number of below-market units.

As Joe Cortwright at City Observatory has explained, inclusionary zoning has a big scale problem, and is unlikely to produce more than a token number of affordable units. If Philadelphia continues to produce about 3,000 units of multifamily housing a year, as it has the past few years, Councilmember Sanchez's bill would result in just 300 units per year. 

"At City Observatory, we’ve been highly skeptical of the effectiveness of inclusionary zoning. While inclusionary zoning gets top mention as a preferred policy by many affordable housing advocates, there’s precious little evidence that its ever had more than a token effect on the size of the housing affordability problem in any city. In addition, because inclusionary zoning requirements essentially shift the cost of housing subsidies onto new development, they raise its cost, and likely reduce the number of units that get built–which tends to aggravate housing shortages and further accelerate prices."

Who pays?

Under the current bill, consumers of new housing are responsible for ferrying the whole weight of this new program, rather than the tax base at-large. This is unfair. If proponents think there is a citywide affordable housing problem, and believe it's worth spending money to address it, then they should propose paying for this from the general fund.

There's a mistaken view that new housing causes neighborhood price increases, which is what's driving the enthusiasm for making "developers" pay (actually it'll be their tenants.) But in reality, it's the scarcity of housing in developing high-amenity neighborhoods that drives price increases, and longtime property owners arguably benefit from this dynamic even more than newcomers. Council isn't asking longtime homeowners to pay anything for affordable housing though.

The other political problem for this idea is that it targets exactly those growing neighborhoods who are doing the responsible thing by upzoning for growth. Neighborhoods who don't want to participate can just erase all the multifamily zoning from their neighborhoods, and there's nothing to stop them from doing that. By contrast, tenants of neighborhoods that do budget for growth would perversely be forced to pay the full tab for their own local affordable housing, when again, this is a citywide problem. 

Affordability for Density

This clearly isn't the final version of the bill, so we're withholding judgment on it until its been debated and amended further. Discussing the bill with people in the housing industry this week, we've heard concerns about the AMI cap levels, the 99-year affordability requirement, and the specific upzoning proposals, some of which don't go far enough, or aren't fully-baked yet. 

However, the basic premise of the legislation--trading an affordability mandate for higher allowable density--is an intriguing opportunity that could be worth engaging with. Councilmember Sanchez and staff may not have landed on exactly the right ratios, but is there a theoretical version of an IZ-for-density trade that would be beneficial for all parties? What would that look like? 

Because for anyone interested in increasing the allowable density of some of the mixed-use and multifamily residential zoning categories named in the bill, or reversing the trend of Councilmembers downzoning growing neighborhoods, opportunities like this don't come around too often. Politically, it's just really hard to imagine Councilmembers ever agreeing to pass even the mild increases in density Sanchez proposes without some type of concession. Reaching a deal on an IZ framework may be the only realistic path forward for a pro-density agenda in the near term, other than the Transit-Oriented Development overlay bill.

If the economics just won't work, they won't work, but the prospect of upzoning some commonly-used zoning categories is an idea worth engaging with. (By the way, withdrawing Darrell Clarke's minimum parking requirements bill, or even further reducing or eliminating the existing parking minimums would make the economics more workable by reducing building costs.)

And to get really real for a second, Philly politics clearly seems headed in a direction where it's difficult to imagine some type of IZ bill won't pass at some point in the future. The ratios in this bill have been ratcheted up since the last go-round in 2008, and future bills are only likely to get more ambitious. Developers should think hard this summer about whether or not there is a strategic value in engaging with this bill and trying to bring it to a more mutually-beneficial place.

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