The following is for study only and has NOT been approved by the
Local Governmental Relations Committee, the Land Use and Environmental
Committee, the Executive Committee or the Board of Directors.
Issue: What is inclusionary zoning, why does C.A.R. oppose it, and how can REALTORS® prepare to deal with this proposal in their local communities?
Action: For information only.
Options: For information only.
Status/Summary: In recent decades, the issue of inclusionary zoning and resale price restrictions has come to the forefront in California. Housing affordability has become a serious problem, and these programs, which typically require the set-aside of units that are affordable to low income households, are regarded by many as a solution. This paper explains why C.A.R. opposes inclusionary zoning ordinances, and why some local Associations have supported such ordinances in their communities. It examines some of the common features of inclusionary zoning ordinances, and reveals some fundamental weaknesses intheir implementation.
A. Historical Perspective
With more pressure from the state to provide affordable housing, and fewer government dollars to subsidize such housing, more local governments have turned to inclusionary zoning programs, which place the primary burden for affordable housing on the private development community. In its most recent list, compiled in 1996, the Governor's Office of Planning and Research identified over 120 cities and counties withsome form of inclusionary housing policy. This number represents a steady increase over the previous decade.
B. Statement of Purpose
Given that an increasing number of local entities have adopted or are considering adopting some form of inclusionary zoning, along with the possibility of a state requirement, this is an issue which still evokes much interest on the part of local REALTORS®. This paper closely examines some of the common features of inclusionary zoning programs, with the intent of providing sufficient background on this subject to REALTORS®, should it become an issue in their community.
C. C.A.R.'s Position on Inclusionary Zoning
C.A.R. opposes inclusionary zoning for several reasons:* It is unfair to place the burden of providing affordable housing solely on developers. The lack of affordable housing is a societal problem, and as such, all of society should share the responsibility for addressing it.
* Inclusionary zoning does not address the factors that contribute to the high cost of market rate housing, i.e., high land costs, lack of available sites, developer fees and exactions, cumbersome permitting process, etc. Moreover, inclusionary zoningonly adds costs to the development of market rate housing.
* Inclusionary zoning places financial hardships on developers. Ultimately, developers will no longer be able to provide housing in the community because the costs are too high, or they will pass the costs on to market rate buyers, thus making it more expensive for the latter to buy a home.
* Resale price controls eliminate homeowners' ability to realize a reasonable profit on the resale of their home and takes away theincentive for them to maintain their home. This makes it difficult to resell inclusionary units, which lessens their availability to the housing market.
* The cost of implementing an inclusionary zoning ordinance for a local government entityis significantly high. Most local governments cannot afford the staff resources and experience necessary to implement and administer an effective program.
* Local government can best provide housing that is affordable for its constituents at all income levels by making it easier for developers to build such housing. Incentives such as reduced land costs and land restrictions, increased availability of housing sites, and reduced fees make the development process less costly and time consuming.
* Because market rate homeowners and renters ultimately bear the cost of in-lieu fees, implementing such fees constitutes a tax on homeowners and renters.
* Many jurisdictions collect in-lieu fees, but do not leverage the revenues tobuild more affordable housing. Instead, in some cases, the money is not spent to produce new affordable housing.D. Local Association Policies
Some local Associations have adopted a policy toward inclusionary zoning that differs from C.A.R.'s. In these instances, REALTORS® in these communities recognized that some form of inclusionary zoning would probably be adopted by their respective city councils, and they believed that a workable ordinance could help the city address its affordability problems. Rather than oppose an inclusionary ordinance, they offered their own proposal and worked with city officials to make the final adopted ordinance acceptable to all concerned. VARIOUS FORMS OF INCLUSIONARY ZONING PROGRAMS
Inclusionary ordinances can vary in a number of ways. However, these programs typically contain some or all of the following features:
· an inclusionary set-aside, usually ranging from 10to 25 percent of the project's units;
· an exemption from inclusionary zoning requirements for small projects, most often for projects of less than five or ten units.
· affordability criteria based on a percentage of median income and/or median home prices;
· provisions for in-lieu fees which allow the developer to pay a fee to the locality instead of building the units;
· restrictions on the resale of affordable units.
B. Mandatory Inclusionary Programs
Ordinances which require a specified percentage of affordable units in all new construction projects constitute the majority of inclusionary programs. Almost all mandatory ordinances contain a threshold at which the inclusionary requirements kicks in. A few cities have a very low or no threshold, in order to discourage developers from down sizing their projects to avoid the inclusionary requirements. Some cities also have a low threshold because a lack of developable land has resulted in a majority of construction permits being issued to small projects.
Most inclusionary zoning ordinances apply to projects of five or more units, and may have a threshold of ten. Cities usually target the larger projects because they are seen as being strong enough financially to be able to sustain the lower profit margin that results from including the below market rate units.
Mandatory inclusionary ordinances also require a specified number of affordable units to be built in the project. This requirement is a percentage of the total number of units being built. The percentage can be as low as 10 percent, or as high as 30 percent in all new multi-family projects. The percentage sometimes reflects an overall goal for affordable housing which the local government wants to reach.
Most mandatory programs also have an option to pay in-lieu fees instead of building the affordable units. This will be discussed in detail below.
C. Voluntary Inclusionary Zoning Programs
Some local governments do not require developers to build affordable units, but they offer builders the option of receiving one or more concessions in exchange for setting aside affordable units on their own volition. These concessions may be given in the form of an increase in the number of units provided or lower parking lot requirements, for example, which can lower the developer's costs and may make the project more profitable. In many cases, units provided under voluntary inclusionary programs must also be placed under resale restrictions.
D. Inclusionary Exactions on Commercial Developments - Linkage Programs
Most inclusionary programs apply strictly to residential projects. However, some cities also require exactions from commercial and/or industrial developers. These exactions are usually for an in-lieu fee which is placed in an affordable housing fund to help finance future projects. These requirements are often referred to as linkage programs because they assume that a link exists between the construction of a new commercial or industrial project and an increase in affordable housing needs in the community, presumably from the new workers that the project brings.
E. Inclusionary Zoning and Growth Control
In order to counter allegations that growth controls exclude low- and moderate-income buyers from a community's housing market, many cities which have such ordinances have incorporated an inclusionary component.
A CRITICAL LOOK AT THE BASIC FEATURES OF INCLUSIONARY ZONING
As discussed above, all inclusionary zoning programs share some or all of several basic provisions. This section examines these features and reveals some fundamental weaknesses in the concept of inclusionary zoning based on common problems that have occurred in numerous cities.
A. Resale Controls
In order to ensure that inclusionary units remain affordable, most inclusionary ordinances contain resale restrictions for ownership units. These provisions, which typically come in the form of a deed restriction, require ownership units to be sold to another qualified low- or moderate-income buyer at a restricted price. The restriction applies to units that are sold within a certain time frame, usually 30 years.
Resale restrictions include various enforcement mechanisms. Several cities and counties, for example, have the right of first refusal when an inlusionary unit is resold. In this case, a city may have 60 days to buy the unit after an owner decides to put the unit up for sale. The city will purchase the unit at its appraised value or a value based on the original purchase price plus an amount tied to the increase in the Consumer Price Index(CPI) during the time the seller owned the unit, whichever is less.
In other localities, affordable units can only be resold to someone who falls into the same low- or moderate-income category as the original buyer. If after one year the ownercannot find a buyer in his/her income category, the local government may allow the home to be sold to someone at a higher income level.
A city may also buy back units when owners cannot find buyers who qualify under low-and moderate-income guidelines. Since sellers do not want to go through the trouble to find buyers who qualify under the city's guidelines, the city may use money from in-lieu fees to purchase the units.
Other cities require an equity recapture as opposed to resale controls.
B. In-lieu Fees
As stated earlier, most mandatory programs also have an option to pay in-lieu fees instead of building the required number of affordable units. While average housing prices in California certainly vary from region to region, the amount charged for in-lieu fees varies more dramatically.
Fees may be based on a percentage of the cost of land in the city, or they may be calculated from a formula that is based on the difference between the cost of producing the units and the price at which median-income families can afford to buy them. Other formulas include: a percent of the gross sales value of the total number of units, or simply a flat rate per unit.
Many jurisdictions preferthat developers build the required number of units under the inclusionary ordinance as opposed to paying the fee. However, because paying the fees is less expensive for developers than building, if given the choice, developers will often opt to pay the fee. To prevent this, many jurisdictions have adopted strict guidelines as to when the in-lieu fee option can be used. Several cities do not allow in-lieu fees. Others only allow certain projects to pay fees.
C. Density Bonuses and Other Incentives
Because developers sustain a loss of profit when building below market rate units, cities and counties that have inclusionary zoning ordinances provide incentives to encourage developers to participate. A common incentive is the densitybonus. The density bonus allows the developer who builds a certain percentage of affordable units to include a certain percentage of market rate units in addition to what would otherwise be permitted under the zoning restrictions for that particular planning area. This provides the builder with an opportunity to recoup the loss he takes by participating in the inclusionary program. One problem that local governments experience with the density bonus is neighborhood opposition.
The staterequires all local governments to provide a density bonus to developers who provide a certain percentage of affordable units. The state requires all cities and counties to provide a 25 percent density bonus to any developer whose project includes 20 percent low-income units, 10 percent very low-income units, or 50 percent senior units.
D. Administrative Costs
Perhaps the most significant drawback to inclusionary zoning programs is the administrative liability. Inclusionary zoning ordinances require a great deal of staff supervision in order to make them effective. As one county official explained, "inclusionary zoning programs are not self-administering."
The greatest demand for program supervision probably comes from resale controls and other mechanisms for ensuring long-term affordability. Resale controls involve many complicated legal and title issues, and they require enforcement.
Please also see a description of the Pro's and Con's of Inclusionary Zoning.
After examining all of the above examples, several observations can be made about inclusionary zoning programs. While these programs were designed to address communities' affordable housing needs, they present many problems as well. Localities frequently cite problems with such provisions as threshold requirements, fees, qualifying buyers, meeting all of the affordable housing needs of the community, legal and technical issues with resale controls, enforcement, and administrative time.
Cities and counties that are considering adopting an inclusionary zoning ordinance must ask themselves if the proposed ordinance will produce enough affordable housing unitsand meet enough of the affordable housing needs of the community to justify its existence. REALTORS® who are involved in discussions of this issue must consider all of the above when determining their own position and when confronting local officials on the matter.
Should REALTORS® choose to oppose an inclusionary zoning proposal in their community, they must be prepared to offer alternatives for meeting the local population's affordable housing needs. Their suggestions should reflect the specific circumstances of the local community. For additional information, please contact C.A.R.'s Public Policy Division at (213) 739-8375, or send an e-mail to Rick Laezman at email@example.com.