To Incent Or Not To Incent?

This is pretty much a done deal: On Monday Seattle City Council is expected to approve a new plan for workforce housing incentive-zoning. But as much as I support the idea of incentivizing affordable housing in Seattle, my weak little brain is wracked with ambivalence over this approach. In short, my niggling angst is over whether the overall effect may be to impede development at the higher densities that are needed to move the City towards a more sustainable future .

For example, would the proposed six-story project at 23rd and Union be feasible for the developer if there was an additional condition attached to the upzone from 40 to 65 feet? This is a project that, given its location, would make a major contribution to the public good by its mere existence.

In the case of upzones from 65 to 85 feet, construction type plays a role that does not appear to be widely appreciated. Seattle building code allows a maximum of five stories of wood construction on top of a concrete base, a.k.a. the “five-over-one.” This construction type is relatively economical, and that’s why they’ve been sprouting up all over the City over the past decade or so.

But to go higher than five stories above a concrete base, code requires either steel or concrete frame construction, which tends to be more expensive. So it typically requires many more stories of building to offset the additional cost of construction, and the two extra stories you get by raising the height limit from 65 to 85 feet usually aren’t enough.

In the entire City of Seattle, I know of only two eight-story residential buildings that came out of the ground in the last development cycle (I trust y’all will correct me if I’ve missed any). The photo above shows those two buildings, which happen to be almost directly across the street from each other on Market Street in Ballard, just west of 15th Ave. One is steel frame and the other is concrete frame (the one clad in yellow is a five-over-one).

Would the developers of these two projects have gone for the two extra stories — which already required more expensive construction — if they had to cover the additional financial burden of affordable housing? It’s impossible to know for sure, but in neighborhoods where rents are lower than those in Ballard, the likelihood of developers opting for the 65 to 85-foot bonus is likely to be fairly low.

So then, how much financial burden would the incentive-zoning actually impose? Take for example a building with five floors of residential and 20 units per floor. Two more floors would add 40 units, and the 17% set aside would stipulate seven workforce units out of a total of 140 in the building. Those seven units would sell or rent for a lower price than the rest, but not by a drastic amount in most cases, since eligibility is based on 80 to 100% of area median income. For a 40 to 65 foot upzone, the impact is a little bigger proportionally: the building would end up with seven workforce units out of 100 total.

The armchair analysis above suggests that the financial hit would be relatively small, though for certain locations and market conditions it still might be a show stopper.

Yet another consideration in all this is that many other cities — including Boston, New York, San Francisco, and San Diego — have implemented inclusionary zoning that is much more demanding than the incentive zoning proposed for Seattle (inclusionary zoning as typically defined is not legal in Washington State). Currently in San Francisco, for multifamily projects with ten or more units, 15 percent of the total units must be affordable. Results have been mixed but generally positive (pdf), and dense housing development didn’t grind to a halt as some had probably feared.

Ambivalent yet?

While there are those who never seem to get beyond scapegoating the developers, the reality is that the community as a whole should be footing the bill for affordable housing. And Seattle already has an affordable housing incentive known as “Homes Within Reach” that reflects that perspective. The program offers up to a 12 year property tax exemption for multifamily projects that provide housing affordable to “moderate-wage” workers.

The smart thing about the tax exemption incentive is that it’s decoupled from density. Affordable housing and density are both key components of balanced sustainability, and nobody wants an incentive that may have the unintended consequence of pitting one against the other. Will this happen with Seattle’s new incentive zoning? Maybe. Then again, maybe not…

22 Responses to “To Incent Or Not To Incent?”

  1. Brice

    the other question of all of the council/mayoral machinations is whether it will be effective…that is, will developers actually take advantage of the “incentive”…the word that i hear is not.

  2. Hey Wait

    I work for a non-profit affordable housing provider and I share your ambivalence.

    Anyway, the primary motivation for implementing incentive zoning is to get for-profits to participate in the construction of affordable housing. There are many positives and negatives, blah blah blah that have already been talked to death though.

    Except for one: if the restrictions only last 50 years and don’t carry with the land, then this tool is doomed. We’ll just be kicking the can further down the road. Philosophically speaking, the upzone is a permanent benefit, why not require a permanent public amenity?

  3. Joshua

    Yes, ambivalence is a good word. The jury is definitely out on this side of the computer, but I’d like to point out a few things:

    1. First off, implications on the rental side of things are interesting. If you assume that a reasonable studio size is about 500 sf, then your 80% AMI amounts to about $2.25/sf. That’s not bad. It’s lower than newer construction (after 2000) in areas like Belltown and Queen Anne, but higher than Greenlake, North Seattle and First Hill. Granted, those numbers don’t reflect brand new construction, which is what we’re talking about here, but they’re not as prohibitive as one would think. And while the economy is down, there are several reasons why this might actually pencil better now:

  4. Joshua

    Oops, posted prematurely. As I was saying, the following reasons help development:

    1. Both land and construction prices are coming down, meaning there’s more room in a pro forma to make this pencil.
    2. While the apartment market has been surging, as have rental rates, it’s likely that these will stall in the next year or two, making the delta between 80% AMI and market rate less prohibitive.
    3. The passage of “Homes Within Reach”. City Council made a point of saying that you could combine the density bonus with a 12 year tax exemption, meaning that the incentive becomes much more interesting.

    On the other hand, I think that the extra time it would take to take advantage of this program would add quite a bit of cost. To make this a real incentive, the city should offer a permitting fast track option.

    To a larger point, though, I’ve found this whole process to be frustrating. As Bruce Harrell intelligently pointed out in the subcommittee hearing on this, what’s the goal here? How many housing units are we targeting? How will we decide if this is successful? Why 17%? Why not 12% Why not 25%? This needs to be part of a comprehensive housing plan, and both the city and the state need to bring a lot more creative thinking (and TIF powers!) to the table to make this goal fit into the many more that we’re trying to meet as a city.

  5. Matt the Engineer

    I’d much prefer simply upzoning, but I consider this a reasonable compromise. The effect will be like an upzone: if building higher doesn’t help projects pencil out, then nothing changes and no harm is done. But if it does pencil out, then we get a more dense (and perhaps more affordable) city.

  6. Chris

    This measure is helpful as political window dressing but does little to create affordable housing. On the flip side, it does not impact project feasibility that drastically. IF this initiative helps to garner political support for added density, then its a worthwhile effort. As an added bonus, any measures to further complicate the zoning code place local developers at an advantage over national developers, so that’s a good thing for local developers.

  7. Finishtag

    Minor correction: The 2006 Seattle Building Code allows for “five-over-two” as long as the top of the roof is less than 70′ from the average grade. When Broadway was upzoned to 65′ from 40′, (arguably) the most economical building type (five-over-two) merged with zoning that made it possible.

  8. dang

    For what its worth, once the top floor level is at or above 75′ a building is considered a high-rise and must then comply with additional code requirements. Granted, a number of these are already required to take advantage of the 5-over-1 that Seattle allows, but there still are additional safety measures that must be incorporated and paid for to take advantage of the extra height.
    That said, is density really about increased building height? Or is it about widespread height? A lot of the taller zones within our neighborhoods are double-loaded corridors, and not districts. Why should the burden of the majority of growth and its associated costs, be on so few properties?

  9. Beal

    The incentive zoning package just passed 6-3.
    I think what has been most interesting about this discussion is what it reveals about the philosophical underpinnings of land use and transportation policy.
    Council member Rasmussen made an interesting point recalling his trip to Vancouver years ago to learn about their incentive (inclusionary, actually, I believe) housing program. City officials called upzones “creating gold,” for which they should claim some public benefits in return.
    Council President Conlin disagreed, explaining the flaw of that logic: If the city expects payment when it creates “gold” then it must also be prepared to pay when city action leads to a decrease in property value — such as the downzones of industrial lands last year. Conlin argued that what is importation is not paying or getting paid, but ensuring the right public policy outcome. In this case, the provision of affordable housing.
    I suppose this pits the takings/givings/free market folks against the regulate-the-hell-out-of-everything-folks — as so many debates do. I guess this boils down to that question that plagues all land use debates: at what point does the public interest trump the private interest? And what if there is more than public interest involved, and they aren’t fully compatible? What then?

  10. Andrew

    San Francisco doesn’t have incentive zoning, it just straight-up requires low income funding. Seattle should just raise the heights AND require low income funding.

  11. Spencer

    I find the ambivalence spoken of in this blog entry worrisome. Of course this may just be because I am biased on the subject of housing. I feel we need to put more of our resources in developing better housing for even lower income levels. Our current economic strategy is unraveling and being propped up by so called stimulus packages and bailouts to keep the momentum of Reaganomics going through then end of the Bush era.

    Are we not seeing clearly through this mess of incentives? If 100% of median income is considered market rate then why do we need to build in incentives for developers meet this level? Shouldn’t market rate affordability be directly linked to market rate constructablity?

    Or, maybe it is wrong of me to assume 100 median income is market rate? Is market rate actually more than what the median income earner makes in Seattle? If so, why is 100% used as the base measure?

    Is it also realistic to assume building at 80-100% median income today means affordability to those people in three-four years. Historically the cost of living goes up and it won’t be getting any lower so long as we continue on with the same ways of consumptive economy.

    So who really benefits from these incentives? 80% of median income for a single person is $45,000 and for two it’s $52,000. For one person rent is $860 to 1300 depending on how you measure. I’d like to know from those people reading this blog living at that level is that is enough for you to live on? Is it enough for you to raise a family?

    My sense of median income is that in most cases to be above it is to be dual income. Between my wife and I we have one job, fall just above the 80% median income bracket and we pay $1100 in rent. We live comfortably, but have to worry some about our spending. We do not save much, if any, at the end of the month. I don’t think we would look to this level of housing as a means to help us save for either to buy a place of our own or have a child (or both).

    [As a side note, should we decide to have a child our lifestyle would, obviously, change dramatically but according to the median income we barely drop below 80% (maybe 5% at most). So, is this measurement of income is telling us a child will only cost us 5% of our income? That's what it seems like.]

    Part of what I am getting at, in a long winded way, is questioning the measurement system we are using to define who needs housing. Is it really helpful? Does it accurately measure both the current and future needs of people?

    So, maybe the problem is people making 80-100% median income just need to resolve that they will not be able to procreate and/or own their own home? Or, they could just “tighten their belts.” You know, suck it up, make some sacrifices so they can live in a nice part of the city or downtown, because we can’t ask developers to take a cut on their profits to do some public and social good.

    My conclusion is that a subsidy for this bracket of housing is not as forward thinking it first appears. It is no more than a break for wealthy developers to provide more than enough housing for better off people in the most desirable parts of Seattle. It is hardly the “socially just” development Tim Burges thinks it is but, rather, closer to a social cleansing that reduces opportunities for people lower on economic stratification.

  12. Matt the Engineer

    [Spencer] I agree it isn’t nearly as progressive as it could be, but I completely disagree with calling it a subsidy. We’re simply allowing developers to build higher on their own land – we’re not paying them anything to do that. I’d argue density will make housing more affordable, and if we simply upzoned we’d end up with cheaper housing throughout the city. It’s simple supply and demand – more housing supply for the same number of people, and more of these people will be able to buy/rent a home. (have we had this debate before? if not, I’m up for it)

  13. spencer

    Matt,

    Can you elaborate on how increasing supply of housing will make it more affordable while it appears personal net income is on the decline? I’m having trouble making the connection between an increase in supply makes housing more accessible to people when we are seeing more and more lay-offs (meaning personal income is on the decline). This to me is at least a parallel movement (downward) in a demand/affordability scale and is only slightly impacted by the decrease in price due to increased supply.
    Also, would you also comment on how property managers will maintain their profits when median income falls (again due to lay-offs) and they are required to charge less for the 80-100% units?

  14. Matt the Engineer

    1st issue. Ah, economics 101. Given a fixed demand for a product, the price is directly related to supply. If we have 1000 people that want to buy a house and 900 houses on the market, the price for the cheapest house will be just a bit more than the price the 100th poorest person can pay. Add another 10 houses to the market (even high-end houses) and the price for the cheapest house will be a bit more than the 90th poorest person can pay.

    This is independent of a decline in income. The prices change, but the situation stays the same – the 91st poorest person has a house.

    ——————————-

    2nd issue. How will property managers maintain profits when wages go down? I’m not sure. Prices will either fall as people can no longer afford rent and drop out of the rental market (move or become homeless *sigh*) or go up as people move from the condo market into the apartment market. Adding in the discount units, they’ll likely make less profit than market rates for these units in either case. But then they’ll have more units in total, so I would assume that overall they can make this up on volume (if developers don’t think this is the case, they won’t build it).

  15. spencer

    Matt, I’m still not on board with you.
    You stated for issue #1, your assumption is a “fixed demand”. I guess I am dubious of that assumption because that’s just not how the economy works. Because a lot of a product exists (remember New Coke?) really has little bearing on whether people want or need (demand) that product. In a controlled environment with demand fixed your concept makes sense (and yes income fluctuation is not a factor), but it is rare that demand is fixed in economics. I imagine that becomes a type of monopoly.

    We also need to consider profit and loss for developers and property mangers – which is where issue #2 was headed. Development is a gamble but ultimately developers and property mangers have a bottom line for their comfort/profit zone. going below that zone means disaster. Not many developers and PMs are willing to go below that threshold with out a guarantee (bailout or subsidy) because they need certain returns on their invested capital (usually from a bank). When they can’t make those returns on investment it’s either because they had a poor business plan or because renters/buyers can’t pay above the developer/PMs bottom line. We then arrive at the place that our economy has just come to:The bail out of the banking system (the construction capital source). To me this means that it is not demand setting price levels but it is the amount of investment capital coupled with profit and loss margins that establish price. Prices only then dip below that minimal profit level when some kind of bailout or rescue occurs or desperation happens.

    So although I appreciate your manageable explanation (Econ101) for housing development I don’t think it is the proper tool for critical analysis of housing development.

  16. Matt the Engineer

    Ah, but demand is more or less fixed for housing in a region. We can’t assume fixed demand for a given housing type, size, price range, or exact location but other than migration effects (which are less price sensitive) we can assume demand is fixed for housing in a region as a whole. This is because short of major financial disasters, most people sleep indoors.

    I like to take extreme examples to see if a theory is logical. Imagine next year a crazy rich developer paid off the City Counsel to remove zoning in, say, Ballard, then filled every square inch of Ballard with 200-floor condos and apartments – then somehow sold them to property managers. What would happen to condo and apartment prices in Seattle? How about condo prices in Bothell?

  17. Spencer

    Matt,
    I guess what I need to simply say is price is not so simply fixed to demand. There a many variables that impact price and it’s not so cut and dry to just say that housing prices will lower when supply is increased. The cost of construction and maintenance impacts what housing will be sold/rented at. Stakeholders need to meet expected returns on investments. Again developers/Pms won’t be able to take losses with out bailouts and subsidies. They have bottom lines with mean prices have fixed range to a certain extent.

    And…we are talking about a specific housing type – 80-100% median income coupled with some higher than median income level. This means we have to consider the many factors impacting demand and how the demand for this housing will change over time. Extremes will work when you consider them in the correct way. What if UW and Nordstroms (our two largest employers) layoff 30,0000 people or the cost of construction continues to increase (as it continues to do)? What does that do to the demand for 80-100% median income housing? It means median income amounts lower. Median income for one person (now) at $52,000 may lower to $46,000. If developers/PMs were aiming their proformas at $52,000 then now have to make adjustments which may include severe losses they can not absorb in a reasonable amount of time. Not being able to lower rent on those units means less people will be able to rent them (lowering demand).

    Based on your logic I am not convinced that just building housing is a silver bullet to get people into housing. A much larger market analysis needs to be done. This is why Sally Clark said this incentive will not solve our housing needs but will provide more at a certain level (my paraphrasing). In my opinion more housing needs to be built at much lower levels. We have been living on top of an economic anomaly for far too long. Look at our current housing prices. There’s a lot of supply out there while demand is low. This is because it was built with higher price levels in mind (increased construction cost and higher profit margins) or it’s price was driven up due to an increase in available capital (unregulated loaning processes, inflated cost of living and speculative earning sources).

  18. Joshua

    Ok, I have to insert just a few comments:

    1. Supply and demand works well for many commodities, but not always so directly for housing. Spencer is right about the exterior factors. One of the reasons housing has been so hot locally is not because there was a huge undersupply – it was because of the availability of cheap money. People could afford more with their money, buyers knew it, bidding ensued and a perceived feeling among many that they needed to purchase quickly in order to not be priced out of the market. All things being equal, if it wasn’t for this trend, there would not have been the rush to buy and accompanying price inflation.

    2. Secondly, just relying on supply/demand to regulate the housing market is not wise. There is at least a 2 year lag time between the market perceiving a demand and actually delivering supply. It’s like trying to steer the Titanic – you see the rocks ahead (over-supply), but you can’t turn it in time because of the massive inertia. This is a huge reason for boom/bust cycles in real estate. It may have a short term affect of creating more affordable housing, but it’s generally not healthy for the market. Relying on boom/bust for affordable housing is pretty regressive.

    3. Spencer, 100% median price is not equal to market price. Market price is what the market will pay. It’s me saying “I should only pay 30% of my income on rent, but I really like Capitol Hill and this cool apartment, so I’ll pay 60% and just make it work”.

    4. Median income is not the best gauge of affordability, but it’s one of the best tracked indicators(through the census) and so it’s the one we use. I think a lot of work can be done to reevaluate the usefulness of this tool. But median income grows, and is updated annually, so it’s not like in 4-5 years you’re stuck with 2008 median prices.

    5. The reason for a focus on 80-100%/120% housing is because the low income housing groups have a number of tools to meet their housing unit shortage. They’re still working on it, but as a sector it’s much more developed because the lobby for low income housing has been very well organized and represented.

    6. The reason workforce housing is being targeted is because that is a segment of the population that has little voice in the housing debate, and a segment that needs to be part of the urban community. If we force firemen, policemen, and nurses (the new mascots of “workforce housing”) out of town because they can’t afford market rate housing but don’t qualify for low income, we’re losing a crucial segment of our population (certainly when it comes to safety). As another example, enabling professors to afford housing near the universities greatly lends itself to a vibrant educational atmosphere, a key component of a vital urban core.

    Just some thoughts.

  19. Matt the Engineer

    //price is not so simply fixed to demand// But it is! The effects you are talking about relate to individual properties. When you look at the market as a whole, an increase in the number of properties will drop prices. The only way for the market to charge more for the poorest renter’s rent when housing volumes increase is to leave properties unrented – which is inefficient and a money loser for property managers.

    //we are talking about a specific housing type// Sure, but I’m not talking about the costs to rent those particular units. I’ve only looked at the region as a whole.

    //What if UW and Nordstroms layoff 30,0000 people// Then prices will go down.

    //[What if] the cost of construction continues to increase// If it costs more to build new units than people can afford, then developers will stop building.

    //What does that do to the demand for 80-100% median income housing?// I don’t know. I can only look at the region as a whole.

    //Not being able to lower rent on those units means less people will be able to rent// Of course that’s not true. They’re going to let these units sit empty for years rather than rent them for less?

    //There’s a lot of supply out there while demand is low.// This can only be a temporary state, since demand is a function of price. Prices will go down until these units are sold/rented. What’s the alternative? Housing sitting empty, and developers pay taxes on them every year? Such a foolish developer will soon go out of business and have to sell their property to someone that will sell/rent the units for less.

  20. Matt the Engineer

    [Joshua] 1. I hope my comments aren’t being interpreted as supply is the only factor that can increase or decrease prices. I was simply answering the question //how increasing supply of housing will make it more affordable//. An increase in supply will always work to drop prices. But that doesn’t mean other factors won’t work to increase prices or drop prices further. Having cheap money may have driven up prices, but having more supply would have reduced prices.

    2. I generally agree. But housing prices in the city are artificially high because of our zoning policies. I think we need to base zoning policies on what we would like our city to look like, and I think it’s time for more density. My reasons for this have more to do with livability and sustainability, but relaxing zoning will certainly increase affordability as well.

  21. Dan Staley

    6. The reason workforce housing is being targeted is because that is a segment of the population that has little voice in the housing debate, and a segment that needs to be part of the urban community. If we force firemen, policemen, and nurses (the new mascots of “workforce housing”) out of town because they can’t afford market rate housing but don’t qualify for low income, we’re losing a crucial segment of our population (certainly when it comes to safety). As another example, enabling professors to afford housing near the universities greatly lends itself to a vibrant educational atmosphere, a key component of a vital urban core.

    We are also talking about economic justice when we talk about workforce housing.

    That is: the poor drive around all over the place to low-wage jobs. This increases VMT – congestion – emissions – time spent away from family/the pub.

    This driving causes auto dependence and a higher fraction of income on housing+transportation and a lower fraction available for food+clothes and less discretionary income to spend on trinkets to keep the economy going.

    One can see a number of unsustainable things in the above brief exposition. I’m not really sure how to fix them, else I’d be telling everyone here that I’m Obama’s choice to run HHS or HUD or something.

  22. justin

    San Francisco doesn’t have incentive zoning, it just straight-up requires low income funding. Seattle should just raise the heights AND require low income funding.
    Achat Chaussures Gucci pas cher
    Gucci Mocassins Femme
    Gucci baskets
    Gucci Bottes Homme

Leave a Reply