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Does incentive zoning help only the big developments?

As you may know, Seattle officials are trying to decide whether to extend the city’s incentive zoning program beyond downtown. The program gives developers more building capacity in exchange for earmarking affordable units.

In some cities like Boston, including affordable housing is required.

Expansion plans had a bit of a setback last week when city consultant Greg Easton of Property Counselors presented his analysis to city council’s Planning, Land Use and Urban Development Committee.

His numbers showed the program wouldn’t yield much in increased profits in Seattle neighborhoods.

The picture got even bleaker for mid-rise developments, where several scenarios showed razor-thin increases in profit margin for incentive zoning.

“Why would a developer take that?” asked council member Tim Burgess. “From a public policy perspective, it would seem like we should develop a program where most people would want to do it.”

Council members asked Easton to recrunch the numbers with some outlyers removed, and to include more comparative analysis.

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This entry was posted by Shawna Gamache on Wednesday, August 6th, 2008 at 3:37 pm and is filed under Government, Planning, Politics, Seattle lifestyle, Zoning. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

  • Matt Hays

    Incentive zoning addresses housing prices by…making most housing more expensive.

    It also puts the subsidies on the backs of the relative few who move into certain types of new buildings, rather than all property owners.

    I’d much rather expand the levy for the <80% folks. For the middle, streamlining the entitlement process, reductions in parking requirements to what’s really needed, and more mother-in-law apartments are some partial solutions with new construction.

    But most affordable housing isn’t subsidized…it’s simply the market-rate housing built in the 20s, or 60s, or even the 80s. The difficulty is that only works if supply is greater than demand. So (yeah, contractor here) we need to keep building new units to keep supply ahead.

  • Howard Greenwich

    The numbers Greg Easton used to generate yields on projects under an incentive zoning program are very conservative. He used average area rents from Dupre and Scott to generate estimated profits to the developer. A more realistic analysis would use market rents for *new* construction, which are considerably higher than the average in any area where there is older housing stock. I don’t think we can conclude from Easton’s numbers that the program won’t work.

    To address Matt’s comments above, even if we doubled the City’s housing levy, it won’t come close to producing adequate affordable housing that would allow Seattle to remain economically diverse. We simply need more tools.

    As to who pays for the incentive zoning program, the subsidy for the affordable units comes from the value of the upzone – not the new residents. Without the upzone, the housing would, in fact, be even more expensive. Which seems to me that makes Matt’s quibble more with existing zoning limits than an incentive zoning program.

  • John Schwartz

    If most developers relied exclusively on Dupre and Scott rent averages, very few new projects would be built. Depending on the neighborhood, and the number of new projects in the neighborhood willing to share rent information, their figures can be off by 10-15%, (generally on the low side.) Their reports are well done and useful–you just have to be careful how you use them.

    However, even if you factor that into the analysis, the incentive zoning buildings of around 85′ require either steel stud and red iron or concrete construction. Given todays construction costs for those product types, you need rents well north of $3.00 per square foot to even start making financial sense of these deals. With the debt markets where they are currently, it’s difficult, (and that’s being optimistic,) to structure any deals that have sufficient returns to justify the risk of capital. If the City Council stays true to their typical course on these types of zoning issues, numerous additional hurdles will be added to the final legislation that will make this initiative even less attractive to developers.

    For example–how many new downtown residential projects have actually “bought” the development bonuses available under last years re-zone? (My guess is none but it’s just a guess.)

    In order to overcome the impact of substantially higher construction costs on every square foot of these projects, you would need to achieve economies of scale that would make these buildings inappropriate for the neighborhoods in which they would be built.

    It would be nice to believe that an effective incentive zoning program could be developed but in our “let’s not upset anyone” political environment, it’s unlikely to happen.

  • Matt Hays

    To address some of Howard’s points…

    I agree that expanding the levy wouldn’t solve our affordability problem. However neither would any bonus program. The levy is simply a way of spreading the cost equitably rather than on the backs of the few, while making bringing in way more money.

    Two cities have been especially agressive on affordability with measures like rent control and inclusionary housing. On the surface they’ve helped some people…but in the process they’ve become the least affordable places in the US: Manhattan and San Francisco. Much of the blame is a lack of new supply, due in part to the affordability programs being a big disincentive.

    Construction costs have risen dramatically in the past few years and I wonder if the analysis covers that. Either way, as John alludes, costs are generally a lot higher per square foot for a tall skinny building than for a shorter, stubbier one, and the construction duration and market risks are generally higher. It’s not a simple equation of “more square feet equals more value”.

    We’ve seen a flurry of proposals under the bonus system, but a lot fewer actual projects. The market has to be very good to make taller buidings work with the bonus fee.

    Fundamentally, I’m annoyed at bonus systems because they penalize the very people who are generally doing what we want — living closer to work, vitalizing Downtown districts, etc. On the transportation side, anyone who moves Downtown and gets off the road is saving us big by reducing transportation demands.

    Of course it’s politically easy to tax the few rather than the electorate. But it’s not equitable and it’s counter to many of our goals.