City Knows MIZ Will Raise All Housing Prices

It’s something I’ve been saying for a long time: Mandatory Inclusionary Zoning (MIZ) will raise the price of housing overall. Why? Because when you fee and tax the production of housing, even when you loosen the production limits, it will take longer and cost more to produce new housing. How do those extra costs get rationalized? By raising the price of the product. And here’s the thing, the City staff working on building the scheme out and implementing it agrees with me. Here’s Geoff Wentlandt talking about how MIZ works at a legal seminar earlier this year :

How would [paying fees] not increase the rate of the, increase the price of the market rate units on that development. And that’s a great question. And it is, um, a trade off and I think part of the policy and it may be the case that the market rate units have to, to some extent subsidize the inclusion of the affordable units and that it is a valid way to view the program. But uh, the proposal and the fees that are being proposed and set are such that we feel pretty confident that development will still be feasible and we would work with the development community that we wouldn’t be over impacting feasibility (the full exchange is in this video starting at about 49:45).

To be fair, the question Wentlandt was answering was, “What happens if a developer doesn’t build to the new zoning limit allowed by MIZ, and still has to pay the fee? Doesn’t that extra cost get made up by raising the rents?”

Wentlandt could argue that his formula of value exchange depends on developers taking advantage of the additional Floor Area Ratio (FAR) or height. Why wouldn’t they after all, since the extra FAR can be rented and generate revenue to offset the fee or lost rents from inclusion?

That’s true as far as it goes. But that scenario depends on a perfect value exchange, in other words, the costs, risks, and lost revenue from fees or lost rent are offset by the upside of additional units priced exactly like every other unit in the building. However, this means that in every project in town from a duplex in the LR-1 zone all the way to a mid-rise apartment in a NC zone will have just the right fee and performance set in code. It would be a one size fits all proposition. What Wentlandt would likely admit, is that this simply won’t be the case. There will be times where the balance might tip either way, with the FAR grant not being worth the additional risk and costs — or worth more.

And I’m not the only one who has noticed that passing and implementing MIZ will raise prices. Here’ testimony from Matt Hutchins who came to these conclusions on his own when part of a City run focus group on MIZ:

In looking at the housing prototypes under the new MHA program, I was struck by how out of balance the proposed lowrise FAR bonus is relative to the MHA burden.

For example, one small project shown was 8 units before and 8 after MHA because the FAR bonus was too small to create an extra unit.  The performance option was infeasible.

Meanwhile, Its MHA payment was a quarter million dollars, due in a lump sum at the time of permit

Hutchins nails it. Why are we doing this again?

Additionally, the amendment added by Councilmember Herbold actually calls for higher fees in areas deemed “at risk for displacement.” I’ll write more about that later, but already the City Council is improvising on the framework it plans to pass next week, adding more costs on the development side. I continue to be amazed and how much time and effort has been put into the MIZ scheme — a program that is going to make housing more expensive. As I have said, we’ll be looking back on this years from now with regret. It’s not to late to stop this before it gets even worse.

 

City Council 1, Grand Bargain 0: Update on Mandatory Inclusionary Zoning

Today the Planning, Land Use, and Zoning (PLUZ) Committee passed 11 amendments to the Mayor’s proposed framework for Mandatory Inclusionary Zoning. I’m not going to get into the technical details of all the amendments but the most significant one passed by the Committee was one that created a big dust up earlier this week. Herbold’s said in an Op-Ed in The Stranger

Would require that we use a displacement risk analysis to approximate the number of existing affordable housing units demolished as a result of upzones. The mandatory affordability requirement would then be adjusted higher over the entire area being upzoned commensurate with the number of units likely to be demolished. While this doesn’t require any mitigation of increased rents from other market forces, it is a modest but necessary amendment.

There were a few issues with this amendment and it’s passage that are worth noting.

First, it was passed over the objection of Chief Grand Bargainer Jack McCullough. This matters because it shows that the big time attorney couldn’t convince anyone on Council to stop what he called “a material change in the “Grand Bargain” if implemented.” As if to make this point even stronger, two Councilmembers, Burgess and Gonzalez,  materialized on cue when the amendments were offered. Burgess cheered the amendments the way he always does when the Council does something controversial. I was right that McCullough is more sheath than saber when it comes to rattling the threat of legal action to stop the amendments. City Council 1, Grand Bargain 0.

Second, this does make things worse. In essence what this does is tilt the value exchange more in the direction of the exaction of value from new housing in the form of higher fees in areas deemed by the City to be “at risk” of displacement. Never mind that the kind of displacement that is conjured up by the word simply doesn’t exist. It doesn’t. It’s a myth. In fact very few units of any kind of housing are lost to new construction. But as always the Council marches on to the music of band that isn’t playing.

What this means is that the City has come up with some way of identifying areas that are “at risk” of displacement. Then when a builder tries to build there, that builder will have to pay even more fees that anywhere else. How much? We don’t know because the framework legislation underlying this has no numbers. We have to wait and see what happens when the Council does upzones. I won’t even bother to link to all the times I’ve said that even as it’s currently hypothetically construed–10 percent boost of FAR for an inclusion of 5,6, or 7 percent inclusion–the Bargain won’t work. Will it work better when the fees or inclusion are increased. Obviously not.

Third, what is notable about the passage is something that Councilmember Johnson said to me after the passage to explain the consensus.  “Everyone realizes that there is a need for more affordable units.” But we’ve been saying over and over again that this isn’t about cranking out units, it’s supposed to be about affordability which is a relationship of a household to price. A person with fewer dollars facing higher rents will obviously find things in Seattle unaffordable. There are two ways to cure that problem, increase the money in that households bank or decrease the price of housing. What’s the best way to decrease the price of scarce housing? Increase supply! But that isn’t good politics at City Hall. In fact, many social justice proponents see the boost in FAR in MIZ as a big “giveaway.”

So what best sums up the latest steps by Council? The sage words of David Neiman:

It’s Not Too Late: A Look at the Flips and the Flops on Mandatory Inclusionary Zoning

Thou hast undone thyself, thy son and me;
And given unto the house of York such head
As thou shalt reign but by their sufferance.
To entail him and his heirs unto the crown,
What is it, but to make thy sepulchre
And creep into it far before thy time? . . .
And yet shalt thou be safe? such safety finds
The trembling lamb environed with wolves 
 . . . thou preferr’st thy life before thine honour

Queen Margaret to King Henry VI upon learning he had disinherited her son to end the War of the Roses
Henry VI, Part III, Act I, Scene 1, 250

I think the Mandatory Inclusionary Zoning (MIZ) is a mistake on a generational scale; we’ll look back years from now and ask, “What were they thinking when they put this in the code?” When I look back at how we got Mandatory Inclusionary Zoning (MIZ), a scheme that would grant additional square footage in exchange for rent restricted units or a cash fee, I can’t help but remember it all started with what was called “incentive zoning.” Incentive Zoning (IZ) was, in essence, the same as MIZ. The difference? Incentive zoning was voluntary. What’s peculiar is that many of the same people who opposed IZ when it was voluntary now support MIZ. What’s going on? Let’s compare the two programs side by side.

Here’s what Ada Healy, head of Vulcan’s real estate operation said about IZ a few years ago in a headline that could just as well apply to MIZ, “Incentive zoning: right sentiment, wrong tool:”

Developers are [avoiding a grant of additional FAR] choosing to build to the existing lower height, which means no funds for low-income housing and no additional supply of affordable units.

Why? According to a recent study by the Seattle City Council’s housing consultant, Cornerstone Partnership, 62 percent of developers are choosing not to participate in the program, suggesting that the fee structure in place does not create an incentive. As a result, the opportunity cost of thousands of housing units going unbuilt has generated less housing supply (which puts upward pressure on rents for everybody), fewer workforce and/or low-income units and loss of significant public benefits (jobs and tax revenue) due to projects built below zoned capacity.

Oddly, Vulcan now supports the program that forces participation, signing a letter that said

And at the center of this comprehensive set of strategies is the newly renamed Mandatory Housing Affordability-Commercial and Mandatory Housing Affordability-Residential programs, and the required upzones to implement both. The proposal is a smart balance of developer requirements and additional building capacity. These are critical and need to be adopted as proposed [emphasis mine].

As I pointed out a little while ago there are no numbers in the proposed framework. However, what is in the actual Grand Bargain document signed by Vulcan lobbyist Ryan “Swords Into Ploughshares” Bayne does appear to lock in the fees Vulcan would have paid in lieu of inclusion when they opposed the voluntary program. I guess Vulcan didn’t get exactly what they want, but they got what they need.

To be fair, Dan Bertolet was not at the Sightline Institute when he wrote:

It’s pretty simple: Most developers said “no thanks” to IZ because the incentive offered by additional development capacity was not sufficient to offset the additional risk and cost. And one component of that additional cost is the requirement to include subsidized affordable housing in the project, or to pay for its construction elsewhere, a.k.a. an in-lieu fee.

The post included the following graphic citing the same data Healy did and showing how incentive zoning really wasn’t much of an incentive:

Bertolet went on to say in a subsequent article, again before he joined Sightline, that

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.

Now that he’s at Sightline, Bertolet suggests that this “impediment” at the “conceptual heart” of MIZ is really a math problem:

But if the mandates are too large—if they are more onerous than the ever-shifting economics of housing construction will tolerate—the city stands to lose both new subsidized apartments and new market-rate apartments. And that outcome truly would be a disaster in a city where a shortage of housing is driving prices sky-high.

Hmmm. Seems like we already solved that math problem when the program was a voluntary one. The voluntary requirements were too large. Now that they are mandatory will the “ever-shifting economics of housing” be different? Maybe we’re heading for disaster. Who knows. We have no numbers. Like me, a liberal arts major, the City has assiduously avoided math.

Yet Sightline agreed, without the numbers necessary to do that math, that the MIZ plan is a “smart balance.” Bertolet also signed the Swords Into Ploughshares letter. (For fun, I’ve posted that whole letter down below. You better check to see if your name is on it. Interestingly only one attorney who signed the now well known letter pointing out that the City could not charge fees for development signed the ploughshares letters. I’ll let you figure out who that is and it isn’t Grand Bargaineer Jack McCullough.).

Let’s look at one more. Back in 2014 when efforts to oppose higher in leiu fees in the voluntary IZ program and linkage taxes were in full swing, A-P Hurd of Touchstone Development (a former supporter of Smart Growth Seattle) said about San Francisco’s program that taxes new housing,

“San Francisco’s program was a big success for the people who got an affordable-housing unit but it’s really terrible for everyone else,” said A-P Hurd, a vice president at Touchstone Corp., which has hotel, office and mixed-use projects under way in downtown and South Lake Union.

“If you care about affordability, your job is not just to build affordable housing; your job is to keep housing affordable for all the people who are in market-rate housing,” she said.

Later, after signing on to the Grand Bargain, Hurd said of MIZ that

It’s part of a much larger strategy to address housing affordability for all kinds of people in Seattle.  “Some people will get a subsidized unit. But lots of people who move here will also be able to get a market rate unit,” she said. Without new capacity through zoning changes, she says many of those people would have a hard time finding a place to live [emphasis mine].

A fascinating restatement amounting to simply shifting from a glass half empty to a glass half full perspective, I guess. To be fair, the first Hurd quote was more about the linkage tax, but Hurd was always aligned with the idea that Incentive Zoning was not an incentive, and that adding fees and inclusion requirements would have the opposite result and would raise prices (she even once called the whole idea behind exactions on new development, “bullshit.”) And that was the basis of her first comment: it doesn’t make sense to tax new housing to pay for units for a lucky few that will get them. But that’s exactly what she now supports with MIZ.

The so-called Grand Bargain will negatively impact none of the people or organizations I mentioned here. After all, though their proxies they agreed to it because it was beneficial for them either politically or financially or both. However, the folks I talk to that build housing haven’t a clue how it might impact their latest deal of project because they’ve seen no numbers. The former allies I mentioned in this post don’t like me much any more. It’s impossible for them to intellectually reconcile their flip. It can’t be done. I guess that means no Christmas Card for me this year. The thing is, if they care what I think now, why didn’t they care what I thought then, had I been there.

Yes, I get the politics. But I get the calls from builders all over town trying to understand how this might impact their projects. These are people running small and medium sized family businesses that are concerned if this will ruin their livelihood or at least slow down their progress. They tell me they don’t want the additional FAR and what they want, is what Hurd promised in The Stranger, predictability, even while many of them can’t even build out the FAR they have!

A.P. Heard [sic], the head of the developer Touchstone, praised the bargain and said it represented greater predictability in the market for developers. She even claimed to be speaking “on behalf of the development community.”

She certainly wasn’t speaking for builders and developers outside Downtown and South Lake Union. In fact, with no numbers, developers outside Downtown and South Lake Union have no way to predict what the City’s mandate will actually do. All I can do is tell them to vest their projects as quickly as they can and maybe, hopefully, this will all go away after the larger developers downtown finalize their Grand Bargain and neighborhoods savage the proposal with the Council. Until then the same thing we said about IZ is true about MIZ, it just adds costs, uncertainty, risk, and will boost prices. Not a single thing has changed but the politics and the instinct toward self-preservation. And like land prices, the price of political expediency depends on your address.

————————————-

The Swords Into Ploughshares Letter. The phrase Swords Into Ploughshares is immortalized at the United Nations and is a references Isaiah, Chapter 2, Verse 3.

October 20, 2015

Committee Chair Mike O’Brien
Seattle City Council
Select Committee on Housing Affordability P.O. Box 34025
Seattle, WA 98124-4025

Re: Council Bill 118498 and Mandatory Housing Affordability program implementation

We are writing on behalf of a broad coalition of affordable housing developers and advocates, for-profit developers and businesses, labor and social justice advocates, environmentalists and urbanists, united together to build an equitable, prosperous, thriving, and inclusive Seattle by ensuring that the benefits of the city’s growth are shared by all current and future residents – from those struggling with homelessness to wage-earners and families. Under the banner Seattle for Everyone, we urge your strong support for the Housing Affordability and Livability Agenda (HALA) and the “Grand Bargain” provisions to produce and preserve critically needed affordable and market-rate housing in the City of Seattle.

We believe that the HALA recommendations represent the first ever comprehensive package of affordable housing policies that will provide for a growing, inclusive city over the coming decades. And at the center of this comprehensive set of strategies is the newly renamed Mandatory Housing Affordability-Commercial and Mandatory Housing Affordability-Residential programs, and the required upzones to implement both. The proposal is a smart balance of developer requirements and additional building capacity. These are critical and need to be adopted as proposed. The Grand Bargain will produce and preserve a record number of income-restricted units, accommodate population growth without sacrificing affordability, and leverage our significant public investments in light rail and bus transit by creating more opportunities for households of all incomes to live within easy access to jobs and schools. While MHA-Commercial and the associated upzones are the centerpiece of the Grand Bargain, the less headline-catching recommendations of tenant protections and review process reform are also essential.

Collectively, these recommendations represent a sea-change in affordable housing politics in Seattle. Now, a new alliance forged by common interests and shared objectives has put forth HALA and the Grand Bargain. We are excited to continue this game-changing alliance to build a diverse, equitable, and prosperous Seattle where the benefits of growth are shared by all. It is only fitting then that we have chosen to name our effort “Seattle for Everyone.”

The Seattle for Everyone coalition is built on the foundation of the HALA report and the Grand Bargain— and each of their components is critical to keeping this alliance together. Furthermore, the ambitious production targets for both market-rate and affordable housing can only be achieved through adoption of the whole package. Accordingly, we implore you to consider HALA and the Grand Bargain as a comprehensive proposal, rather than a menu from which to pick and choose. We urge you to adopt the numerous pieces of legislation required to implement HALA and the Grand Bargain and to minimize changes that would pit one faction against another, leading to more uncertainty, wasteful delay, less affordability and less housing supply. While we understand and respect the legislative process, the importance of following through on the HALA recommendations cannot be understated.

We look forward to working with you as you continue to implement HALA and the Grand Bargain. It is our hope that we can stand together several years from now and celebrate the HALA legacy of real affordability and livability for our city.

Sincerely,

Adam Dodge, Columbia City resident
Alan Durning, Executive Director, Sightline Institute
A-P Hurd, Touchstone Barrientos, LLC
Beacon Development Group
Bellwether Housing
Ben Broesamle, Magnolia resident Benjamin Gould, Fremont homeowner
Bridgette Maryman, NewHolly resident
Capitol Hill Housing
Charles R. Wolfe, Attorney at Law
Charlie Cuniff, Columbia City resident
Chris Rule, Greenwood resident Compass Housing Alliance
Dan Bertolet, Central District resident
Dave Freeburg, Belltown resident
David Moseley, Alliance for Pioneer Square
David Rolf, President, SEIU 775
DESC
El Centro de la Raza
Faith Pettis, Partner, Pacifica Law Group
Futurewise
Greg Smith, CEO, Urban Visions
Joe Geivett, Emerald Bay Equity
Jon Scholes, President and CEO, Downtown Seattle Association
Jonathan Hopkins, Denny Triangle resident
Josh Brower, Veris Law Group PLLC
Katherine F. Mackinnon, Ravenna resident
Keith Kyle, Olympic Manor resident
Kelly Rider, Director of Government Relations & Policy, Housing Development Consortium Seattle-King County
Lauren Craig
Mark Barbieri, Washington Holdings
Matt Gangemi, Queen Anne resident
Matthew Johnson Columbia City resident
Maud Daudon, President & CEO, Seattle Metropolitan Chamber of Commerce
Melissa Jonas, Beacon Hill resident
Mercy Housing Northwest
Mike Eliason, Fremont father
Mytoan Nguyen-Akbar, Lake City resident
Phillip Duggan, Pinehurst resident
Puget Sound Sage
Renee Staton, Pinehurst resident
Rob Harrison, Harrison Architects
Ryan Bayne, Coalition for Housing Solutions
SAGE Architectural Alliance
Sara Maxana, Ballard resident
Schemata Workshop
Scott Matthews, Sr. Director, Residential Development, Vulcan Real Estate
Seattle Subway, transit advocacy organization
Sharon Coleman, Board President, NAIOP
Sierra Club
SMR Architects
Tim Weyand, CEO, NK Architects
Tonkin Architecture
Transportation Choices Coalition
Uptown Alliance
Washington Low Income Housing Alliance
Zachary Pullin, Capitol Hill resident

I Agree With Herbold: What is the Value Exchange with MIZ?

Councilmember Lisa Herbold has proposed some amendments to the Mandatory Inclusionary Zoning (MIZ) scheme being considered by the Planning, Land Use, and Zoning Committee on Tuesday. In the simplest terms, these amendments are asking a value exchange question: is there enough public benefit coming from the upzones that are proposed. Remember, MIZ is a mechanism that is supposed to grant more square footage in exchange for including rent restricted housing or paying a fee. Herbold’s amendments are about pushing for more public benefit and asking whether the City is getting enough value or public benefit from the up zones:

The Council intends to consider whether to include higher performance and payment amounts for those areas that have been identified . . . as having a high displacement risk.

I wrote about this a while ago in the context of Herbold’s statements at meeting about upzones in the U District. What Herbold wants to consider is whether fees should be higher in places where there is a lot of naturally occurring affordable housing. I’m not going to get into the details of this other than to point out what I said earlier. This is about value exchange.

And consideration of value exchange is exactly what has been missing from the whole MIZ discussion. In our view and the view of an attendee of the City’s focus groups on MIZ, there isn’t nearly enough FAR as it is to cover the impacts of increased costs and surpassed rent revenue. Here’s what Matt Hutchins said on City Builders Facebook page:

I was struck by how out of balance the the FAR bonus is relative to the MHA burden, and that the FAR bonus is too little to actually take advantage of the extra height.

For example, one small project shown was 8 units before and after (no additional units just slightly bigger ones) because the FAR bonus is only .1, but the MHA payment was up to a quarter million dollars. For a small project like this, it doesn’t make sense to perform because you haven’t got enough FAR bonus to create that extra unit.

So there it is. Herbold is smart enough to ask the basic question: are we getting enough. That’s the same point Hutchins is making too: is the builder getting enough. The legislation has no numbers in it at all. I have a deep and longstanding disagreement with Herbold and her supporters. They think there is lots of profit to ladle out of development projects to pay for subsidized housing. I believe that just makes all housing more expensive, making the problem worse, and creating a spiral of legislation adding even more costs in the name of affordability.

The Herbold amendment question isn’t at all about ideology, it’s about math. And there is no math covering the exchange in the MIZ legislation. That’s why this whole MIZ thing needs to stop turning until there are numbers. I believe we, not Herbold, would be right: whether or not additional FAR can pay for fees or inclusion is going to vary project by project, and usually the FAR grant doesn’t create enough value. But how can we know without any numbers? We can’t.

That’s what makes a letter form Jack McCullough, well known Grand Bargaineer, so ironic. He is threatening the collapse of the Bargain if Herbold’s amendments pass.

Summation: MIZ is Mistake of Generational Proportions

The following is what I would say to the Planning, Land Use, and Zoning (PLUZ) Committee before it meets on Tuesday, August 2, with my two minutes if I am able to get them. Being able to give public comment these days is always hit or miss. I limited myself to 300 words. This is my summation on why I think Mandatory Inclusionary Zoning is the wrong thing at the wrong time for our city. If you agree, feel free to use this to shape your own statement to the PLUZ Committee. Rob.Johnson@Seattle.gov, Lorena.Gonzalez@Seattle.gov, Lisa.Herbold@Seattle.gov

Mandatory Inclusionary Zoning (MIZ) is a mistake of generational proportions. It seems MIZ would bridge the differences between those who know that more new housing will ameliorate higher prices with those who say that more housing will make prices higher. However, that is a bridge too far.

When housing is scarce the asking price for it goes up until demand for it drops, usually during a recession. It’s called supply and demand and it isn’t a point of view, it’s the way the world works; trying to compromise with it is like trying to compromise with gravitational pull. It’s impossible.

However, the market will never produce enough housing to make it free. There will always be households that struggle to pay for housing because they don’t have enough money. Some households need help to offset housing costs. The best way to generate that subsidy is through a broad tax that redistributes wealth from those who have to those that have not, discourages inefficient use of land, and generates enough money for those who need it the most.

Instead, MIZ will force housing production and tax all new housing to build a very small number of expensive subsidized units. Putting a MIZ mechanism in the code ensures higher prices by reducing the incentive to produce more housing (lowering supply), adding costs to new housing, costs paid by higher rents in market rate units. Once enshrined in the code MIZ would become an entitlement program and self-perpetuating justification for non-profit housing developers: prices will go up and so will demand to increase the exaction of fees to pay for housing to offset the higher prices created by MIZ.

Future generations will ask why is this in the code? The answer? “To create affordability.” It will have done the opposite.