The city that never sleeps, New York, is in the process of developing a Mandatory Inclusionary Zoning (MIZ) Program like the one Seattle is considering. An article in City Limits tries to get to the bottom of some of the math being used. In spite of some good reporting  the article only finds the same questions we have about MIZ we have here: is it legal and feasible?

What the article does do is point out the age old issue of trust. Policy makers don’t seem to want to believe the numbers given to them by people in the industry, so they hire consultants. The consultants to the City said

Assessed financial feasibility using “yield on cost”, which basically takes the point at which a building is fully leased and divides total income by project cost. A developer is not likely to take on a rental project, according to developers and industry experts, if they cannot achieve a yield greater than 6 percent.

What do developers here think of that?

One I asked said

The 6% yield number rings true, but of course that number moves drifts up & down with market cycles & the yield for competing investment alternatives.

That said, the whole NY methodology smells fishy. Seattle should be doing a “value creation/value capture” methodology, where we establish a fair value for the extra FAR (equivalent land value), and we turn that value into an annual discount stream by dividing it by a cap rate. What they are doing in NY sounds like some agency decides what “enough” profit is and then tries to skim off the rest of the proceeds for the MIZ program.

And another,

NYC sounds unusual and complicated. It should be simple. Also, I wouldn’t do a project for a 6% yield. The return varies based on cost of capital, location, product type, timing, etc.

Exactly. And so far the Grand Bargain seems to be relying on the inflexibility of the land use code to peg rates of inclusion and value, something that doesn’t account for the “drifts up and down” of the market. New York seems headed for a confusing and complicated system that’s likely to make things worse

The article does make the obvious point,

For officials and advocates disagreeing over whether to implement a citywide overlay, the question may come down to economic theory. Many economists see affordability as a matter of supply and demand: the city has not built enough housing to accommodate a growing population, they say, and, due to the short supply, prices are rising for families across the income spectrum. According to this argument, the more housing we can produce—whether market-rate or below-market rate—the more we will ease demand and lower rents.

More housing is what we need, and even newer housing at higher prices helps overall affordability. It does. The MIZ scheme is complicated and likely pushed legal limits against reducing the value of private property. New York’s efforts will likely be influential here, so it will be worth watching how they organize and implement their MIZ proposal. Some might think if MIZ can make it there, it can make it anywhere including Seattle; but that all depends on the math, politics, and the law.