Inclusionary zoning is a bad idea and is, in the end, a price control that creates inflation when non restricted units have to bear the cost of subsidizing the restricted units. This increase the rents of all other units. It’s why we and the development community have always opposed all forms of mandated inclusionary zoning, including when it is wrung out of a project in exchange for what is already a public benefit, more, new housing.

There is an important article about inclusionary zoning that I have referenced before,  “The Economics of Inclusionary Zoning Reclaimed”: How Effective Are Price Controls?, that decisively shows the inclusionary zoning works just like rent control, creating inflation to fight inflation.

Although the program is legally and economically distinct from rent control, law-and-economics scholars who have analyzed the issue have argued that price controls on a percentage of new housing will have many of the same negative effects as rent control. In one classic article, The Irony of “Inclusionary” Zoning, Yale Law Professor Robert Ellickson argues that inclusionary zoning actually decreases development and makes housing less affordable; thus, it should be called exclusionary rather than inclusionary. The widely accepted view within the law-and-economics literature has been that price controls through inclusionary zoning will have negative, unintended consequences on the housing market.

And in a very detailed agreement called the Statement of Intent for Basic Framework for Mandatory Inclusionary Housing and Commercial Linkage Fee, the City and various parties in the HALA process agree to a series of formulae for how to determine what performance (how many on site units must be created for upzones) and what the fee would be in cases where a project can’t perform. And here’s one of the devils in the details. Many, many projects won’t benefit very much from additional capacity created with additional Floor Area Ratio (FAR). The deal seems to have been written with mostly high and mid rise projects in mind. When considering smaller scale projects the number of units that have rent restrictions starts to consume more and more of the rentable space. What can a developer do? Raise rents in the other units to compensate for the lost revenue, exactly what we have said would happen, and the opposite outcome of what HALA is trying to accomplish. 

And what about 4, 5, and 6 unit for sale, townhouse projects. Based on the first look at the math in the agreement, there is no way to perform by creating a unit a fee must be paid. How is that fee calculated? Hard to tell. But yes, whatever that fee might be, it will be paid for in the form of higher prices for the houses being sold.

However, this is a compromise on our bedrock position and demonstrates that we are willing to give to help address housing issues for people struggling with housing costs. This agreement

• Is more efficient–O’Brien’s scheme would have taxed new growth and essentially laundered the money through a vast bureaucracy to try to build very pricey units. The dollar he took from the rich to give to the poor would have turned into .50 fast. This way, the private sector delivers units that don’t require expensive transaction charges or prevailing wage labor.
• Trades value for value–If the math works out right, additional capacity will benefit renters and builders who will be able to deliver more product to meet demand in the market.
• Pushes the Council–No rezones, no cookie. If the Council listens to its NIMBY constituents they get no new affordable housing.
• Breaks the “social justice” frame–NIMBYs have long used poverty and affordability as noblisse oblige at best and a shield at worst to demand the status quo. Now non-profit housing advocates will stand shoulder to shoulder with us pushing for rezones.

So is anyone happy about this compromise? No, not really. The City continues socialist style targets for housing instead of allowing the market to meet demand and intervene when there are failures. But this deal and the report transforms the debate — or has the potential to — if the Council leads. Nobody at the City seems to have the ability to do anything that will incentivize creating new housing that doesn’t also carry with it something that they can pitch to angry, NIMBY neighbors as punitive. The agreement forged by HALA is better than the awful, backwards, and unfair linkage tax championed by Councilmember O’Brien. But it replaces something really awful that would destroy our housing economy with something bad that will make it worse. And neighbors don’t see enough blood splattered on the floor either.

What’s ahead yet? Tracking just how all this math will be done. We’ll be watching closely, especially for problems at the low-rise and single family level where most builders make their living.