By Richard Drdla, Richard Drdla Associates, Toronto, Canada. We asked Richard, an expert on planning for affordable housing in North America, for his views on the Greater Sydney Commission’s recent policy proposals for ‘affordable rental housing targets’ . Richard compares various aspects of the GSC proposals, as set out in its October 2017 ‘Information Note’, with the corresponding ‘inclusionary zoning’ (IZ) practices used in the US.  

*

The inclusionary zoning practices typically used in the US and the GSC proposals

share the same overall aim – to harness the land-use planning regulations in a

way that requires the private development industry to include at least some

affordable housing in new residential projects. However, while undoubtedly

influenced by US practices, the GSC proposals set out an approach so different

that they cannot be considered to constitute inclusionary zoning as the term is

understood in the US. Indeed, the GSC’s Information Note rightly avoids making

such a claim.

The IZ programs, while recognizably similar across the US, still vary somewhat,

especially region-by-region. Therefore, the comparison that follows is based on

what are considered to be the "best practices” used there.

Targeted incomes

The GSC policy aspires to provide housing affordable to those on 'very-low and

low incomes', which are respectively defined as being for 50-80% of the median

income and below 50%. Although such targets are very difficult to compare across

countries or even jurisdictions, the GSC policy and IZ programs seem to

addressing roughly the equivalent income range.

The income band targeted by the IZ programs, however, does vary somewhat

according to housing costs. Across the middle of the US, the target is generally

50-80% of median income. But in the more expensive areas on the west and east

coasts, the upper threshold is generally higher – up possibly to at least 150%, if

not more. In general, cities have higher upper thresholds than nearby suburban

communities and smaller towns. On the other hand, these programs do not

provide housing for those earning below 50%, and possibly not even for those

below 80% in more expensive areas.

Despite these numerical differences, the fundamental purpose of these programs

remains consistently the same across the US. They are all principally

directed at correcting the increasing failure of the market housing system to deliver

a sufficiently broad range of housing, especially in high-growth areas.

These programs are typically designed solely by municipalities, with the clear

intention to operate independently of upper-tier governments, and to serve housing

needs as they want to define them. As such, the programs rely on land-use

planning regulations (which are under their control), and not upon financial

subsidies (which are beyond their resources or could involve conflict with the state

and/or federal governments over priorities).

As a consequence, these programs aim to generate what is widely and commonly

called “below-market” housing. This is housing essentially for households left out

of the private housing market by the rapidly rising prices over the last 20 or more

years. On the other hand, they do not typically provide social housing, nor housing

for those in greater need like the homeless. These groups are considered beyond

the reach of such programs, and dependent on deep subsidies potentially

available only through upper-tier governments.

What does confuse this clear distinction is the many examples of developments

achieving deeper affordability by using federal/state dollars layered on top of the

reduced price or rent achieved by IZ. But overall these remain the exception

rather than the rule. The vast majority of IZ developments in the US still proceed

under the basic or “default” rules to provide “below-market” housing without any

such subsidies.

Upzoning

The proposed GSC policies will apply only to developments on newly upzoned

sites. In most US programs, by contrast, the affordable housing mandate applies to

all developments seeking approval. That includes, not only sites subject to

rezoning, but also those proceeding under the existing or “as-of-right” zoning. The

only exceptions to this are the dozen or so big city programs, where the mandate

in most (but not all) cases is applied only to rezonings.

As a general rule, the mandate in the US is applied as widely as possible to

maximize affordable housing production. Limiting IZ to rezonings in the big cities,

nevertheless, can be generally justified because nearly all st developments there

need a rezoning. On the other hand, imposing this limitation in communities where

rezoning is less prevalent would have substantially reduced the affordable housing

output.

The US experience, however, clearly shows that even “as-of-right” developments

are able to provide affordable housing without imposing an undue burden on the

private developers. What is important is that the rules and obligations are

reasonable, and that they are fixed ahead of time so the housing market as a

whole has time to adjust to the demands.

Rental housing

The GSC policy is directed at providing exclusively affordable rental housing. In

contrast, IZ programs in the US typically do not specify the tenure of the housing to

be provided. Most US programs simply take a percentage of whatever the

developers have decided to build. This means that the housing predominantly

provided in most markets is affordable ownership because the developers

predominantly are building ownership housing. But it also means that where

market developers are building rental housing (what would be termed in Australia

‘build to rent’), they are expected to provide a percentage as affordable rental, and

then continue to own and operate them at an affordable rent.

Some programs do allow for designated rental operators to purchase some of the

affordable units at the prescribed reduced price. Because most are incapable of

raising the financial resources on their own, they must rely to a large extent on

government funding to do so . In practice, this funding has never been enough to

acquire much more than a small part of the affordable units generated by IZ.

Proffered provision

The GSC policy will require the developers to provide the affordable units at no

cost to qualified rental operators. Under IZ, in contrast, the developers are

required to deliver the units at a reduced price that is typically something like 20-

50% less than their market value. (That figure varies widely according to the

targetted incomes of IZ beneficiaries in each jurisdiction and the market prices of

each project.) The developers recover the remaining value by selling the units at

the prescribed "below-market" price to individual owners or qualified rental

operators, or continue to rent out the units at a comparable "below-market" level.

The gifting of the affordable units will fundamentally affect the financial calculus

behind these provisions. Most notably, it can be expected to lower significantly the

maximum setaside that can be reasonably imposed on the developers (see

below).

Subject areas

The GSC policy will allow for different obligations and rules to be used in different

areas. In the US, the IZ programs typically apply the same obligation and rules

universally across the entire jurisdiction. The main exceptions are the more

demanding requirements used in some cities in areas near new major transit

facilities, and on public lands sold by government for market housing.

Maximum setasides

The GSC policy will limit the affordable housing to a maximum of 5-10% of the

additional floorspace resulting from rezoning in any subject development.

Similar maximum setasides are used across the US, where 20% represents the

common best practice, while most fall between 10% and 25%. This applies to the

total floorspace of the entire development, and not just the additional floorspace

consequent on rezoning.

Nevertheless, there is one relevant distinction between the GSC policy from the

US practices. As noted earlier, the GSC will require that the affordable units be

gifted at no cost, while those in IZ are offered for sale at a substantial writedown or

held by the developers and rented out at below-market rates. This will almost

certainly mean that the 20% setaside used in the US cannot be simply accepted as

possible under the GSC policy.

Viability testing

The application of GSC policy will be subject to viability testing. It is understood

that this will be done area-by-area, not project-by-project, whenever different

affordable housing obligations and income targets are applied. According to the

Information Note, this is considered necessary in order "to ensure that the Target

does not impede the economic viability of the projects delivering the housing."

Viability tests like this are not used in IZ programs in the US, and there is no

evidence that they are needed. The affordable housing requirements have not

been shown to hinder development. After all, developers can protect themselves

by simply not building when the economics do not suit them. But two authoritative

studies show that developers in municipalities with IZ continue to build at virtually

the same rate as those in nearby municipalities without IZ.

Many of these programs have addressed the issue of viability in a different way –

namely, by offering regulatory concessions (but not financial incentives) to

developers. These concessions are offered on a fixed and standard basis for all IZ

developments across the entire municipality. As such, the concessions are clearly

not intended to ensure the viability of any particular development, nor make the

developers “whole” again.

There probably is a residual cost burden in these programs even after these

concessions have been granted, but the developers are not expected to absorb

this cost. Rather, it is now generally accepted that the developers will "pass it back

to the land" by the paying less for development sites. The market can adjust in this

way, provided the affordable housing obligations are reasonable and set out ahead

of time.

The GSC Information Note acknowledges this potential, when it states the

obligations should be fixed in advance "so that it can be factored into [the]

underlying land prices". What the note does not do is take this statement to its

logical conclusion – namely, that viability tests are not needed because market

forces on their own will adjust land prices in a way that will sustain the economic

vitality of the development industry.

The only known examples of financial testing at all similar to the GSC approach

are found in the inclusionary practices used in NYC and Vancouver. These

practices remain exceptional, and strictly speaking the latter is really not

inclusionary zoning. Both are exceptional in that they rely on ‘pre-zoning’, in which

all of the key zoning parameters – including, most notably, development density –

are determined and pre-approved ahead of time on an area-by-area basis. These

are fixed in advance after a formal process that includes area-specific planning

and financial studies as well as local public consultations. In contrast, IZ typically

fixes only the key affordable housing requirements in advance, and then uniformly

across the entire jurisdiction, while typically leaving density to be determined siteby-

site at the development approval stage.

There is a fundamental difference here. Pre-zoning attempts to anticipate the

market, and then sets the affordable housing requirements accordingly. IZ

standard practice sets the affordable housing requirements, and then expects that

the market to adjust to these needs.

Fees-in-lieu

The GSC proposal does not fully address the use of fees-in-lieu, but the

information note indicates that this aspect might still be considered.

Fees-in-lieu are widely used in IZ programs. They enable municipalities to deliver

special needs and other housing not directly provided under the IZ programs. They

also provide a way of engaging smaller developments that otherwise might have

difficulty in providing the actual units. The latter is important for maximizing output,

as well as treating all developers more or less equitably.

On the other hand, fees-in-lieu are often not used in the most effective and

appropriate way. The prescribed fees often fall short of reflecting the current value

of the foregone affordable units, and the developers are also often given the right

to choose when they can be used. Under these conditions, the developers will

invariably pay cash rather than produce affordable housing because it is far easier

(and possibly less expensive) to do so.

The best practices generally allow for use of fees-in-lieu, but only where the

municipality has the authority to decide when they can be used, and then only

when they will produce demonstrably greater value than the developer constructed

units.