Why inclusionary zoning has a cash-out provision

Daniel Kay Hertz has a recent post about how Chicago’s inclusionary zoning (IZ) policy is insufficient at creating enough units to meet Chicago’s affordable housing needs.

Montgomery Ward Complex

Some of the loft condominiums within the former Montgomery Ward Catalog House, where one penthouse unit sold last October for $2.95 million, were set aside as public housing replacement units.

When I was working for the Chicago Rehab Network 11 years ago, I wrote up the broad outlines of what was eventually adopted as Chicago’s IZ policy. I certainly concur that it is not going to solve the affordability crisis in Chicago anytime soon, but I still think it’s a reasonable approach to providing workforce-level affordable housing within the context of how Chicago builds housing — and once it was implemented, IZ multiplied the number of affordable units that Chicago’s Department of Housing could take credit for (primarily through LIHTC).

During the process of drafting this policy, we anticipated and understood that IZ would absolutely not be a cure-all, regardless of how future politicians would try and take credit for it. Furthermore, as Alex Block points out in a comment to the post, IZ absolutely does attempt to do two, contradictory things: (1) integrate gentrifying neighborhoods by creating new, permanently affordable units and (2) creating as many units as possible.

Since CRN is a coalition of CDCs, almost all of whom work exclusively in poor neighborhoods, the CDCs stood to benefit more from approach #2, and so the law probably errs in that favor. Even CRN’s members who worked in fast-gentrifying neighborhoods, though, would rather have served two families in Oakland than one in the South Loop, and the cash-out provision allows them to do so. I certainly don’t blame them, even if the net result does to a small extent perpetuate socioeconomic segregation.

As part of the process of creating this legislation, we conferred with developers of both low-rise and high-rise units, who shared their pro formas with us, and with very extensive research done by groups like MPC and BPI, mostly relying on established policies in primarily low-rise places like Montgomery County, Md. and Burlington, Vt. We saw very few examples of successful policies that worked in a high-rise context. And since a large share of the development in Chicago, then as now, was in downtown high-rises, we needed to find some way to get buy-in from high-rises.

In short, affordable units within high-rises turn out to be very difficult to create and administer. High-rises are costly to build per square foot, and there isn’t much latitude to trim the costs through things like unit sizes and finishes. Most crucially, high-rises are subject to numerous cost thresholds, beyond which the primary incentive of IZ (“free land” in the form of higher density) can become worthless — e.g., a 7-story building is actually far less profitable than a 6-story building. And once a high-rise is completed, it’s difficult to balance the operating costs of luxury amenities (concierge, pool, etc.) across market and affordable units, which has recently been in the news with the “poor door” controversy. (This is somewhat less of a problem in MoCo, since the Washington area’s very high AMI allows for luxury studio apartments to be counted as “moderately priced dwelling units.”)

So, given these difficulties — and given the CDCs’ thirst to capitalize a housing trust fund that could significantly expand their efforts at helping low-income families in neighborhoods (rather than moderate-income singles downtown), we went with the “cash-out” provision that pretty much exempts downtown high-rises.

As for exempting small developments, that’s solely related to the fact that the requirement kicks in based on the number of units, and it’s impossible to deliver a fraction of a housing unit.

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5 thoughts on “Why inclusionary zoning has a cash-out provision

  1. Pingback: Inclusionary zoning, again | City Notes

  2. Payton,

    The way you explained the existence of the cash-out option makes perfect sense. But shouldn’t it follow that the cash-out payment to the housing trust fund be larger? I am not familiar with Chicago’s IZ law, but $100,000 per unit seems laughably low. $100,000 per unit would make sense in a very low-cost metro (Oklahoma City, etc.) or rural areas. $250,000 or $300,000 would seem like a better starting place for a city like Chicago. Also, if $100,000 was appropriate at the time the IZ law was first drafted, why not peg it to housing costs in the city? (Possible metrics might be HUD’s fair market rents, median price/sqft in the MSA or census tract, etc.).

    Nathan Wallingford

  3. In a DC context, there are of course both pressures to increase affordability (too many people paying more than 30% of income, etc.) as well as to at least appear to be doing something to “combat” gentrification. I remember that you had spoken before about the effectiveness of land banks or community land trusts, and I wonder if that is a viable option for DC. How much land does DC own, and is it generally located in gentrifying areas that are also suitable for residential development? I know that DHCD does surplus some land occasionally:

    http://districtsource.com/2014/08/124-units-affordable-homeless-housing-north-capitol-ne/

    but it is my sense that most of the surplus land is EotR and if used for new production of subsidized units would further contribute to the economic segregation dynamic.

  4. Hi, Nathan. The in-lieu fee is tied not to the ultimate purchase price of the unit, but rather to the writedown (price difference) between an affordable and an equivalent market-rate unit. Although this figure obviously varies, $100K seemed like a nice round figure back in 2003, and in Chicago it is indeed indexed to CPI.

    I’m intrigued by the idea (which Ed Glaeser raised) of charging the “inclusionary tax” on a per-foot basis, rather than a per-unit basis, but haven’t yet worked through the ramifications.

  5. CLTs are a great way to ensure perpetual affordability in instances where (a) prices could escalate soon and (b) contributions are available, either in cash or unappreciated property. In Burlington and Chicago, all new-build assisted for-sale housing units (including inclusionary units) are automatically enrolled into a CLT to keep them perpetually affordable. Another interesting, if as yet not fully implemented, model from Austin is the “homestead TIF,” where TIF proceeds (which are dependent on rising property values) are steered into a CLT.

    A land bank makes more sense in a context where abandonment is a problem. Vacancy rates are currently low here, and a lot of the “surplus” land is in Federal hands. In theory, DC’s blight tax would be a great way to steer property into a land bank, but there just isn’t enough blight to make it worthwhile.

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