Affordable Housing Institute : US

Games are more fun when they’re positive-sum — and this applies very directly to affordable housing and inclusionary zoning.

 

Girls just wanna have sums!

 

Because affordable housing always costs money, some lucky stakeholder must fund the cost-value gap.  While this money ultimately is or derives from government, government often wriggles, seeking to find ‘off budget’ ways of funding its contribution, or even better, deflecting that contribution onto someone else. 

 

It’s your problem now

 

One such deflection — which I generally extol — is inclusionary zoning, the device by which any new development pays an in-kind tax by delivering some number of affordable homes that must be built within the larger development. 

 

In economic terms, inclusionary zoning is a tax upon development rights, assessed against the increase in value between (1) undeveloped and unzoned land, and (2) that same land still undeveloped but now zoned.  And zoning is destiny.

 

“Perhaps as a punishment”

 

Rather than being cash, it’s paid in-kind – taken in the form of housing affordability or ongoing price/ rent bargain. Being in-kind is not a bug, it’s a feature — and one with curious, unexpected, but meaningful benefits.

 

There’s a further variant: linkage, which essentially creates a secondary (resale) market in zoning permissions and affordability mandates — and because markets always clear, issuance of zoning scrip travels with breathtaking rapidity from those who have it to those who need it to build.

 

I like inclusionary zoning because it’s local, it’s flexible, and it’s non-cash, so much better able to defend itself against being raided for other municipal purposes. 

 

Housing resources on the other sdide

 

And there’s one other reason I like inclusionary zoning: its US versions are positive-sum games.  Most US versions (like Massachusetts’ landmark Chapter 40B) have a density bonus — developments that use Chapter 40B can put more people on the same site than conventional zoning.  The density bonus means added value to the parcel holder, a partial compensation for the in-kind tax levied in the form of the affordable units.  Embedding a density bonus into the equation creates positive-sum possibilities for some developers and some localities, and is an essential lubricant in creating that mythical win-win situation much beloved of policy advocates and researchers.

 

I’m as mythical as a win-win situation

 

Must inclusionary zoning be positive-sum?  What happens if it’s a zero-sum game? 

 

That contrast — between a positive-sum experience and a zero-sum experience — is highlighted, over and over again, by the English case of the United Kingdom’s version.  Section 106 pits a local authority and a developer together in an entirely zero-sum game fought out according to rules established by Parliament in Westminster.

 

“Two men enter!  One man leaves!”

 

With Britain having embraced an expansive view of greenfield protection, house and land prices are enormous, so developers and local authorities are thrown together in a zero-sum cockpit.  Not surprisingly, five years’ experience shows how zero-sum negotiations are probably negative sum, with costs outweighing benefits.  As reported in a study sponsored by The Joseph Rowntree Foundation:

 

Policy research and social development

 

This study provides an update on how local planning authorities have been implementing affordable housing policies (Section 106 of the Town and Country Planning Act 1990) in the context of changing and uncertain policy.

 

Section 106 policy has been through a period of uncertainty and continuing change together with consistent pressure to expand the number of affordable units delivered.

 

In a zero-sum game, whatever I win, you lose — and vice versa.

 

Heads, I win; tails, you lose?

 

Key points

 

1.       Local planning authorities have continued to improve the implementation of their Section 106 affordable housing policies despite continuing uncertainties over the last five years. Planning Policy Statement 3, published in March 2007, was welcomed as it reduced uncertainty by defining affordable housing and allowing authorities to reduce the threshold at which Section 106 contributions are required.

 

Markets always like reducing uncertainty.

 

Don’t go that way

 

2.       Increasing requirements for other planning obligations such as highways and education, along with the affordable housing requirement, may make sites unviable. In these cases it is the affordable housing requirement that is squeezed.

 

Beyond housing, there ain’t no such thing as free infrastructure; and a locality has only its up-zoning ability to create new value without investment.  So naturally the civic infrastructure, which usually is more appealing politically, competes with affordable housing.

 

3.       Viability issues have made it necessary for some local authorities to do financial viability assessments, adding considerably to their work load. Authorities felt this was necessary to address perceived inequalities in their negotiations with developers.

 

You bet every negotiation is unique.  As I’ve posted elsewhere, land value is a residual, and the value of urban land relates directly to its post-development value minus the costs of developing.  The result is that what a locality can get depends very much on local and transient factors, so they need consulting assistance.  (In the United States, my for-profit Recap Advisors provides such services.)

 

4.       Although developers increasingly accept the need to provide affordable housing, tenure is now a major negotiating point as developers see a higher proportion of shared ownership as a means of reducing their financial commitment.

 

Trying to make the pie higher

 

For a developer, it’s a simple equation:

 

 

 

More bargain element, fewer units provided.  Zero-sum.

 

5.       Achieving the affordable housing target is the over-riding issue on some development sites, while on others a lower percentage of affordable housing may be accepted to achieve a house type that meets local needs.

 

The locality has only a certain Cost to negotiate, and it may decide it wants more homes with less bargain element in each one; that’s one of the political and policy pressures favoring workforce housing.

 

6.       All the authorities in the case study areas were concerned that further changes in policy might adversely affect their capacity to meet affordable housing objectives.

 

Devalue the currency: result, fewer affordable homes.

 

Not worth the paper it’s printed on

 

Add processing costs: result, fewer affordable homes.

 

Remember, affordable housing always costs money.

 

When the game is zero-sum, we should expect little if any agreement between the respective parties — developers and localities — about the best approaches to reform. 

 

We’re disagreeing on how to reform the system

 

 

None of these tackle the core issue: that Section 106 is zero-sum.  Items 1 and 2 merely swap money-in-kind for money-in-cash.  Item 3 is double-edged, because it increases standardization from community to community, which has one benefit (developers can move among localities more easily) and one cost (localities lose flexibility).  Item 4 is an exhortation without an action

 

About the only thing on which the antagonists will agree is that national government should make the game into positive-sum, by providing additional national resources (revenue sharing, tax or VAT waivers, or matching funds).

 

Shall we play, ‘get the grant’?

 

What then has the study found?

 

[Continued tomorrow in Part 2.]

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