The Math Behind Bill de Blasio’s Affordable Housing Zoning Plan

Will De Blasio’s proposed mandatory inclusionary housing program create income-diverse neighborhoods, or indulge luxury developers with city tax dollars for little return in affordability? Will the policy live up to its official description as “the most rigorous program that exists in any major US city,” or is it a tepid plan aimed at winning the real estate industry’s approval?

As community boards review the city’s proposal as part of the Uniform Land Use Review Procedure (ULURP), they are seeking answers to these questions—many of which lie in the gritty details of a complex program.

Under the proposal, whenever the city or a private developer initiates a land use change that substantially increases an area’s allowable residential density, that area would become a Mandatory Inclusionary Housing zone.

In this zone, a developer constructing, enlarging, or converting a building of more than ten units would be required to set aside a percentage of floor area for affordable units.

The proposal includes three compliance options: option one, a set-aside of 25 percent of the floor area for families making an average of 60 percent AMI ($46,620 for a family of three); option two, a set-aside of 30 percent of floor area for families making an average of 80 percent AMI ($62,160), or, in special cases, the “workforce option,” a set-aside of 30 percent of floor area for families making an average of 120 percent AMI ($93,240).

In contrast, most cities around the country require set asides of no more than a 10 to 20 percent.

Those options, however, do not satisfy some affordable housing advocates. “These levels are, quite simply, not where the need is greatest,” wrote Moses Gates, director of planning and community development at the Association for Neighborhood and Housing Development, in a blog this summer.

“85 percent of New Yorkers making under 50 percent of AMI are rent-burdened, and in need of affordable housing. This is compared to less than 10 percent of New Yorkers making 100 percent AMI,” he wrote. “Any new [mandatory inclusionary housing] policy needs to specifically address this, and require a significant portion of affordable housing for truly low-income New Yorkers across all of these options.”

In response to such concerns, the administration has cited efforts to balance the quest for affordability with economic and legal concerns, and they have promised to use subsidies to reach deeper levels of affordability than are possible through zoning laws.

“Some of the provisions may not be up to everyone’s wishes,” said Winston Von Engel of the Department of City Planning (DCP) at a recent community board meeting in East New York, one of the first neighborhoods where the policy would take effect. “But it is what is legally supportable, and it’s also what’s financially feasible because it makes no sense to put in a regulation that kills housing production, period.”

To determine whether the mayor’s mandatory inclusionary proposal is sufficiently ambitious, City Limits examined the city’s financial feasibility study and spoke to experts about the assumptions underlying the proposal. Our examination indicates that the proposal is not the outcome of a formula, but the result of cautious judgments that are open to questioning. The city has attempted to meet its affordable housing goals while still keeping the city attractive to developers—and that means not always holding developers to the most stringent requirements possible.

Determining financial feasibility

To craft a policy that would promote affordability without “killing” development, DCP hired Bay Area Economics (BAE) to create a model that would show how a range of inclusionary zoning requirements would impact developers’ bottom lines.

BAE used real-estate data and interviews with developers and industry experts to make assumptions about the cost of land, construction, and other factors. They modeled the impact of mandatory inclusionary zoning using three different degrees of density increases and a variety of neighborhood types. BAE, with guidance from DCP and other agencies, chose to examine set-aside percentages between 20 percent and 50 percent and AMIs from 60 percent to 90 percent.

The consultants 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.

The study led BAE to a number of conclusions: first, that requiring an affordable set-aside of 20 to 30 percent in strong and very strong markets is financially feasible for rental projects, so long as the developer is also receiving a 421a tax subsidy. For condominium projects, even higher set-aside percentages are feasible. Second, the report found that requiring affordable housing in neighborhoods with weak to moderate markets was not financially feasible without subsidy. However, in mid-market settings—neighborhoods like Greenpoint, Long Island City or Harlem—affordable set-asides might be feasible if the required AMI was raised to higher levels.

Heeding these conclusions, the Department of City Planning crafted three options that allow developers a measure of flexibility. Whoever initiates the rezoning—whether the city or the developer—will select the option they believe most appropriate, and the City Planning Commission and City Council will vet the decision through ULURP. All three options allow income averaging, which means the affordable units can be rented to people making below or above the set AMI, so long as no resident makes more than 130 percent AMI ($101, 010).

The Department of Housing and Development will decide on a case-by-case basis whether the weakness of the market necessitates that the developer receive subsidies in order to meet the requirements of option 1 and 2. The workforce option, which requires a 30 percent set-aside for families making $96,240, can only be applied in combination with option 1 and 2, and is intended to encourage the provision of affordable units in mid-market neighborhoods without the use of subsidy. (If only a single lot is involved in the rezoning, the workforce option can apply to the building/) Therefore, this option cannot be used with subsidies or in Manhattan community districts south of Harlem.

Room for a stricter option?

What DCP doesn’t say—but what is clearly revealed by charts in the BAE study—is that developers of high-rise rentals in the hottest markets of Manhattan could actually withstand stricter requirements, with higher set-aside percentages and lower AMIs. Under the proposal’s option 1, high-rise developers would achieve a yield of 8.7 percent. In fact, rental high-rises in these hot markets would still be financially feasible were the city to require a 40 percent set-aside of affordable floor area at 60 percent AMI—and in condominiums, a 50 percent set-aside.

Of course, not all developers would agree. “The claims that you could do 50 percent at the land value have assumptions that are so far from reality,” says Martin Dunn, president of Dunn Development Corporation, an affordable housing developer.

Yet assuming BAE’s numbers are right, the charts beg the question: why didn’t the city create a fourth option, requiring that 40 percent of units be available to families making 60 percent AMI? Or, why not investigate the yield on cost for AMIs below 60 percent, and create an option requiring that a certain percentage of units be available to families making 30 percent or 40 percent AMI?

DCP officials reply that the purpose of the policy is to promote economic diversity by offering developers a set of options that are “broadly feasible in a range of neighborhoods and market conditions, not just one building type.” In fact, to frame the policy as an effort to capture a portion of the developer’s profit, requiring more affordability from developers making more money, could lead to charges of unconstitutionality, officials say.

Indeed, the policy of mandatory inclusionary zoning remains in a legally tenuous position. Though it has become nationally widespread in the past decade, developers have brought legal challenges in many cities, and have successfully struck down programs in some, including Los Angeles and Madison, Wisconsin. In a major victory for the policy this June, the California State Supreme Court upheld San Jose’s program, but developers are appealing that decision to SCOTUS.

Developers are most likely to succeed in a legal challenge if they can prove that a city’s policy amounts to an “exaction,” which means taking money, services, or land from a property owner in exchange for granting approval to develop without a necessary and limited government purpose. A mandatory inclusionary zoning proposal is likely to win the court’s support if it can show it is a land-use regulation seeking to promote economic diversity, with built-in flexibility for developers.

Several elements of the de Blasio proposal may help avoid charges of exaction, says Brian Connolly, a zoning lawyer at Otten Johnson. The policy allows developers to request a reduction of the affordability requirements, if those requirements make their project financially unfeasible, by applying for a waiver from the Board of Standard and Appeals. This provision could give developers “an escape valve,” and make them less likely to pursue legal charges, Connolly says. So could the fact that affordable units are required only where land is upzoned—several other cities require affordable set-asides regardless of land-use actions.

The proposal does not, however, allow developers of buildings of over 25 units to buy out of the requirements by contributing to an affordable housing fund, an option that many other cities provide to avoid legal challenges.

Critics question merits of study

Gates at the Association for Housing and Neighborhood Development is especially concerned about the workforce option. If a developer undertakes a rezoning in an emerging, mid-market neighborhood—Harlem or Greenpoint—they could legitimately apply this option. If that neighborhood, however, becomes a hot market, the developer will make a windfall profit, and the city will have produced no units of deeply affordable housing. (It will, however, create permanently affordable middle-income housing for years to come, and free up subsidies for use in other neighborhoods, officials say.)

Gates also wonders if the BAE study, conducted before the legislature made changes to the 421-a program, might underestimate the benefits to developers of applying mandatory inclusionary housing with 421a. The new program extends the tax credit period from 10 years to 35 years, and offers developers new compliance options that Gates fears will be lucrative for developers. Yet in some ways the new program is more strict, requiring that all developers build affordable housing in order to qualify for the tax credit, not just those developers building in certain neighborhoods. The Department of City Planning says the new 421a program will not affect the return on cost, and affordable housing developer Dunn says the new options would not make development cheaper.

Ronald Shiffman, co-founder of the Pratt Center for Community Development, questions why the city bases its analysis on yield on cost, a figure, he says, that underestimates the benefit to developers because it is measured as a percentage of total development cost, including borrowed money that the developer did not have to contribute. He added that the market-rate rents used in the report appear excessively high, and wishes the city had calculated the average—not the median—of going rents. (Market-rate rents in the report are not based on interviews with developers but on an average of market data from the last 18 months in recently built structures.)

In addition, Shiffman would like the city to require mandatory inclusionary housing in every new building—not just those affected by an upzoning. DCP is adamantly against this idea on the premise that it would depress development overall. Shiffman acknowledges that a citywide requirement would indeed make development less attractive, but believes this would lower the cost of land that has been excessively inflated by real estate speculation in recent years.

Gates agrees that the policy should be citywide. “It would stifle development for a while, but once folks learn that it’s not going away and that this is the new baseline, the market would eventually adjust to that,” he says. “With a citywide overlay you might give up some short-term market rate housing production but in turn you get a more equitable city across the board in the long term.”

A question of economic theory?

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.

The de Blasio administration has adopted this theory, while noting that increasing supply will not be enough. “It is important to continue to sustain high levels of housing production, as articulated in the housing plan and in One NYC…to accommodate population growth,” said DCP’s Howard Slatkin to the City Planning Commission on September 21. “But just producing more housing is not going to make available housing available at all the income levels.” Reaching everyone, the city says, requires the use of subsidy, tax incentives and zoning tools.

Critics say the supply and demand theory ignores how the introduction of new market rate rents cause prices to rise in the surrounding area, displacing residents.

“The cure is worse than the malady,” says Tom Angotti, professor of urban affairs and planning at Hunter College, referring to inclusionary zoning. As for supply and demand, he says, “it’s not a matter of an absolute principle. Market-rate development can mean a lot of different things but market-rate development today in New York City equals luxury development. We don’t need more of luxury development,” He noted that rental vacancy rates vary greatly by rent level. In 2014, the rental vacancy rate for units with rents of less than $800 was 1.8 percent, far below the 5.60 percent vacancy rate for private, non-regulated units.

As an alternative strategy that does not depend on the production of market-rate housing, some scholars say we should spend more on preserving existing affordable housing and on building public housing on city land. According to 596 Acres, the city owns over 800 acres of vacant land—nearly the size of Central Park.

“It would better for the City to undertake the development itself,” says David Burney, an associate professor of planning at the Pratt Institute. “The city has land, can borrow at lower rates than the private sector, can eliminate developer soft costs and profit, and can build housing that is permanently affordable.”

Yet others note that the city is already struggling to maintain its existing public housing stock, and that its efforts to obtain more funding through progressive taxation and strengthen rent protections are frequently stymied by the state legislature.

“The only way [De Blasio] can create resources to build housing are to rely on a partnership with the private sector,” says Shiffman. “Yes, he has some money to put into it, and that will sweeten the pot in some areas, but it forces him to deal with it on their terms.”

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City Limits’ coverage of housing policy is supported by the Charles H. Revson Foundation.
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