Housing Complex

Sometimes Public Policy is Complicated

How can we best help lots of different kinds of people live here? (Lydia DePillis)

How can we best help lots of different kinds of people live here? (Lydia DePillis)

Four years after the enactment of inclusionary zoning laws, which allow developers to build more densely in exchange for selling some units at affordable rates to qualified buyers, we're still arguing about whether they should exist. Or at least, Matt Yglesias is. Yesterday, the Coalition for Smarter Growth's Cheryl Cort rebutted the argument–advanced primarily by the non-profit housing developer Manna, Inc.–that subsidized buyers should be able to sell their houses for market rate after a period of several years. We need indefinite price restrictions, Cort says, to maintain the city's affordable housing stock.

Yglesias thinks that's too complicated:

What if instead of doing all this, we let developers charge whatever they want for the apartments they build, thus increasing the quantity of property taxes paid by rich people living in fancy condos? Then we could take that revenue, and either write checks to poor people or else reduce the regressive sales tax rate. You can make housing more “affordable” through regulatory mandates that it be sold cheaply, or else you can increase income (check writing) or increase the affordability of other items (sales tax cut). But my option would seem likely to do more to increase the overall supply of housing in the metro area (making it more affordable for everyone) and also perhaps spur business expansion and job growth.

Really? Cutting little checks to poor people is going to help developers secure financing to build more housing? Can you name any place where that's actually worked?

Mostly, I'm surprised that Yglesias doesn't seem to recognize one of the primary goals of inclusionary zoning: Keeping neighborhoods diverse by allowing lower-income people to live there, while simultaneously increasing density (one of Yglesias' biggest hobbyhorses). Purely spreading around the proceeds from additional property taxes might give poor folks a little more disposable income, but not enough to allow them to buy market-rate condos in places like Columbia Heights, which would quickly become islands of wealth without income restrictions on new developments. In fact, inclusionary zoning is one of the only tools we have to help low-income people share the benefits of a rapidly improving city (and studies have shown that well-designed programs, which are fair to developers, don't hobble housing creation).

So yes, it's a more complicated way of making housing affordable. But sometimes public policy requires nuance to achieve specific goals. That's why the health care bill is over 2,000 pages long.

  • Elaine

    I have to say, though, Yglesias gets props for trying to find solutions that are minimally invasive to the workings of the market. What he should also focus on, however, are such things as tax policy.

    The mortgage interest tax deduction, for example, one of the most unnecessary and costly elements of the tax code, is long overdue for a makeover. Just restructuring that, to grant to mortgageholders a declining-value flat deduction for their primary home (yes, I said no vacation homes) based on income and family status, would have the salutary effects of bringing in billions more in income tax revenue, reducing the market price and lending distortions that are a result of the interest-based deductions, and providing a stronger mechanism for more families with lower incomes to be able to afford homeownership and build wealth.

    But then of course the Realtor lobby would instantly run squealing to its favorite congressional pets, protesting about "government intervention" and predicting the imminent collapse of the real estate market. Although funny, the real estate market in Canada seems enviably stable right now ...

  • Skipper

    Yglesias has become incredibly lazy in his blog posts. He also ignores the vast majority of comments, especially those that point out the flaws in his thinking.

  • http://www.flickr.com/ Mr. T in DC

    FYI, Columbia Heights will never become an "island of wealth" even if only market-rate housing is built from now on. There are thousands of units of subsidized housing up and down 14th Street that aren't going anywhere anytime soon, a very dense concentration of below-market rate housing in fact.

  • Lydia DePillis

    Hi Mr. T.,

    Right, I should have mentioned those complexes. They're certainly the reason why Columbia Heights remains as diverse as it is. Mostly I was thinking of the new buildings around the commercial core. A lot of new construction affected by IZ regs will be clustered around metro stations, so those are the kinds of "islands" I"m referring to.


  • Shiv Newaldass

    Disclosure: I work for Manna, so my comments will obviously be biased.

    All evidence that "wealth-creation" and "unit-preservation" can be achieved in the District with this tool- IZ- is not proven. Ms. Cort and others use evidence from land trusts in suburban Vermont to "prove" that it works. Incomes and home prices are vastly different there than they are here. Additionally, Montgomery County has only recently implemented its longer term restrictions, so there is no actual data from there that proves this balance can work.

    Unlike Ms. Cort, Manna actually develops units and works directly with buyers of these units from our homebuyers training club. We know how much subsidies are used to produce our units and also know that for most of our projects, these subsidies are repaid to the City. Ms. Cort offers vague references of how this might work utilizing a very flawed example to justify her position. A $200k home sold two years later for $211k will not net a positive gain for the family. Average closing costs alone are almost 10%, resulting in potentially a 4% out of pocket cost to the seller. And while this might not be as dramatic a loss as the market rate owner, these families only have two choices- sell and take a lost or stay. The market-rate owners can choose to rent out their units.

    I work with families who live under these restrictive covenants, three of them who live in a really nice building in Columbia Heights, and their financial situations have gotten worse since purchasing. All of the market rate owners in the building know who the “affordable unit owners” are. Condo Association meetings are awkward, especially when discussing condo fees increased, which by the way have increased to a level that makes their “affordable unit” unaffordable. They feel marginalized and isolated. Two of them have attempted to sell their units to other persons in their income category, not wanting any appreciation in return, simply a way out of what they have described as a “prison”. No luck finding a buyer and no help from the City. When they do finally resell, they will not be able to purchase again, because their first-time buyer status is no more and they will be forced back into an affordable rental situation.

    So how is this really balancing wealth creation or preserving units? No actual gains are made and though this particular unit might be kept “affordable” for another family, another “affordable” unit will need to be created to the original ADU owner who sold the unit and made nothing from the sale and now will need an affordable place to live.

    Also, Ms. Cort and others have not considered the cost involved in maintaining these units. These owners aren’t allowed to take out an equity loan and do improvements, and in 10, 15, 20 years, a lot of things will need to fixed in these units. This will be a cost that the City absorbs.

    This policy is really short-sighted. Developers benefit because of the increased density and the City benefits because of the tax revenues that will eventually be generated by all of these units, including the affordable ones. But the family doesn't. They would have been better off as renters and no amount of formulas can convince them otherwise now.

    There is also this very erroneous assumption that restricting these units will suddenly result in a large loss of affordable units. Affordable homeownership housing makes up less than 6% of the total budget the City spends on affordable housing in general. Affordable Rental gets the lion’s share of the public resources with 85%.

    Manna conducted a study of past buyers and found that over 90% of them had remained in the units, well after the restrictive period. The reason they were able to stay was because they used their equity to pay down other debts, send their kids to school, or start businesses- none of which these buyers will ever be able to do under IZ.
    It’s essentially glorified renting guised under homeownership.

    Manna has reached out to Ms. Cort and others in the past offering substantive data showing how these restrictions do no in fact work. We have yet to directly hear back from any of them.

    A subsidy recapture and recycle provision would be a fairer way for all parties to benefit from market appreciation.

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  • Eric

    Sounds like he means vouchers for lower income people to afford more expensive housing. That would make it cheaper for developers and property owners, but expensive for the city.

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  • J. Stein

    Shiv- I just read and commented on Chery Cort's article. I am simply baffled by her comments. She does not seem to have a real grasp of the situation and from reading your comment, I am convinced that Manna knows best. I had actually entered the lottery for the City Vista Condos a few years back but when I read the fine print about the restriction period, I ran and thank goodness I did. A friend of mine purchased there and she believes it was the worst decision of her life. Her unit is falling apart and her condo fees are skyrocketing. I don't see how any of these "smarter growth" people believes in this crap. There nothing smart nor any growth with this policy.
    Keep up the good job.

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  • Tad Baldwin


    I would like to address several of the points made by Mr. Newaldass in the 9/23/10 City Paper Blog taking exception with the District’s new inclusionary zoning program and defending what MANNA apparently considers the only correct way to structure affordable housing homeownership programs. I am a volunteer affordable housing advisor to the Coalition for Smarter Growth (CSG) involved with affordable rental housing in DC, and a former non-profit developer in Montgomery County, with many years experience in their valuable inclusionary zoning program.

    You have criticized or claimed resale data do not exist for sharing equity while maintaining affordability for the next buyer. I have made information available to both you and to the City Paper several times about the Montgomery County experience with units with ten year price control limits sold after approximately seven years. I quote from my November 8, 2009 response to your November 6 article in the City Paper.

    Research conducted in 2007 by this writer into actual resale experiences under the Inclusionary Zoning program in Montgomery County (the MPDU program), provides what I consider reasonable equity sharing arrangements for lower cost garden condo units that should be similar to the percentage gains upon resale for the DC Inclusionary Zoning units. After seven years of ownership, with down payments of an estimated 5% or less ($4,285) and below market tax exempt financing, the 16.4% CPI increase on this $85,700 unit sold in 2003 amounted to $14,017. After a similar time period, the owners of a $104,900 unit (with a down payment of $5,245 or less) received $25,385 in 2006, a CPI increase of 24.2%. A reasonable amount for a down payment elsewhere and the unit is available for the next qualified low/moderate income household.

    I would like to add that the amounts of CPI gain above do not include the additional return of the down-payment or any equity buildup, the latter of which is admittedly minimal in the early years of a 30 year mortgage.

    Your example of a loss on an affordable unit sold after two years is hardly surprising. Closing costs will certainly eat into any potential gain for even market rate sellers. Homeowners are urged to have at least a four year holding window, more if possible.

    You talk of restrictive covenants in a Columbia Heights apartment complex without mentioning the resale formula. We agreed that some resale restrictions imposed in the past have been onerous. Helping to refine better standards is always welcome. Just hearing how MANNA has the only reasonable approach is, however, insulting to most of the other developers of affordable sales housing in this city and country.

    This exclusive focus on “wealth creation” and minimizing the value of retaining affordable housing stock tends to distort the purpose of the public funding (or private requirements in the case of inclusionary zoning). Normally the housing costs and quality of the affordable units is far superior to what is available in the private market and, if families are resident for enough years (say 6 or 7 at a minimum) they will often leave with a substantial enough payout to help provide a significant portion of a down-payment on a modest cost market rate home.

    Repairs will need to be made to the price-controlled unit over time. If the owners have not put savings aside (as many homebuyers do) and the private lending sector will not respond given the controls, this could be an area of a publicly guaranteed loan program. You may have some good suggestions on how this would work.

    Without addressing myself to the additional points I did refer to my files for past papers in response to your argument that the IZ restrictions do not work. I’d like to remind you of your extensive email communications back and forth with me in early 2010.
    Tad Baldwin

  • http://www.smartergrowth.net Cheryl Cort

    I'd like to associate myself with Tad Baldwin's comments above, but address the condo fees problem. This has been a problem before affordable units were required under ad hoc zoning commission rulings or as a part of DC public land redevelopment deals. Developers have every reason to low ball condo fees, then leave the new owners stuck with hidden costs. Thus all owners, whether market-rate or affordable face dishonest "teaser rate" condo fees that could escalate the moment the developer has sold the last unit. Several recent cases seen to show that more "truth in condo fees" needs to be required of developers.

    Now that Inclusionary Zoning is in place, we have a new office in the Dept. of Housing (DHCD) to better manage these situations, rather than let individual deals invent terms building by building. I'm hopeful that the new program can better education buyers, developers and help us impose honest condo fee assessments so that everyone gets a fair deal and no surprises.

  • Shiv Newaldass

    Tad- I do recall our email correspondence very well and was tremendously grateful that we did have it. But I do recall that information was shared both ways and that everything you are stating here, I responded with substantive data refuting your assertions. You ended with a kind note appreciative of our recycle and recapture model, something that you were not aware of prior to our conversation.

    Just to clarify, Ms. Cort is the one who used the example of the 2 year resale period. I was simply pointing out a key factor that she had missed when comparing it to market rate units.

    Manna has never been an advocate of a restriction-less program, but we do see the firsthand negative consequences longer-termed restrictions have on the families we work with- most of them low and moderate income buyers.

    Like Ms. Cort, the equation you offer does not account for closing costs (which is not factored into IZ regs). 10% in fees eats away at that 16.4% gain you utilize in your example. As a result, a 1% gain a year isn't going to move these families into another home and since they will no longer qualify for an HPAP type program, owning will not be possible. More than likely, as a DCFPI report indicated last year, their incomes would not have gone up either during this same time, so they would most likely need another affordable unit, but this time, not ownership. So, the result, a step back rather than forward for these families.

    Yes, Manna has stated all along that our focus is on the families we serve than the units we produce. Homeownership is a tool for economic growth.

    I understand your concern about Montgomery County's MPDU program, but the District is not Montgomery County. Aside from the dramatic difference in demographics, the volume and type of affordable homeownership housing that is produced in the District pales in comparison to what is developed in Montgomery County. DC's affordable homeownership housing makes up less than 6% (most of them being condominiums) of the total affordable housing units in the City, while rental (which should have longer-termed restrictions) make up 85%. The exact opposite is true for Montgomery County. The vast majority are for sale Single Family Homes. So a growing family in DC will have a harder time staying in a 2 bedroom condo than a growing family in Montgomery County living in a 3 bedroom SFH.

    Additionally, Manna has never claimed that a one-size fit all policy is the best means of addressing the affordable housing crisis in the City. We actually argue the exact oppositve. We've argued for a Continuum of Affordable Housing Options which recognizes and appreciates ALL of the different types of affordable housing in the City- including traditional ownership.

    We developed all types of housing in the District, but have focused primarily on affordable homeonwership housing. In the almost 30 years of Manna doing this, we have developed and sold over 1,000 units in every quadrant of the City in every market imaginable. The perspective we are offering is one based on hard data from years of on the ground experience in the District of Columbia.

    Ms. Cort- the condo fees that are rapidly increasing for the affordable unit owners at Kenyon Square isn't a result of Developer's negligence alone, but also a reality of market conditions. Even if full-disclosure was given to these buyers, it is the Condo association that creates the rules after the units are purchased, not the developers. When only a fraction of the building is comprised of affordable unit owners, how do you think the rest of the association will vote when fee increases are necessary? I'll be happy to share with you the contact information for the ADU owners who have had their fees increased by 40 and 50% more through a vote by the larger association. One indicated that when the next increase occurs in January, his fees will surpass his mortgage and he will no longer be able to "afford" to live there anymore.

    I highly doubt that a more diligent administrator would be able to force the associations to amend their bylaws for the sake of these families.

  • Locke

    I completely agree with MANNA. The restriction period for ADUs is unnecessarily long. We should not prioritize trying to have affordable prices at the expense of people being trapped in their home for such a long period of time. Since most of these units are 1-2 bedrooms, one cannot expect a family with 2 kids (national average) to live comfortably. Not to mention, when unexpected events in life occur or when opportunities come up that requires you to move, such restrictive covenants inhibit these residence from pursuing these opportunities. The freedom to pursue happiness is basic freedom of all individuals, and these restrictive covenants impede on these freedoms.

    These covenants should be lessened to no more than 7 years, after which the ADU owner can sell at market value without restriction. I’m sure policy makers are very stubborn when it comes to issues like this. I think all the owners of ADUs in the city should unite, start a petition, and have their voices heard.

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