Housing Complex

Why Inclusionary Zoning Isn’t Working Yet

The future 2920 Georgia Avenue, a sister to the first inclusionary zoning-compliant building in the city.

In 2007, the D.C. Council passed an inclusionary zoning ordinance, which requires residential developers to price between 8 and 10 percent of units in a new building below market rates. Modeled off a Montgomery County law that has generated thousands of affordable condos and apartments since the 1970s, it's one of D.C.'s key initiatives to mitigate the effects of gentrification, since it leverages private construction to create housing for folks with low incomes—even in the priciest neighborhoods.

It took a while to get off the ground, though. The District didn't publish regulations until August 2009, when most of the buildings you see rising today had already secured their permits. In fiscal year 2010, the program had still generated no affordable housing, while rents were headed skyward.

This year's annual report, scheduled to be released next Friday, will finally show some movement. The Department of Housing and Community Development is even hiring somebody to oversee the administration of all the new units. Most of them will be apartments, since that's mostly what's getting built these days. But some of them will be condos, and unless the regulations are tweaked, they likely won't sell—no matter how many people want to buy them.

How do we know? It's already happening. The very first two condos created through inclusionary zoning are in a building at 2910 Georgia Ave. NW. While the rest of the units have sold out, these two have been on the market for almost a year now. Acquiring them requires filling out a tall stack of paperwork, but it should be worth it: One costs $130,000 (compared to the market rate of $250,000) and the other is $220,000 (compared to a market rate of $350,000).

The problem is, you can't get a mortgage—or not very easily, at least. Most low- to moderate-income buyers want to get a Federal Housing Administration-backed loan. But the banks that FHA works with don't want to issue loans on properties that can't be resold at market rates in the event they go into foreclosure. As currently structured, the District's IZ program keeps those affordability restrictions in place, so FHA is a non-starter.

Department of Housing and Community Development head John Hall hesitates to frame the issue as a "problem," exactly, saying that buyers could get loans from independent community banks that don't sell their mortgages on Wall Street. "The mortgage products that are being chosen are really what's driving the challenge to selling the units," Hall says.

But FHA loans are a really important part of affordable homeownership, and there will have to be some changes in order to make sure all the units coming down the line actually end up selling. To that end, DHCD has opened up the IZ program for comments, and the Comprehensive Housing Strategy Task Force will talk about how to revise them, along with the Metropolitan Washington Council of Governments. They may end up allowing IZ units be sold at market rate if they go into foreclosure, as the city of Glendale, Calif., recently contemplated. Or they may find a way to expand the availability of loans from community banks.

Either way, developers just want to see something happen soon—they're not thrilled about having to include affordable units at all, but unsold condos are even worse. And yes, it would have been nice if the city had figured this out five years ago.

  • Drez

    Interesting. Thanks.
    MIZ had been on my mind lately.

  • jcm

    What do they do about this problem in Montgomery county?

  • Realist

    Lydia- don't ignore the fact that these units come with PERMANENT RESALE RESTRICTIONS, so even if you "purchase" these units, you never see the upside of any equity gains. Glorified renting with none of the benefits and all of the risks of homeownership. Who really would buy this. While the mortgage issue is important, it is still secondary, ask any potential buyers.

  • CJ

    How are these properties allowed to appreciate? I assume there is some mechanism to accrue equity that tracks the market.

  • http://alexblock.net Alex B.

    Which all gets back to the point that the most important thing the city can do is to continue to add housing supply that will, over time, lower the market rate for housing in DC. If the affordable housing ordinances (i.e. housing below market rate) were operating from a different starting point, then these kinds of programs might be more effective. But since they're starting from such a high price point that even solidly middle class folks are taking advantage, we get issues like this.

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  • Tom M.

    Actually, Alex B., it is not necessarily so that adding housing supply will result in lowering market rate houseing or even moderating the increase in prices. It is the balance between effective demand and effective supply. And that can also very by specific blocks or even individual buildings. In fact, a case could be easily made that the requirement to include "affordable housing units" in developments actually drives up the cost of housing by prompting "cost shifting". We cannot assume that "affordable units" are a free good without affecting other variables.

  • http://alexblock.net Alex B.

    Tom M,

    Of course, block by block variations in price will happen, but I'm speaking about the aggregate impacts. The costs of housing in DC in areas with modest amenities and transit accessibility have been skyrocketing, and that's going to have negative impacts on the city's overall economy.

    And yes, I agree, the requirements to add in affordable housing do indeed increase the costs of development and therefore raise the market price for housing otherwise, but there are a number of other constraints that also raise those costs.

    Given the very strong demand we're seeing for urban living, the increases in supply have not yet kept pace. We'll see what happens when the new housing units that are under construction now come online, but many of the signs are pointing to a continued demand for living in DC's walkable neighborhoods, and the increases in supply have not yet kept pace.

    So, in short, I don't really disagree with anything you say.

  • http://www.montgomerycountymd.gov/mpdu Chris Anderson

    JCM - Montgomery County's Inclusionary Zoning Law (Chapter 25A of the Montgomery County Code) specifies that in the case of foreclosure, the restrictions are released. This is the primary difference with the District's and Fairfax County's law that resulted in FHA giving clearance to Montgomery County's Moderately Priced Dwelling Unit (MPDU) program (for the purposes of being eligible for FHA insurance.

  • dud

    everybody wants to say that they know what something should cost, and that is supposed to say something about how smart they are, when these are just rules and ordinances being fabricated and followed blindly with no critical thinking about who is living where - there is only the obsession that these people have with who they think should be living there and it's inhumane. the truth is, nobody knows what anything costs, and that's why this simulation of action being taken on the part of less-monied people is such an effing racket.

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

    Thanks for writing about this big problem with federal rules. We need to change the federal rules. Luckily, most IZ units coming on line will be rentals and not confront this problem. But the problem needs to be fixed ASAP!

    On the question of shared equity: equity from a IZ unit that is sold is shared with the owner & the city, by allowing the price to rise as the Area Median Income rises. This preserves the affordability of the unit into the future, while also sharing increased value with the seller. It's a reasonable way to balance the interest of the assisted homeowner and the city which is trying to sustain a stock of affordable housing for its residents. The Center for Housing Policy has done great work on this issue and showed that DC's IZ approach (similar to San Francisco's) is optimal. See: http://www.housingpolicy.org/toolbox/strategy/policies/shared_equity.html

  • Shiv Newaldass

    I work for a nonprofit, Manna, Inc. that has been producing affordable for-sale units for over 30 years in the District.
    The District’s IZ law isn’t a shared equity arrangement like Ms. Cort suggests. The structure is different and the benefits to all parties are not as plain as the report she provided indicates. First of all, the District does not get any portion of equity in this arrangement and the homeowner gets very limited appreciation. IZ in DC limits what buyers get based on a resale formula that has a number of variables. The limited appreciation gets further diluted if a real estate agent is involved in the resale process sand other closing costs fees are assessed. So, say a unit that is purchased for $150k today is resold in year 7 for $180k, because of the $15k in closing cost fees, the seller will only gain about $15k from this arrangement. If they had placed $200 a month in a 0% interest savings account, they would have made almost $17k with no risk and still be eligible for first time homebuyer programs. The upside to potential buyers is not apparent and might be one of the reason why these units have not been sold, but the covenants surviving foreclosures in a tough one and needs to be addressed regardless.

  • dud

    So Shiv, what you're saying is that a low-income buyer who would be eligible for one of these homes isn't going to see the benefit of buying a home because they might not perceive home ownership as a perishable risk? It seems to me that developers have always know that, and as a result are not incredibly interested in making their low-come unit obligations equitable for anyone, with the hope that once people stop paying attention, they could find another solution for selling off the unit that might not be entirely within the bounds of the law. I am trying to understand.

  • Shiv Newaldass

    Dud- In my experience, low and moderate homebuyers have to go through additional hurdles to purchase a home and folks in Manna’s Homebuyers club spend between 6 months and 2 years working on their credit, on a budget, and setting money aside to assist with a downpayment. For them, a home purchase is the culmination of a lot of work. To take away the upside of owning simply for the sake of being a good location or in an amenity rich area isn’t as appealing.

    As for the intentions of the developer, I really think that they are simply complying with the law. It really wouldn’t be that beneficial to hold on to these units and carry the expenses for them as they remain unsold. I think it’s just difficult to sell units with long-term restrictions. Manna mortgage assisted in the lottery for the affordable for-sale units at CityVista and with 2500 hundred applications, hundreds of income-eligible buyers for 89 units, it took multiple rounds and almost 2 full years to sell these units, even when the market rate units were moving like hot-cakes. It was hard to get the appropriate income buyers; then out of this dwindled pool, we had to make sure that they could qualify for a mortgage; then out of this further dwindled pool, we had to make sure they like the place and would purchase the units. The hesitation by many income-eligible, mortgage-ready buyers was the 20 year resale covenant attached to the CityVista units. Just imagine going through this process with the IZ units that have permanent restrictions.

  • puzzled

    obviously affordable renters are simpler.

    In NYC affordable owned housing has been provided in subsidized coops (mitchell lama). Being coops with a collective loan, obviates the banking issues with condos. The owners do not get appreciation, but they get democratic control of the building that they would not get in a rental. Thats the cooperative idea. Not sure if its worth doing with condos.

  • http://alexblock.net Alex B.

    puzzled,

    I think co-ops hold a lot of promise as a mechanism to a) provide affordable housing, b) provide the stability that ownership can offer in high-priced and dense areas, and c) better handle these kinds of challenges of appreciation. Definitely something to look into.

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  • Co-op resident

    I reside in a co-op in Columbia Heights in Ward 1. I think co-ops are a good option for low and moderate income folks; however, I think that just as higher-income individuals have options, so should low and moderate income individuals. I know many lower income DC residents that have purchased homes and condos (in all-affordable condominiums with great management and structures) throughout the city. Most of them received downpayment assistance and went through home counseling programs, and they have been very successful homeowners. I know a mother of 4 who purchased just north of Logan Circle in the early 2000s, a neighborhood that she had lived in for a while at that point. She has been able to stay in a very quickly gentrifying neighborhood, has taken advantage of her stable mortgage to have extra money to go back to school, and is hoping to save towards and use some of her home equity for her children's education and skills advancement. Now, in a co-op setting she would have stability and the opportunity to save, but she wouldn't have access to equity in the same way. Again, I think people should have options.

  • http://alexblock.net Alex B.

    Co-op resident,

    The challenge is that with owned housing, you can't both preserve the affordability of the unit when that unit turns over while still allowing the owner to realize the appreciation. If the owner sells and realizes the appreciation, then the unit isn't affordable anymore. That's the policy challenge here.

  • http://urbanplacesandspaces.blogspot.com Richard Layman

    another good, important piece, and good comments too. You weren't here during the IZ advocacy campaign. My problem with IZ isn't IZ per se, just that impacts such a small portion of the housing market. Coops, land trusts, and just greater production--some of the things mentioned by the commenters--ought to be combined into an integrated program and plan for housing ownership diversity.

  • http://ruseriousingme.blogspot.com R.U. Seriousing Me?

    The greatest benefit to the owner of an IZ unit is that he can live in a neighborhood he otherwise wouldn't be able to afford. Condo fees and individual unit maintenance costs rise over time, counteracting the capped appreciation of the unit's value. The tax benefits of homeownership are minimal for low/moderate income households.

    In my ideal scenario (which could only function in an alternate universe with more policy flexibility), the Housing Authority would purchase and operate these units.

  • Shiv Newaldass

    If the intent of a policy is to preserve a unit permanently, then make them all rental or as the last commenter suggested. But to guise this as homeownership does not help anyone. It hurts all parties involve and this unfortunately is becoming a hard reality that the District will have to face. With limited appreciation further diluted by escalating condo fees and other expenses, permanently restricted for-sale units aren’t very appealing.

    Affordable homeownership opportunities only account for less than 5% of the affordable housing stock in the District. Co-ops, Land Trusts, Rental, and other types make up the lion’s share of the Continuum of Affordable Housing Options. Allowing some low and moderate income families the opportunity to build wealth is the only way the District will help move people up the socio-economic ladder. Manna has suggested a subsidy recapture and recycle model to account for any difference in market price and affordable price, so that there is no windfall profit given to the buyers. They simple will get whatever the normal appreciation is over the initial market price, just like everyone else. It is the fairest way to help families grow. More information can be found here: http://www.hatdc.org.

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