Zoned Out

Inclusionary zoning is picking up steam in the Southland, despite its negative impact on home prices

Picture yourself walking into a car dealership next time you need to purchase a vehicle.

Day-old coffee. Pushy salesmen. Screaming toddlers.

But you really need a car, so you pick out a decent SUV for a decent price and start talking terms with the dealer.

Everything looks good, you're whipping out your checkbook, and then he says, "Just one more thing. Since SUVs are so expensive in California, and many people can't afford one like the one you want, you need to pay an extra $10,000 so we can sell one to them under cost. Thanks."

Sound preposterous?

The same thing is happening with homes throughout California as local government leaders fall in love with an affordable housing quick-fix called inclusionary zoning rather than addressing housing as a community-wide responsibility.

Inclusionary zoning ordinances require builders to set aside a certain number of affordable homes in a project in order to get it approved. Different cities require different amounts, but all end up costing the new homebuyer, who is forced to subsidize his or her neighbor's home.

"It's an impossible situation," said one Southern California builder who declined to be named. "If I don't pass along the cost to the new homebuyer, I lose money. If I do pass along the cost, some buyers can no longer afford the home."

Inclusionary zoning is a term builders in the northern part of California are all too familiar with. But those in Southern California's building industry are just now beginning to see the ripples.

Inclusionary zoning was first fashionable – for a brief time – in Southern California about 30 years ago, when several cities began to notice that some buyers couldn't afford to buy homes in their communities.

The easy fix? Force builders to sell some homes at below the market rate, or have them pay a fee to the city to fund future affordable home projects. Instead of addressing the shortage of affordable housing as a societal issue, city leaders shifted the burden to their newest residents and needlessly drove up prices on all other homes.

Many cities soon began to encounter the myriad of economic problems that come with inclusionary zoning and in-lieu funds.

Instead of making homes more affordable, inclusionary zoning actually drove up home prices in the community and created a gap between affordable housing and market rate housing so big that it squeezed out those in the middle — would-be buyers like policemen, teachers and nurses who can't afford the additional costs added by inclusionary zoning, but whose income isn't low enough to qualify for the affordable housing. City leaders took notice, and the practice soon died out.

But with builders prevented from meeting market demands and another housing crisis in full swing, many cities are attempting to ignore the catastrophe that killed this dinosaur and are giving the ordinances another life.

What is inclusionary zoning? Inclusionary zoning ordinances are local laws forcing builders to sell generally 10% to 20% of their projects to low- and moderate-income buyers at below-market rates. If builders don't want to build these homes or condos as part of the project, they often can pay in-lieu fees that the city promises to use for future projects.

We'll use Pasadena as an example.

Pasadena approved an inclusionary zoning ordinance in 2001 "to supplement other programs that assist and encourage affordable housing in the city." Any project of 10 or more units must make 15% of the units affordable.

The city does provide builders with three alternatives to actually constructing the required units on the primary development site:

• Build the units on another site.
• Donate another site.
• Pay an in-lieu fee.

At least 10% of the inclusionary homes in Pasadena must be sold to low income households – households whose gross income is less than 80% of the median income for Los Angeles County, as determined by the U.S. Department of Housing and Urban Development. The other 5% must be sold to low- or moderate-income households whose gross income is less than 120% of the county’s median income.

If a Pasadena builder chooses not to build the inclusionary units, either on the primary site or at another location in the city, he or she can donate land to the city for construction of the units, or can pay $1-$41 per square foot – depending on location – to an Inclusionary Housing Trust Fund for each un-built unit.

And, finally, inclusionary homes must remain reserved for their specific income levels for 30 years.

For incentives, the city will work with builders to allow for high densities on the projects and may waive some fees, such as the construction tax. The city may also help market the inclusionary homes through its community development commission.

Inclusionary zoning ordinances are similar in other cities.

One thing many city officials don't see under inclusionary zoning's attractive façade is the tremendous burden it brings with it.

Homeowners are prohibited from turning over the property and selling it at market value for a profit. That requires deed restrictions, which prevents the attainment of the American dream of realizing market appreciation in one's home.

The homes must remain reserved for specific income levels for 30 years. That means if a homeowner receives a raise above that level, he or she could loose their home.

And then there's the unfair aspect of forcing someone to sell a product below the cost to produce the product.

Research Doesn't Support Assumptions Recent research of existing inclusionary zoning programs in California is disproving the theory that forcing builders to sell some homes at below market rates is the only way to increase the supply of affordable housing. A 2004 study by two economics professors at San Jose State University actually found that inclusionary zoning ultimately makes housing less affordable and that inclusionary zoning requirements results in less housing at all income levels.

The professors studied the 13 cities in Los Angeles and Orange counties with inclusionary zoning policies and found that the median city produces only eight affordable housing units per year. Yet in those cities, the cost of providing affordable housing units added between $33,000 and $66,000 to the cost of each market-rate new home. In high-cost areas such as San Juan Capistrano and Laguna Beach, the study found that affordable housing mandates added a whopping $100,000 to the cost of a regular, market-rate home.

"Inclusionary zoning drives away builders, makes landowners supply less land for residential use, and leads to less housing for homebuyers – the very problem it was instituted to address," according to professors Benjamin Powell and Edward Stringham. "We find that new housing production drastically decreases the year after cities adopt inclusionary zoning."

For all 13 cities in the study, average production of housing fell the year following the adoption of inclusionary zoning. In the eight cities with data for seven years prior and seven years following inclusionary zoning, 17,296 fewer homes were produced during the seven years after the adoption of inclusionary zoning. In those cities 770 "affordable" units were produced. "One must question whether 770 units are worth the cost in terms of 17,296 fewer homes," the study says. "By discouraging production of 17,296 homes in those eight cities, $11 billion worth of housing was essentially destroyed." In Northern California, a local homebuilders association the market in Union City in Alameda County and concluded that in a typical, 100-unit subdivision, the 85 market-rate homebuyers would have to pay an extra $30,897 on a $441,000 house in order to sell the other 15 units at below cost to low- and moderate-income buyers.

To make matters worse, instead of a monthly mortgage payment (principal plus interest assuming a 5% down payment) of $3,196 without the inclusionary law, the market-rate homebuyer would pay $3,417 – an extra $221 per month over the 30-year term of the mortgage, according to the association study.

That comes to $2,652 more per year, and additional $79,569 over the life of the loan.

Public Doesn't Support Mandates A survey of Southern California voters during the summer of 2005 shows very little public support for inclusionary zoning laws.

When given the choice between policies requiring builders to construct affordable housing and policies that create favorable conditions and incentives for builders to construct affordable housing, only 28.1% chose mandates while 58.3% chose incentives.

Meanwhile, 67.8% said they agreed that forcing builders to sell some homes at below market rates would only help a few families and do very little to solve the overall shortage of available housing, and 76.5% agreed that building multi-family housing, such as apartments and condominiums, would be a more efficient way to provide affordable housing and use less land.

And while affordable housing opportunities is a big concern for Southern Californians, they want government officials to focus time and effort on tackling other priorities. When asked what their community officials' top priorities should be during the next two years, only 8.2% said expanding affordable housing opportunities while 27.4% said improving education, 19.8% said improving traffic congestion and 15.2% said fighting crime.