Cambridge, Massachusetts, requires that 20% of the new space in larger housing developments include affordable homes. This, as we have talked about many times before on this blog, is known as inclusionary zoning (IZ). According to the Pioneer Institute, there are more than 141 communities in the state that have some sort of IZ policy.
But now, what is happening is that the numbers don't work on new housing projects. In the 30 years since the ordinance was enacted, it is reported that it helped create 1,603 affordable homes. However, since 2017 — the year the city increased the affordable requirement to 20% — only 200 new affordable homes have been created. That's approximately 20-22 new affordable homes per year — not much.
These numbers also don't speak to the number of new housing projects that could have been built, but weren't feasible precisely because of the IZ policy. This is the greater risk, because even new "luxury" projects help to relieve housing pressures within a market.
It is for this reason, along with others, I'm sure, that a developer is now suing the City of Cambridge, arguing that inclusionary zoning is unconstitutional on the grounds that it infringes upon people's property rights. To quote the developer, "I [would] have to build at a loss. Eventually, you just throw your hands up and say it doesn't work."
If successful, this case could help to change how cities tax new housing and how they aim to create new affordable housing, though I should mention that there have already been prior rulings on this issue.
Customarily, the way municipalities try to offset the burden of inclusionary zoning is to allow additional density and/or waive certain development levies. However, to accomplish this, you ideally need a planning framework where it's perfectly clear what maximum density would have been permitted without IZ.
For example, if 100,000 square feet is the maximum permitted density without IZ, and an additional 20% is permitted with IZ (+20,000 square feet) you can now calculate whether this additional density is enough to perfectly offset the IZ tax. If it is not, well then, you could maybe have a situation where it's deemed as an unconstitutional "taking" of private land (oh boy, please don't take this as any sort of planning legal advice).
I think most of us would agree that cities are better when they are diverse and attainable to more people. The problem with IZ policies is that they run the risk of selectively taxing only certain people in an effort to create this outcome.
Cover photo by Brett Wharton on Unsplash
One perverse way to think about development is that it is a tool to transfer costs away from people who don't want to pay for stuff to people who don't know they're paying for stuff. Two good examples of this are development levies and inclusionary zoning. Inclusionary zoning is a popular policy tool to create affordable housing because nobody feels like they're directly paying for the requisite subsidies (i.e. no public money) and it does, to varying degrees, result in affordable housing.
Cambridge, Massachusetts, for instance, enacted IZ policy in 1998 and, up until the market turned in 2022, it created just shy of 1,600 affordable homes. This only works out to ~66 units per year, but Cambridge doesn't build that many new homes. Starts over the last five years have hovered somewhere around 500 new homes per year. But now starts are falling and new projects simply aren't penciling (as is the case in many cities).
Here's a specific example from the Boston Globe:
The project at 2400 Mass. Ave. helps explain why. With 60 condominium units, North Cambridge Partners figured their project would generate about $108 million in sales if all the units were sold at market prices, said Tim Rowe, the developer’s lead investor, who is also the founder and CEO of the Cambridge Innovation Center. But with 12 of those units sold at far-lower “affordable” prices under the city’s inclusionary rule, that amount drops to about $90 million.
The developers figure they’ll sell the market rate units at somewhere around $1,500 per square foot, or perhaps a bit less. That’s a very steep figure, one that’s partially driven by high construction costs and the need to offset the discount on the affordable units. The price for affordable units, under the city’s rules, would come in closer to $275 per square foot.
There’s a lot of talk about how venture capital investment has shifted from the suburbs to cities and how it is also concentrated in certain metro areas. But a new report from the Martin Prosperity Institute has dug even deeper to look at the top 20 neighborhoods (zip codes) in the US for venture capital investment.
Here’s a summary of what they found:
“The top 20 neighborhoods or zip codes for venture investment include nine in San Francisco, five in San Jose, three in Boston-Cambridge (one in suburban Waltham and two in Cambridge close to MIT) and one each in San Diego (close to the University of California, San Diego), Dallas, and New York (close to New York University).”
And here’s the full top 20 list:
Cambridge, Massachusetts, requires that 20% of the new space in larger housing developments include affordable homes. This, as we have talked about many times before on this blog, is known as inclusionary zoning (IZ). According to the Pioneer Institute, there are more than 141 communities in the state that have some sort of IZ policy.
But now, what is happening is that the numbers don't work on new housing projects. In the 30 years since the ordinance was enacted, it is reported that it helped create 1,603 affordable homes. However, since 2017 — the year the city increased the affordable requirement to 20% — only 200 new affordable homes have been created. That's approximately 20-22 new affordable homes per year — not much.
These numbers also don't speak to the number of new housing projects that could have been built, but weren't feasible precisely because of the IZ policy. This is the greater risk, because even new "luxury" projects help to relieve housing pressures within a market.
It is for this reason, along with others, I'm sure, that a developer is now suing the City of Cambridge, arguing that inclusionary zoning is unconstitutional on the grounds that it infringes upon people's property rights. To quote the developer, "I [would] have to build at a loss. Eventually, you just throw your hands up and say it doesn't work."
If successful, this case could help to change how cities tax new housing and how they aim to create new affordable housing, though I should mention that there have already been prior rulings on this issue.
Customarily, the way municipalities try to offset the burden of inclusionary zoning is to allow additional density and/or waive certain development levies. However, to accomplish this, you ideally need a planning framework where it's perfectly clear what maximum density would have been permitted without IZ.
For example, if 100,000 square feet is the maximum permitted density without IZ, and an additional 20% is permitted with IZ (+20,000 square feet) you can now calculate whether this additional density is enough to perfectly offset the IZ tax. If it is not, well then, you could maybe have a situation where it's deemed as an unconstitutional "taking" of private land (oh boy, please don't take this as any sort of planning legal advice).
I think most of us would agree that cities are better when they are diverse and attainable to more people. The problem with IZ policies is that they run the risk of selectively taxing only certain people in an effort to create this outcome.
Cover photo by Brett Wharton on Unsplash
One perverse way to think about development is that it is a tool to transfer costs away from people who don't want to pay for stuff to people who don't know they're paying for stuff. Two good examples of this are development levies and inclusionary zoning. Inclusionary zoning is a popular policy tool to create affordable housing because nobody feels like they're directly paying for the requisite subsidies (i.e. no public money) and it does, to varying degrees, result in affordable housing.
Cambridge, Massachusetts, for instance, enacted IZ policy in 1998 and, up until the market turned in 2022, it created just shy of 1,600 affordable homes. This only works out to ~66 units per year, but Cambridge doesn't build that many new homes. Starts over the last five years have hovered somewhere around 500 new homes per year. But now starts are falling and new projects simply aren't penciling (as is the case in many cities).
Here's a specific example from the Boston Globe:
The project at 2400 Mass. Ave. helps explain why. With 60 condominium units, North Cambridge Partners figured their project would generate about $108 million in sales if all the units were sold at market prices, said Tim Rowe, the developer’s lead investor, who is also the founder and CEO of the Cambridge Innovation Center. But with 12 of those units sold at far-lower “affordable” prices under the city’s inclusionary rule, that amount drops to about $90 million.
The developers figure they’ll sell the market rate units at somewhere around $1,500 per square foot, or perhaps a bit less. That’s a very steep figure, one that’s partially driven by high construction costs and the need to offset the discount on the affordable units. The price for affordable units, under the city’s rules, would come in closer to $275 per square foot.
There’s a lot of talk about how venture capital investment has shifted from the suburbs to cities and how it is also concentrated in certain metro areas. But a new report from the Martin Prosperity Institute has dug even deeper to look at the top 20 neighborhoods (zip codes) in the US for venture capital investment.
Here’s a summary of what they found:
“The top 20 neighborhoods or zip codes for venture investment include nine in San Francisco, five in San Jose, three in Boston-Cambridge (one in suburban Waltham and two in Cambridge close to MIT) and one each in San Diego (close to the University of California, San Diego), Dallas, and New York (close to New York University).”
And here’s the full top 20 list:
Rowe estimates the six-story, 72,000-square-foot building would cost $85 million to build, leaving the developers with $5 million in profit. But to come up with that $85 million to begin with, they’d need to find an equity investor willing to put up about 35 percent of the money — $30 million — and then borrow the rest. The investors the developers have talked with about financing the project are seeking such a high rate of return that the project would need to net roughly $16 million, Rowe said, $11 million more than what the developers currently project to make.
I'm impressed the developer shared this much about their economics.
What is clear is that the affordable units don't come close to covering the close to $1,200 psf it would cost to build the building. And so somebody has to cover this shortfall. Nobody wants to spend public money on this and so it gets passed onto the market-rate buyers who don't exactly know what they're paying for, but frankly don't have a choice either way if they need a new home.
When the market is robust, this can clearly work. But when the market softens, it can shut off development. Today, there's debate in Cambridge about whether the 20% requirement should be lowered to spur more supply. This would certainly help but it gets at the real conundrum of inclusionary zoning. Lowering the burden will create more market-rate housing. And so what is the most equitable and ideal percentage of affordable housing that should be mandated in IZ policies?
In other words, exactly how much cost should we transfer from the people who don't want to pay for stuff to the people who don't know they're paying for stuff? In my view, it shouldn't just be new homebuyers who pay to subsidize the creation of new affordable housing. Why only them? If there's collective agreement that more affordable housing is a good thing for our cities, then there should be a more broad-based solution.
Cover photo by Henry Dixon on Unsplash
Initially I looked at this list and thought that neighborhoods such as Menlo Park and Redwood City shouldn’t be labeled as San Francisco, since they are outside of the county. But technically they still fall within the San Francisco Metropolitan Area.
It’s amazing how San Francisco dominates this list.
Rowe estimates the six-story, 72,000-square-foot building would cost $85 million to build, leaving the developers with $5 million in profit. But to come up with that $85 million to begin with, they’d need to find an equity investor willing to put up about 35 percent of the money — $30 million — and then borrow the rest. The investors the developers have talked with about financing the project are seeking such a high rate of return that the project would need to net roughly $16 million, Rowe said, $11 million more than what the developers currently project to make.
I'm impressed the developer shared this much about their economics.
What is clear is that the affordable units don't come close to covering the close to $1,200 psf it would cost to build the building. And so somebody has to cover this shortfall. Nobody wants to spend public money on this and so it gets passed onto the market-rate buyers who don't exactly know what they're paying for, but frankly don't have a choice either way if they need a new home.
When the market is robust, this can clearly work. But when the market softens, it can shut off development. Today, there's debate in Cambridge about whether the 20% requirement should be lowered to spur more supply. This would certainly help but it gets at the real conundrum of inclusionary zoning. Lowering the burden will create more market-rate housing. And so what is the most equitable and ideal percentage of affordable housing that should be mandated in IZ policies?
In other words, exactly how much cost should we transfer from the people who don't want to pay for stuff to the people who don't know they're paying for stuff? In my view, it shouldn't just be new homebuyers who pay to subsidize the creation of new affordable housing. Why only them? If there's collective agreement that more affordable housing is a good thing for our cities, then there should be a more broad-based solution.
Cover photo by Henry Dixon on Unsplash
Initially I looked at this list and thought that neighborhoods such as Menlo Park and Redwood City shouldn’t be labeled as San Francisco, since they are outside of the county. But technically they still fall within the San Francisco Metropolitan Area.
It’s amazing how San Francisco dominates this list.
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