Brandon Donnelly

Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.

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Search results for: “inclusionary zoning”

  • Where developers won’t build even with $0 land

    Building on yesterday’s post about inclusionary zoning, below is a telling diagram from the Urban Land Institute showing which areas of Portland can support new development and which areas cannot. To create this map, ULI looked at achievable rents in each US census block to determine, quite simply, where rents will cover the cost of new development (all types of construction).

    However, in their models they are also assuming a land value of $0. And typically people want you to pay them money when you buy their land. So in all likelihood, this map is overstating the amount of blue — that being land where new development is feasible.

    But it does tell you something about developer margins. A lot of people seem to assume that the margins on new developments are so great that things like inclusionary zoning can simply be “absorbed” without impacting overall feasibility. The reality is that there are large swaths in most cities where development is never going to happen even if you were to start handing out free land.

    This map is also helpful at illustrating some of the impacts of IZ. If you assume that rents are the highest in the center of the city and that they fall off as you move outward, then the outer edge of the above blue area is going to be where development is only marginally feasible. And so any new cost imposed on development would naturally start to uniformly eat away at the blue feasible area — that is, until rents rise enough to offset it.

    Of course, this is a simplified mapping. Land usually costs money. Land values might also be highest in the center and fall off as you move outward, or there could be pockets of high-cost land. There may be more price elasticity in certain sub-markets compared to others. So the impacts of a new development cost may not play out as neatly as I outlined above.

    Regardless, there will be impacts, which is why I find this map telling even if it isn’t fully accurate or up to date. Maybe some of you will as well.

  • A question of land value

    Let’s say that we have a piece of development land worth $100. That is the market value of the land based on its highest and best use at this particular point in time. Now let’s assume that the land was just encumbered with a new burden: inclusionary zoning. All of a sudden there is now a requirement to make available X% of any residential units built at 50% of average market rents for the area.

    Technically, the land is now worth less than $100. And there is a school of thought out there that, in instances like this one, the price of all land should automatically reset downward to offset and account for the inclusionary zoning burden. But as I have argued before on the blog, land prices tend to be fairly sticky, unless the owner is distressed and really needs to sell.

    So what can often happen is that the land owner will stubbornly cling to the original $100 number. The thinking being, “I was once told that my land is worth $100 and so that’s the minimum price I’m willing to accept.” In this scenario, you may need a broad increase in rents in order for a transaction to occur. This way the market rate units might be able to fully subsidize these new affordable units, preserving any margins and justifying the original $100 number.

    Of course, the impact of inclusionary zoning is a hotly debated topic and there are a number of variables to consider. And so I will leave it at that for today. The real purpose of this post is to consider another permutation. Let’s once again say that we have a piece of development land worth $100. But instead of being owned by 13 siblings — and 3 cousins that live abroad and can’t be reached other than by fax — it’s owned by the government.

    In this case, the government wants to sell the land and is considering two options. It can either (1) sell it for $100 and maximize immediate taxpayer revenue or (2) it can sell it for $80 with the condition that the buyer agree to deliver X% of affordable units (and a bunch of other goodies and positive externalities). I would also add that this fictitious town is experiencing what some might call a housing crisis.

    If you were a private sector actor, you would probably choose option 1. You would take the additional $20 and retire to Florida (I’m off by a few zeros). But this is the government we’re talking about and presumably the government is thinking about the broader public good. Which option do you think is better at maximizing that?

  • How superstar cities can continue to scale

    Aaron Renn’s latest article in the Manhattan Institute is about how America’s top cities can “grow to new heights.” Usually when we talk about urban problems, it is because of failures. But in this case, it is about problems of success (though I suppose you could argue these are still failures).

    Cities such as New York and San Francisco have, in his view, stopped thinking like growth cities and that is leading to high home prices and overburdened infrastructure. But we all know that these problems are not unique to only “superstar cities.”

    Not surprisingly, Aaron argues that we need to stop implementing land use policies that only exacerbate our housing supply problems. Things like rent control and inclusionary zoning. And in some cases, it may be time for states to start intervening in local planning decisions.

    For the full article, click here.

  • Solving the rubik’s cube

    Developing a building can often feel like you’re trying to solve a rubik’s cube. Among other things, you have to manage a myriad of different stakeholders, all of which — naturally — operate in their own self-interest. There’s the city, community, politicians, various agencies, consultants, tenants, purchasers, lenders, investors, the market at large (of which you really have no control of), and many others. Oftentimes you even have stakeholders whose interests are mutually exclusive. Indeed, the things that they want can sometimes be at odds with each other. Your job is to figure out a solution that satisfies as many of these interests as possible.

    To give you an example, let’s say that you’ve been asked to introduce a stepback into your building in order to break up the elevation. From an urban design standpoint, this may make perfect sense. Hello, datum line. But now your construction costs just went up. You have to transfer your mechanical lines, insulate the roof, introduce new bulkheads, and, for the purposes of this example, let’s say you now need to introduce a structural transfer. This is big cost item that you hadn’t accounted for. And because you just reduced the height of the building to satisfy another stakeholder, you don’t have the excess clear height to accommodate the additional depth required by this new structural element. There is, of course, always a solution. But usually something will need to give.

    At the same time, this raises some interesting philosophical questions. What’s more important in this example? The urban design move or keeping construction costs low so that the building can be delivered more affordably? The cynics will argue that this is a moot point because developers will always profit maximize. But I would encourage you to check out some of my past posts, such as “Cost-plus pricing” and “The impact of inclusionary zoning on development feasibility.” This problem solving dynamic is one of the things that makes development so challenging. But it is also one of the things that makes it incredibly rewarding.

    Photo by Ivan Bandura on Unsplash

  • Toronto to market 11 city-owned sites for new affordable rental housing

    At the end of last month, Toronto City Council adopted the “Housing Now” action plan. The first phase of the plan involves the public marketing of 11 city-owned sites for the purpose of finding non-profit and private sector partners to help redevelop the lands with new mixed-income housing. It is expected that these lands could accommodate about 10,000 homes.

    Here is the list of sites:

    As part of the offering, around 2/3 of the built units will need to be rental (the above chart shows more), and of these rental units, 50% will need to be affordable with rents set to 80% of Toronto’s average market rents. All of this should translate into approximately 3,700 new affordable homes. (Mayor Tory’s plan is to build 40,000 affordable rental homes by 2030.)

    The City wants to ultimately retain ownership of these lands, and so the sites will be offered up through long-term land leases. It looks like they’ll be for 99 years. The City will also be forgiving a number of fees and levies for the 3,700 affordable homes. They are pegging the PV (present value) of these development incentives at just over $280 million:

    Making use of surplus public land to increase the supply of affordable housing certainly makes a lot of sense. But there’s a cost burden associated with these affordable units, which is why discussions around inclusionary zoning often come back to offsetting measures. Who is going to pay for these subsidies?

    The above “financial incentives” — which in this case are simply foregone revenue — speak to this cost burden.

    Tables: City of Toronto

  • Limits of housing affordability

    The San Francisco Chronicle recently published an article called, “SF residential projects languish as rising costs force developers to cash out.” It talks about the impact that rising costs (both construction and other) are having on new housing supply. Some developers aren’t building even though may have entitled sites. And that’s because the math doesn’t work, even though we’re in a market with a severe housing shortage.

    Here is an excerpt from the article that talks about the kind of pricing that is needed in order to make a project work:

    Chris Foley, a real estate investor and partner in brokerage firm Polaris Pacific, said that in the current construction environment a condominium developer needs to sell units for at least $1,400 a square foot for a wood-frame building and $1,800 a square for a taller, steel-frame midrise or high-rise. Even in a city where more than 80 percent of the population is priced out of the market, those numbers are a stretch, Foley said.

    San Francisco also has inclusionary zoning, which requires a certain percentage of units in any new development to be priced below market. According to the article, it is 18% for new rental projects and 20% for new condo projects. That’s a cost that needs to be absorbed by the remaining market rate units – so price accordingly. 

    The MIRA tower designed by Studio Gang is currently under construction and has 156 affordable units and 393 market rate units. The market rate pricing looks something like this:

    That’s the case with three buildings rising near the new Transbay Transit Center: Mira, the Avery at 400 Folsom St., and One Steuart Lane, which overlooks the Embarcadero at the foot of Howard Street. Unless there is a remarkable drop in the market, units in all three of those buildings will probably have an average sales price of more than $2,000 a square foot and penthouses could fetch $3,000 or even $4,000 a square foot. A 3,326-square-foot penthouse at 181 Fremont St., which opened last spring, recently sold for $15 million, or $4,500 a square foot.

    Projects being squeezed by rising costs is something that we are also seeing here in Toronto. And I don’t believe that the general public fully appreciates that there are limits to the costs that can be shouldered by new development. And the reason for that is because there are limits to what people can afford to pay for new housing.

    Photo by Jamie Street on Unsplash

  • Construction costs are no joke right now

    I don’t know what it’s like in your market, but everyone is talking about it in the industry here in Toronto. Combine these rapidly rising hard costs with higher development charges and inclusionary zoning and you get significant upward pressure on condo prices and apartment rents. 

    This is also one of the reasons – perhaps it is the main reason – why you’re seeing some projects get cancelled. These are projects that maybe sold in one market (lower revenues) and are now trying to build in another (higher costs). The math no longer works. Sorry.

    I mention this today not to complain, although I’m always up for a good industry commiseration over beers, but because I often hear people lament that Toronto needs better design. Why aren’t developers using triple-glazed windows? Why aren’t developers thermally breaking the balconies?

    I will always advocate for better design. That is core to my belief system. But everything costs money. There are very real limits in this equation. And markets have a funny way of telling you exactly what those are.

    Photo by Filip Mroz on Unsplash

  • 2017 year in review

    I just finished going through my list of 2017 goals. I didn’t accomplish everything I wanted to, but I did manage to check off a number of professional and personal goals.

    Some of the remaining goals have been pushed to 2018. But there are also items that I have since realized aren’t worth pursuing and so I have dropped them from the list.

    All that said, it was a great year. Here is a rapid-fire summary of 2017 told through posts from this blog.

    Thanks for reading. Onward my friends.

  • 616 Croft Ave., LLC, v. City of West Hollywood

    The Supreme Court of the United States may soon consider whether inclusionary zoning is in fact unconstitutional.

    A pending petition by the developer of an 11-unit condominium project in the City of West Hollywood is asking whether a $540,393.28 “affordable housing fee” – which is being imposed as a mandatory approval condition – is “subject to scrutiny under the unconstitutional conditions doctrine” set out in previous cases.

    The petition is supported by a collection of researchers and academics from Yale University, George Mason University, as well as many other institutions.

    More specifically, the question asks whether a “mandated permit condition” satisfies the “essential nexus” and “rough proportionality” tests established by the following decisions: Koontz v. St. Johns River Water Management District, 133 S. Ct. 2586 (2013); Dolan v. City of Tigard, 512 U.S. 374 (1994); and Nollan v. California Coastal Commission, 483 U.S. 825 (1987).

    To put it crudely, the nexus and proportionality tests essentially state that for an exaction to be constitutional, there needs to be a reasonable relationship between the ask and the adverse public impacts that can be directly attributable to the project in question.

    Here is an excerpt from the petition:

    Together, the nexus and proportionality tests hold that the government cannot condition approval of a land-use permit on a requirement that the owner dedicate private property to the public, unless the government can show that the dedication is necessary to mitigate adverse public impacts caused by the proposed development.

    In the case of 616 Croft Avenue, the argument is that this 11-unit condo project is not directly responsible for the lack of affordable housing in the city. In other words, the need for affordable housing exists independently of this project. So it fails the test.

    Another excerpt:

    Accordingly, the City
    provided no evidence of nexus and proportionality,
    admitting on the record that the in-lieu fee was not “intended to mitigate impacts caused by development.” Instead, the City explained that the fee was designed to meet “needs for affordable housing that exist independently of the Applicants’ residential
    development project.

    The petition also gets into the fact that, irrespective of this test, inclusionary zoning has not necessarily been shown to have a meaningful impact on affordable housing supply. And it may actually increase housing prices because of a reduction in overall supply and because the cost burden typically gets shifted over to the market rate units. More reading here.

    What do you think of this argument? It will be very interesting to see how this one plays out.

  • The 0.1%

    City Observatory recently published a post called, The 0.1 percent solution: Inclusionary zoning’s fatal scale problem. 

    I recognize the political attractiveness of this land use policy, but I’ve always been skeptical about its effectiveness. 

    Here’s an excerpt from the post:

    “While inclusionary zoning gets top mention as a preferred policy by many affordable housing advocates, there’s precious little evidence that its ever had more than a token effect on the size of the housing affordability problem in any city. In addition, because inclusionary zoning requirements essentially shift the cost of housing subsidies onto new development, they raise its cost, and likely reduce the number of units that get built–which tends to aggravate housing shortages and further accelerate prices.”

    Sadly, I think that many housing policies tend to be more about optics, than about impact. There’s rarely such thing as a free lunch.