The numbers don't work in Cambridge
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.
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
I'm grateful for the time the author took to write this.
It's a little old, but Evan Roberts made some similar points in 2016 and attempted to articulate a framework against which IZ and other social policies should be evaluated. Roberts argued that social support should be financed by a broad section of society; such funding should be transparent as to who pays and who benefit; it should be independent of the timing and fluctuation of private decisions; and the policy shouldn't have negative secondary effects. I'd have to think more about whether this is a perfect list, but it's not a terrible start. Roberts argues that IZ largely fails on all counts in part because of some of what Brandon is arguing today: that the cost is borne by few and those costs are largely hidden. Roberts concludes IZ is "understandable politics, terrible policy." See https://streets.mn/2016/03/03/inclusionary-zoning-understandable-politics-terrible-policy/
Couple of nitpicky comments: 1) is the headline really fair? It seems to me, if I am understanding properly, the numbers have worked in Cambridge for more than 20 years or so with more than 10% of units built deemed affordable. Maybe there is failure in not building enough units over that time but can we really say that is a failure of IZ? Agree with you that these instruments should be flexible and adjust to the times. 2) the language you employ creating a binary between “people who don’t want to pay” and “people who don’t know they’re paying for stuff” seems vague, unproductive and unnecessarily open to negative interpretation. By “people who don’t want to pay for stuff” I assume you mean governments and advocates for developer subsidized IZ? Is it really that these entities “don’t want to pay” or that they see subsidized units as part of the social contract we make with developers (right or wrong). 3) I’ve read a few of these developer penned critiques of IZ and they are always missing the final paragraph where they suggest alternative solutions to consider.
The governments and advocates think the social contract is with developers, but it's actually with the buyers of the market rate homes, who are effectively subsidizing the affordable homes in their complex. Brandon raises the point that maybe the whole city should pay for IZ, not just the buyers/tenants in new buildings. I think the headline is fair today, if not in the past.