Developers in California won’t let inclusionary zoning case rest

I have been away from this blog for so long, part of me fears I have forgotten to write well about affordable housing. Still, life has reached a stabilizing point for me in the past week or so and I realized I am becoming restless without writing here. And so, to welcome what I hope is a more consistent return to this blog, another look at San Jose’s controversial inclusionary zoning laws.

Inclusionary zoning has popped up before, and again developers are throwing a legal tantrum because they are required to provide (a very minimal amount of housing) to the poor. If you recall, in June 2015 the California Supreme Court upheld the right of cities throughout the state to require developments of more than twenty for-sale units to set aside 15 percent of units as below market-rate. A controversial inclusionary zoning law in San Jose was the catalyst for case.

San Jose first passed its inclusionary zoning ordinance (which requires the 15 percent set-aside as described above in addition to a 15 percent set-aside for rental developments) in 2010, to be implemented in 2013. The ordinance approved by city council sets for-sale affordable prices as affordable to households earning 110 percent of area median income (AMI) on for-sale units; rental fees are affordable for households earning 80 percent AMI (9 percent of total units) and 50 percent AMI (6 percent of total units). This translates to incomes for a four-person household of $116,930, $75,500, and $53,150 respectively (FY 2015).

Legal challenges brought by the California Building Industry Association (CBIA) in 2013 halted the ordinance’s enforcement, and so inclusionary zoning in San Jose has never been active. Unsatisfied by the California Court’s unanimous June ruling, the CBIA filed a writ of certiorari with the U.S. Supreme Court in September, 2015 asking for a review of the case. The U.S. Supreme court will announce its decision to review (or not to review) the case by the end of January, 2016.

Gary Galles, the author of this editorial in the Los Angeles Times, argues in favor of the CBIA, vilifying inclusionary zoning (and all other laws that give relief to low-income households). He claims inclusionary zoning hurts the housing market by reducing the amount of new homes and driving up the price of existing ones. There are a few studies cited, all of which seek to prove that developers do not develop if they are required to set-aside affordable units. This is bad for people seeking both affordable and market-rate housing, as well as local economies that rely on steady housing growth. Galles only looks at housing starts, however, and does not include any analysis of other market conditions.  A reduction in starts could reflect declining housing markets in general, unrelated to zoning ordinances. He does not look at the number of people housed by inclusionary zoning, which could be another helpful metric in determining the efficacy of ordinances.

The editorial’s argument had me somewhat convinced for a moment, because I have wondered, myself, if tactics such as linkage fees and inclusionary zoning are effective at creating more affordable housing. Developers are often loath to build unless they can extract the full perceived value from the land. Making some money is not better than making no money, since they can simply take their business to areas where consideration for the poor has not been enacted into law. Furthermore, the amounts usually mandated by zoning ordinances (between 10 and 15 percent) do not create enough units to house everyone who cannot afford market-rate shelter. One study cited in the argument makes just this point.

My tepid support turned to vehement opposition, however, when Galles made an analogy between inclusionary zoning and food stamps.

Suppose there was a law that if you opened a new supermarket you had to sell 15% of your groceries to low-income people at far-below market prices to improve their access to good nutrition. This would clearly be an unfair burden. Those wanting to open new supermarkets did nothing to cause the problem; on the contrary, they intended to increase food accessibility.

Increased access to food may cause some momentary financial hardship for the grocery store owners in this scenario (although at the rate food is inflated to make a profit, I am not convinced a price reduction of 15 percent would not make much of a difference to a store’s bottom line) but any profit loss would ultimately be rendered negligible by the increased volume of sales created by opening the store to a new demographic. Similarly, a 15 percent reduction in profit for developers would not be significant and would provide a needed resource for the community.

To unpin the argument one step more: any price reductions can be recouped by using less-expensive building material, reducing amenities in lower-priced units, and using simpler finishing touches in interior spaces. The developer does not have to spend as much to construct the less-expensive units and, therefore, does not have to reduce their profit margin. The developer can also apply for density bonuses, flexible parking requirements and government subsidies to fund the affordable units. Developers are rewarded amply for compliance.

Affordable housing helps decrease the distance people must travel between work and home, reducing traffic and infrastructure loads, increasing the amount of time parents have to spend with children (creating more potential for academic and economic success), reducing overall household costs and allowing families to pay down debt and even build savings. In sum, by pricing housing within the reach of working-class households it is possible to create economically vibrant, inclusive urban places. Sure, the developers might have to eat a bit of money up front, but ultimately they will end up paying fewer of their taxes toward welfare programs because of the enormous economic hardship alleviated by having decent, affordable living spaces.