Tuesday, May 30, 2006

Well, Vaporware *Is* Affordable

by Tom Bozzo

One of Madison's Big Bad Mandates is the "inclusionary zoning" (IZ) ordinance, which requires that developers include "low-cost" housing in most new developments in the city — "low-cost" meaning affordable to families not exceeding 80% of the county median income.

The law is widely regarded as needing improvement. The required fixes relate mainly to terms that are intended to prevent IZ properties from being flipped to market-price housing, which also make IZ units less attractive to potential buyers. (Though in a post-bubble world of zero house price appreciation, the issue of being able to capture near-term market price increases should be less prominent.)

IZ is structured as a quid pro quo, with developers eligible for concessions such as increased project densities, expedited review, or waivers of fees as inducements for providing the low-cost units. IZ units which fail to sell to eligible buyers after a 240-day marketing period revert to market-price housing, too. Nevertheless, the real estate-industrial complex is bitterly opposed to IZ and has actively sought repeal of the ordinance, citing the cost of the mandate, the Law of Unintended Consequences, etc.

One of the possible unintended consequences is making market-price housing more expensive as the other units in a development cross-subsidize the low-cost housing. For there to be a cross-subsidy, though, the units have to be priced below the builder's cost.

As it happens, "low-cost" is relative. As noted by Ald. Brenda Konkel and Lisa Subeck in a fascinating exercise we'll return to, "affordable" means single-family houses priced in the vicinity of $175,000-200,000 for families with roughly $50,000 a year incomes. So how does this square with costs? I will pick on Veridian Homes, our biggest local builder, since they typically supply the bulk of single-family house building permits to the listing in the Thursday Wisconsin State Journal. Madison building permit fees depend on the project cost, so the permits theoretically provide some — certainly not inflated — indication of new construction costs.

The May 25 paper listed seven Veridian permits in Madison, one of which I'm throwing out as it's listed cost ($325,000) tags it as luxury housing of some description. The remaining six permits listed costs ranging from $119,000 to $156,000. In my reading of the permits listing, this is typical of Veridian's bread-and-butter contributions to suburbia. As of the last assessment cycle, the city values most of the lots at around $50,000 (relationship to actual land acquisition costs on the fringes of suburbia unknown). Put it all together and the cost of these Veridian houses with lots is something like $170,000-$206,000. I would conclude that while Veridian may not be earning much profit on a $201,988 IZ house, it's probably covering its costs. The immediate conclusion is that the cost — as opposed to profit — critique of IZ is greatly exaggerated.

This brings us back to Konkel and Subeck. They surveyed several developments and repeatedly found that the IZ units did not, except theoretically, exist; in some cases, the IZ units had indeed been marketed for the required period and been bumped out of the IZ program to market price without actually having been built. Go see their collection of pictures of dirt, piles of rocks, and port-a-potties — really.

Konkel and Subeck also suggest that in other cases, developers were frustrating the program by accentuating its complexities. (*) There's a fairly obvious financial incentive to do so, since the cost of waiting out the IZ marketing period is small (as long as the housing market doesn't crash in the meanwhile) relative to the benefits from selling the unit at market prices. This is particularly true for developers who aren't even carrying the IZ units as built inventory.

That IZ opponents are trying the "take the ball and go home" approach to obstructing useful reform of the ordinance seems like less of a problem as good faith in their dealings with the city is hard to find.


(*) You might recall, among the bad reasons advanced by business interests in opposition to the sick leave ordinance, the suggestion that paid leave would be a payroll accounting nightmare.
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