× Expand Photo by Caitlin Penna 1701 North Apartments in Chapel Hill

When Chapel Hill Town Council members began debating a mandatory inclusionary zoning ordinance in 2005, they knew they were entering a legal gray area. But their goals weren’t revolutionary.

The housing market was booming, and developers were building wherever possible. Because they often had to petition the town to rezone land, the council could force developers to set aside a portion of units at below-market rates or pay into an affordable housing fund in order for their projects to proceed—a policy referred to as conditional inclusionary zoning. Chapel Hill had been using this strategy since 1995, officially since 2000. It seemed to be working.

But problems loomed. If developers didn’t need to rezone, the council had no leverage. And negotiations over the payment or the number of units to be set aside were arduous and created uncertainty for developers. Faced with too much risk, some started to bail on their projects. Town officials decided they needed a new plan—and mandatory inclusionary zoning looked like a viable option.

They had an example to follow. In 2001, the town of Davidson became the first municipality in North Carolina to enact such an ordinance. Rather than negotiating with developers on a case-by-case basis, Davidson set standardized affordable housing concessions for new for-sale developments. A few years later, Manteo followed suit.

In a 2005 work session, then-Chapel Hill mayor Kevin Foy, council member Sally Greene, and council member (and future mayor) Mark Kleinschmidt argued that a similar ordinance would streamline the process for developers while also ensuring that no projects slipped through without contributing to the town's affordable housing stock.

The most immediate downside was that the town would give up the flexibility to negotiate with individual developers. There was also the small matter that what the town was considering might be illegal. State law doesn’t give municipalities the authority to enact mandatory inclusionary zoning. It doesn’t explicitly forbid it, either, but that still left the ordinance's legal standing in a sort of limbo.

To weigh the pros and cons, the council did what local governments do: It formed a task force. Chaired by Greene and Kleinschmidt, the task force included affordable housing advocates and developers, hired consultants, and studied the policies in Davidson and Manteo. And after five years, Chapel Hill had a proposed ordinance of its own.

Chapel Hill’s version requires new residential developments with five or more units for sale to make 10–15 percent of them affordable to households that earn between 65 percent and 80 percent of the area median income, or donate an equivalent value of land, existing housing, or cash in lieu of units. It passed unanimously in June 2010—by which point Chapel Hill, like the rest of the country, was on the wrong side of the housing market crash.

“We knew at the time that it was a tool, but not a solution,” says Susan Levy, task force member and Habitat for Humanity of Orange County executive director.

Eight years on, however, it hasn't even been much of a tool. In some ways, it might have made things worse.

There are fewer than fifty-five hundred housing units in Chapel Hill that are affordable to households making $58,600 a year, or 80 percent of the area median income for a family of four. Yet, according to the 2016 American Community Survey, nearly eighty-five hundred households make less than $50,000 a year, and just over half of those make less than $20,000 per year.

But since it came into effect in 2011, Chapel Hill's inclusionary zoning ordinance has generated just eleven affordable units, plus $803,250 in payments to the affordable housing fund. (Habitat for Humanity says it costs about $78,000 in materials to build one of its houses in Orange County.)

That’s because most developments since then have been rentals, and the ordinance only applies to for-sale projects. A state law passed in 1987 bans rent control, and with mandatory inclusionary zoning already on shaky legal footing, Chapel Hill—like Davidson and Manteo—decided not to further chance a lawsuit by adding rental housing. Instead, its ordinance tacks on a voluntary option, enabling rental properties that add affordable units to receive density bonuses—in other words, permission to add more units than they could otherwise. But only six affordable units have been added that way.

Instead, developers followed market forces created after the recession, which pushed them toward rentals—and high-end rentals at that. Banks stopped giving loans for condos and other for-sale developments, and “the finances of development require at least high-middle-class,” says Robert Dowling, executive director of Community Home Trust, one of Chapel Hill’s largest affordable housing providers.

But while “the housing crisis explains everything from 2008 through 2015,” says Dowling, who served on the task force, many advocates say the ordinance itself is creating perverse incentives for developers to focus on more lucrative rentals. In that way, they argue, the ordinance is actually harming the town’s affordable-housing market.

“It seems like it’s increasingly difficult for developers to meet the requirements” of the ordinance, says Levy, who also chairs the Orange County Affordable Housing Coalition. By opting for rental projects, developers can avoid those requirements altogether. And luxury rental projects are much more profitable than affordable ones.

Chapel Hill’s rental market could eventually become saturated, nudging developers back toward for-sale developments. That would provide the ordinance an opportunity to show its worth—unless, that is, a lawsuit filed this year eliminates that possibility before it arrives.

In September 2012, the council and WCA Partners LLC came to an agreement on a parcel of land on Martin Luther King Jr. Boulevard. In exchange for a $233,000 contribution to the town's affordable housing fund, WCA would be permitted to build 145 rental units and nine for-sale townhomes, plus office and retail space.

Since the development, known then as Charterwood, only had nine for-sale units, WCA argued that it should only be required to contribute one townhome and a fee equivalent to 20 percent of another under the town's mandatory inclusionary zoning ordinance. But because the property required rezoning, the town felt it had the right to demand more, as it has done for decades under its conditional inclusionary zoning policy.

In 2014, Chapel Hill Housing LLC bought the land from WCA and developed it as 1701 North Apartments, one of the many luxury rental complexes cropping up across the town. Chapel Hill Housing paid the $233,000 fee WCA agreed to, but filed a lawsuit in February claiming that the payment was illegally collected and should be refunded. (The lawsuit was originally filed in Orange County Superior Court, but the town had it moved to the U.S. District Court in March.)

The company claims that while “the Town’s Charter authorizes the Town to provide incentives” for developers who build affordable housing, it cannot “require all housing developers to reserve a certain number of housing lots or units” (emphasis in the original). Further arguing that the inclusionary zoning ordinance “makes an illusory distinction between properties intended for sale and properties intended for rental” and that the $233,000 fee was “a product of a random, arbitrary, and capricious negotiation,” the suit concludes that “the Town does not have and never has had legislative authority to impose affordable housing obligations” on developers.

Company officials did not respond to multiple requests for comment, and the company’s lawyer, William J. Brian Jr., declined to comment.

In North Carolina, local governments only have the powers granted to them by the state constitution and statutes, and inclusionary zoning isn't one of them. The state could explicitly grant local governments the authority to enact inclusionary zoning, but it hasn’t done so. A 2001 bill that would have done that died in committee, and bills granting the power to specific municipalities, including Durham in 2017, Carrboro in 2003, and Cary in 2001, met the same fate.

However, towns do have the authority to regulate “the location and use of buildings.” In a 2010 blog post for the UNC School of Government, C. Tyler Mulligan, author of Inclusionary Zoning: A Guide to Ordinances and the Law, argued that if affordable housing is understood as a protected “use,” inclusionary zoning is legal. Mulligan cited other statutes—one that gives municipalities the authority to consider affordable housing in land-use decisions, though not zoning in particular, and one that specifies that zoning powers “shall be broadly construed”—in support of his argument.

Mulligan tells the INDY that he believes inclusionary zoning can be applied to rentals, at least in some cases. He points out that the state prohibition on rent control has an exception for cases in which local governments “enter into agreements with private persons which regulate the amount of rent charged for subsidized rental properties.”

“Inclusionary zoning can be designed to fall under that exception,” Mulligan says. The density bonuses included in the voluntary-rental provision of Chapel Hill's ordinance fall under that umbrella.

In court documents, the town largely sidesteps arguments about its ordinance’s legality, arguing instead that the terms of WCA’s permit “were on record and knowable to [Chapel Hill Housing] at the time it negotiated for and purchased the subject property.” In other words, the town is arguing that the ordinance is irrelevant to 1701 North, because the payment was decided by negotiations, not the ordinance.

Though the case is currently in federal court, disputes over state law could eventually find their way back to state courts. And historically, the N.C. Supreme Court has not been kind to local governments in these matters. In the 2010 case Lanvale Properties v. Cabarrus County, for example, the court struck down Cabarrus County’s ability to fund public infrastructure through impact fees levied on new developments, ruling that local powers should be construed narrowly except “when our zoning statutes are ambiguous.”

There’s also the possibility that the General Assembly could preempt Chapel Hill’s ordinance before the courts weigh in.

Something similar has already happened in Orange County, which used to charge impact fees to fund its school system. (The fees were permitted in Orange County through a previous law, so the Lanvale decision did not apply.) But state Representative Sarah Stevens, a Republican from Mount Airy admittedly acting on behalf of a developer, pushed through a local bill in 2017 repealing the county’s authority to do so.

Even if the ordinance survives, it’s not clear that it will do any good.

There are 880 inclusionary zoning programs across twenty-five states, according to the affordable housing organization Grounded Solutions Network, 56 percent of which include a mandatory component. According to the Lincoln Institute of Land Policy, 70 percent have been created since 2000.

But inclusionary zoning is often criticized by developers, city planners, and affordable housing advocates alike.

A common argument is that inclusionary zoning raises the price of housing. Because developers must hold some units below market rate, they raise prices on the rest. That creates a glut of expensive units and a small number of affordable ones, but leaves out anything in the middle.

Chapel Hill’s already-stringent requirements on developers only exacerbate the problem.

“The fees alone make affordable housing almost impossible,” says Ann Moss Joyner, a former developer and now president of the Cedar Grove Institute for Sustainable Communities, which advocates for equitable community development. In Chapel Hill, a special-use permit—the kind WCA received to build Charterwood—is $7,785, plus $30 per one hundred square feet. In Wake County, it’s $800.

To address affordability, Moss Joyner advocates for what’s called development by right, meaning developers wouldn’t need approval from the town council for projects permitted under zoning regulations. She also supports rules that allow for granny cottages, add additional duplex zoning, and encourage boarders, which she believes would both make Chapel Hill attractive for developers and increase housing supply.

Comparing Chapel Hill with the rest of the Triangle makes clear that developers prefer building elsewhere. Chapel Hill has only grown in population 5.7 percent since 2010, compared to 18.2 percent in Wake County, 13.4 percent in Durham, and 13.8 percent in Chatham—which will soon add homes for sixty thousand more people in Chatham Park. Housing construction numbers follow the same trend.

But with a growing region and one of the area’s best school districts, there’s still demand. As a result, prices are continuing to rise. A 2017 Chapel Hill-Carrboro Chamber of Commerce report shows that home prices in Chapel Hill are higher than they were at the peak of the housing boom before the recession. The price per square foot in Orange County is the highest in the Triangle—$146, compared with $114 in Durham, $124 in Wake, and $142 in Chatham. Looking just at the Chapel Hill-Carrboro City Schools district makes the problem even clearer: There, it’s $160 per square foot.

In addition, with development in Chapel Hill trending toward luxury rentals that can offset the cost of fees and affordable housing concessions, the town’s median rent has risen from $848 in 2010 to $1,061 in 2016, according to the American Community Survey.

Both nationally and in Chapel Hill, Dowling says, the housing crisis is “perfectly understandable. It’s driven by the fact that our model for development is premised on private-sector, private-capital, profit-driven entities providing the housing.”

It’s fundamentally a supply problem. Not enough homes are being built. With so much demand, that means higher prices.

Some advocates are tempted to return to strategies in place before the ordinance. Between 1995 and 2011, the town’s conditional inclusionary zoning policy created 290 affordable units and brought in more than $1.3 million in payments to the affordable housing fund. If it was working then, it could work again, they say.

“In an ideal world,” Dowling says, “you’d have a voluntary ordinance, and it’d be structured to be precisely at that tipping point” that would maximize concessions while still enticing developers to build.

But that leaves the same problems that caused the town to turn to a mandatory ordinance in the first place. In addition to the risk developers face, the conditional strategy also requires public meetings, which open the door to opposition from affluent residents who fear their property values will suffer when developments with an affordable component are built nearby.

“People don’t even want to live next door to housing for teachers and firefighters,” Moss Joyner says.

Ronald Carnes, a member of the Community Empowerment Fund, which works with Chapel Hill’s homeless population, adds that this kind of not-in-my-backyard opposition is often tinged with racism. “There’s more to it than just the fact their property values might decrease,” he says. “There are racial issues, and that’s different.”

This year, Chapel Hill is pushing another affordable housing strategy, one that doesn’t require a legally murky ordinance or protracted negotiations with developers. It simply wants to build affordable units itself. In November, residents will vote on a $10 million housing bond that prioritizes land acquisition, home repairs, and constructing new affordable developments on town-owned land.

Mayor Pam Hemminger and town council member Jessica Anderson both cite various town-funded affordable housing projects such as a partnership with the Raleigh-based nonprofit DHIC that includes 149 units, 80 of which opened in June. They also note a mixed-income development on Homestead Road (currently in the concept phase) and a plan to convert the current parks and recreation building on Plant Road into affordable housing.

All told, the town is aiming to create four hundred more affordable units in the next five years. But there could be a nearly three-thousand-unit need. Even with the affordable housing bond, the town isn’t going to solve the problem itself.

Development—especially development involving public money—is complicated, slow, and expensive. And whether through bonds or payments developers make in lieu of providing affordable housing, it can take years for funding to be converted into housing.

“You can’t live in a payment in lieu,” says Anderson. “Yes, it can contribute to our larger strategy, but is it equivalent to a unit [of affordable housing]? Probably not.”

That’s why advocates like Dowling and Moss Joyner say Chapel Hill must find ways to make affordable housing financially viable for developers. There simply isn’t anyone else who can build enough units.

In some cases, developers’ biggest opponents aren’t affordable housing advocates, but rather well-heeled residents worried about the town’s “character.” NIMBY opposition to density is the most obvious point of conflict, as are anti-sprawl regulations like the rural buffer, a 1984 agreement curtailing development on thirty-seven thousand acres within rural Orange County.

At some point, advocates say, Chapel Hill must look at the costs of those benefits.

“When you restrict the supply of housing, it’s going to get more and more expensive, no matter how you restrict it,” Dowling says. “In the 1980s, we didn’t want suburban growth around here, which everybody loves. But there are costs.”

That’s especially true now that there’s little undeveloped land left within the buffer, he says.

Those limitations are straining the town’s existing affordable housing supply. Many affordable units are older and can’t command higher prices. But with restrictions on new growth and increasing demand, those units are apt to be “bought up and torn down, because they can fill it with people who can pay those prices,” Dowling says. And because that kind of development typically has fewer than five units and does not require rezoning, the town’s inclusionary zoning rules won’t apply.

As affordable housing disappears, those with very low incomes—people the inclusionary zoning regulations weren’t designed to help—could suffer.

“At this point in time,” says Carnes, “there are zero dollars laid aside for housing for people below twenty percent [of AMI]. Something has to be done about it.”

One such something Carnes supports is a “master leasing” program. It would empower a nonprofit to rent blocks of apartments and sublease them at subsidized rates to residents earning less than 30 percent of AMI. Carnes says it benefits landlords because it guarantees rented apartments and uses the nonprofit to act as a guarantor, reducing risk. For residents, it cuts the long wait times associated with Section 8 programs. (Recipients of Orange County Housing Authority Section 8 vouchers have been on the waiting list an average of more than seven years, according to the authority’s website.)

“The people who benefit from these projects quite naturally want it now—all of us do,” Carnes says. But it takes time to create an effective, scalable program, he says. "We've been building our foundation a block at a time.”

Carnes says he believes Chapel Hill is trying to do the right thing. But it’s not clear whether Chapel Hill has the resources or leverage necessary to combat a problem plaguing cities across the nation.

“It’s never going to be enough,” Anderson says. “There are always going to be people on our waiting lists and on our partners’ waiting lists. But that doesn’t mean that we give up.”

Follow Matt Hartman on Twitter @themhartman. Comment on this story at backtalk@indyweek.com.