Developers are saying proposed affordable housing mandate isn't feasible

Two developers say they've been stopped cold by inclusionary housing proposal headed toward city council

Some developers have already stopped buying property within city limits because of a mandatory affordable housing proposal headed toward the Portland City Council.

The 2016 Legislative Session adopted Senate Bill 1533, which lifted the state ban on inclusionary housing (Texas is the only state left with this preemption). Now, the City of Portland is pursuing mandatory inclusionary housing to harness the economic power of the private market to increase the supply of affordable housing.

The Housing Bureau commissioned an independent analysis on the inclusionary housing programs economic feasibility in Portland. Public testimony to be included in the draft closed on Oct. 25.

If passed by the city council, it would require new developments with 20 or more residential units to set aside 20 percent of those units as affordable housing, for those earning 80 percent of the area median income (currently about $58,650 for a family of four).

Commissioner Dan Saltzman is proposing a program developed and recommended by the Portland Housing Bureau, which is expected to go before the city council on Dec. 21. Its very likely to pass, according to the Portland Housing Bureau and the Bureau of Planning and Sustainability, and if it does it would go into effect on Feb. 1, 2017.

This proposal addresses the consequences Portlands unprecedented growth has had on housing affordability, Commissioner Saltzman said. Inclusionary Housing can help ensure that Portland has economic diversity in all areas of our City so that Portlanders who work here can afford to live here.

Critics said inclusionary zoning hasnt worked in other cities, would drive up housing prices and would shift development outside Portland to the suburbs. Proponents said it would be helpful along transit corridors, pushing developments out of close-in, walkable neighborhoods residents are flocking to. (read it in the Feb. 5 edition of the Portland Tribune Portland wants Legislature to allow inclusionary zoning, but progressive economist says it wont help with housing crisis by Steve Law).

The Business Tribune called some busy developers about town to find out if their plans are changing with the impending proposal.

Vanessa Sturgeon, CEO of TMT Development, said the inclusionary zoning would make Portland more like San Franciscos model  ultimately worse in affordability.

However, Vic Remmers, owner of VWR Development and Everett Custom Homes, said he wont be able to develop at all in the city under the inclusionary housing proposal.

Not buying property, no new projects

What most developers are doing now is just not buying any properties and not working on any new projects because of the new rules, Remmers said. There are a lot of projects wed normally maybe try to purchase right now that were not doing because of these rules  because of the possible inclusionary zoning.

Between developing apartment buildings and luxurious single-family homes around town, Remmers is notorious for almost infilling over three sequoia trees in Eastmoreland (you cant kill trees in Portland) and is generally snubbed by the historical types who disapprove of density in close-in neighborhoods, although his homes are exquisite. He has found allies in the Oregon Home Builders Association, 1000 Friends of Oregon, the City Club of Portland and other groups that support developing density in historically single-family neighborhoods, providing access to close-in transit, amenities and employment opportunities for renter-income households.

The negative effect is they were going to build lots of apartment buildings in the city, Remmers said. Were already in a housing crisis and its going to get even worse  we arent going to be able to build these projects. Youre going to get less housing development, its becoming even more expensive, and there will be even more of a shortage now with unintended consequences if they dont make it reasonable to build the project.

According to Remmers, the proposal would only work if people start taking dramatic price reduction on most of their land, or if the city adds a new incentive (see sidebar), but for now, hes going to opt out of the city limits.

The suburbs is where you can still do things because theyre not fast-tracking this like the city of Portland is, Remmers said. Thats where most developers are looking now to do projects.

As for the positives of the proposal:

Youd have a little more diversity in your project: more diversity in prices, Remmers said. The negative is youre losing apartments normally rented for a larger number. Youre renting for less money, so its going to have a dramatic affect on your value of the buildings.

Remmers said, Make some changes to the program to make it feasible for us to build these projects going forward, or were going to look at fewer units and fewer projects for the city.

Zero appraisals, halt completion

According to Vanessa Sturgeon, CEO of TMT Development, building a project large enough to offset the affordable housing mandate costs would require a development bigger than anything residential around the whole Portland area.

Honestly, I doubt well see projects of that size happen, I think project completion is just going to all but halt, Sturgeon said. Land values have already gone way down ... were starting to see appraisers mark land value down to zero because of it.

Sturgeon said she has not invested in any properties since she started following the proposal.

We just wont do any multi-family developments, Sturgeon said. Well just stop, which is what youre going to see most folks do.

TMT is known for developing the fourth-tallest high-rise in the city, Park Avenue West. It was once a testament to the Great Recession, but TMT completed it earlier this year.

We will not go forward with multi-family developments. It really hits so hard, it makes the risk not worth it, Sturgeon said. I think the tax breaks end after 10 years, so I see it becoming worse.

She said the way the mandate is drafted, it will have the opposite affect on housing availability in the long run.

My suggestion is they continue to offer incentives ... but in a more robust sense rather than offering a stick approach, which is going to decrease supply while demand continues to rise, Sturgeon said. So, I expect it to push prices on the entire market up.

According to Sturgeon, if the citys incentives were bigger and more rounded, it could answer the diverse housing problem.

If it were a bit more robust, it would be the answer because diversity on every level is important from ethnic diversity to financial diversity  all those things are important to creating a healthy community, Sturgeon said. But I dont see inclusionary zoning fostering diversity, I just see it slowing down the supply.

She predicts other developers will follow the same path she plans to  the suburbs.

Yes, were looking to the suburbs, and thats what everyones going to do, Sturgeon said. During these boom times, the quickest way for people to get projects done is going market-rate.

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Affordable developers: part of the solution

Affordable housing developer Sarah Stevenson, executive director of nonprofit Innovative Housing Inc. said it could be a part of the housing solution although it wouldn't directly fund IHI. The nonprofit already develops affordable housing for the city, and wouldnt be subject to the increased affordability requirements.

At first, Stevenson thought nonprofit developers would be able to use the fee-in-lieu revenue generated from opt-outs to develop more affordable housing, but says it now looks like that funding will be needed to support the inclusionary zoning program itself  especially the deeper affordability options.

As such, Im no longer counting on revenue from inclusionary zoning to support IHIs future projects, Stevenson said. It is possible that a for-profit market-rate developer would be interested in paying IHI or another nonprofit to develop off-site units to satisfy its inclusionary zoning obligations  that could create a new funding source for our future projects.

Its a possibility that depends on the market, project timing and developer relationships, and isnt solid funding for IHI, but it is possible and we would be happy to have that conversation with our for-profit counterparts.

In the big picture, Portland needs more affordable housing options along a spectrum of affordability from zero to 100 percent, and I have always thought inclusionary zoning was a good idea, Stevenson said. Portland has become a very desirable location for investors  the for-profit developers working in Portland are smart and resilient and Im confident they will find a way to make this work.

While Stevenson has heard from market-rate developers who are skeptical and concerned that it will impede development, she thinks the city should have implemented an affordability requirement a long time ago.

I think in a relatively short time the market, and investors expectations, will adjust to the inclusionary zoning reality and the City will gain some affordable units, Stevenson said. Not nearly enough to solve our current crisis, but it will be one part of the solution.

Next Steps:

The Planning and Sustainability Commission will hold a work session on Nov. 8, and vote on a recommendation for City Council to consider on Dec. 21, 2016.

Incentives:

Matthew Tschabold, policy and equity manager with the Portland Housing Bureau, said the incentives vary by zoning and by FAR (floor area ratio, or the ratio of the size of the building to the size of the land its on).

There are two options. One is to build new units off-site: that can be in another building, or the developer themselves can pay someone else to build the units, Tschabold said. You can dedicate existing units that are existing, market-rate units, they just have to be a similar size, quality, bedroom count and things like that.

The mandatory program requires 20 percent of units in the building be affordable to household who make 80 percent of the median area income. A deeper option offers making 10 percent of units affordable at a 60 percent median area income. Those are both on-site options.

As for off-site, there is only the 60 percent median area income option imposed on 20 percent of the units. For the re-dedication of existing units, it requires 25 percent of the total units be included.

Depending on the zone, its either a ten-year property tax exemption on all residential units, a property tax exemption of affordable units, or some amount of fee waiver or direct subsidy, Tschabold said.

There is an opt-out fee in lieu of offering affordable units, ranging from $23 to $30 per gross square foot of residential space in the building.

For more on the policy, visit: portlandoregon.gov/bps/article/594281