Implementing the Grand Bargain to foster development


The reading this week reminded me of our discussion of the HALA Grand Bargain in class a few weeks ago. The Grand Bargain taxes development. The Grand Bargain also assumes that land-banking land owners will revise downward the price at which they sell their property to developers in a generally rising market cycle. That is not likely. The issue with the 5%-8% mandatory inclusionary zoning (MIZ) requirement is that the units do not qualify for federal subsidy or financing and that MIZ directly lowers the yield of the project. This means that MIZ is essentially a direct tax on development. As a city, we want more housing development. Taxes deter capital, instead of attract capital to development.

In the case of a 100-unit entirely one-bedroom development project with: 650 sf average rentable unit sizes, $3.25 per square-foot for market units, 5% vacancy for market units, $6500 per unit in OpEx, and $300k per unit in development cost, the MIZ requirement of 8% creates a 30 basis point tax on the yield of the project.

30 basis points might not be the difference between a project moving forward or not, but in cases where it is, then it is a travesty.

The flip-side of the issue is that developers are not the entirely-evil actor, the land-banking landowner is. Their entire return is based on achieving the maximal price for their land, given that landowners do not need to sell until rents rise enough to achieve the land prices they were achieving prior to HALA implementation, there would be some marginal decrease in new starts. There is a way to ease into the implementation of MIZ.

We can still require MIZ units, and subsidize them during a six-year HALA implementation period with an affordable housing levy on land value. We already have a split property tax system between land value and improvements value assessments. However, the improvements to land can not be blamed for the huge rise in unaffordability. Underutilization of increasingly highly valued land can be blamed. Continuing to split the improvements and land assessments, but increasing the levy for land assessments to increase funding to subsidize the property taxes attributable to projects that pursue one of two affordability options:

Projects can take the required route and build the required 8% of units to 60% AMI, and their property tax would be reduced to zero for the improvements for those 8% of units for 12 years. Alternatively, projects can pursue both the MIZ and MFTE. In those cases, the projects would have their improvements valuation decreased to zero for 12 years for the MFTE units, and the land value reduced equal to the improvements assessment of the 8% MIZ units.

This incentive for MIZ units would be tapered down over the six year implementation period and any excess funds raised by the six-year levy would go towards direct construction of affordable housing



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