Seattle is pursuing an inclusionary zoning policy called Mandatory Housing Affordability (MHA), similar to successful programs in over 500 municipalities, including Redmond and Federal Way. However, it’s not without critics. Dan Bertolet, the lead housing writer at Sightline, is one of those critics. He recently wrote two harsh articles along with three other criticisms123. This shouldn’t come as a surprise. Bertolet’s background includes opposing various forms of inclusionary zoning over the last few years; at Crosscut, Smart Growth Seattle (a lobbyist for developers) and his own blog City Tank where criticism was focused on a voluntary program456789.

Before diving into the details, it’s worth considering the big picture. Sightline created hypothetical projects threatened by MHA, then extrapolated this to suggest housing supply will decrease, rather than other possibilities, such as developers pursuing different projects. While MHA aims to produce 6,000 affordable homes, the articles don’t address the magnitude of impact on housing supply. On the other hand, empirical research10111213 and expert opinion suggests minimal or no impact on housing supply. Some research even finds inclusionary zoning increases housing supply.

The Feasibility Question

There’s also ample reason to doubt Bertolet’s hypothetical examples would be threatened by MHA. He says,

In practice, developers usually apply a more complex pro forma, but again, because for MHA the important result is the before-and-after difference in return, a simple pro forma is sufficient here.

The return on investment (ROI) before and after MHA doesn’t predict the policy’s success. A project with a 50% ROI before MHA and 20% after would have a shocking 30% decline in ROI! Yet, both scenarios are feasible. Bertolet later says,

For the proposed upzone from NC85 to NC95, MHA would actually obliterate almost all of the return on investment.

This doesn’t refer to the difference in ROI, only the near zero ROI after MHA. It may be unintentional but readers are left with the impression his number reflects feasibility. This moves the goalposts from his original claim.

In sum, Bertolet’s argument consists of a simplified pro forma not meant to indicate feasibility and no overall market analysis. Fortunately we have more robust analysis, indicating MHA is feasible. Most people concerned about housing supply can stop here.

However, readers interested in the minutiae of Bertolet’s numbers will also find those questionable. He declined to share his spreadsheets but a close approximation is reproduced in these four spreadsheets. The following screenshots capture variations from those spreadsheets. Overall, there are two categories of problems: missing calculations and problematic assumptions.

Missing Calculations

First, there are no loan details in these scenario. Developers doing $45+ million dollar projects will use loans. The first example, NC-65 to NC-75 with on-site MHA, shows a low 8.3% ROI. However, investor returns on equity would likely be 15-20%.

Second, Bertolet leaves out important feasibility calculations. For example, do projects produce enough income to get loans? This is often determined with a debt coverage ratio (DCR). All of his ‘before MHA’ scenarios would likely not be able to receive large enough loans with a DCR of 1.25. If projects aren’t possible without MHA, it’s not surprising they’re infeasible with MHA.

Example projects aren't feasible even before MHA.

Third, it’s not instructive to focus on a small set of hypothetical projects. All four examples begin with an ROI of 13%. These scenarios show projects on the edge of feasibility. MHA might make some hand-picked examples infeasible but it doesn’t matter if other examples become feasible and the overall impact is minimal. For example, the lot at 1202 NE 50th St would likely see an increase in ROI after the University District rezones.

Bad Assumptions

Bertolet’s entire argument also rests on some highly variable assumptions.

First, recent industry research suggests Bertolet’s capitalization rates might be wrong. This number dramatically impacts ROI. Below are examples from adjusting capitalization rates only half of one percent.

Higher cap rates show infeasibility.
Sightline’s 5.5% cap rates.
Feasibility complete changes with 5% cap rates.
Exact same scenario with a likely 5% cap rate.

Second, Bertolet assumes developers are inflexible. His examples show a single scenario that is problematic but doesn’t illustrate changes developers might make. Some possibilities include decreasing unit sizes, reducing parking, or avoiding additional concrete by using more FAR in a shorter building. Bertolet’s example of NC-85 to NC-95 in a medium market, additional FAR from MHA (6.25 compared to 6) could be used in a 85-foot building, keeping the same construction costs. This makes the MHA option feasible.

Project is feasible when construction costs are steady.

The Bigger Picture

Without government intervention, regardless of the housing supply, housing markets will segregate by income. Amid the discussions of feasibility and growth, it’s worth remembering that equity requires inclusionary zoning. A city must have affordable homes in all neighborhoods. Seattle’s MHA program requires most new development contribute towards neighborhood affordability.

Bertolet’s writing continually focuses on regulatory costs. All this quibbling over small changes in costs misses the forest for the trees. The biggest problem Seattle has control over is density, not regulatory costs. While MHA would make up only 3-8% of total project costs, it also increases density.

Bertolet focuses on regulatory costs while land prices rise, often account for over 20% of total costs. Labor prices are also rising dramatically. Yet we’re in the middle of a record-breaking apartment boom. Focusing on regulatory costs implies we can’t have a nice city with energy-efficient buildings or seismic retrofitting. Instead, regulations must make real estate the most profitable investment. But maximizing returns to real estate sets us up for failure. We need to make sure development is feasible and regulations ensure construction booms create affordable housing.

Since affordable housing advocates know this, they began working on inclusionary zoning nearly 20 years ago. Slow and fitful progress was opposed by Bertolet and others prior to the most recent construction boom. If opposition hadn’t prevented faster implementation of a more ambitious program, a 10% requirement might’ve netted Seattle about 3,000 units.

Regardless, Seattle’s recent breakthrough resulted in MHA legislation that is awaiting implementation. This legislation is the result of a multi-year stakeholder engagement. It builds upon consistent empirical research and a general consensus among housing experts.

In consultation with housing experts, stakeholders outlined specific details for Seattle’s program:

  • 3-10% of all new residential units should be affordable;
  • A developer fee is required equal to the subsidy cost plus 10%, if units aren’t built on-site;
  • The requirement will apply to Seattle’s 28 urban villages and urban centers; and
  • Areas will be rezoned to ensure development creates affordable housing.

These details in context of academic research suggests Seattle’s program is conservative:

Survey of set-aside requirements in California.

Wrong Questions, Misleading Answers

Bertolet’s strategy to focus on marginal examples, using bad assumptions, is a pitfall of the pro forma analysis. Like a restaurant owner opposing a minimum wage increase because their accounting shows it won’t work, Bertolet’s analysis relies heavily on specific assumptions without acknowledging the flexibility of markets. A proper analysis was already completed in a number of studies141516. That effort echoed what’s found in the academic research; Seattle’s MHA won’t affect housing supply.

While this article focuses on criticizing Sightline’s articles, it’s possible Bertolet is right and the affordability levels are too high. Since he didn’t share his calculations, they are recreated them for readers to play around with themselves. However, it’s also possible that the MHA requirements are too low. Nico Calavito, a housing expert involved with inclusionary housing implementations, summed this up, “It seems to me that with an upzoning 3-10% [inclusionary requirement] is a very small amount. If upzoning is involved it should be higher than that.”

Fortunately, the law requires the program to be reviewed, allowing us to alter the numbers if necessary. Bertolet paints a grim picture but the reality is much less concerning. Lower housing supply is only one, unlikely outcome of many possibilities. Developers may adjust their design, wealthy renters might pay more, labor costs can decrease and developer profits might go down. Bertolet also continuously overlooks the most likely outcome, despite the evidence, of an incorrect MHA requirement; land prices will change. Yet his own examples show land prices adjusting to construction costs.

High $268 land costs with expensive construction.

Low $86 land costs with expensive construction.

Frustratingly, Bertolet calls for the city to conduct further feasibility analyses. This is the same strategy used by density opponents trying to block the University District upzones. Some are even referencing Sightline while opposing upzones. Density advocates are feeling discouraged and less likely to advocate for MHA upzones, handing the megaphone to opponents. The only result of all this will be less density and less affordable housing.

In a city that has the most cranes per capita and some of the fastest climbing home values, it’s high time we mandated equity. This construction boom won’t last indefinitely and we need more homes for our growing population. At a time when our nation is fighting over whether to close our doors on refugees and immigrants, we have to keep our priority front and center; opening Seattle’s doors to people of all incomes, races, nationalities, and religions. That doesn’t require us to just build; it requires us to build justly.

The Seattle Process has done its job. Now is the time to move forward with MHA. The need has never been greater.


Editor’s Note: A correction was made to the LR3 to NC75 upzone image. The wrong MHA percent was used in the original assumption.

Footnotes

  1. http://www.sightline.org/2017/01/10/checking-seattle-mandatory-housing-affordability-math/
  2. http://www.sightline.org/2016/06/01/seattles-housing-future-depends-on-a-mathematical-and-political-balancing-act/
  3. http://www.sightline.org/2016/11/29/inclusionary-zoning-the-most-promising-or-counter-productive-of-all-housing-policies/
  4. http://citytank.org/2013/10/23/welcome-to-the-affordable-housing-policy-twilight-zone/
  5. http://citytank.org/2013/10/15/the-road-to-san-francisco-is-paved-with-housing-supply-suppression/
  6. http://citytank.org/2013/09/26/we-should-all-be-on-supplys-side/
  7. http://citytank.org/2013/10/31/the-mixed-messages-and-misplaced-burden-of-taxes-on-new-development/
  8. http://citytank.org/2013/11/22/getting-real-about-the-costs-and-benefits-of-affordable-housing/
  9. http://citytank.org/2012/12/05/density-shrugged/
  10. http://furmancenter.org/files/publications/IZPolicyBrief.pdf
  11. http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9906.2010.00495.x/abstract
  12. http://www.huduser.org/portal/periodicals/cityscpe/vol11num2/ch1.pdf
  13. http://www.wellesleyinstitute.com/wp-content/uploads/2013/01/Rosen2004.pdf
  14. http://clerk.seattle.gov/~public/meetingrecords/2014/plus20140930_9d.pdf
  15. http://www.seattle.gov/Documents/Departments/HALA/Policy/2016_1129%20CAI%20HALA%20Economic%20Analysis%20Summary%20Memorandum.pdf
  16. http://clerk.seattle.gov/~public/meetingrecords/2014/plus20141014_1d.pdf

38 COMMENTS

  1. This is a fantastic article. I hope people that have been sitting on the sidelines as spectators choose to get involved and reach out to their councilmembers today! See you at council tomorrow, everyone.

  2. Owen,

    It’s unfortunate that you apparently do not understand one of the most fundamental principles of real estate development, namely, that feasibility is a game of probabilities and does not operate like a binary light switch. The higher the return/risk ratio, the more new housing we get, and there is no magic tipping point below which added costs imposed by MHA would have zero impact on feasibility.

    I say unfortunate because if you were not ignoring this basic principle, you would recognize that a before-and-after comparison (which the city has not conducted) is the only valid way to assess the impact of MHA on feasibility, and you would also realize that most of the criticisms you present above would fall away to nothing.

    Explaining this in detail is too much for a comment thread, but I invite Urbanist readers to check out my articles (conveniently linked above) and decide for themselves.

  3. We know Bertolet’s not on board with the MHA proposal, but this article didn’t specify whether developers in general are on board with the proposal.

    Quoting https://www.theurbanist.org/2016/09/05/lets-talk-inclusionary-zoning-an-interview-with-rachel-meltzer/: “You obviously need the development community on board because that’s how you’re going to build affordable housing through inclusionary zoning.”

    Are there developers who support the UDistrict MHA upzone? That would speak volumes over trying to pick apart Bertolet’s numbers.

    • It might help to consider the class of developers more in specific here. If Vulcan supports the MHA upzone, does that mean the MHA numbers are right? If they’re going to build office buildings, the economics are not the same.

    • Thanks for reading Andrews. A large number of people, including for profit developers have signed onto the grand bargain. Of course, this fact has been used by some upzone opponents to suggest only the big developers care.

      Overall though, I find this framing problematic. If we’re talking about housing affordability why are we asking if private developers, Sightline or even The Urbanist thinks this is a good solution? My personal opinion is that no one listens enough to affordable housing professionals and advocates. This group overwhelming supports MHA, including the U District implementation.

      Some will say the group is only in it for the fees (ignoring the on-site option and equity/social justice groups that won’t get any fees). This narrative strikes me as really harmful. Do we really believe affordable housing professionals and advocates are cynical and self-interested, rather than sincerely pursuing the best affordable housing solutions. Alternatively, do we believe the people doing this advocacy don’t know the mix of solutions needed to achieve housing affordability?

      Overall, I think the conversation could be hugely improved by centering it around, and listening to affordable housing and renter rights professionals and advocates. These groups overwhelming support MHA.

      • That constituency’s self-interest doesn’t come just from lusting after the meager in-lieu fee revenue. They’re utterly dependent on city hall to give them a seat at the table, and they’re going to behave themselves. In any case, the last thing we’re going to get from them is an informed analysis of development feasibility under current MHA parameters.

      • Of course affordable housing professionals and advocates support MHA. The MHA concept itself is sound, and there’s no question that we should support IZ/MHA in general. However, I’m asking about the specific UDistrict proposal. Seattle’s MHA implementation is complex* and neighborhood-specific, which is why I specifically asked about developers and UDistrict. MHA only works if developers build new units, and I’m hoping to hear about developers who think that MHA will either incentivize them or at least not cause them to back away from new projects. I’m suggesting that this would be an extremely effective counter-point to Bertolet, for those who are hung up on concerns about depressing the production of new units.

        * Anytime I see legislative complexity, I think “unintended consequences”.

        • Spectrum Development’s Hal Ferris spoke out in favor of the downtown/south lake union incentive zoning policy back in the day (precursor to IZ/MHA). He was blackballed for it by his colleagues for breaking a pernicious ideological purity test.

          I wouldn’t expect to see many to take that risk now.

      • @disqus_ZuT7j89Srp:disqus, the feasibility is the only thing you got from developers, because it is what developers use to convince bank to finance, equity investor to invest and land owner to sell (many land owners exchanges their land to get a % ownership of the development, so they sometimes play a dual roles). It is how a project happens (or not happen). Emotionally, all parties involved tend priced-in some future rent / price increases, otherwise the productions will lag demand even more, although they shouldn’t priced-in future rent increases.

        Without rent / price increase, the profit of developing is probably in a single digit range (after financing and investor returns, developers gets close to zero). Projects in the last few years make money because the rent / price has increased since they penciled. If you compare the return of a development vs simply owning an existing property of similar size over the same period, the difference between developing and owning is already probably single digit. Taxing development further, without a value exchange, will certainly change the feasibility of projects.

        Even when the math is complicated because of the number of cases involved, each individual math can be understood (but I prefer a much simpler equation to calculate the fee, as well, instead of a huge permutation of tables, to avoid “unintended consequences” as well). Again, be warn the math only cover best case scenario, which meant non-best cases are over-burdened.

        For LR3, for example, the best case is to increase FAR from 2.0 to 2.2. With a fee of 7%, it means 77% (2.2 * 7% / (2.2 – 2.0)) of new capacity is going toward affordability housing. It is by no mean small, but probably okay for project that able achieve additional FAR without some major cost increase. Like what Dan showed in his articles, when the costs increase significantly to build additional FAR, it cut deep into feasibility.

        I would also like to stress again that some projects cannot (not financially feasible) to be built to max FAR as is. So, there is absolutely no value exchange for those projects, and any fee would directly reduces feasibility.

    • If developers are onboard with MHA, whether it is “voluntary inclusion fee in exchange for up zone” vs “mandatory inclusion fee” would make no difference. Developers are under the pressure to get the most out of any projects, they succeed or fail base solely on that.

      But, the whole thing isn’t about the developers. If they cannot get financing for a project at current price point, they just won’t start it.

      The whole ordeal is whether people want more housing to happen at the current price point or not.

      You can make the tax however large, apartments will still be built at some point, but the tax will delay projects from happening until rent has risen enough to justify the tax.

    • Andres, private developers have very little gain by publicly commenting on this policy. The minute they opened their mouths to say that the requirements are too high, they would get accused of being greedy and self-interested. I get no shortage of private messages from developers, though, like this one:

      “It is obvious that a ‘before and after’ analysis of the U District rezone is lacking in the city’s process. I cannot think of a more straight forward manner to do it than what you presented in your article. Developers will begin all projects with a simple model just like yours rather than create a complex model from day one. If the project looks good then you begin digging into every detail, otherwise, you move onto a new idea. It is impossible to forecast what is going to actually happen to development with this new zoning, but your approach shows that the MHA aspect of it is not going to encourage development in today’s market. I do not think anyone can honesty argue with that conclusion.”

  4. The cities that are the cheapest to live in are just the ones that build the most housing relative to the population. How much gets built is determined by geography, zoning, and the cost of development.

    MHA increases zoning but also increases the cost of development. So obviously, we’d be better off if we just did the upzones but didn’t have the “affordable housing” requirement.

    Cities that try to control affordability with rent control, and yes “affordable housing” is a form of rent control, have always failed. NYC and SF both have out of control rents. It didn’t make up for the fact that they just didn’t build enough housing for the population they have.

    On the other hand Tokyo has reasonable rent despite a surging population because they just build the housing people need and connect it with good transit.

    That said, I’m willing to support MHA since I know that backtracking or having endless debates can be disastrous in Seattle politics. The same is true of the SR-99 tunnel, and the light rail alignments. It’s naive to think the perfect solution will ever be arrived at in a political process. Instead, it’s important to support the good enough solutions.

    • Exactly. But the problem is I am not convinced that MHA as proposed is “good enough.” What evidence makes you so sure that it is? The more closely I look at the numbers, the worse it seems to be.

      In my view, I am not making the perfect the enemy of the good, I am trying to make sure we don’t end up with something that’s actually bad.

      • It seems like the disconnect stems from your idea that any one project that was marginally feasible before MHA becoming infeasible after MHA proves that supply will go down and prices will go up. This ignores the bigger picture: the package of zoning changes may make many more projects (with more units per project too) feasible more than replacing the few cases where potential projects become less feasible under MHA.

        And let’s just quickly note that land prices will likely absorb some of the cost of the program over time. You say this will just lead to fewer land sales but we haven’t seen empirical evidence this is the case.

        A worthy goal would be adding some zoning capacity in these seemingly infeasible areas. Scuttling the whole program because in a few instances the program did not seem balanced in Sightline’s rough pro forma approximation does not seem the rational reaction. Pass it and improve it. Don’t go back to square one.

        • What evidence do you have to support your belief that the MHA upzones will “make many more projects feasible”?

          • The clearest examples are in urban villages with big expansions of dense multifamily zoning like Crown Hill.

        • Doug, do you also believe that when land prices get a boost from an upzone that allows higher value housing to be built, that the rate of land sales for housing development does not increase?

          • Short answer: not necessarily. It all depends on a number of factors.

            The strength of a particular housing market’s demand and availability of equity would still be major factors in determining how many sales go through. You can’t build what you can’t sell.

            Another variable: if each project has more units thanks to the upzone, then you don’t have to redevelop as much land to produce the same amount of units.

            With 10,000 apartments set to open in 2017 and 12,000+ predicted in 2018, it’s quite possible developers/banks aren’t as gung-ho for the years following. Demand isn’t infinite even if it’s very high now.

            If that happens some opportunists will say hey look MHA hindered development when really it appears we implemented MHA just after the peak of a business cycle heading into a trough. Maybe you’re right and MHA offers too little value in exchange for the inclusionary requirements. But we have to be careful to tell the signal from the noise.

          • Doug – To be clear, what I’m asking is this: if you believe that lower land prices don’t slow sales because land is inelastic, which you apparently do, then the converse must also be true, namely, that higher land values don’t accelerate sales. Do you agree or not?

          • I’m loath to speak in absolutes. Obviously you cannot get somebody to sell for peanuts. But that doesn’t mean you cannot capture land value in the margins with inclusionary zoning.

            I’d love to keep engaging with you on the abstract Econ101ism battlefield but unfortunately I don’t have a think tank paying me to do so. Thus, I’ll find a better use of my time. Opportunity cost and all. No free lunches!

          • I appreciate all the work you do on your own time, thank you.

            But given that you so confidently claimed in an Urbanist article headline that “Sightline got the economics mostly wrong,” I assumed you would be able to answer my question easily.

      • Ok, but the worst case scenario is that the MHA percentage is set too high, and we don’t see a lot of this development materialize. Then the city council can go back and dial back the MHA requirement.

        On the other hand, the rezones themselves are very complicated work. These are block by block negotiations that have taken years and require an environmental impact statement. Scuttling that work has a much higher cost than going back and tweaking the MHA requirement later.

        Ultimately, this is a theoretical discussion with a high level of uncertainty. The best way to get some clarification is to move forward, look at the results and adjust as we go along.

        • I think this idea that Council will fix it later if it isn’t working is a major misread on what’s politically possible in this city.
          Proving causality will be near impossible and you would need very very strong evidence to get any elected official to lead an effort to make it easier on developers when housing is still expensive and the general public is still upset about it.

          The city promised to revisit micros if the new rules killed production. We’ve had production numbers for a while now showing that they did, but where is the city’s review and reset? Oops, not much political upside for any Councilmember, oh well.

          One reason for the uncertainty is that the city has not done before-and-after analysis of MHA. It’s not that hard to do. I didn’t expect the results to look as bad as they do. That’s why you do analysis — to reduce the uncertainty and make smart policy choices.

          Why is it such a total non-starter for the city to even consider dialing back the MHA requirements before adoption? Why is everyone so sure that the original proposal got it so right? Erring on the low side presents a lower risk to affordability. And raising mandates later will be much easier than reducing them.

  5. The MHA program is predicated on the terms of the HALA grand bargain, which has as its core principle the idea of equal value exchange: Value is created through an up-zone, and value is returned in the form of rent subsidies or payment. Sightline’s article points out correctly the city failed to perform a before & after analysis to test the value exchange. It also correctly concludes that if you test the value exchange, using the assumptions in the city’s own analysis, it doesn’t look very good.

    The CAI analysis linked in the article doesn’t examine the value exchange proposition. It was structured to avoid this analysis, for the simple reason that it would likely be damning in many instances and so make the program more vulnerable to legal challenge. Instead, it was designed like the earlier Jacobus study used to justify the linkage fee: Numbers get shoved into a bucket, swirled around, arranged in a table, and then a conclusion is written that declares that development is still feasible.

    A pro-forma analysis is very sensitive to the accuracy of its assumptions, and small changes to assumptions like the cap rate can have a huge effect on the calculated ROI. That is exactly why an apples-to-apples before/after analysis is key to getting the policy right – so that errors in the assumptions largely cancel each other out.

    Loan details aren’t included in a simple pro-forma because time-weighted returns are so sensitive to assumptions and the amount of leverage used that they can be quite easily tweaked in any direction. A simple static pro-forma is the tool that people use to quickly analyze the fundamentals of a project and make “go” or “no-go” decisions.

    A badly designed MHA program can suppress development instead of encouraging it, and in doing so it can drive up rents for everyone across the whole market, not just in new development. A badly designed MHA program can encourage developers to put their money into buying and and re-positioning existing properties in lieu of new construction, exacerbating price escalation in the existing housing stock. A badly design MHA program hurts a lot of poor people while helping a lucky few.

    Cities all across America have gotten housing policy wrong. HALA generated interest throughout the country because it is an opportunity for a major city to show some leadership & chart a better way forward. The MHA program is one of the most tenuous elements of HALA – a necessary element for bringing all parties to the table, but requiring mathematical precision & technocratic governance to pull it off. Sightline is correct to point out that we have fallen short on the governance side, because we have. That’s what think tanks do. The truth hurts.

  6. For those interested, they can read the actual “Grand Bargain” here:

    https://www.documentcloud.org/documents/2812350-Final-Framework-MIH-and-CLF-071315-1.html

    In the most literal sense, it doesn’t mention equal value exchange. Some comments have mentioned this because it is mentioned a number of times in the Sightline article.

    While it’s possible there has been further discussions referring to a concept of ‘equal value,’ there’s definitely not any definition of what this would mean. The most practical way to measure this would be by calculating the cost of the unit subsidy/linkage fee versus the extra revenue from upzoning. This math is included in the public spreadsheets.

  7. For the record…

    This statement illustrates the core problem with Owen’s critique:

    “If projects aren’t possible without MHA, it’s not surprising they’re infeasible with MHA.”

    Let’s say we have an NC65 midrise apartment project that isn’t currently feasible at a location near the Rainier Beach light rail station. By Owen’s logic, even if MHA adds net costs and makes building there even less feasible, that’s not a problem, because it’s already infeasible and so that must mean MHA hasn’t changed anything, no harm done whatsoever. The reality is, of course, that in fact MHA would make it worse, because it would make the project and others like it even less likely to pencil, and development would be stalled that much longer until rents rose high enough to offset the costs imposed by MHA.

    The logical flaw is the assumption that’s there some magic ROI level above which everything pencils, and below which everything doesn’t, and as long as MHA doesn’t push ROI across that threshold then it has no impact on feasibility. I don’t blame Owen, though. Most of the “expert” feasibility studies on IZ that I’ve seen make the very same fundamental mistake.

      • Given that my “for the record” comments were all submitted 3 days after my comment that you added them to, I think it would be fair to put all the “for the record” comments in a separate comment. The way it is now, all that information gets buried.

  8. For the record…

    Owen’s complaint that I didn’t consider design flexibility is flawed for the same core reason that undermines his other arguments: he’s only considering the after-MHA scenario. If a developer could get a better deal with smaller units or less parking they would already be doing that under existing conditions without MHA. MHA wouldn’t somehow make that efficiency-gaining flexibility possible when it wasn’t before. Getting more FAR using wood instead of concrete can happen in some zones, but would probably only help one-in-a-thousand MHA NC75 buildings, if that.

    Regarding Owen’s suggestion that 85-foot buildings could be built in NC95, I guess he didn’t read my article very closely because I said the very same thing, and also noted that MHA would reduce ROI by about 40%, which isn’t far off from what Owen’s own results show.

  9. For the record…

    The cap rates I used were the cap rates that city planners decided were most reasonable to use for their MHA feasibility study (the one that Owen thinks is “more robust”) based on input from a working group of local professionals. Lower cap rates are possible in very hot markets but the city correctly decided that it would be misleading to use cap rates that reflect unusually strong market conditions. In any case, since I was doing a before/after comparison, you’d see the same general trend for change in ROI (worse with MHA) even under a lower cap rate, as Owen’s examples in fact demonstrate.

  10. For the record…

    “MHA might make some hand-picked examples infeasible but it doesn’t matter if other examples become feasible and the overall impact is minimal. For example, the lot at 1202 NE 50th St would likely see an increase in ROI after the University District rezones.”

    If true, the city should consider raising the mandates for that upzone, and that’s why it’s important to do before/after analysis! Talk about hand-picked though: too bad that zone represents a small portion of the total U District rezone and is relatively low density. We focused on the highrise upzones because they are the most consequential. NC65 to SM-UD85 on the Ave is another important upzone (assuming they bring it back) that I’m sure would lose a lot of ROI with the MHA upzone because of the required construction cost change.

    Similarly, we chose to analyze the NC65-NC75 upzone because it is one of the most important multifamily zones in the city. Despite Owen’s claim that we didn’t “address the magnitude of impact on housing supply” we did estimate that it could jeopardize thousands of new homes over 10 years. We couldn’t get any more quantitative because the city has not published any projections of MHA production broken out by zone.

  11. For the record…

    “Yet his own examples show land prices adjusting to construction costs.”

    As explained in the article, land price was adjusted to set up a baseline building that could pencil, and since it’s before/after it’s fairly arbitrary where the land price lands. In any case, just because someone would bid less for land if they had to build NC95 doesn’t mean anyone would sell at that price. In fact, since they are so much more profitable NC75 projects would bid more for land and get it, the result being underbuilding in that NC95 zone.

  12. For the record…

    “Bertolet also continuously overlooks the most likely outcome, despite the evidence, of an incorrect MHA requirement; land prices will change.”

    I guess that depends on how you define “overlooks.” In one of the articles Owen linked to Sightline provided a lengthy discussion of the effects of development fees on land price. Added costs on development will no doubt result in developers bidding less for land, but when owners get offered less for property that is producing income, they will be less likely to sell, and if they don’t sell, then no new housing gets built.

    Or another way to think about it: For someone who already purchased a property, if the added MHA costs make leaving the property in its current use more valuable than redeveloping it into housing, then that same math will make it more valuable to keep the property than sell it to someone who can only offer a land price that’s low enough to make housing development pencil.

    http://www.sightline.org/2016/11/29/inclusionary-zoning-the-most-promising-or-counter-productive-of-all-housing-policies/

  13. I have a selfish request; I’m fairly new to Seattle but I’ve found this blog to be extremely instructive. But also very hard to understand coming from not having a background in development. What are some resources for a neophyte like myself to read to start getting up to speed on these pretty complicated issues that are nevertheless very important to be aware of.

    • Hi James, Thanks for the feedback. I think you’re right. We talked internally a little about what we might be able to do. We’ll do our best to put together some explainers on development.

      • That would be fantastic! I’m actually working with a lot of people in the NACs, the neighborhood action coalitions that formed in the wake of trumps presidency, and a lot of us are very eager to start learning more about this stuff to get more people’s voices heard. Anything you can provide would be a huge boon and I’d love to take it back to my groups.

  14. “Fortunately we have more robust analysis, indicating MHA is feasible.”

    That is a highly misleading statement. The city’s analysis found that some prototypes would be feasible and some would not. But don’t take my word for it, just read the key findings in the report itself:

    http://www.seattle.gov/Documents/Departments/HALA/Policy/2016_1129%20CAI%20HALA%20Economic%20Analysis%20Summary%20Memorandum.pdf

    “In low market areas, nearly all development prototypes appear challenged.”

    “In medium market areas, all but five prototypes show positive residual land values, though some prototypes that show positive RLV may not achieve high enough RLV to afford prevailing land prices.”

    “In high market areas, results indicate generally good prospects for project feasibility.”

    City policymakers have shown no inclination to address the fact that their own study says that generally, the weaker the market, the greater the impediment on homebuilding imposed by MHA.

    For the SM-UD240 upzone that I analyzed in my article, the city’s study does not account for the Voluntary Incentive Zoning cost that the city estimates at $7/sf on the capacity over the base (FAR = 4.75). Even without accounting for that cost that would further reduce feasibility, the city’s study found a project would only be feasible if land could be bought for $85/sf, a highly unlikely low price for the large assemblage of land in the U District that would be needed for a highrise project. With only 5% higher construction costs, a developer could afford to pay zero for land.

    It’s also worth pointing out that both my analysis and the city’s feasibility study used development prototypes developed by city planning staff to illustrate the likely scenarios under the MHA upzones. Planners presumably would not be using “marginal examples” for this purpose. Still, Owen cites this as evidence that my articles are misleading, while simultaneously praising (and misrepresenting) the city’s study.

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