Editor’s Note: This article is largely informed by a comprehensive look at the legality of inclusionary zoning by Josephine Ennis which can be found here

The legality of Seattle’s inclusionary zoning program continues to be questioned by a small, well-funded group of people. The complexities of land use law can lead to numerous avenues that could be pursued to prove (or challenge) the legality of a certain issue. Seattle is pursuing a conservative approach when it comes to inclusionary zoning, aiming to meet the strictest interpretation of the law.

Background

Skepticism about Seattle’s inclusionary zoning program’s legality often references various cases, including federal cases. Since inclusionary zoning was first implemented in the 1970s and exists in more than 500 municipalities, it’s unlikely federal law poses a risk to the program. In fact, the US Supreme Court recently declined to hear a challenge to inclusionary zoning, effectively upholding its legality.  

This means questions about the legality of Seattle’s program likely stem from state law, not federal law. The Washington State Supreme Court’s past rulings suggests to some people that inclusionary zoning might be illegal. The court consistently interpreted state law regarding development taxes and fees very strictly. These decisions prevented preservation of low income housing, tenant relocation assistance and open space set asides. Despite these rulings, there is a strong argument to be made the state constitution allows these programs and the current court–with its makeup of different justices–might overrule previous interpretations.

Regardless, in 2006 the Washington State legislature amended state law to explicitly allow inclusionary zoning. Since then a few municipalities implemented inclusionary zoning, including mandatory requirements. This means the question of legality now rests on the design of programs. Seattle’s policy attempts to meet a strict interpretation of state law, even though other designs might also be legal.

The Legality Of Mandatory Inclusionary Zoning

To meet the strictest interpretation of state law, Seattle looked to the 2006 amendment on inclusionary zoning. This amendment sometimes divides opinions about the legality of mandatory inclusionary zoning because of this paragraph:

If a developer chooses not to participate in an optional affordable housing incentive program adopted and authorized under this section, a city, county, or town may not condition, deny, or delay the issuance of a permit or development approval that is consistent with zoning and development standards on the subject property absent incentive provisions of this program.

This paragraph applies to programs that are ‘optional’ by design but the law does not state that all programs must be optional or voluntary. In fact, if all programs were required to be voluntary or optional, using the word optional in this paragraph would be unnecessary. Later in the regulation, the law states:

The jurisdiction may establish a minimum amount of affordable housing that must be provided by all residential developments being built under the revised regulations, consistent with the requirements of this section.

The language referring to requiring a minimum amount of affordable housing from all residential development strongly suggests a mandatory program.

Lastly, courts are required to follow administrative rules established by agencies so long as those rules are within the agency’s authority. Following the passage of the inclusionary zoning language, the commerce department established rules on incentive zoning, explicitly stating that municipalities can create mandatory inclusionary zoning laws.

Designing A Legal Mandatory Inclusionary Zoning Program

Since Seattle believes a mandatory program is legal, the design must also comply with state law. Some criticisms of Seattle’s MHA program contend that the design must provide an equal or greater value to returns on investment on a percentage basis. In other words, if a hypothetical project earns 10% back on it’s investment before MHA, the law would require a 10% or greater return after MHA.  While federal cases dealt with this argument, state law says nothing about it. The state law says:

The incentives or bonuses shall provide for the development of low-income housing units

The most practical guidance on how to determine whether or not the upzones are sufficient is probably found in this advisory document by The Housing Partnership:

the key to the fairness of mandatory programs is to ensure that the value of incentives fully offsets the cost of the subsidy to the included units.

This guidance suggests Seattle only needs to show they made a reasonable effort to increase profits through incentives–density bonuses–equal to or greater than the subsidy needed for the affordable units. For example, if an affordable unit rents at $1,000 and market rate units rent at $1,500, profits from upzoning should equal a value of at least $500. This has nothing to do with the percent a developer returns on their investment.

Seattle is accomplishing this through upzones and FAR increases, allowing developers to build additional market rate units. Seattle’s consultant studies shows the value of upzones are generally sufficient to cover the cost of the MHA subsidies. A simplified example can also be found in this spreadsheet which allows people to try different development assumptions. Overall, the evidence suggests the value of the upzones are greater than the cost of the subsidies. While this doesn’t address how to best design an inclusionary zoning policy, it does indicate that Seattle’s program will likely meet the legal requirements. If Seattle is ultimately sued it will likely clear the hurdle of a strict legal interpretation.

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Misleading Sightline Articles Undermine Inclusionary Zoning Effort

13 COMMENTS

  1. I started to look at this for the typical small project, ie under 20 units, where payment is the only realistic mode. I think I broke the spreadsheet–‘No Go’ across the board. Could you guys mock up a generic 6 unit townhouse or small apartment building?

    • If you cannot build to max FAR and more, the fee is a pure tax with absolutely no exchange. The incentive only works when you site allow for max FAR, and it generally gives you half a story more. The fee is calculated based on the entire FAR of the project. The actually % depends on zoning and area:

      If your site is going to get a M-1 suffix, and couldn’t build to max FAR, your project will probably be completely hoisted.

      See page 156, 157, 158, 167, 170

      http://www.seattle.gov/dpd/cs/groups/pan/@pan/documents/web_informational/p2535411.pdf

      • I think it was the commercial square footage @ zero where I had my first problem. I’m going to goof around with it tonight with a potential 10 unit apartment building, and see what happens.

        • Cool. If you discover any other issues let me know and I’ll make adjustments to the original spreadsheet. I haven’t had enough eyes look at it yet to be highly confident there aren’t errors.

    • Here’s a view with a .5 FAR increase, M level MHA requirements and RSL zoning. I didn’t spend any time taking a look at what sort of FAR changes we should expect with townhomes but people can change the FAR and the inclusionary requirements as they see fit.

      https://docs.google.com/spreadsheets/d/1j–KKlyK-ePY-DAYY7HOCi2cLbHpX9YQnQJhj49PbBs/edit?usp=sharing

      Three other notes:

      1) I found an issue with the spreadsheet that caused it to error out when there was no commercial square footage. That is fixed.

      2) The spreadsheet isn’t really designed for calculating value of sales, rather than renting, which is what you would expect with townhomes. The capitalized value is probably pretty close to the sale value, however I’d actually expect this to be a slight underestimate.

      3) The spreadsheet doesn’t have a good estimate on how much the cost of MHA is for properties that are going to sell. This would likely be the capitalized value after the upzone minus the capitalized value before the upzone.

  2. I didn’t see you adjust financing cost for the the in-lieu fee (which probably cannot happen, as the fee is required before the permit), nor reducing cash-on-cash return. Those are huge one affecting feasibility. Even without that corrected, the math already showed it is less favorable. Also, it seemed to me that you assume additional equity has no cost to developer. But, even if developer has the money, he could have earned returns investing in other people project. Most likely developers take equity in and pay a return. Together, it showed to me that it can make feasible projects infeasible, which constraints supplies and increases rent for everyone.

    Also, I really wish you can look for more than one examples that not simply showed a single best case scenario and look into the mechanism. Not building to maximize FAR is common. And, even the proposal recognized it. The proposal simply play bully by explicitly disallow director making adjustments.

    Page 165,
    http://www.seattle.gov/dpd/cs/groups/pan/@pan/documents/web_informational/p2535411.pdf

    “The fact that a property owner is unable to utilize the full amount of any increase in residential development capacity enacted in connection with implementation of this Chapter…”

    Also, it is a very “legalese way” to interpret the simple english word “incentive”. Maybe it is really how lawyers argues in court, I don’t know, but it simply isn’t what “incentives” means. Imagine a car sales tell you to buy a car because there are many incentives only happen in this weekend, and what he meant is that you get a $3000 discount, but also be charged $4000 additional delivery charge. That’s not an incentive.

  3. Thanks for writing the article. I’m glad we are all trying to make Seattle a more open and inclusive city.

    As I embark on a journey to develop housing, I can resonate with Tom’s comment. The feasibility study needs to holistically take into account the numbers from the perspective of different stakeholders.

    Namely, we need to take into account the opportunity cost of adding on the in-lieu fee. For many small developers like myself, we do not have unlimited capital to invest. The more capital we are required to put into a project, the more risk we have to manage, thus the more return the project has to offer in order to offset the risk.

    I’ve lived in Seattle pretty much my whole life. I saw what happened a decade ago. When you commit to building new housing and sign that personal guarantee on the loan, you put your life at risk to the perils of the market and the policies being made.

    For many large corporations or governments, a few hundred thousand or a million dollars here and there are quite negligible in the grand scheme of things. But that is generally not the case for most developers. We are small business owners, much like your local mom-and-pop store or restaurant.

    Imagine yourself and your personal savings – the moment you start to build new housing for the people of Seattle – you realize you need to come up with another six figure amount of cash in order to start building.

    For someone like me, that simply means I won’t be able to move forward with the project. And the net result – we don’t get new housing units.

    The legality of the current proposal is irrelevant – if we collectively decided that more supply is what we need, then we shouldn’t even consider embracing a policy that does the opposite.

    What if we give people the freedom of choice of whether or not it makes sense to build more units for a particular project? For some projects, it may not make sense to build higher. For others, it would make sense to pay the fee and build more units. And the net result, we will have more housing units in Seattle than ever before.

  4. I don’t see how this is at all legal in state law. The link is to *inclusionary zoning*, not mandatory inclusionary zoning. IZ is legal because cities are allowed public-private agreements for rent control. But cities just can’t force rent control (MIZ/MHA). The statute is very clear about this.

    I’m afraid the clawback amendment passed today will mean that 5+ years of effort in this rezone will be lost once someone gets around to suing the city over the illegal language in the upzone. What a waste of everyone’s time.

    • If I were a developer, I’d build only to the old zoned height/FAR, so as to avoid having the top floor sawed off my building years later after the verdict is handed down!

    • By the way, the link is to neither “inclusionary” nor “mandatory inclusionary” – the I word there is “incentive”, and I’m pretty sure that’s what it has been when we see IZ (or MIZ) elsewhere, e.g. Valdez. We already have on-mandatory Incentive Zoning (cf. https://www.seattle.gov/housing/housing-developers/incentive-zoning) This article would have done better to use “incentive” in place of “inclusionary” in every instance.

  5. I’m neither lawyer nor MHA fan, but I’d like to understand the “exchange” issue. Valdez has always referred to this as though it’s central, but … The (3) section of 36.70A.540, where looking through the haze of that section we might dimly see a mandatory program, at best could be said to imply an exchange by proposing capacity increase, in the context where the title mentions “incentive.” (My own idea of “incentive” is, like, the carrot dangled in front of the donkey to cause it to move forward. If you give the donkey a carrot, and then say “wasn’t that a nice carrot, now get moving”, that’s not properly an incentive program. But this legislation is deplorably obscure, so who knows.)

    Anyway, if 36.70A.540 is all we have to go on, then it looks to me like developers have to be satisfied with a sort of collective gain, that the additional “capacity” has lowered land costs or something in general. If you look at a specific case, and for example try to calculate the specific benefit to your own situation because the lot you’re developing went through an M1 level upzone at some point in the past, it won’t be there – but no one ever said it would. Did they?

  6. “For example, if an affordable unit rents at $1,000 and market rate units rent at $1,500, profits from upzoning should equal a value of at least $500. This has nothing to do with the percent a developer returns on their investment.”

    No, profits have everything to do with return on investment. If the MHA upzone renders the return on investment so low that the project can’t be built, the “profits from upzoning” are zero.

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