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A fundamental challenge facing every urban area is to ensure safe, clean, affordable, and diverse living environments for its citizens. Nowhere is this more evident than in the District of Columbia. The influx of economic development in the District over the past several years has helped revitalize downtown neighborhoods and business districts. The District’s renewal, however, has come at a cost. The increase in development has escalated home rental and sale prices, exacerbating an already-significant deficiency in the availability of affordable housing and preventing many low- and moderate-income residents from living in the communities in which they work. In an effort to create more homeownership and rental opportunities for these residents, the D.C. Zoning Commission recently established final rules that require the provision of affordable housing through a mandatory inclusionary-zoning ordinance. Generally, inclusionary zoning is a policy tool which aims to generate affordable housing by requiring developers to set aside a certain percentage of housing units in new residential developments for low- and moderate-income households. In implementing this rule, the District hopes to produce more affordable housing by using the skills of private developers, to create additional homeownership opportunities for low- and moderate-income residents, and to encourage diversity and economic integration by providing a range of housing options throughout the city. DISCOURAGE DEVELOPMENT? Despite its potential benefits, though, the inclusionary-zoning program has rules that raise concerns. In fact, the program could actually discourage development if developers decide the bonus density is inadequate or compliance is not practically or economically feasible. This could decrease available housing, increase the cost of existing housing, and defeat the program’s purpose by not creating measurable amounts of affordable housing. Other major cities, such as Boston, New York, San Francisco, and Denver (and other jurisdictions, such as Montgomery County, Md.), have implemented similar policies to help meet housing needs and achieve economic integration in their communities. These policies have yielded varied results. Although inclusionary zoning has created more affordable housing in certain areas, it has actually slowed down the production of affordable and new housing in others. In order for such a policy to be effective in the District, the most common problems must be avoided. Studies have shown that inclusionary zoning has not been very successful in its most basic objectives — increasing and sustaining the number of affordable units actually being built. An inclusionary-zoning program that places too great a burden on private developers is likely to be ineffective because developers will not economically support projects that don’t seem feasible. As currently drafted, the inclusionary-zoning rules may do just that. Nonetheless, the D.C. Council and the zoning commission still have time to identify and implement an effective housing policy that will promote affordable housing for low- to moderate-income groups in the District. How will the program work? The inclusionary-zoning rules will affect developers building residential developments within designated inclusionary-zoning areas. The program requires that new residential developments with 10 or more dwelling units, and existing residential developments with 10 or more units undergoing substantial rehabilitation within the inclusionary-zoning overlay district, set aside 10 percent of their density, or 75 percent of achievable bonus density, for low- and moderate-income households. Bonus density means the percentage or number of units that a city permits a developer to construct on site beyond what is typically allowed under normal zoning ordinances. The exact set-aside requirement will vary based on which overlay district the property is located in. Upon implementation of the rules, the mayor and the Council will establish maximum purchase and rental prices and select eligible households. Typically, when implementing inclusionary zoning, local governments grant developers incentives or other concessions to encourage them to build affordable units in their developments. Under the rules, the District will grant a bonus density of up to 20 percent more total floor area than would otherwise be permitted, thus allowing developers to increase the total number of market-rate units they may construct. In most jurisdictions with inclusionary-zoning programs, developers are permitted to fulfill their set-aside requirements by constructing the affordable units off site. One problem with the rules is that, although they do authorize the set-aside requirements to be constructed off site if developers show that on-site compliance with the requirements would impose an economic hardship, the factors to be considered for proving economic hardship are limited. In addition, the rules prohibit owners and future owners of any such off-site development from applying or accepting developmental subsidies and from requesting exceptions to or variances in the inclusionary-zoning program rules. Also, although the rules permit developers to request waivers or exemptions, the rules are silent about how to provide expedited reviews on exemptions filed to the Board of Zoning Adjustment. Finally, the rules also require inclusionary units to be leased or sold only to eligible households for as long as the inclusionary development exists. Most jurisdictions with similar programs have shorter terms for affordability requirements. In short, the final rules for the inclusionary-zoning program do not provide adequate flexibility or offsets to address the unique challenges to the development of affordable housing in the District. Before the inclusionary-zoning program can become effective, the commission will need to designate the Inclusionary Zoning Overlay District. This is not expected to occur before the end of next month, when the Council adopts legislation to implement the inclusionary-zoning program. The commission appears to be aware of the possible adverse consequences and has indicated a willingness to re-examine the rules if notified by the D.C. Office of Planning that development in the District has declined because of the program. The Council and the commission will need to carefully evaluate what has and has not worked in similar programs, taking into account some unusual conditions that exist in the District and the relatively modest benefit achieved under these programs in other areas compared with the potential risks of negative impacts on local markets. BY THE BAY For example, one study has shown that in about 45 cities around the San Francisco Bay area, the production of new housing units fell an average of 31 percent the year after the adoption of inclusionary-zoning ordinances. As a result, new-home prices were $22,000 to $44,000 higher than they would have been without the ordinances. In addition, inclusionary zoning has resulted in few affordable units actually being built. For example, in Fairfax County, Va., approximately 582 units have been produced in the nine years since inclusionary zoning was implemented, which equals 64 units a year. And in Montgomery County, Md., approximately 11,000 units have been produced in 31 years, or 355 units per year. How can a program like this work? To be truly successful, it must promote collaboration among the nonprofit, government, and business sectors. A collaboration would allow the parties to identify factors that hinder affordable housing and develop goals to improve inclusionary zoning. The inclusionary-zoning program implemented in the District should not have the effect of artificially raising prices on other market-rate units, limiting the amount of potential equity that can be generated for subsidized units, discouraging landowners from making their land available for residential use, or establishing price controls on new development that lowers assessed values and could result in reduced D.C. tax revenues. The District is a unique city in many respects. Unlike the majority of jurisdictions that have adopted mandatory inclusionary-zoning policies, certain District and federal laws, rules, regulations, and programs limit the amount of bonus density that can be used by developers. The 1910 Height Act, which restricts the height of all private and commercial buildings, makes the traditional density incentive ineffective in many cases. Moreover, the developable land in the District is constrained in other ways. Within the District’s 69 square miles, there are a number of large parks and a large amount of land set aside for the federal government. In addition, the District has more than 30 historic neighborhood districts. Historic-designation restrictions limit the size and use of any development, and any construction, alteration, or density change would require additional review processes and delay. Furthermore, there are five zones in the central part of the District in which no additional density could be traded for incentives or compensation in the inclusionary-zoning ordinance. Accordingly, for a significant portion of the District, the 20 percent bonus density just won’t work. The success of the proposal hinges on developers being able to realize value from the density bonus that will enable them to create affordable units. If the District inclusionary-zoning program is to actually provide sustainable and affordable housing, it must be flexible. The inclusionary-zoning program should also be accompanied by other incentives, subsidies, and a blend of funding sources. In addition, the commission and the Council should consider revisions to the inclusionary program so that the set-aside requirements expire after a period of years unless other assistance is offered. It is unrealistic to assume, for example, that low-income tenants or owners of inclusionary units will be able to physically maintain units for the life of a development without governmental assistance of some kind. Programs that impose requirements without any provision for future needs are likely to fail over the long term and therefore discourage quality development in the short term. For this reason alone, off-site developments should be allowed to receive development subsidies from federal or District government programs that have been established to help provide affordable housing. Other incentives that should be considered include availability of payment in lieu of taxes, financing in redevelopment areas, tax abatement, tax deferrals, and capital subsidy through use of housing trust funds or other sources. In addition, expedited permitting, flexible design and zoning, relaxed development standards, and fee waivers, deferrals, or reductions should be considered. Also, the procedures and requirements for eligibility for exemption from various compliance requirements are burdensome and costly. These requirements should be revisited to consider giving developers greater flexibility to transfer density bonuses to other development projects within the city (including commercial projects) or to other developers, and to rehabilitate units in lieu of building new affordable units within the same ward or within a certain distance of a development. In addition, any program should also provide full or partial exemptions of certain requirements when additional burdensome and costly circumstances exist, such as when the project involves historic rehabilitation, when the site requires significant environmental remediation, or when the project incorporates the development of public streets and other infrastructure. For the District’s inclusionary-zoning program to best achieve its objective of creating more affordable housing, it must have commercially realistic and sustainable requirements, carefully crafted, along with flexible incentives and public/private collaboration. The real hope for further progress in meeting affordable-housing goals in the District, and, in fact, meeting all of the District’s goals for its citizens, is to ensure stable economic conditions for the District as a whole. Many believe this will be achieved by increasing the amount of money generated by the District’s income, real estate, sales, and other taxes through attracting new residents and related businesses, rather than by imposing often unworkable requirements that may be well intentioned but are not effective.
Kenneth G. Lore is a partner and group leader in the real estate corporate group with Bingham McCutchen. He is based in the firm’s Washington and New York offices.

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