IZ rears its ugly head again

by V Smoothe | January 8, 2008 | 3 comments

My God. I am so incredibly bored with blogging about inclusionary zoning. I’d love to just ignore it forever, but I don’t feel like I can since it appears to be the primary focus (PDF!) of the Community and Economic Development Committee’s “comprehensive affordable housing discussion” today. Really, though – how much more is there to say?

There is no evidence anywhere that a policy like the one being considered in Oakland is successful at providing affordable housing in cities. IZ advocates’ own studies find that successful and productive IZ programs actually subsidize the cost of the inclusionary units (in addition to allowing density bonuses, etc.), and do not expect developers to shoulder the burden. Most cities in Alameda County that have IZ produce fewer units of affordable housing per capita than we do. The city’s own economic study shows that the introduction of an inclusionary zoning policy would halt development in most parts of the city, thereby reducing the amount of money available to fund affordable housing construction through the RDA set-aside. The City Council is exactly the same as it was last time we voted on IZ, and there’s no reason to think anyone has changed their minds in the meantime. This entire discussion is pointless, and writing about it is growing unbelievably tiresome.

I’ve said this all before. Over and over and over again ad nauseum. So instead of ranting about the extreme retardation of this proposal yet again, I’ll just fall back on what I do best – page through a report nobody else is going to bother taking the time to read and share some of the information it contains.

In 2006, the City commissioned an Economic Feasibility Study of inclusionary zoning from the Hausrath Economics Group. The report concludes that the inclusionary zoning proposal considered by the Council in the fall of 2006 simply will not work here. If you want to read it yourself, here’s the executive summary (PDF!), main report (PDF!), and (my favorite!) technical appendices (PDF!). From the report:

Overall, the impact analysis identifies that the costs of inclusionary requirements in the City’s proposed ordinance are high relative to returns from housing development in Oakland. The proposed inclusionary requirements could cause returns from development to fall below feasibility thresholds in almost all cases. The pro forma analyses show that, for the five prototypes that are feasible in the base case, there is only one prototype under one compliance option where development might be marginally feasible. The two prototypes that are already not feasible in the base case, would have returns that fall further below feasibility thresholds with the additional costs of the proposed inclusionary requirements. The proposed requirements are anticipated to have the greatest impact on the feasibility of developing lower-priced housing in the neighborhoods and developing the more costly building prototypes downtown. (emphasis added)

Yawn. It’s all so vague. Marginally feasible this, pro forma analyses that. Let’s look at some numbers.

First we’ll look at what it costs to build in Oakland. Say you’re a developer and you want to build yourself some condos in downtown Oakland. You’ll probably want to do something along the lines of what the Hausrath report calls “Prototype E.” You see a lot of these around, probably because they’re among the most profitable to build. These will be 4-5 story condo buildings in downtown Oakland or Jack London Square, containing between 100 and 140 units.

First, you’re going to have to buy some land. That’s going to run you about $56,000 per unit. Since your land is probably contaminated with God-knows-what, you’re going to have to do some work on the site before you can start building anything. Add $11,200 per unit. Then you need a building. That’ll be roughly $227,900 for each unit, plus another $24,000 per unit for the parking space. Landscaping will add another $3,300. Whew! You’ve taken care of all your hard costs, and you’ve only spent $322,400 per unit. But you aren’t done yet. You’ve still got your soft costs to cover, like paying your architect and engineers, hooking up sewer and water and so on, which are going to run you about $68,000, plus $14,000 in permit fees. And forget the interest you have to pay on your construction loan! That’ll be another $22,900 for a grand total of $427,300.

Now your building will probably have a mix of unit types – mostly one and two bedrooms, and a few larger and more expensive units. When you average out the sales prices for the three, you’re looking at an average sales price of $540,000 per unit. (If you’re looking to buy, know that you could also get a cute little house on 82nd Avenue for that.) Subtract $18,900 in sales costs, and you’re looking at a revenue of $521,100 per unit. And since that unit cost you only $427,300 to build, you’ve got yourself a healthy $93,800 in net revenue, 22% of your development costs.

God, wasn’t that fun? Let’s do it again, this time with the most profitable development type, “Prototype D,” 4-5 story condos in North Oakland or along the eastern Estuary waterfront with between 80 and 100 units. Here’s your per unit costs:

Land: $50,000
Site Work: $13,000
Building: $244,250
Parking: $20,000
Landscaping: $4,000
Permit Fees: $14,500
Other Soft Costs: $70,000
Construction Financing: $23,500
Total Development Costs: $439,250

Average Sale Price: $565,000
Less Sales Costs: $19,750

Gives you a profit of $106,000 per unit, or 24.1% of development costs.

Hot returns! Remember, though, that you’re earning that 22% or 24.1% over the entire period of the project – not annually. Your building took about 18 months to construct, and before you broke ground, you had to buy the land, secure your entitlements, plan your building, meet with the community and get the Planning Commission to give you the go-ahead – a process that easily takes over a year to complete. The figure begins to look rather unimpressive. (Before you give up, remember that these returns are on the entire cost of development – not on your initial investment. You probably borrowed about 75% of the project costs to finance construction.)

To make a project worth building, developers need a minimum of 18-20% returns on development costs for both these prototypes. They’re both running above that in current market conditions, which is why we’re seeing so many of them being built. Of course, if you’re forced to give away 15% of your units at a loss of between $130,000 and $260,000 each, returns drop significantly. For the Prototype E downtown mid-rise development, they go from 22% to 11%. For the Prototype D North Oakland mid-rise, they drop from 24% to 12%, both well below the feasibility threshold. Meaning nothing gets built.

So if you hate all new development and want it to stop, IZ starts looking like a pretty good plan. On the other hand, if you can about the benefits of density, smart growth, an increased revenue base, or maybe providing affordable housing you should probably take a step back and rethink this plan.

This is something that IZ advocates just don’t seem to get. Nancy Nadel and Jane Brunner can sit around talking about integration and the dire need for affordable housing until the cows come home, and Jean Quan can cry, and after a long while, they might be able to convince some people that they actually do care about helping the less fortunate residents of Oakland. All they’ll manage to convince me of is that they’re bad at math. Not yours truly, though. I’m a whiz. I got a perfect score on my GRE math test, so you can trust me when I let you in on a little secret: 15% of zero is still zero.