Let’s Talk Inclusionary Zoning: An Interview With Nico Calavita

Below is an interview transcript with Nico Calavita. This transcript is part of a series of interviews that are meant to shed light on how experts think about inclusionary zoning. You can see a full listing of all the transcripts here. This transcript was lightly edited for clarity.

Owen Pickford (OP): Seattle is going to implement a 3-10% requirement, depending on a couple different factors and how the legislation plays out. In areas called urban centers or urban villages; the city of Seattle has areas that are zoned for growth. They’re basically zoned for development capacity and they’re where they’re trying to direct their growth. Those areas will have an inclusionary requirement. At the same time they’re going to implement the inclusionary requirement they’re going to do an upzone. Places that are medium zoned will have maybe two more storeys or so. There’s about quite a lot of areas that are zoned for single-family detached housing right and that will probably changed to lowrise or commercial zoning.

Nico Calavita (NC): I’ll make a comment later but you can go on with your questions….It seems to me that with an upzoning 3-10% is a very small amount. If upzoning is involved it should be higher than that.

OP: That’s your initial thought?

NC: My initial reaction, yes. I don’t know if you have seen two reports that were released in the last couple years. One is called ‘benefit zoning’ and the other is called ‘value capture.’ When we finish, I will send them to you.

OP: Yes, please do. This actually gets to the meat of my questions. I’ve spent quite a lot of time following this issue for about two years. I’ve read a lot of the research that’s been done. I might get the number wrong now, but there’s about four or five studies that have done empirical research, specifically trying to answer the question of the effect of inclusionary zoning on housing supply. One of those studies is probably bunk and I think you were one of the authors that wrote crticism of it. It’s the Powell and Stringham study. And then the only other study that I know of that found a negative affect on housing supply was the one out of the Furman Real Estate Center. It found a negative affect only in Boston. It looked at Boston, DC, and San Francisco, and it found a negative affect in Boston.

NC: I think it was a slight negative affect.

OP: Right, yep. So my first question is, are there any other studies to your knowledge that have found an negative affect from inclusionary zoning, or is that it?

NC: That’s it.

OP: In addition to that, it’s my understanding that there’s at least three studies that found no affect. And even in some studies they found an increase in some types of housing production, like multi-family. Does that match your understanding?

NC: Yes.

OP: I’m curious, have you personally done empirical research on that question specifically? The affect on the private market housing supply.

NC: No, I have not.

OP: So generally speaking there’s a few theories about what happens with inclusionary zoning, why we’re seeing these results I should say. Powell and Stringham are basically saying, it’s a cost on developers so they’re not going to develop. The Furman Center study is, and almost everyone else I’ve talked to, I’ve talked to quite a few people, think it’s more complicated. It’s a little bit more nuanced. There’s a few different things developers can do. What a lot of people think developers do though, is a cross-subsidy, where the units in the building they’re constructing end up with higher rents to subsidize the inclusionary units. It seems to me that in my conversations with people that’s where they’ve landed, rather than the third option, which is developers bid less for land. Do you have an idea about how your colleagues opinions break down?

NC: So by cross-subsidy do you mean that they would charge more for the market  units?

OP: Yeah. Let me give you a little background on why people are saying that. I’ve asked this question, if it doesn’t reduce supply, what is actually happening? The answers I’ve received have varied a little bit but one of the answers I received was exactly what you just said. They charge more for the units that are private market units. And I’ve asked, “what makes you think that rather than thinking the developer bids less for the land?” And the answer that I’ve received is basically, “have you ever looked at a developer’s pro-forma? I’ve seen a lot of pro-formas from developers and that’s how they represent their project.” What’s your reaction to that? Have you heard that before? Do you think that’s a reasonable take?

NC: No, this is actually the first time I’ve heard that a developer would charge more for sale or for rentals. What the response to that usually is, “Any rational developer would be charging the maximum the market can bear.” The market isn’t just the market for new construction. It is the whole market, the existing supply of housing, which is much larger. So the developer would charge what the market can bear at a particular time. To me that answer does not make any sense at all, “some units are inclusionary, therefore I’ll charge more for the market rate units.” You would be charging the maximum you can. Otherwise you are not a rational developer.

OP: So with that view, it sounds to me like you think the cost comes out of the land, out of the bid for the project.

NC: That is a strong possibility. I have talked to developers myself in presentations and the response has been, “well of course. If now my costs increase, I would bid less for the land. I would negotiate for a lower price of land.” I knew an economic consultant that was doing studies for a commercial linkage fee increase in San Diego a couple years ago and he went as far to say that this increase would be absorbed in three years after the enactment of the increase. The other side of that which is not good, the landowners might not agree to a lower price for land. The argument could be made that in some cases the developer will wait for higher prices. It might stop development that way.

OP: So what do you think? Do you think that happens?

NC: I don’t have any empirical evidence but I think that’s something that could happen. A city passes an inclusionary 20%. That increases the cost. The developer is negotiating for a piece of land. He says, “You have to come down 10%.” And the landowner says, “that’s really what I want for my land, take it or leave it.” That might kill the project.

OP: Do you think that an inclusionary requirement with an upzone is a pretty good way to handle that problem?

NC: Absolutely, absolutely. I assume economic studies have been done, to set the value of the increase. I’m surprised that is 3% but it depends on how much of an increase it is. Just 3% of inclusionary seems to me that it is favoring the developers. Given the heat of the market in Seattle, they’re probably going to make more money with the upzone

OP: They’ve conducted a nexus study. That nexus study included basically an estimate of what the developer could handle. The maximum the developer could handle is definitely higher than that. There’s a few reasons why they are not doing that and it depends on who you talk to. I think it’s a political decision. But there’s people who I respect and are being honest about this who are saying, “we need to get IZ implemented first and we need to not screw it up.” They don’t want to implement it in such a way that it kills development and makes it a failed policy.

NC: Ah, yes I know. These people are being paranoid. It’s all related to the health of the market. If the market is booming, there is no way that with an upzoning a 3-10% inclusionary is going to stop development. No way.

OP: Ok. So one of the questions I’ve had that I’ve been asking people is, are there people who disagree with you about inclusionary zoning that you respect? Can you explain why they disagree with you? What are the legitimate points of disagreement?

NC: I’ve been in the context of first San Diego and now in the Bay Area. In San Francisco, inclusionary is going to be put on the ballot to increase it from 12% to 30%. The costs are such that this is not seen as such a terrible thing. I will send you an editorial I wrote for the San Francisco Chronicle, in which I propose to phase in this increase, on the basis of the land market’s need to adjust to this increase. There should be a period of years, two, three four years, in which this increase is phased in for the market to adjust to the reality of the land market.

OP: To clarify, that process of adjustment, your thinking is that it sends the right signals to landowners.

NC: Right. So if a developer was negotiating for a piece of land at the time…Let’s say inclusionary is a new thing, or the time when San Diego approved inclusionary in 2002. When the in lieu fee was very low, that is really not going to hurt the developer. He might gain some discount from the landowner. But the phase in would allow the developer and the landowner to understand what the market is and how it’s going to be the next year and the following year. That was done in San Diego and that was my proposal in San Francisco as well. You shouldn’t increase all of a sudden because it will hurt some developers who bought the land three months ago or before this was approved by council. Again, the idea is that you need the market to adjust to these additional regulations. I will also send you an article that I wrote with a co-author of the book on inclusionary zoning with an international perspective. The article was a proposal to have a two-tier inclusionary. One is an inclusionary that applies to the existing layer of zoning and then to have a higher inclusionary which is tied to upzonings which increases the value of the land. I will send you that too. More for you to read.

OP: There’s a bunch I’ve read already.

NC: Sure, but these writings emphasize value capture and give examples in San Francisco and San Diego and Santa Monica.

OP: Ok. One of the other criticisms I hear about inclusionary zoning a lot is that cities should be focused on something else. It’s not a good enough policy that cities should be focusing on it. There’s generally a few reasons for that. A lot of economists think housing vouchers are a better solution. The other is that inclusionary zoning just doesn’t create enough units.

NC: Absolutely true. This is all true. But the answer I think is that we need everything possible to address the housing crisis. I think you have a crisis in Seattle and the same is true in San Diego and the Bay Area and so on. Low-income housing tax credits produce much more housing than inclusionary does. And that addresses a lower income of the AMI scale. Inclusionary does a pretty good job for just below 80% of AMI. And in San Francisco where the prices are where they are, one of the goals of inclusionary is for it to address between 80 and 120% AMI. So inclusionary is not a panacea that will solve the housing problem. It is a local response. It produces, in the case of in lieu fees, local funds that can be leveraged with federal and state funds. Especially in California there is a very active non-profit sector. There is a big debate about whether inclusionary should generate money or units. I don’t know what is being proposed in Seattle. Here there is disagreement among us in terms of have the developer build the units or have the developer pay money and nonprofits can use the money to leverage and build even more housing.

OP: Ok. I definitely get that it’s going to take multiple policies. Cities have restrictions because it really needs a larger response than just a local response. But let’s say you’re the dictator of a city and you can craft a policy. What do you think is the root problem that needs to be addressed and what policy would focus on that?

NC: Housing affordability is related to wages. We’re seeing a decrease of low-income households in the Bay Area, with people moving to the fringe of the metropolitan area in search of chaper housing. The other problem is related to the maintenance of existing affordable housing. Many times we focus on building but don’t fund the maintenance of naturally occurring affordable housing. The scope of the problem is so large that a city can not address that by itself. It really needs to happen in state houses and the federal governement. Cities are getting into commerical linkage fees and inclusionary zoning because the state and federal government are not doing enough.

OP: Ok, so the way the debate is happening in Seattle right now is focused on how much could this problem be solved by the private market, if we just liberalized our zoning codes. Any time there’s a policy that interferes with the private market, there’s a lot of push back for that reason. There’s a ton of support across coalitions for policies that give tax breaks and things like that. But a policy that adds cost or regulations to private developers gets a ton of push back. I’m just kind of curious how much energy should be focused on liberalizing the private market zoning codes. Should that be a priority?

NC: It’s an issue of planning versus affordability. I’m both a planner and an affordable housing advocate. In the state of California there’s a state density bonus law that basically allows any developer to come into a neighborhood where planners have determined the appropriate densities and the developer is allowed to increase densities 25%. So what does that do to the planning  process? It’s a question of how far do you want to go in terms of densifying the city without harming other aspects. You have to set a balance between increasing densities and harming quality of life. For example, what about traffic? In San Francisco BART is breaking down. Who is going to pay for the increase in demand on mass transit? It is the development that is increasing and creating demand for mass transit. The developers are benefiting from this increase, especially the land owners. It’s an issue of balancing transit reliance issues and creating more affordable housing. But my feeling is that the maximum 10% might sound radical but 10% inclusionary is nowhere near the value the developers are getting. If indeed the economic analysis has shown that they’re going to benefit more than what they are giving in terms of inclusionary, then a higher inclusionary requirement would be commensurate with the benefit they get from upzoning.

OP: When you’re using your intuition on this and you say that 10% seems low or 3% seems low, where’s that intuition coming from?

NC: Well for example, I’ll send you a graph of what inclusionary housing production has been in San Diego since inclusionary housing was passed in 2002. You’ll see that when the economy was booming, the amount of dollars increased proportionally. So does inclusionary without density bonuses fail? No, it was very successful. It succeeded without density bonuses.

OP: So you’ve seen enough cities and you’ve seen enough programs, that it seems completely reasonable to have a higher amount. One of the questions that people have posed to me is that, the debate that people have is, what are the limits of the ability of land to absorb this cost?

NC: And that’s why you should always call for a financial economic analysis. That gives you the base and then you have a political decisions. But you need that knowledge in order to have a political discussion.

OP: Ok. You feel that if you did a survey of your colleagues, that would probably describe where there’s debate? The ability of land to absorb costs? That’s really the big question?

NC: Not really, not at the point that I think would be healthy. I think that’s because in this country the land issue is not as important as it might be in Europe or South America, where this issue is huge. It’s part of the culture of planners to understand the issues. In England it’s called betterment. We have no such word in this country because the issue of land values and taxes in not important. It’s not taught here. I’ve been trying the past few years to make American planners aware of this issue. It’s happening and value capture is being utilized more and more. Still it’s something that’s not part of the American culture. I think that it’s not something that is being discussed. If you know, Rick Jacobus did an inclusionary housing matrix or calculator. Are you aware of that.

OP: No, I’ve spoken with him but he hasn’t mentioned that to me. I’ve met him because he helped craft Seattle’s policy.

NC: He’s come up with a calculator where you increase the percentage of inclusionary and that affects the profitability of the developer. You increase the AMI and that affects the profitability of the developer. He’s been unable to insert in this calculator the value of the land because it’s much more difficult. For example, the effect of inclusionary on land prices will take a few years to show. You can not immediately calculate how that will affect the project. What I’m trying to demonstrate is that land value is not really part of the discussion the way it would be in other countries. In this particular calculator, the land value is not a factor.

OP: The political conversations that I have a lot focus around free-market versus government intervention. There’s been a tremendous popular, cultural movement to liberalize zoning codes. This has been picked up by mainstream journalists, Matt Yglesias. Ed Glaeser’s book was a New York Times best seller and he’s a big proponent of liberalizing zoning codes. It seems necessary to me as well but also comes in conflict with things like inclusionary zoning policies.

NC: As I mentioned a few minutes ago, it’s in concert with planning. Why do we have urban planning? Why there’s a long history of zoning regulations and development planning, community plans? What we plan should change with the times. We have to be careful though in this search for higher density, urban living, smart growth, and so on, that we do not fall in a position in which the quality of life in our cities is not as high as it should be.

OP: Do you have examples of cities that are particularly good examples of poorly planned cities?

NC: No, I don’t. Houston and Phoenix and so on are used as examples but I don’t know them well enough. I’m more familiar with cities like Vancouver, Portland, and San Francisco.

OP: Is there anything else you want leave me with? We’re going to be covering this pretty closely on our website. Are there any guiding points that you think would be important to leave us with that I haven’t thought of already?

NC: I’m really impressed with all the work you’ve done. In a way, I sense a particular political culture in difference cities. I’ve sensed that the political discourse on development in Seattle is really very much in the hands of developers. For a city to contemplate plan changes and higher densities, and at the same time consider inclusionary of 3-10%, when in a city as conservative as San Diego there is an inclusionary of 10% without density upzonings just tells me that it’s not in the place that I expect it to be. The discussion and the narrative seems to be dominated by developers or density people without the other side having enough power to counteract their narrative discourse.

OP: That’s an interesting observation. It was a big deal that inclusionary zoning is even being considered from most people’s perspective here. The people that I’ve talked to that have been advocating for this for a long time were shocked that the Mayor came out with it, in the sense that they’ve been working on it for so long they couldn’t believe it’s finally happening.

NC: It’s a city that seems to be progressive but I don’t know much about it, I’m talking about Los Angeles, where they have pretty progressive mayors. I think that is the only big city left, with Seattle, that doesn’t have inclusionary zoning in the country. That is surprising in a way.

Nico Calavita is an emeritus professor at San Diego State University. He has deep experience with planning, land use, and housing issues both in academia and in public. He’s currently working with the East Bay Housing Organizations. You can read more about him here.