Let’s Talk Inclusionary Zoning: An Interview With Rick Jacobus

Below is an interview transcript with Rick Jacobus. 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): For a while Seattle was thinking about doing this linkage fee policy and it slowly shifted after a lot of political wrangling into an inclusionary zoning policy. What they are looking at doing is considering legislation in the fall of this year that will implement inclusionary zoning with upzones. The planning department is calling it mandatory housing affordability. They’ve mapped out neighborhoods where they are going to upzone areas and when they do the upzone all the units built, any new construction, will be subject to the inclusionary requirement. Are you familiar with Seattle’s legislation at all and where we are at politically?

Rick Jacobus (RJ): That’s about the level of my familiarity right there. I haven’t followed it very closely since I was working there.

OP: I think you are pretty familiar with inclusionary zoning fights generally, the politics of those and you probably could guess that one of the biggest, there are really two controversial things but probably the biggest one is that they are looking at upzoning single-family zones. They’re going to take some single-family zones and make them low-rise probably. The second most controversial thing is the requirement on developers. Is the inclusionary zoning policy actually going to make our city more affordable because it’s going to lead to fewer units being built overall? That’s kind of the argument that’s being made. You’re pretty familiar with those arguments right?

RJ: Oh yeah. I spend a lot of my time in those arguments.

OP: Ok. From my understanding there’s only a handful of inclusionary zoning research that looked at empirical research. It’s probably less than six papers total. I get that it’s probably a really hard thing to measure empirically. So a lot of these papers acknowledge there’s a lot of nuances and it’s a difficult thing to have a black and white answer about, the fact that whether or not it affects supply by adding additional cost. When I’ve looked at the papers there are really two papers that have suggested there could be effects on supply. One is bunk. It wasn’t peer reviewed. It was put out by The Reason foundation. The Powell and Stringham paper. You’re familiar with that?

RJ: Yep.

OP: Then the other one is out of The Furman Center for Real Estate in New York. That one found impacts on single-family housing production in suburban Boston. Are you familiar with that one?

RJ: Exactly, yes.

OP: I’m curious, are there other papers that have attempted to find this connection between housing supply and inclusionary zoning and have actually found a negative impact?

RJ: Leaving out the question negative, I think those are the only two papers that I’m familiar with that have done original empirical research in an ambitious way. There are quite a few student papers that exist. Someone looked at too small of a data set to draw any meaningful conclusions. Those are the two papers that get cited in this conversation. I’m not aware of another good study out there. What I’m going to send you though is a literature review that Cornerstone Partnership did that includes references to a lot of the other studies that are out there. There’s half-a-dozen papers that assert one thing or another without original research. They try to summarize the research that exists or that kind of thing. But those are the two where there is a data set that someone analyzed in detail. There are a couple southern California papers that I think are interesting. And Powell and his co-author did a couple different regional studies as part of that same project. All of their studies found exactly the same thing. I’m not aware of another good study.

OP: On the flip side, my understanding is that there are few pieces of original research that have found what you might summarize as virtually no impact on supply. Some found other impacts that were not related to supply but not a negative impact on supply. The papers that I’m thinking of are the ones by Gerrit Knaap as well as Arnab and Bento and another I think. I’m not sure I’m remembering correctly. It looked at a ton of municipalities in California. Some in southern California and some in San Francisco. Do you know the paper I’m referring to.

RJ: I recognize the name Bento and feel like I’ve looked at that paper. I’m not remembering the specifics of it. I’m pulling up the literature review. There’s also a UCLA study, a group of students did a study, but I forget the name off the top of my head but I forget the authors of that study.

OP: Then there’s another study that I know of, Vinit Mukhija who also did not find an impact on supply. And there’s the David Rosen study that I’m familiar with. The Furman Center also didn’t find an impact in San Francisco. So that paper also made the argument as well that there might not be an impact in certain circumstances.

RJ: They were looking at the whole Bay Area, not just San Francisco and the whole Boston Region.

OP: The Furman Center Study? Is that your memory?

RJ: Yes, that’s right.

OP: Ok, so that’s kind of the list of studies that I know of that had empirical research. One of the things I’ve been trying to dig up is if there is other stuff out there I haven’t found that is worth reading. I think I’ve seen your literature review. I’m almost positive I’ve seen that because I’ve read a lot of the Cornerstone stuff already. If you send it to me I’ll look at it to confirm.

RJ: Cornerstone had a grad student do a more thorough literature review early last year but I just sent you the link. There’s actually four different papers that she wrote. One of them is effects on production. One is affects on prices. [These papers can be found here and here.] Two others are off your topic.

OP: Ok. So that’s kind of where I’m starting from and I’m going out to the authors of these studies. I’m going to try to make sure that I summarize them correctly by asking them, “Do you agree this is what you found when you did this study?” Then the next question I’m asking them is, “What are the mechanics that made that happen?” This is a little speculative. They’ve looked at the empirical research. They said, “Here’s what we found.” But I’m curious why the market behaved that way. Powell and Stringham, that’s obvious. They think that the additional cost is going to reduce the amount of housing that’s built because stuff isn’t going to pencil out. With almost everyone else it’s a bit more complicated discussion. There’s a few different arguments that I’ve been hearing.

RJ: Can I interrupt? Before we get into that. I wanted to back up a step and suggest, if you’re talking to the authors of the Furman study, one of the questions that I always have trouble with is the magnitude of the effect they found. They found an effect on production in the Boston region. They refer to it as very small. They give the numbers for it but the numbers are percentages. What I think what would be really helpful is if you could get them to characterize in plain language how big of an affect they thought it was. How it compared to other effects on pricing or production.

OP: That’s a good idea. I will do that.

RJ: Sometimes I see people describe their research as finding an insignificant or trivial effect and I don’t think that’s really exactly what they found but it’s also not a very big effect. What’s the right way to characterize how much of an affect they thought it had. It’s a change in the relative change so it’s hard to wrap your head around their actual numbers.

OP: Ok. My memory of that is that I thought it was a small affect. I also thought it was only on single-family homes. So the study was limited to not look at multi-family residential stuff. I thought that was kind of a weakness of the study.

RJ: Yeah, the other thing that I don’t think is totally obvious just from reading the study is how small some of the jurisdictions in suburban Boston are. I don’t know how much that affects that outcome. I don’t have a particular theory about why it would affect it one way or the other. It’s really different to talk about some of those communities versus the communities in the Bay Area which are much bigger.

OP: Yeah, so I was kind of getting to this a little bit. People are finding an effect or not finding an effect. They kind of have to speculate why that is happening. One of the things that I thought was actually bizarre about the Furman Center study was that they didn’t find an affect in San Francisco but they did find an effect in Boston. So clearly those jurisdictions have something different about them that’s causing something different to happen. That’s the only thing we know for sure. So when I ask people why there might be an effect or why there might not be an effect, the conversation begins with, “Can the developer rent this apartment at a higher rate to provide a cross-subsidy to the people that are getting the inclusionary zoning units?” It’s kind of interesting to me that’s how the conversation begins because it sort of skips over whether or not the developers are going to bid less for the land or handle it some other way.

RJ: Yeah, I don’t really experience the conversation starting that way when I have it. I think that’s possibly idiosyncratic in terms of who you’ve talked to. I think that even the economists who are concerned about inclusionary tend not to think that there is a direct cross-subsidy within the project in a dollar for dollar sense. My memory of what they said in the Furman study was that their explanation was that there was more flexibility and incentive in the Bay Area than in the Boston area. That made a difference in terms of developers being able to figure out a way to make their project pencil in spite of the additional cost of compliance.

OP: Ok.

RJ: And certainly if it’s incentives, that’s a no brainer. I think anecdotally that the policies in the Bay Area aren’t of the type where that the incentives would entirely off-set the cost of compliance. But you don’t even have to worry about the economics except whatever is left over after you account for the incentives.

OP: I’m not sure I understand exactly where you are going.

RJ: Let’s say it cost a certain amount to provide an affordable unit but you get a certain benefit from the density bonus or the permit waivers or whatever. It’s only the net effect that you have to worry about showing up in housing prices. So if jurisdictions were more generous with incentives you would expect less of an effect on prices right off the bat.

OP: This is the interesting question a couple people have raised. You might see no affect from a regional perspective, or high level perspective, but you might see project by project affect where some projects have a higher rent than they would’ve otherwise.

RJ: I’ve heard developers argue that and I’m not a developer so I don’t really know how that would be. The question I always want them to answer and I’ve never felt a satisfactory answer to, if the market is going to bear that higher rent, why is it that they weren’t planning to charge that to begin with.

OP: Yep, and that’s the counter I’ve heard as well.

RJ: I’m not even saying there’s not an answer to that, I just don’t know what it is. Often when the developers say to me is that what they’re going to do is increase the cost on the other units. I translate that in my head. I think that developers are appropriately focused on their project. I think what they are thinking is that sometimes if they can’t increase that rent then they’re not going to build. What they are thinking is that the inclusionary requirements are going to filter which projects get built and it’s only going to be the ones where they can recapture enough to make up for the inclusionary requirement. Which I think gets you back to the more ‘economist’ view. Unless there’s some other mechanism where they can suddenly charge more for units that have low-income housing next door to them, I don’t know what that would be.

OP: This is kind of a harder question, I think. Are there people that you know who disagree with your perspective about how inclusionary zoning works? Do you think they reasonably could be right and we don’t know enough yet? Are you able to characterize where you disagree with them?

RJ: Sure yes. I just had a really interesting experience the other night in which a friend invited myself and several housing advocates over for drinks one afternoon with a lawyer who represents the development community in Oakland and someone who manages a construction firm. They were concerned about the economics of a linkage fee in Oakland. We had a really interesting conversation along the lines of the questions you are asking. But we had enough time and it was outside of the political spotlight. We had enough time to really talk through where there were differences in opinion. They felt like they could figure out a way to raise the prices on the other units and that somehow that’s what they would do. I think that the main point of contention is always what is the degree to which land values are really flexible enough to absorb the cost. For people who follow the economic thinking, they say, “Ok, we’re not going increase the prices but we’re going to reduce production and that’s going to ultimately increase prices.” The issue is really, if we have this fee or cost, can land prices really decline or can they rise more slowly to capture the cost of providing the inclusionary units. I think everybody agrees that there is some limit and there’s no data on what that limit is. People have different gut reactions to whether that limit is high or low.

OP: I agree, that’s one of the biggest controversies. I’ve asked if there’s research and everybody has said that there’s not. People don’t really know. There is research though on impact fees and their affects on land costs. Why do people not think that is a sufficient proxy?

RJ: Because in the traditional impact fee, the property owner is receiving a benefit and paying a fee for that benefit. In the mock-up of the inclusionary requirement, you would assume the property owner receives no benefit from the inclusionary requirement. So the impact on land value is going to be different from when there is a park or fire impact fee. I think that other literature encourages me to feel like there’s a lot of ability for land prices to absorb fees. But it’s not a direct correlation. You can’t just cite it and say: “They showed that.” They actually showed that prices when up proportional to the benefit not the fee. Does that make sense?

Rick Jacobus a national expert in inclusionary housing and affordable homeownership. He is also is the principal of Street Level Urban Impact Advisors. Rick helped with Seattle’s linkage fee studies. You can read more about him here.