November 7, 2016 Eric Kronberg

Affordable Housing: Not If, but How

Affordable housing is now and will continue to be an exceedingly important and challenging need for cities across the nation, and Atlanta is no exception.   More and more people are looking to live closer to where they work, live, learn, and play.  We have a very limited amount of land that qualifies as walkable urban, and not even all of that has access to MARTA rail.  This scarce resource is rapidly becoming more expensive as a large and growing number of people compete for the limited amount of available housing.  The Beltline is sparking further demand, speculation, hope, and price appreciation as single-family homes and commercial properties become more desirable within this hoped-for walkability.

I had a chance to hear some of the goals and hopes for the current Beltline Inclusionary Zoning Policy being considered by Atlanta City Council recently.  “Inclusionary Zoning” is a fancy way of saying that zoning will legally require certain projects to provide some amount of affordable housing.  The current proposal is that all projects located in the Beltline Overlay that have five or more units will have to provide 15% of their units at a rent that is affordable to someone making 80% of the area median income (AMI) or 10% of their units at 65% of area median income.  This slide below translates those goals into rents for various residential unit sizes.

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Finding the Funds

It is encouraging to see affordable housing front and center at a City Council meeting, but equally concerning to see the proposed solutions currently being considered to address the situation.  On one level, encouraging people to prioritize living next to transit (or future transit) is one of the best things that can happen to our city.  Transit increases access and connectivity and is therefore inherently inclusive. It also reduces the need for individual vehicles, the effect of which I’ll discuss in a moment. Having an inclusive city is important.  Period.  Focusing on affordable housing options during this property price appreciation is critical too; however, there are a couple key points to make.  First, there is no silver bullet in solving the affordable housing challenge, and the public sector can’t do it on its own.  There simply are not enough local, state, or federal subsidies available to adequately address the problem.  The private sector has to play a role.  That said, cities cannot expect that they can issue an unfunded mandate through an inclusionary zoning policy and expect the private sector to solve this problem on its own either.

Let’s walk through some basics of development math to provide context for how inclusionary zoning interacts with projects.  These are the primary cost components of a development project:

  • Land Cost- How much it costs to buy a piece of land to build something on it.
  • Development Cost/Soft Costs- Efforts to organize the project, engineers, architects, project managers.
  • Zoning Costs/Entitlement Costs- The costs associated with changing the zoning to permit the project you would like to build, and associated approvals after the zoning is in place.
  • Parking Costs- The costs associated with vehicle storage for a project, whether on a surface lot, in a deck, or underground.
  • Storm Water Costs- The costs to capture, infiltrate, and slowly release storm water that falls on the site.
  • Streetscape Costs- The cost of improving all the public infrastructure including sidewalks, bike racks, street trees, and other such public amenity, typically in the public right of way, not on private property.
  • Compliance Costs- The ongoing costs of making sure a project complies with local mandates, such as reporting compliance of rent thresholds with AMI limits for inclusionary zoning.

Finally, one more cost: Construction Cost – the cost of the construction the building itself.  While this is typically the largest part of the budget, the costs above take up a significant amount as well.

I’d like to quote the world of small development’s cult hero R. John Anderson: “If you can’t get the rent, you can’t do the building.”  When deciding to take on significant risk to develop a property, it is a straightforward process.  You do the best you can to identify all the costs, all the potential revenues, and add a contingency for all the potential things that could go wrong along the way.  If the revenues do not adequately cover the debt service, you don’t do the project; simple as that.  One major challenge with a forced inclusionary zoning policy is that it adds both development and compliance costs while reducing the potential revenues.  These challenges will have to be met by reducing costs in other areas and/or increasing revenues from the non-constrained rental units.  Less money will go to the construction budget, resulting in worse buildings, and rents will tend to be higher, pricing out middle-class applicants.

We Need Smarter Strategies to Help Share the Burden

I would like to point out that City of Atlanta has a habit of solving collective issues by punting as much as it possibly can onto private development.  Examining how we address these issues offers a glimpse of potential ways to offset the costs of an inclusionary mandate.

If we had a better zoning code, we wouldn’t have to tackle the permissions for each development on a project-by-project basis through neighborhood organizations, NPUs and the Office of Zoning and Development.  This is exceedingly expensive and inefficient way to deal with really bad land use rules.  Would you rather see $50,000 going to a zoning attorney, or to streetscapes?

If we were more rational in understanding how cities work, we wouldn’t be forcing each individual site to provide for full private vehicle storage for all cars expected to drive there.  Parking costs are a huge, huge chunk of a project budget: we are legally mandating millions of dollars per project be spent on this instead of investing in a better transportation system.  Expanding on-street parking and transportation alternatives would be a far better use of these resources.  Eliminating parking requirements altogether would allow each development to consider how much parking it really needs to provide based upon market demand.  Parking would still be provided for a majority of projects, but only the minimum amount needed to function (or whatever the bank requires, but that is another blog post).  Less money spent storing vehicles means more resources to allocate to other things such as affordable housing.

Storm water costs are another big chunk of the budget, particularly for smaller projects.  The city requires private development to shoulder a significant amount of storm water burden instead of addressing it collectively.  Having each site maintain its own underground vault is a significant waste of resources, and inefficient in addressing the overall watershed problem.  This is worthy of an entire blog post, but imagine taking a Fourth Ward Park storm water solution to the west side, but sizing it to also handle development around those parks.  In return for not having to spend $250,000+ on storm water per project, developments could then afford to dedicate some of its units to affordable housing.

The city has also forced streetscape repairs and upgrades onto new development instead of approaching the challenge holistically.  This has resulted in a disjointed, unconnected series of improvements surrounded by substandard, crumbling pedestrian infrastructure.  There have been discussions about focusing TAD dollars to offset some of these costs, which we applaud.  This is a worthwhile goal for larger projects, but harder for a small project to pursue and coordinate.

All of these costs are being put on the backs of the private project budget.  People often ask why we don’t have better buildings in Atlanta.  The project budget is generally sucked dry for nice things once you pay for all these other costs above.  Know that apartments have been considered to basically be a sure investment bet for some time in cities like Atlanta.  This means that investors and lenders are willing to accept exceedingly low returns on their money to fund a project.  This is also why lending has quickly curtailed for these projects.  There is a newer general expectation that we may be overbuilding high-end apartments, and therefore lending costs are rising as a response.  These apartment deals were often so marginal on their returns that it takes very little to kill them.  The double whammy of added costs and reduced revenues of inclusionary zoning is a very scary prospect for these developers.

Scale Matters

I’m not a fan of big mega apartment projects; I am a fan of neighborhood-scale infill.  This might be considered projects with less than 20 units, something that fits in with the scale of houses and buildings of a community (AKA Missing Middle Housing).  These smaller projects have very little economies of scale, and can usually only pencil out if you limit the amount of storm water, parking, and public infrastructure required along with the building cost.  There are no proposals I know of to limit these costs on small projects.  The current Inclusionary Zoning policy being considered is looking at including all projects with five units or more.  Forcing a five-plex to have 15% of its units be affordable is really a 20% mandate since you must have at least one unit qualify.

Consider that most infill projects like this require a rezoning, and that the return on rezoning efforts is essentially the same whether you are trying to zone for a 4 plex, a 40 plex, or a 400 plex.  It is much more rational to spread this effort over as many units as possible.  Addressing our zoning ordinance directly to allow more small-scale projects needs to be an important part of the inclusionary zoning discussion.  Eliminating parking requirements is a huge part of making these small projects both pencil out and function.  Taking a proactive stance on increasing the amount of on-street parking should be considered as a key way to make living in our city more affordable.  Allowing these small scale projects to conform to the single family storm water ordinance instead of the one used for 400-unit complexes is another important component.

This whole discussion really boils down to examining the incentives offered as a tradeoff to something the city wants, but doesn’t want to pay for directly.  One great comment made by Councilperson Andre Dickens at the presentation was that the city has tried to offer incentives for several years to encourage the inclusion of affordable housing in projects.  No one has used these incentives.  That should be a wake up call that the incentives were either misguided or not enough.

Providing affordable housing is expensive and hard.  It typically is being done only by a small number of firms that have the expertise to handle the associated brain damage related to compliance at all stages of these projects.  We need to agree as a city that affordable housing is a high priority, and that it comes with significant costs.  If we want to be an inclusive city, we are going to have to discuss our city’s budget as much or more  than our zoning code if we are going to solve this problem.

There are opportunities to provide more space for smaller scale projects to meet the growing housing demand.  This is an area where changing zoning rules can have a significant impact.  You can develop, build, and rent quality housing if it is 2-3 stories, wood framed, not required to have parking, meet the 80% AMI targets, and be profitable without subsidies.  It’s really unfortunate that we don’t legally allow this type of development throughout most of the city right now.

If City Council wants to provide a top-down, restrictive inclusionary zoning solution, they must also look at providing changes to smaller scale zoning to help meet these affordable housing goals.

About the Author

Eric Kronberg

Eric Kronberg, AIA, LEED AP is co-founder and principal of Kronberg Wall Architects in Atlanta Georgia. A graduate of Tulane University, Eric has worked on a wide range of projects across the US. Eric and co-founder Adam Wall formed Kronberg Wall Architects in 2003 in order to focus on creating happier, healthier urban environments in Atlanta and elsewhere.

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