Austin Contrarian

The Downtown Austin Plan would indeed penalize density

The Downtown Austin Plan's most controversial proposal is not to make the 2008 intermim "density bonus" program permanent, but to eliminate CURE zoning.  (CURE stands for "Central Urban REdevelopment").   The recommendation provoked a sharp debate at the City Council's August meeting and it will provoke another one when the City Council takes up the Plan again in October.  City staff has now recommended that the City keep a modified CURE option, validating what I and many others have contended for years:  implementing a density "bonus" program while simultaneously eliminating CURE zoning would penalize density. 

A bit of background.  The City does not impose height limits in the Central Business District outside the Capitol View Corridors, but it does arbitrarily cap floor-to-area ratios ("FAR").   The City caps both height and FAR in Downtown Mixed Use districts.  Most of west Sixth Street between Lavaca and South Lamar -- an area experiencing rapid densification -- is zoned DMU rather than CBD, so the height and FAR caps have particular bite there.

The City for years has had a process for increasing FAR and height limits downtown, namely CURE zoning.  CURE combining districts are allowed to redevelop buildings that are at least ten years old or to develop vacant lots.  Because the CURE regulations do not specify what benefits a property owner/developer must offer, the process results in a lot of ad hoc negotiation between the City and developers.  A developer typically agrees to participate in the Great Streets program and kick in money for parks or affordable housing.

In 2008, the City adopted the interim density bonus program.  The main provision requires developers who want to build residential space in excess of the allowable FAR either to devote 10% of the extra space to affordable housing or pay a per-square-foot fee on 100% of the extra floor space.  Commercial developments must pay half of the fee on the extra floor space.

The Downtown Plan proposes eliminating CURE as an alternative to the density bonus program.  I and others have argued that this will raise the effective price of extra density, which is bad policy because extra housing and office space downtown produces many spillover benefits.  Raising the price might not eliminate all requests for additional density, but we should expect it to have an impact at the margin.

Proponents of the mandatory density bonus program, however, have argued that it is better than the CURE process because it provides developers and property owners a cheap (a relative term in Austin), predictable, administrative approval, as opposed to the ad hoc, expensive and unpredictable CURE zoning process.   The mandatory density bonus program, in other words, effectively lowers the price of density, or so these advocates have claimed. 

The market has proved the proponents wrong.  In the three-plus years since the interim density bonus program was adopted, no developer has sought extra height or FAR under the density bonus program.  Every developer who has sought additional entitlements has used the CURE process.  If developers consider the density bonus a cheaper alternative than CURE zoning, then they would use it.  They don't, which implies that making the bonus program mandatory would raise the price of density.

City staff more or less agrees with this view.  City staff now recommends that the City keep the CURE process for now.  Staff notes that no project to date has sought additional height or FAR through the density bonus program.  Instead, all have opted to do so through CURE combining districts.  It proposes that the CURE program be modified to require the developer to show that it has provided the density bonus program benefits to the maximum amount feasible.  This would require developers to show which provisions could be met by the project and to demonstrate that compliance with certain elements of the project would make it financially infeasible.

Staff understands that CURE is useful as a benchmark for measuring the real cost of the density bonus program.  Or, as staff puts it, keeping CURE zoning would provide "useful information on the economic and financial realities of compliance with the Downtown Density Bonus program." 

Staff also recognizes that raising the price of density might discourage housing or office space at the margin.  Specifically, it states:

One of the charges made against a density bonus program (when CURE is not an option) is that it unduly "penalizes" projects.  If, in fact, a density program did do that, and if CURE was not available, then no project would seek additional density -- and no community benefits would be achieved.  

That is equivocal enough, but when combined with its recommendation that the City retain CURE zoning in some form, it is an admission that the density "bonus" program might indeed discourage density.

My view, of course, is that we should allow unlimited FAR and height (outside the view corridors) as a matter of right, and impose reasonable design guidelines to ensure that new development contributes to a pedestrian-friendly, authentically urban environment.

I've argued some of these points before here and here.

More coverage by Wells Dunbar and Community Impact News.

NIMBYism and affordable housing

The federal government underwrites affordable housing in part by providing tax credits to developers who build affordable housing.  The Texas Department of Housing and Community Affairs parcels out these tax credits in Texas.  A lot rides on TDHCA's decisions and competition for the tax credits is fierce.

This Statesman article on TDHCA's scoring system is interesting because it explains how NIMBYism is baked into TDHCA's evaluations.  Although projects are scored on several criteria, local opposition (or support) carries a lot of weight.  The scoring system effectively counts local reaction twice:  it weights letters from neighborhood associations and it weights letters from the legislators who represent these neighborhoods, who, naturally, can be counted upon to do their constituents' bidding.  There is a 52-point swing between unqualified opposition and unqualified support, a big deal given the maximum score is 226.   (Although I am calling this "TDHCA's system," in fairness I should note that it is merely implementing statutory standards.)

It's worth stressing that these are not zoning cases.  Tax-credit subsidized housing can only be built where zoning allows it.  Developers, in other words, merely propose multi-family projects for parcels of land that the city has already determined are suitable for multi-family housing.  Concerns about traffic, noise, overcrowding, etc. should have been resolved when the parcel was zoned.

Weighting the neighborhood's approval and the approval of its proxy is of course bad policy.  Homeowners are notoriously risk averse.  Their risk aversion causes them sometimes to oppose a project that has a remote chance of depressing property values even though it has a better chance of raising property values.  The premise of the tax-credit program is that cities need more affordable housing.   Politicians like to talk about affordable housing in the abstract but ultimately it has to be built somewhere, which means that neighborhood opposition has to be discounted rather than emphasized.  Unless, that is, we are happy to relegate it to neighborhoods that are already full of affordable housing, which is the effect of current policy. 

I also want to point out that the TDHCA's system institutionalizes a sort of "ward courtesy" at the state level.  The Texas Legislature attempted to reform that system this session, but Perry vetoed it for murky reasons.  (Texas Housers has a detailed account.)  The proposed reform would have entrusted the decision to support or oppose the project to the local elected body rather than a single legislator, probably in the sound belief that councilmembers are more likely to make reasonable decision in the aggregate than individually.

Taxing density

I've owed a comment on this for a while.

ROMA, the outfit charged with developing a plan for downtown Austin, has proposed a density bonus ordinance for downtown residential development (available here).   Austin's had a temporary density bonus program since 2007.  ROMA is proposing to make that program permanent.

All things considered, it is not a particularly onerous proposal.   ROMA would allow commercial and hotel developments an automatic bonus if they comply with "gatekeeper" requirements, which mainly means complying with the city's urban design guidelines and submitting a detailed site plan for review and approval.   ROMA and its economics consultant concluded that the market for office and hotel space will not support a density bonus program.

The big change is for residential.   Residential properties seeking an increase from the district's base zoning must not only comply with the gatekeeper requirements but also must pay a bonus on the extra square footage.   Half the bonus must be satisfied by providing on-site affordable housing or an in-lieu fee of $10/sf.   The other half must be satisfied by providing a "community benefit," chosen from a menu of public space (fine), music venues (dumb), daycare or senior-care (dumber), or "family-friendly," three-bedroom apartments (dumbest).

The "temporary" density bonus scheme retained CURE zoning, a tool for obtaining additional square footage by providing ad hoc benefits, subject to city approval.   Some have criticized that exception as an ad hoc loophole for allowing developers to "get away" with providing merely nominal community benefits.

ROMA claims the new scheme will benefit even developers/property owners by providing certainty.  But my understanding is that every increase in entitlements since 2007 has been obtained through the CURE exception.   There is already a predictable way to get more entitlements, in other words, but developers and property owners have opted for ad hoc. This hardly supports ROMA's claim.  No, the evidence is that the bonuses have bite.

I was befuddled by the initial density bonus plan and I'm befuddled now.

A density bonus is a tax on marginal increases in density.  Don't be confused by the rhetoric.   It is a tax.  The plan raises the cost of that last square foot.   The claim that it does not raise the price because no one is entitled to an increase in density is a bit of misdirection.   The fact is that the city has an unwritten policy allowing increases in base square footage.   A property owner who wants more square footage can reasonably expect to get it for the payment of a nominal amount.   And it is expectations that determine property values, not the words written in the code.   Raising that cost -- frustrating those expectations -- reduces the incentive to build that last square foot.

The density bonus program is a bad idea because extra space downtown is an unmitigated good.   We shouldn't tax economic goods; we should tax economic bads.

More space means room for more people.  And more is better, at least for downtown.   More people means more demand for downtown businesses, a livelier streetscape, more eyes on the street.   We should encourage the clustering of people downtown.  Density bonuses shunt people elsewhere.

Density is downtown's reason for being.   That's why businesses and residents pay a premium to be there.  Agglomerations are valuable.   While they sometimes generate negative externalities, they do not downtown.  Downtown is not a desirable place despite the crowding together of people; it is a desirable place because of the crowding together of people and businesses.   Residents like being close to other people and to downtown establishments.  Downtown businesses like being close to other businesses.   That's why law firms, advertising agencies, government workers, accounting firms and others cluster downtown despite the cost.

Then there's the fiscal benefit.   Every extra square foot of downtown space generates gobs of revenue for the city.   Another square foot, valued at $400, generates $10 per year in extra taxes -- twice the proposed density surcharge.  And that's an annual payment.   If we use the city's cost of money as the discount rate, the present value of that square foot to the city, county and school district is $200 or so.   Why risk that for a one-time payment of $5?

That extra square foot imposes no cost on the city.   Adding twenty residents to a 200-resident project imposes no extra burden on our schools.  Nor on the fire department.   Nor on our streets or utilities.   By contrast, without the extra space, these twenty residents will need twenty homes in the 'burbs (or displace twenty other central Austin households who will land in the 'burbs), with the new infrastructure necessary to support them.

I've heard the argument that all the new downtown development will require the city to make massive upgrades in downtown infrastructure.  That's an argument for another day.  But we're concerned here with the impact of a marginal resident.  How much will that last resident cost the city in addition to the investments it must make anyway? Anyone who blames that last resident (or ten or hundred) for new infrastructure investments is engaging in hand-waiving, not evidence-based argument.

And then there's the argument that the new condos are making downtown less affordable.  What people really mean is that the new condos are not adding to the supply of affordable housing.  They are expensive (relative to the city's MFI) but that does not imply that they are raising the cost of the existing stock of affordable housing.  I suppose they are reducing the relative share of the existing stock of affordable housing (and there is some older, affordable stuff downtown).  But many central Austin neighborhoods have little affordable housing.  No one is pushing to require property owners in Pemberton Heights or Tarrytown to pony up money for affordable housing.  Many of these property owners have seen a windfall of hundreds of thousands of dollars from the run-up in property values during the last decade.  I'm not suggesting that we tax those windfalls, but it makes no sense to saddle downtown properties with the responsibility of providing affordable housing while letting relatively wealthy central Austin homeowners -- the main beneficiaries of central Austin's pricey real estate -- off the hook.   

Council is scheduled to consider the density bonus program at its next meeting.  The Planning Commission at its last meeting recommended deferring a decision for more study.  I suspect that the members who pushed for it are not worried that the plan is too onerous; they want to make it more onerous and need time to generate more public opposition to the plan.

I've heard some Council members are growing skeptical of the plan, for just the reasons laid out here.  Here's hoping they do the right thing.

Morrison and I finally agree on something

City Council approved the Village of Little Texas affordable housing project at today's meeting.  A whopping $3 million and a permanent exemption from property taxes breaks for 50 affordable units.  Laura Morrison cast the lone nay vote.  For once, we agree.

Affordable housing densities

Austin's freshly minted Comprehensive Housing Market Survey has lots of interesting tidbits.  One is this map depicting Austin's concentrations of housing affordable to households earning between 51% and 80% of median family income.  (The darker the color, the greater the density of affordable housing.)

I suppose this is no real surprise, but the degree of segregation still is striking.  Most cities have pockets of affordable housing concentrated near the city center.  Inner city neighborhoods have high concentrations of old housing, and old housing tends to be cheap housing.  Mass transit is usually better in central cities, too, and the poor need good mass transit.  And, finally, central neighborhoods are usually quite dense, which means lower land costs per unit.

Central Austin, though, has very little affordable housing.  Even central east Austin, historically a repository of cheap housing, now has only a moderate density of affordable housing.  Affordable housing in Austin instead has been relegated to large, deep pockets in the older suburbs to the north and south; these, incidentally, contain some of the densest census tracts in the city. 

A couple of those who commented on my post on the city's affordable housing investment in the Village on Little Texas pointed out that there is already a lot of affordable housing in the area.  This map confirms the point.  I've marked the site of the Village on Little Texas with a light green arrow.  It is in, or at least on the fringe of, one of the largest pockets of affordable housing in Austin.

It's fair to ask whether the city should invest millions to subsidize a relative handful of affordable units in an area that already has market-rate affordable units.  Particularly such steep subsidies.  The city needs to step back and sort out its priorities.  

Too much

One more point on the Village on Little Texas.   As I noted, the Austin Housing Finance Corporation plans to provide a subsidy of $5,000 or so per year per affordable unit.*  Austin's cost of money is roughly 5%, the interest it pays on bonds.  A $5,000/year subsidy is thus equivalent to a $100,000 lump-sum investment, assuming the $5,000/year subsidy increases with inflation.

That's a lot of money.   At this price, $1 million buys just 10 affordable units.  Austin has 300,000 occupied housing units.  An extra ten units here or there is not even a rounding error.

$100,000 is too much to pay for one unit of affordable housing.  Good non-profits can do much more with much less by matching city money with private donations and federal grants.  We have no business spending $100,000 per unit if a non-profit can procure an affordable unit for $10,000.

*I should be clear that this is my estimate; I'm using the reported difference between market rents and subsidized rents. It could be that the 50% MFI units are receiving a subsidy of just, say, $3,000 per year. It would be nice if AHFC told us, rather than making us guess.

Bad deal

This affordable housing project in South Austin is drawing lots of criticism.   Rightly so.

It's a complicated deal and the Austin Housing Finance Corporation has not disclosed all the relevant details, which makes a thorough analysis impossible.  But the gist of the deal is this:   AHFC will buy a tract of land on Little Texas Lane in South Austin for $2 million.  It will then loan a developer another $1 million to develop the Village on Little Texas, a 240-unit apartment complex.  (Ironically, this project will be built next to the "apartment-complex city" I recently called a wasted opportunity.)

The project will provide 50 units affordable to tenants making less than either 50% or 30% of the median family income.  Rents for the affordable units will range from $339 to $613 for one-bedroom units, and $396 to $726 for two-bedroom units. Rents for the remaining units will range from $730 to $1,025.  (AHFC memo (pdf).)

AHFC is paying too much for these affordable units.  Because AHFC will own the property, the city, county and AISD will forego property taxes, which (according to the Statesman) will range from $300,000 to $400,000 per year.  But the affordability discount appears to be roughly $400/month per month, or $5,000/year.  The total value of the subsidy for 50 units, then, is $250,000 per year, much less than the foregone taxes.

AHFC has is also taking a roughly one-third ownership in the project.  I haven't seen pro formas for the project, but I doubt that it will generate enough profit to provide AHFC a decent return on its $2 million investment (or $3 million, if that $1 million loans is forgiven).  

It looks like a bad deal.

There are two other problems.  First, AHFC should be maximizing the number of affordable units.  It is a bad idea for it to tie up millions of dollars of capital in one project.  Even if that investment generates a decent return, that's $3 million that could be used today for affordable housing elsewhere.

Second, the tax break is troubling.  It is an off-the-books subsidy, which tends to obscure the true cost.  

But, worse, this kind of tax break is really a shell game the city uses to screw AISD and the county out of their share of property taxes.  Here's how it works:  AHFC gets the property tax free.  The taxes the property would have generated are instead added to the project's net return.  AHFC gets one-third of these profits.  So AHFC effectively has one-third of the property taxes returned to it.  But the city is entitled to only 20% of the taxes generated by a piece of property; AISD, the County, ACC, etc. get the rest.  Thus, by purchasing the property, AHFC essentially raises the city's share of the property tax from 20% to 33%.  The rest of the county and AISD's share goes to the developer.

Perhaps a hypothetical will make it clearer.  AHFC buys a piece of property and develops the project on its own so that it is entitled to 100% of the net return.  Since it pays no property taxes, those taxes swell the net return dollar for dollar.  AHFC (and the city) effectively use AHFC's non-profit status to convert AISD and county taxes into city taxes. 

No wonder the city likes this structure.

My piece at Newgeography

Here.

My thesis:  Central Austin has a strikingly low percentage of families compared to the suburbs.  None of the usual explanations applies -- i.e., central Austin families (except for those in a few neighborhoods) have not abandoned central Austin because of crime, overcrowding, post-industrial blight, bad schools, or the flight of jobs to the suburbs.  The only explanation, I think, is that Austin's suburbs have better, bigger and cheaper housing.

I did not offer a prescription.  Anyone who reads this blog can guess, though.  We need more multi-family in central Austin to relieve the price pressure on single-family homes and to give households more options.  (Multi-family has many other benefits besides these, of course.)  And we need to make it easier to upgrade central Austin's generally older, smaller and inferior housing stock.   The McMansion ordinance did not cause this divide, but it certainly won't help.  (For those who don't know, the McMansion ordinance bans even relatively modest homes on some lots, homes no one would call a McMansion.)

I often experience buyer's remorse after writing a piece like this because I'm afraid my single friends will take it the wrong way.  I don't think families with children are more important or "better" than other households.  I merely think Austin's core must have a good mix of households to remain healthy.  (The suburbs would be healthier, too, if they offered singles or couples something other than inexpensive  housing in compartmentalized pods.)  Balance matters, if for no reason other than allowing us to continue using the expensive assets (like schools) already in place.  I don't think we have a good balance now.

For those interested, here is my previous piece at Newgeography.

Affordable housing study: Too much single family housing

Central Austin is unaffordable in part because it has too few apartments.  The lack of space for multi-family props up their rents, either by directly restricting supply or encouraging older units to "filter" up to a more expensive market.

There are too few apartments in central Austin because too much land is set aside for single family.  Here is what I wrote a year ago in opposing the Zilker neighborhood's VMU opt-out request: 

According to the City's residential acreage data a paltry 11% of the Zilker neighborhood's residential property is zoned multi-family. Only 2.6% is zoned at the reasonably dense MF4 or MF5 levels.

These multi-family parcels are nearly maxed out. According to data collected by the city demographer, ZNA had 933 occupied multi-faily units in 2005, or roughly 1,000 total units (assuming a reasonable vacancy rate). Using the residential acreage data above, the City's minimum site area standards, and a reasonable assumption about the mix of one-room and two-room apartments, I've calculated that the current zoning permits fewer than 1,200 multi-family units. While some of ZNA's 1,000 existing units are non-conforming (i.e., not built on MF-zoned property), there is clearly little room for more housing under current zoning entitlements. And we all know what happens when a developer asks for greater entitlements in the Zilker neighborhood.

Austin's affordable housing consultant, BBC Research & Consulting, apparently agrees.  From its report: 

It is unclear, based on a review of the city’s recent update to its existing Comprehensive Plan and future land use map, how much land is dedicated to high density single family development and multifamily development (e.g., single family detached homes on 3,500 sq. feet lots and multifamily density of 20 units/acre). These uses appear minimal compared to the amount of land dedicated to standard single family residential.

Note BBC did not conclude merely that we have a "minimial" amount of the land set aside for multi-family today.  It concluded that even our long-range plans allocate too little land to multi-family.

Perhaps the city should establish baselines for neighborhoods -- e.g., neighborhoods' comprehensive plans should set aside a minimum of  __% for multi-family.  If they don't, Council won't approve their plans.

See Austinology and M1EK for other takes.

The City's Comprehensive Housing Market Survey

In the fall of 2008, the City Council, concerned about the lack of affordable housing in the city, commissioned a comprehensive housing market study from BBC Research & Consulting.  BBC presented its final report to Council in March.  (H/t Katherine Gregor.)

I haven't had time to work through the entire 142-page report.  I disagree with some of what I've read, but there is much here to like -- and much that echoes this blog's themes.

BBC's very first recommendation is that the city "reevaluate the zoning and development process."  BBC recognizes that part of the problem is the role played by neighborhood groups and part of the problem is the lack of density; not surprisingly, these are linked:

Austin’s current process of evaluating applications for residential development is community based. The city’s zoning and land use regulations also reflect the city’s dedication to environmental preservation and commitment to smart growth.

These principles are part of what makes Austin a great city. However, they can conflict with providing affordable housing for residents and workforce.  In desirable areas where there is much demand for housing, anything that constrains the supply leads to increased housing costs.

We have identified several opportunities for the city to modernize its current development process that will reduce the barriers to affordable housing development in Austin.  These include:

• Reconsider the role that many neighborhoods groups are playing in development decisions.
• Develop a strong, citywide Comprehensive Plan that guides development and forms the basis for the acceptance or denial of development applications.
• Increase density by approving dense developments that offer opportunities for affordable, attached housing products.
• Educate residents about the need for workforce housing in Austin and the consequences of not meeting current and future needs for housing.

(Italics mine.)

And more on neighborhood groups and density two pages later:

The city’s current neighborhood-based planning process does very little to facilitate the development of affordable housing on a citywide basis. Some of the neighborhood plans have affordable housing as a goal; others do not. We were also told many times in our focus groups with more than 100 stakeholders that Austin has lost many affordable units to neighborhood resistance.

Austin is not unusual in this regard. Residents in every city and town are notoriously resistant to density, and the more affordable the project and the greater the density, the higher the resistance. Neighborhoods often forget that a desirable city will grow; they cannot stop this momentum. Restricting workers from obtaining housing in an area does not mean these workers will go away— they may live farther away, but they still need to drive to work. Growth limits almost always lead to increased traffic congestion and the leapfrog effect of affordable housing being pushed farther and farther from employment centers.

Neighborhoods often use declining property values as successful arguments to fight affordable housing developments. Many academic studies have adeptly demonstrated that the effect of density and affordable developments on property values is not negative.

As I said, there is a lot more to this study, and it flags other problems with Austin's housing market.  I intend to cover some of the other points after I've finished working through the study.  But it's good to see the city hired consultants willing to provide a clear-eyed assessment of the city's problems.