THE BLOG
03/04/2014 11:28 am ET Updated May 04, 2014

MORE NYC -- How Inclusionary Zoning Fees Can Produce Millions of Affordable Housing Units for NYC

This is part of a series of posts outlining the economic, jobs and environmental gains for NYC from a large-scale expansion of housing construction in the City

There is a crisis of affordability for renters, both in New York City and across the nation. The professional class in the City continues to grow without the City keeping up with housing needs, forcing up housing prices in the central business district and also forcing the displacement of existing low-income renters as professionals gentrify what were once affordable neighborhoods.

However, the artificially soaring housing prices in NYC also create a massive opportunity. Zoning rules have trapped four decades of unmet demand in lower Manhattan and, from an environmental perspective, the equivalent of a vast pool of clean energy ready to be tapped. On top of the 1.5 million workers living in Manhattan, there are an additional 1.5 million workers commuting into the central business district to work. If only a small minority of those commuters want to and can afford to live nearer their workplaces, that is still a vast pool of demand for new housing built in lower Manhattan.

And if the high value of that unmet demand is tapped through inclusionary zoning fees, the purchase of new property in the skyline of lower Manhattan can help fund housing for millions of current and potential low-income and working class families in New York City, fuel jobs for those building them and servicing their new residents, and radically decrease carbon emissions as suburbanites are moved from energy-sucking tract homes into new walkable neighborhoods in energy-efficient construction.

Problems with Existing NYC Inclusionary Zoning: Existing exclusionary zoning rules have been deployed in a few developments in New York City. Luxury condominiums built on the Brooklyn waterfront were required to set aside 20 percent of new units for tenants making less than 80 percent of the median area income. The Atlantic Yards project in Brooklyn and others have also required units to be set aside as affordable as well. There is also a voluntary program that allows developers to add height to their buildings as long as some percentage of units are set aside as affordable.

However, these programs have been limited and applied to few projects given that new construction is nearly impossible under existing zoning rules in the most desired neighborhoods of Manhattan.

The value of height is so large in parts of Manhattan that the fees would be phenomenal. The economic value that could be tapped in the skyline of lower Manhattan is rather precisely defined by the sale currently of "air rights," where owners of buildings zoned for greater height sell off the unused height to other developers nearby looking to build taller than allowed zoning for their land. One developer in 2013 paid a record $600 per square feet -- $40 million in total -- to add floors to a luxury tower. That is the extreme but air rights sell for hundreds of dollars per square feet -- notably more than people pay per square foot for finished units outside the central business district.

In a partial model of what is being proposed here, Mayor Bloomberg proposed upzoning part of Midtown on the East Side. That upzoning would have allowed taller building, but developers would have to pay a fee to the city of $250 per square foot for commercial development and $360 for residential development -- although that upzoning is largely projected to be limited to commercial property. And that upzoning and sale of air rights would have raised an estimated $750 million to be used for only for local transit and other improvements in the neighborhood. Still, factoring in the fact that new construction in Midtown East sells for an average of $1186 per square foot , the $360 air rights price for residential units charged by the City works out to a fee roughly equivalent to 30 percent of the likely final price of the potential units.

So a 30 percent inclusionary zoning fee is quite reasonable for new units in any upzoned parts of lower Manhattan.

Why Leveraging IZ Fees Beats Mandating Units: Current inclusionary zoning programs miss a critical opportunity by just mandating that units be built in the same neighborhood, rather than assessing fees for the city to fund housing on its own terms. 100,000 units built under the current voluntary inclusionary zoning system would yield only 20,000 affordable units under current law (or 30,000 affordable units even with a 30 percent set aside rule). Additionally, because even the small amounts of affordable units are concentrated in single neighborhoods, they have no citywide constituency. A broader-based program of collecting fees from building in the most valuable luxury real estate zones and distributing those fees throughout the City for affordable housing, as well as medical, educational and transit infrastructure, would create both the political support to expand such programs and to ensure that developers aren't being given sweetheart deals.

Collecting inclusionary zoning fees and building in cheaper areas of the City (which can still mean being quite transit accessible as a recent infamous New Yorker piece documented in highlighting the massive inequality along the same transit lines.) Where building 100,000 units would yield only 20-30,000 units through requiring developers to set aside affordable units, a 30 percent IZ fee on the same units could yield roughly $43 billion and fund literally millions of affordable housing units if the government instead funded affordable housing in Northern Manhattan and the outer boroughs -- and leave extra money on top for educational, medical and transit infrastructure to support the expanded population.

This difference comes from compounding two forms of investment leverage. The first is leveraging IZ fees from astronomically expensive lower Manhattan real estate to build units in much cheaper neighborhoods. The second area of leverage is that current affordable housing programs leverage both additional private capital and federal funds to gain up to ten dollars in affordable housing for every local dollar invested. Between 2003 and 2010, New York spent just $1.7 billion of state and local funds on affordable housing in New York City. Combined with federal funds and private capital, this yielded 108,683 units (or housing for roughly 220,000 people assuming household sizes averaging two people).

If this same multiplier held for the full projected $26 billion set aside for affordable housing from IZ fees from 100,000 units, that would yield affordable housing for 2.5 million people. Since there's good reason to believe that the same amount of federal funding match might not be available and other costs may be higher in the projected program (such as a greater commitment to using union labor), a more modest multiplier of 4 times investment in federal and private capital match would still yield affordable housing for almost one million people.

And of course, finding the political will to upzone and build even more units in lower Manhattan or wealthier parts of Brooklyn could multiply those results. Such a program would have not just local implications but make a significant dent in the need for affordable housing nationwide.

Read the whole MORE NYC plan here

Sign the petition to Mayor De Blasio in support of the plan

Past MORE NYC posts:

  • How an Alliance to Massively Expand Housing in NYC Can Fight Climate Change, Make Housing Affordable, Create Good Jobs and Fund Social Needs for all New Yorkers

  • Context: Why Housing Costs are So High in New York CIty