…and some suggestions for ensuring it succeeds
Recently, amendments were proposed to promote the creation of housing affordable at lower incomes within the Journal Square neighborhood in Jersey City, under the name of Mandatory Affordable Housing (MAH). Unfortunately, the MAH amendments repeat some mistakes that were made by Seattle’s Mandatory Housing Affordability program, which is strikingly similar to what’s being proposed in Journal Square.
So what happened in Seattle? The federal Department of Housing and Urban Development just published a study (free link) by two economists (Krimmel and Wang) who work at the Federal Reserve and the University of Pennsylvania. The study shows that the Seattle MHA program caused 70% of the construction that would’ve happened within the MHA boundaries to shift to nearby, lower-density zoning districts that did not have inclusionary requirements. In other words, not only was 70% less affordable housing built within the MHA area than if the plan been properly balanced, but a wave of 100% market-rate development spread to other less dense neighborhoods that had not been targeted for additional density. While some affordable housing was built, a lot of affordable housing was left on the table.
Fortunately, there is a fix to avoid this in Journal Square: properly balancing the incentives so that we can avoid Seattle’s fate. The Krimmel and Wang study points out the root cause of Seattle’s failure: “On balance, it appears the cost of the affordability requirement to developers outweighed the benefit of additional units via upzoning”. This led to “strong strategic substitution of new construction away from blocks and parcels subject to the MHA.”
I worked out some examples to measure the costs and benefits of the Journal Square MAH proposal. I find that the balance of costs and benefits for the Journal Square MHA proposal is even worse than the Seattle MHA under various scenarios. Given the large amount of development taking place in Journal Square, if anywhere near 70% of it is diverted to other neighborhoods like in Seattle (even a much smaller fraction), it would exert considerable development pressure and would represent a massive lost opportunity for affordable housing.
Below I explain the Journal Square MAH and Seattle MHA, walk through some examples of how both programs would work on some typical sites, and compare the costs and benefits of the two programs. I’ll also point out places the development could shift in Jersey City due to the misbalance in the program. I end with some possible fixes that will improve the MHA program’s chances of success (spoiler: allowing the Journal Square office bonus to be used to be used for inclusionary housing would be one path to mitigating the issues presented here).
How the Journal Sq MHA Would Work: An Example
Land-use attorneys generally believe that adding inclusionary zoning requirements without some compensatory benefit is not legal. As a result, cities that implement inclusionary zoning programs provide some developer benefit, in terms of tax abatements, reduced fees, low-interest municipal bonds, or increased density. Jersey City’s MAH plan proposes to accommodate inclusionary zoning by adding additional height to buildings. 10% of units would need to rent at a range affordable to tenants at an average of 53% of Area Median Income; half of these units would need to be two-bedrooms; 20% would need to be 3-bedrooms.
This table might make your eyes glaze over, so let’s work through an example. 60 Cottage Street is a brand-new 5-story, 21-unit building in Journal Square. All units are market-rate. Rents for 1-bedrooms begin at $2,350, which according to the federal and state guidelines is workforce housing, at around 104% of Area Median Income (in this case affordable to two wage-earners making roughly $50,000 a year; workforce housing is defined as anything below 120% of Area Median Income). Under the MAH proposal, this building would have to provide 10% of units as income-restricted housing, at an average of 53% of Area Median Income. That is, 2.1 units out of 21. Journal Square MAH would therefore entitle the building to one more floor as a benefit. Assuming that 5 units could fit on the extra floor, the building could now be 6 floors and 26 units. 10% of 26 is 2.6 units, which would be rounded up to 3 units under the Journal Square MAH. So of the units added by the MAH allowance, 3 of 5 would be income-restricted (60%) and 2 of 5 would be market-rate (40%). We can say that the plan has a 40% benefit ratio of benefits to costs (remember this–we’ll come back to this again).
Measuring Costs and Benefits
Recall that the study of Seattle MHA determined that developers decided to build outside of the MHA area because the benefit of the added (market-rate) units was too small relative to the costs (in terms of inclusionary units). So the really important question is: how do the costs and benefits in the Seattle MHA program compare to those in the Journal Square MAH proposal?
The density benefit that comes with Seattle’s MHA rezoning is typically a bump in allowable square footage and height. According to the Krimmel and Wang paper, the most common Seattle MHA rezoning (from LR-3 to LR-3(M)) “increases allowable FAR from 2.0 to 2.2 post-MHA”–in other words, a 10% increase. As most of these LR-3 zones were just outside of downtown Seattle, the required income-restricted set-aside ranged between 5% and 7%.
How does this work out, in terms of costs and benefits? Suppose a 100-unit building was allowed before the MHA change in the LR-3 zone. After the change, the 10% FAR increase could translate to roughly 110 units. So 10 additional units were allowed. Krimmel and Wang report that 98% of developers take the payment-in-lieu option, so all 10 added units onsite are market-rate, and (110 x 7%) = 7.7 income-restricted units were funded off-site. The benefit ratio (additional market-rate units allowed, over total additional units built) is 11/(11 + 7.7) = 55% benefit ratio. Recall that the benefit ratio in our 5-story Journal Square example was only 40% (2 market rate units out of 5 additional units). In other words, the benefit ratio for our Journal Square example is lower than a typical benefit ratio of the Seattle MHA plan.
But that is just one site in Journal Square. I sifted through permits to look at typical unit counts and allowable heights for various different zoning districts within Journal Square, and found that for a wide range of scenarios, the benefit ratio (blue) of the Journal Square MAH plan is lower than the Seattle MHA plan:
The one exception was large sites that allow 6-story buildings, which are typically located in Zones 4 and 5 of the Journal Square 2060 Redevelopment Plan.
Unintended Consequences
While some developers will still choose to build with the Journal Square MAH requirements, especially if they have already assembled properties but not consolidated them before the law is passed, if the MAH isn’t properly balanced, other Journal Square developers could choose several options that will result in no affordable housing:
Build outside of Journal Square, in similar-density and lower-density zones that are not covered by the MAH plan. (e.g., Zone 4A in Hilltop which allows 4 to 7 stories; Newark Ave in Hilltop and around McGinley Square which allows 5 stories; the Marion section, where 4-to-8-story buildings are permitted; along Monticello Ave, which allows 5- and 6-story buildings on typical lots; and sites downtown which allow high-rises).
The MAH can only be triggered by lot consolidation, so developers will avoid adding additional parcels to their assemblages (especially if the additional lot wouldn’t trigger a lot-area height increase under the 2060 Plan; I’ve identified a few such assemblages in Zone 3 of the 2060 Plan).
Choose to build hotel, which is allowed in Journal Square to the same height as residential. NYC has effectively banned new hotels since December 2021 and recently cracked down on AirBnB causing 77% of listings to disappear, making Journal Square an profitable option for hotel developers.
Possible Solutions
The best way to avoid these unintended consequences is to balance the benefits and costs more effectively. At the minimum, increasing the benefit ratio to at least be higher than Seattle’s under all scenarios would help ensure that more affordable housing will be built, and less development pressure will spread outside of Journal Square into surrounding neighborhoods. While it might not be politically feasible to add additional floors, I would note that the city already allows a 2-floor office bonus in Journal Square, and this bonus is routinely taken by developers. Allowing inclusionary housing to be built as part of this office bonus instead of office would increase the benefit ratio, and make mixed-income housing construction more likely to materialize, without substantially increasing building heights beyond what MAH proposes. Options implemented by other cities include reduced fees, streamlining approvals for inclusionary developments, and reducing property assessments specifically for the income-restricted units only.